I have a basket in my office that I fill with things that I should read. Sometimes I print an article about an interesting book or person and put it in the basket. Sometimes I place an outline from a Zoom program that I half-listened to while I was working on other tasks in the basket. New laws and ideas for this column are routinely placed in the basket.
At times, my basket starts to overflow. When that happens, I know that it needs to be cleaned out. In the deep darkness of winter, I find it is more difficult for me to do this simple housecleaning exercise—unless I have a purpose. What motivated me to do my basket cleaning was this month’s column. I feel that I need to educate insurance professionals—particularly about how new cases impact risks and coverages. With that in mind, here are a few relatively recent cases that I have been keeping in my basket.
A couple of Uninsured Motorist Coverage cases were issued this past year. In Nationwide Mutual Insurance Co. v. Shilling, the appellate court made clear that the statute of limitations in an underinsured motorist claim begins to run when the insurer denies the insured’s claim, as opposed to beginning to run on the date of the accident. In Barry v. Queen, the appellate court found that the phrase “damage to property” as incorporated in the uninsured motorist statute, embraced loss of use damages. These cases, as well as the recently enacted statute allowing for enhanced uninsured motorist damages, should cause insureds to consider higher UM limits.
In addition to higher UM limits, an insured should consider the language of the policy with respect to first-party property damages. In National Ink & Stitch, LLC v. State Auto Property & Casualty Insurance Co., a federal court in Maryland determined that the insurer was required to pay its insured’s property damage claim after suffering a ransomware attack. The policy at issue covered direct physical loss of or damage to “covered property.” Under the policy, “electronic media and records (including software)” included data stored on a variety of media. After suffering a ransomware attack that compromised the system, the insured submitted a claim. The insurer denied the claim on the grounds that the cyber-attack, and subsequent damage to the insured’s computer system, did not amount to a direct physical loss to the insured’s computer system. After briefing, the federal court ruled for the insured holding that software can be susceptible to physical loss or damage. The court found that loss of use, loss of reliability, or impaired functionality was sufficient to establish physical loss. Importantly, the court focused on the language of the policy that defined covered property to include data, software and other electronic media. Consequently, it is important that the specific language of the policy, including the definition of “covered property,” be reviewed to determine what is and what is not covered.
Policy language is also important to the issue of coverage under the ensuing loss clauses of insurance policies. In Bethany Boardwalk Group LLC v. Everest Security Insurance Co., an insured made a claim to recover costs incurred for repairs to the hotel’s roof, interior damage, and lost business income. The insurer denied the claim on the ground that the hotel’s roof was defective and, therefore, the insured’s losses were subject to the policy’s exclusions for faulty workmanship. The faulty workmanship exclusion, however, was qualified by an ensuing loss clause—this clause provided that the insurer “will not pay for loss or damage caused by or resulting from” faulty workmanship, “[b]ut if [faulty workmanship] results in a Covered Cause of Loss,” the insurer “will pay for the loss or damage caused by that Covered Cause of Loss.” In this unreported case, the federal court applied a broad construction to ensuing loss and granted judgment in favor of the insured for the interior damage and the loss of business income for damage relating to water.
Another federal case, Jowite Limited Partnership v. Federal Insurance Company, concerned an ensuing loss provision under an all-risk policy. The dispute in this case concerned whether there was coverage for damages to an apartment building that resulted from the defective design and construction of the building’s foundation and the subsequent settlement of the building. This court viewed “the core of the dispute is whether the ensuing loss clause in the Policy’s defective design and construction exclusion restores coverage.” The Court here found that the exclusion barred coverage, particularly as they “flowed directly, naturally and predictably from the defectively designed and constructed foundation.” So, in the last year, there have been two case with varied facts, with one ruling in favor of the insured and the other favoring the insurer. Policyholders may want to review the ensuing loss clauses of their policy, particularly immediately after the events giving rise to a claim. Certainly, insurance companies must pay precise attention to the ensuing loss clause language of their policies.
Policyholders that are subcontractors (and insurance companies that insure them) need to be aware of a recent case dealing with defense costs. In Selective Way Insurance Company v. Nationwide Property and Casualty Insurance Co., applying the language of the policy and using a potentiality of coverage standard, the appellate court upheld, for the most part, a decision by the lower court that the sub-contractor’s insurer must provide additional insured status to a general contractor. The sub-contractor was found to be liable for the contractor’s defense costs plus the contractor’s insurer’s legal fees incurred in prosecuting a declaratory judgment action.
Finally, there are two cases that raise risk management concerns. In Plank v Cherneski, Maryland’s highest court found that a breach of fiduciary duty can be an independent cause of action. As a result, all parties acting as fiduciaries need to have an insurance review to make sure that their interests are protected. On a different front, Steamfitters Local Union No. 602 v. Erie Insurance Exchange; Steamfitters Union No. 602 v. Cincinnati Insurance Co. clarified obligations that land owners owed to their next door neighbors. The Court found that the defendant commercial property owner owed its neighbors a common law duty to maintain its property; this duty to maintain included making sure that the conditions on the owner’s property would not cause an unreasonable risk of fire to spread to the neighboring property. Minimizing the risk of spread will need to be considered in risk management. Insureds that are next to potentially vulnerable properties may also need to make sure that they have sufficient insurance.
The reporting on these eight cases has made a dent on my basket. But there will be new cases, new laws, and new ideas that will slowly cause it to fill up again. So stay tuned for more in the coming months.
Ms. Lambert has over 35 years of experience in handling complex commercial litigation and insurance matters. Ms. Lambert has worked on national class actions, significant litigation and regulatory matters for Fortune 500 companies. She has also assisted small and mid-sized companies and business executives with contract, real estate, liability assessment and commercial disputes that needed to be resolved quickly and efficiently. Ms. Lambert is best known as an attorney who knows the field of insurance. She has represented insurers, policyholders, and insurance producers in disputes both in court and before the Maryland Insurance Administration.
Ms. Lambert is the firm’s Co-Liaison for Harmonie, a national network of high quality law firms that serve the special needs of the risk industry, and was recently appointed to Harmonie’s Board. She can be reached by phone at 410-339-6759 or email email@example.com.