Insurance as a hidden asset on the balance sheet
April 2016 | EXPERT BRIEFING | RISK MANAGEMENT
Many companies purchase liability insurance as a part of the cost of doing business, but few executives or even in-house counsel understand the opportunities for coverage that may be unexpectedly available even under ordinary commercial policies. Identifying and unlocking those opportunities means that the company will have additional sources of liquidity to address third party claims. In other words, insurance may often represent a hidden asset on a company’s balance sheet.
These opportunities may not always be recognised because liability insurance policies are written in a manner that is virtually impenetrable to most lawyers, let alone business people. In addition, companies presented with a claim denial from their carrier often do not have the specialised knowledge that is needed to push back hard enough, especially in those areas where claims arising out of new technologies are moving the boundaries of applicable coverage law.
Several examples illustrate this trend, as outlined below.
Patent infringement claims
While it may be commonly understood that only a specialised, patent specific insurance policy will respond to a patent infringement claim, this is not in fact the case. Recent decisions in the US have found in favour of coverage for policyholders in patent cases under both commercial general liability (CGL) and directors and officers liability (D&O) policies.
For example, in the CGL context, several recent US cases have found coverage for patent infringement claims where the underlying technology was used as part of an insured’s advertising activities. In two of those instances, Amazon and Hyundai, successfully pushed back against their respective insurers’ claim denials and were thereby able to secure coverage under plain vanilla CGL policies for third party patent infringement claims.
Similar decisions have also been handed down where D&O policies have been involved. Customarily thought to be implicated principally in connection with shareholder litigation, D&O policies contain a broadly written grant of coverage. Thus, ‘wrongful acts’ – even those resulting in losses caused by deliberate, intentional or knowing acts – are the usual trigger for coverage under such a policy.
In a recent example, an investment management company was sued for patent infringement relating to a communications system allegedly protected under a third party’s patent. In that case, the court found coverage for the patent claim because the investment company’s alleged use of the patented technology in its operations met the threshold of a ‘wrongful act’ under the policy.
Trade libel, false advertising and other competition-related claims
One of the covered offences typically included in a CGL policy is ‘disparagement’. Thus, where a claim is brought by one competitor against another based on statements in advertisement or other media made by the policyholder competitor about the other, or about its products, this key trigger of coverage may be implicated. Indeed, some court decisions have even found ‘disparagement’ where a vendor claims that it was the ‘only producer’ of a certain software product or where it claims that its products are ‘more effective’ or ‘superior’ to those made by others.
Coverage under a D&O policy for such claims is also possible. Indeed, as false advertising lawsuits typically allege that a party’s erroneous or suggestive advertising constitutes the underlying ‘wrongful act’, the broad grant of coverage found in a D&O policy would potentially enable such claims to be covered under these kinds of policies.
A lawsuit involving the claimed theft of trade secrets might also be covered under a company’s D&O policy. Thus in a recent case a claim for theft of trade secrets was brought against the officer of a company that had purchased a D&O policy. The officer had allegedly developed the pertinent technology/trade secret at Company A, where he had worked before subsequently moving to Company B.
In connection with the ensuing lawsuit against the officer and his new employer, the Court found that Company B’s D&O policy obligated the insurer to reimburse the company not only for its legal expense in defending itself and its officer in the underlying suit, but also to reimburse the company for about $20m funded by the company to settle the underlying case.
Cyber liability claims
A word of caution is warranted here. While there are some instances in which cyber-liability claims have been picked up under traditional insurance policies, those traditional policies are not adequate substitutes for the specialised cyber risk policies which are specifically designed to respond to these types of claims. This is especially true because exclusions based on cyber liability are now commonly included in traditional liability policies.
Nevertheless, there have been several intriguing decisions in this area which could be valuable for those companies faced by cyber risk claims, but which do not have specialised insurance protection. For example, in one recent case, a company that was victimised by computer hackers successfully obtained reimbursement for remediation-related expenses following a data breach under its ‘blanket crime policy’.’ That policy contained an endorsement for ‘computer and funds transfer fraud coverage’.
Although the company’s insurer initially denied the company’s tender, the company successfully sued the insurer for a judicial determination of the extent of coverage. In that case, the court held that under the company’s traditional, non-specialised ‘blanket crime policy’ the insurer was responsible for reimbursing the company millions of dollars in losses that it sustained in connection with a data breach and the ensuing theft of customer information.
There are at least two lessons from the above examples. The first is that companies and in-house counsel need to understand and update their insurance programme on a regular basis to adapt to the changing risk profile of their enterprise. The second is to not take no for an answer from their insurance carriers where there is a legitimate case to made that a policy covers a third party claim. In this way, companies can access, or monetise, their insurance assets.
Peter S. Selvin is a partner at TroyGould PC. He can be contacted on +1 (310) 789 1230 or by email: firstname.lastname@example.org.
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Peter S. Selvin