Insured Success

Continuing our two-part series on Bermuda Form policies, John Ellison, Richard Lewis and Catherine Lewis return to discuss how policyholders can perfect their coverage and handle the dispute resolution process. ----more---- Transcript: Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's Insurance Recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist.  John: Greetings, everyone. Thanks for joining us again for another session of Insured Success. This is part two of our podcast on the Bermuda Form, and today we are focusing on perfecting the coverage available under the Bermuda Form coverage and how to deal with the dispute resolution process. We've already covered the history of the form and key policy terms and coverage issues in our part one podcast, but now we're on to how the policy actually works and how you can put it to use. Joined today by two Lewises, Richard in New York and Catherine in London. And without further ado, I'll turn it over to you, Rich.  Richard: Okay. We're going to talk a little bit about some of the issues that we've seen at the claim side from the manner in which the program is structured. As we covered, I think, in the first one, the limits of Bermuda Form policies are huge. A program can have hundreds of millions of dollars in limits. And so are the retentions. They can be, I think when the policies first came out, they were 25 to 50. And a lot of policy holders have up to a hundred million dollars in retentions. And what will often happen is a policy holder will buy different products, whether it be captive insurance or actual domestic GL insurance and put that in their retention. And this can lead to some issues. The first issue being, as we covered in the first podcast, that the trigger of the occurrence-first reported policies, the Bermuda Form policies, is notice of an occurrence or notice of an integrated occurrence during the annual period. The problem would be if the policyholder in the retention purchase GL insurance that's triggered on a different mechanism, either an occurrence policies or claims made policies. Occurrence policies are policies that are generally triggered by injury during the policy period. And the issue you can see that may occur, and we've seen it many, many times, is that, you know, the policyholder gives notice in say 2005 of an integrated occurrence or an occurrence under its Bermuda Form policies. And there have been problems with this, you know, say a product over a 10-year period with injuries triggering a 10-year period in the occurrence policies. And so what the Bermuda Form carrier will say is that I'm excess not only of the retention in my year 2005, but I'm also excess of all the other limits that were recoverable under the occurrence policies from years 1995 to 2005. So I'm excess of 10 retentions. There's language you can use in your occurrence first report or in your occurrence policies, either like a deeming clause or something that deems only one year to be triggered. Similar issues occur with claims made policies, although generally claims made policies have a batching mechanism where only one year is triggered. Unfortunately, if the first claim came in in say 2003 and you give notice of integrated occurrence in 2004, the same issue can occur. The Bermuda Form carrier will say that I'm excess of two retentions. The other big problem that we've seen a lot is where the underlying coverage has defense costs outside the limit. Obviously, in these mass tort cases that implicate Bermuda form coverage, the defense costs can be massive. And a lot of those defense costs are incurred before there's any settlements or judgments. And if for some reason, the coverage and the retention, whether in a captive policy, we've seen that, or an actual real insurance has defense costs outside of limits, it's very difficult to recover those defense costs under the Bermuda Form policy. They say the only thing that eats through my retention where defense costs are outside of limits are settlements and judgments. And then I think I'm handling it back to John for the underwriting process.  John: So issues that can arise in these Bermuda Form claims often will implicate what happens during the underwriting process. And just like with any application process for any type of insurance, insurers will often look for misrepresentations as part of that. One of the things that's a little unique about Bermuda is that some of those forms, analogous to what some D&O insurers do, will be attached as exhibits to the policy when issued. So there has to be care taken to be candid and honest and open about your business and any issues you have with claims when applying for the product. But one of the things that we've seen that there's often a blurring between underwriting and claims that happens in the insurance world. And oftentimes policyholders are of the view that if they tell their underwriter something as part of the process of buying a policy, that will satisfy notice of claim requirements. That is generally not the case under the Bermuda policy. It really does need to be a separate line of communication with respect to claims and claim issues that is independent of and separate from any communications that are engaged with an underwriter at a Bermuda insurance company because the Bermuda carriers will take the position that information passed to the underwriter doesn't necessarily satisfy the obligation to provide information of claims to the claims department. So that's a point that is often overlooked and policyholders can be confused or taken advantage of if they don't recognize that distinction in how they're communicating with the Bermuda market. Now, another thing that needs to be kept in mind when you're potentially restructuring a program and maybe moving insurers around from their historic participation in the program, like changing layers or maybe actually switching from one Bermuda carrier to a new one, these policies have inception dates and retroactive dates. And typically, when the structure of the program is changed and a participation layer is different or a new carrier comes onto the program, the inception date that you will get for the new policy is often not back to the beginning of the time of the program when you were first buying Bermuda coverage so that there can be a gap in coverage. And the historic coverage that you thought you had because you've been buying in Bermuda for years or maybe decades can be disrupted substantially. And that is something you really need to keep in mind when you're renewing coverage in Bermuda and how the policies line up against the historic structure of the program. And you need to work on that closely with the broker to make sure you don't have gaps created by different inception dates or different retroactive dates that can leave huge holes of coverage based on the limits that Rich described earlier. One other thing I'll just talk about on the underwriting thing is there are oftentimes best terms provisions that are attempted to be put into policies, usually at the higher layers of a program that tries to, it's like a most favored nations type of clause. That can really be disastrous if there is some policy in the tower that is different or has more limited terms than potentially others in the program and just need to be aware of these things. They're often attempted to be slipped in, in my experience at least. Right near the renewal date, so there's not a lot of time to deal with them. You have to be vigilant about knowing what sorts of endorsements are being tacked on to the policies at the last minute. Again, that's something that should be a joint project with your broker, but it's definitely something you need to take into account. So we're now going to segue into actually perfecting your rights to coverage under the policy. And if you get into a claim dispute, how you may need to deal with the underlying defense issues and then perfecting rights under the Bermuda program. And I'm going to turn it over to Catherine to take this on.  Catherine: Thanks, John. So as Rich touched on at the start, the notice provisions in a Bermuda form policy are really important. And first point to note is that the notice clause will operate to trigger cover. And its second purpose is that it fixes the limits and retentions that will apply. What I mean by this is that the timing of the notice and the policy year in which it is noticed will confirm the retention or policy limits and the terms and conditions that will apply to that claim. So that will include any retroactive dates, discovery provisions and endorsements. So the policy year to which it's noticed is really important. Failure to give proper notice may defeat a coverage claim and now that's not a hard and fast rule but the clause typically requires notice to be given as soon as practicable and during the policy period or the discovery period and I say may defeat cover i mean the strictness of that is a question of New York law and will depend to the extent to which an insurer can show that it was prejudiced by the timing of the notice but typically the obligation to give proper notice will afford some sort of protection to insurers and in our experience is a real risk area for policyholders. And this on terms of formalities, notices must be in writing and we'll have to include general information about the underlying claim. The Bermuda Form also allows a policyholder to give notice of an integrated occurrence and we discussed integrated occurrences in some detail in our first podcast but in short it enables a policyholder to give notice of all of the personal injury or property damage claims that fall within the policy definition. If a policyholder is giving a notice of integrated occurrence the notice must be explicitly designated as such and it's important that any of these notifications are really carefully drafted and it has a significant impact on the volume of claims that are to be aggregated. So an overly broad notice might inadvertently capture issues outside the liability problem and if it's drafted too narrowly the notice may not capture the full extent of the problem particularly the case if the case theory as to the underlying issue changes as is likely to do. So over the first hurdle of notices the Bermuda Form also deals with the life of the claim itself and the conditions of the Bermuda Form set out the relationship between policyholder and insurers once there is a claim that's been notified and the insurers are afforded a right to associate with the policyholder in the defense and the control of claims relating to the occurrence. And as well as the insurers having a right the policyholder has the obligation to cooperate with the insurers. And we typically are advising clients to keep insurers notified of all material developments in the underlying actions. And this brings us on to notice and consent settlement. Obviously, when dealing with significant must-talk claims and underlying issues, the priority of policyholders and our clients is to resolve the underlying liability. The loss payable conditions in the policy envisages that a policyholder will seek and obtain insurers approval of settlement in writing. Practical issues that arise in our experience in relation to complex towers of insurance, where it might be unclear which ultimate attachment point the liability is going to reach. And it might be unclear whether consent of all the insurers in the entire tower is required, or simply those whose layer is affected. So depending on the particular facts and circumstances, it might generally be sensible to notice all insurers of the proposed settlement to avoid issues down the line. And of course, we've all seen that specific issues can arise where an insurer who has been asked to consent decides to ignore the request. And usually, if they ignore a request of consent, they can't then turn around later and invoke a lack of consent as the defenses are not paying. But it just really reinforces the fact that these policies do require significant interaction with all insurers no matter where they sit on a tower.  Richard: I just want to add a couple more things about this, just because one of the first things that happens in a Bermuda Form arbitration is there's a lot of hearings about disclosure. And so when you're cooperating or you're dealing with requests to associate or allegations that you have to cooperate, just keep in mind that at the level of the claim, what you need to do is you need to protect your privilege. And you have to have an eye on protecting the privilege information, the core privilege information. So in general, what we advise is you provide everything that crosses the line. What that means is all the underlying pleadings, everything that you're sending to the people who are making claims against you, everything they send to you. If you provide your defense counsel to give an update of the case, just like in any U.S. case, you do it by teleconference with an instruction to your defense counsel to not talk about privilege matters, but talk about things that cross the line. One thing that will often come up in these arbitrations is what they call the common interest or a waiver of privilege because the carrier is in a position, is in the same position as the policyholder. I think generally after reservation of rights, that shouldn't survive. But as a general matter, protect your core privilege material and also send correspondence to the carriers as if you are setting up a direct examination or a witness statement for your witness to show how much cooperation we were affording the carrier. And so there's a written record of everything that the policyholder was doing to comply with its duty to cooperate, although not to share privileged information.  John: So I think we're now going to talk about some settlement coverage issues that almost always arise in these disputes, given the amount of money involved and how much effort needs to go into resolving claims that reach attachment points in the hundreds of millions of dollars. But fortunately, New York law on this topic is generally pretty favorable for policyholders. There's a leading Second Circuit case called Luria Brothers that talks about what a policyholder needs to do to receive coverage under New York law for settlements. And it's basically a reasonableness test that takes into account all the factors and issues that your company is dealing with and defending, you know, a series of what is typically a series of claims. And all that needs to be ultimately demonstrated is that under the circumstances that you were facing at the time, those claims are resolved. You know, was there a rational, reasonable approach taken to valuing the claims and the exposure the company was facing? And then, you know, a resolution that was negotiated that essentially matches up with what a normal, reasonable business would do to protect itself in resolving claims like those that are pending against you. A related issue that often gets litigated in these arbitrations is when there are claims that are asserted in the underlying cases that are both in the covered basket of coverage and some that may not be covered. The classic example is where someone is facing a series of tort claims and they're alleged to have been negligent and engaged in some type of intentional conduct that would arguably be excluded under the policy. Again, New York law is generally favorable on this point. There's a whole line of decisions. It's called the relative exposure test. And, essentially what the policyholder needs to demonstrate only is that they've entered into a reasonable settlement that would satisfy the Luria Brothers test. And then there's a presumption that arises that all of the settlement is covered and the burden of proof shifts to the insurance company to demonstrate if they can, that some of the claims were paid for were outside the scope of coverage that were provided by the Bermuda Form. You typically prove this to a certain extent with testimony from defense counsel about things that cross the line, back to Rich's point about the privilege, often expert testimony is used to say that any reasonable company faced with the avalanche of claims that they've settled would have acted in accordance with the way the settlement was handled and papered. And there's lots of ways to work through this, but it's something that defense counsel, in-house counsel, and coverage counsel should be working closely on together so that it is documented and papered as best it can be with the eye towards avoiding having this issue become a big problem in an arbitration down the line. So we've covered some of the major points on perfecting the claim. Now let's talk about how the dispute resolution process and arbitration works under the Bermuda Form. And for that, we'll have Catherine get started.  Catherine: Taking it back to its sort of basic level, the policy is a contract between the insurer and the policyholder, and as such, the arbitration clause in the policy is private as between those contracting parties. And as a matter of English law, arbitration is a confidential process and awards aren't public. So it's not therefore usually open to either the policyholder or the insurer to use one award as a precedent in a case against another insurer or policyholder. All that said, the insurance market is pretty small and people talk. So insurers participating on a program will be well aware of other decisions made on that program if there are multiple arbitrations against multiple different insurers. And they will also be aware of claims involving other policyholders. So if the same liability issue is arising throughout the market, the chances are that insurer will be sitting on a program for multiple policyholders and they'll be aware of the coverage issues arising under those programs. So given the inherent confidentiality surrounding arbitrations, and that it's a private dispute resolution mechanism between policyholder and insurer, it's challenging in our experience to join arbitrations together without the consent of the insurers involved. And it's sometimes a frustrating position where there would be significant cost savings for a policyholder inviting only one arbitration against its insurers. In practice, it's pretty difficult to persuade insurers to combine their arbitrations.  John: So now I think we're talking about how do we get the process started? I mean, it's typically a three-person arbitration panel. Each side gets to pick one, and the process is started by a notice of arbitration either from the policyholder or the insurance company to the other party designating their arbitrator, and then there's a 30-day period for the other side to pick theirs. And then there's usually a negotiation process that leads to the selection of the chairperson for the panel. The world of Bermuda Form insurance arbitrators is a pretty small one, and there are an enormous number of repeat panels and repeat players in this. So it is really important you're working with people who know that pool of candidates and also know kind of the general thinking that they have towards insurance issues because they will have likely seen some of these issues in other disputes previously. And it very much operates like a small club, so to speak, with the arbitrators typically having characteristics of either being a retired English judge, either still practicing or retired, now KC, who's had a substantial practice in the insurance space. And then there are often some U.S. lawyers who serve as arbitrators over there who have significant insurance background from their practices.  Richard: The only thing I'd say about that is sometimes you'll have an issue in your case that's just not understood by KCs being like, how could American juries do this? And sometimes you'll want an American practitioner or American judge to be able to explain that, you know, say liabilities for which the policyholder really had no responsibility are still being heaped upon them. And that that's just something that happens in parts of the United States.  John: Yeah, and it's hard to overstate the importance of this selection process because it often can be outcome determinative. So, you know, focusing on panel selection and doing your due diligence as best as you can on getting, you know, a panel that you're comfortable with is really critical to the process. It's really hard to overstate how important it is. But, Rich, go ahead on other characteristics of the panel.  Richard: Well, they're very expensive. KCs are very expensive and there's a little bit of sticker shock on that. And the other thing that you can expect is that when they see what each individual is getting paid, they're all going to want to get paid the highest rate of any of the three. And there's not a whole heck of a lot you can do about that, especially at the beginning of an arbitration.  John: Yeah. And one of the issues that's a little different about the way arbitrations work under this form is all of the arbitrators have to swear to neutrality. I mean, it's different in a lot of respects from a U.S. Arbitration under the AAA format or jams or something like that. You know, arbitrators are not party affiliated like they often are in the U.S. and so the conflict issue and things like that is not something that really has much weight in London like it might in the United States. And, you know, once the panel is in place, they're kind of off on their own as a three, three person group that operates entirely independently of the parties and is not to be dealt with, you know, other than administrative things. So it's, it's a very different system. And, and, you know, I think it works just as well as the U S system. You just have to be aware of how, how it operates in a slightly different fashion. But Catherine, why don't you tell us about the timing and process?  Catherine: Yeah, sure, John. Thanks. I'm talking about a bit of logistics. So, yeah, as John mentioned, there's a pretty narrow pool of specialist arbitrators who hear these. They're also very busy. And combining that with the barristers that are usually appointed by each party, fixing the final hearings can be challenging. And for hearings over a week, I think you're looking 18 or more months ahead. So it's not a quick process once you're in the arbitration and I'd say 18 months is still pretty quick in some of our experience in terms of structure they follow a typical English civil litigation format so for any international listeners these are not memorial style pleadings you'd get in some other arbitrations it's rather an exchange of evidence at various stages and for those in the US there are no depositions and I'll just run through the steps very briefly. The first stage is always an exchange of pleadings so statements of claim defense and counter claims there's then a procedural hearing which sets the order of directions for the remainder of the arbitration and the first sort of evidential step is then disclosure or document production often by Redfern or Stern schedules which is a common feature of arbitration generally typically the discovery or disclosure burden is going to be on the policyholder as that's the party with the relevant documents regarding the underlying claims and liability fully appreciate it's going to be quite extensive and therefore quite expensive for when you're dealing with the mass talk claims and frustratingly for policyholders is quite often minimal disclosure by insurers. Once the document production stage is over, it's then on to witness statements. So these are written witness statements prepared by each party, sort of advancing its own factual position. And there were no depositions. What happens at the final hearing is that the witnesses attended for cross-examination and they're then cross-examined on the points made in their witness statement. After the exchange of written witness statements, there's then expert reports. Then it's preparation for the final hearing which will be involved preparing written opening submissions which in England and Wales is referred they're referred to as skeleton arguments then there's the main hearing followed by written closing submissions if the tribunals ask for them, and then the preparation of the award by the tribunal and I think Rich is going to talk to us a little bit more about some of the logistics.  Richard: Yeah I just have a couple brief points you know one of the points is you will be very well served by hiring a barrister to present your case. John and I did this one time without a barrister. It went much better with the barrister. Another issue is whether you have English solicitors. If you are a US firm that has a policyholder as a client, there's just so much groundwork that needs to be done over there. If you don't have a London office in that law firm, you probably need to hire a solicitor as well as a barrister. Another issue that comes up is procedural or substantive law. UK law will cover the procedural issues. US, typically New York law will cover the substantive issues, but there are some things that fall between the cracks. For instance, we had a case where privilege attached to what we'll call peer reviews of doctors. And was that California privilege? Did that apply or would it be evaluated under English law? Other issue that comes up is interest. Is it substantive in New York law, or is it procedural in English? And that's still up for a little bit of debate.  John: Yeah. And one of the things that is unique about this is that these rulings are all supposed to be confidential, but this goes back to what I was talking about earlier and the due diligence and importance of selecting a panel. Even though everything is supposed to be confidential, there is a small cadre of people who seem to know the result of just about every arbitration that happens. Maybe not all the details, but at least who won and who lost. So although there isn't precedent in the traditional sense of being able to cite to another case or another arbitration award. People do know what is going on in these cases, and it's important that you be aware of that. And even though there isn't some website or books that you can go look up the results of all of these prior arbitrations, you do need to have people on your team who do know what's going on over there and how these things are proceeding in other matters. So just a point there.  Catherine: Thanks. Yeah, just the last point for me on this is a fairly unique aspect of the media form arbitrations, which is a feature of English procedure. And it's certainly a novel point for our US clients. So the usual rule in England is that the losing party pays the winning parties legal costs and expenses. In these types of arbitrations, there's usually a fairly clear a successful party with either the insurer being ordered to pay the claim or the policyholder being denied coverage. If there is an uncertainty then about who has won and who has lost the tribunal will typically be asked to determine it. The rule as to cost shifting and the losing party paying costs doesn't mean that there's an open-ended indemnity for all costs but a successful party in the arbitration might recover anywhere between 65% and 80% of its legal costs and expenses.  John: Just to close this out, we want to highlight a couple of points that we hope you've already gotten, but just to emphasize the notification process and the communications process with the carrier is critical. It's a little different than dealing with kind of traditional US domestic insurers. So you need to work closely with your broker and with a knowledgeable coverage counsel on that. That's also, that same logic applies to the structuring of the right legal team for these because although there are similarities to arbitrations that occur domestically, there are unique aspects. And as Rich said, the happenings in London, if that's the form as opposed to Bermuda, are often substantial. So having a cross-ocean team in place is really critical. I already re-emphasized the picking the right panel and doing your due diligence there. All of these are our key points. And we hope that we've given you a little more understanding of the Bermuda Form process and happy to help with any questions that may arise. And we thank you again for listening to this latest podcast of Insured Success and hope you keep on listening. Thanks very much. Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's insurance recovery group, please contact insuredsuccess@reedsmith.com. Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.  All rights reserved.  Transcript is auto-generated.

In 2024, the citizens of more than 60 countries have gone or will be going to the polls to exercise their electoral rights, leading some to dub this year the “super-cycle” election year. The political change that some of these elections will bring could also bring political risk, but political risk insurance can mitigate some of those risks. In this podcast, Laura-May Scott, Emily McMahan and Katherine Ellena discuss what this insurance is designed to cover, how it could be triggered during this year’s elections and some practical considerations for evaluating a company’s risk profile and insurance suites in respect of political risk. ----more---- Transcript: Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's Insurance Recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist.  Emily: Hello, listeners, and welcome to the Insurance Success Podcast. My name is Emily McMahan, and I am an associate in the Global Commercial Disputes Group at Reed Smith in London.  Laura-May: And I'm Laura-May Scott, a partner in the Disputes Group at Reed Smith in London.  Katherine: And lastly, I'm Kat Ellena, an associate in the Insurance Recovery Group in Los Angeles. Today, we're going to talk about a key insurance in a business's armory, political risk insurance. We will also be considering this type of insurance in the context of elections. Emily: So this year, over 60 country citizens have gone to or are going to the polls to exercise their electoral rights, dubbing 2024 the super cycle election year. As we know, political change brings about uncertainty and therefore increased risk for organizations operating from or doing business in those affected countries. This is where political risk insurance can step in to mitigate some of these risks experienced by organizations that are associated with political change.  Laura-May: Exactly that. And for those experienced in insurance and risk management, political risk insurance isn't just a peripheral concern. It's a critical tool in strategic planning and operational continuity. This insurance serves as a crucial tool for mitigating uncertainties that arise from political shifts, which we often see are magnified during elections or political unrest.  Katherine: So with that backdrop in mind, in the next 10 minutes or so, we will explore three things. First, what political risk insurance is designed to cover. Second, how this coverage could be triggered in light of this year's super cycle of elections throughout the world. And lastly, some practical considerations for risk managers and company executives alike when evaluating their company's risk profiles and insurance programs in respect of political risk coverage.  Emily: Great. So let's start with setting out what exactly political risk insurance is. Political risk insurance is designed to cover a policyholder's financial losses and operational disruptions arising from political events, such as government changes, policy shifts, civil unrest, and geopolitical tensions.  Katherine: That's right, Emily. and political risk insurance specifically provides coverage for risks like expropriation, political violence, currency and convertibility, and government contract breaches. During election periods in particular, these risks can become pronounced, which requires a proactive approach to risk management.  Laura-May: Yes, and in an election context, the risk faced by companies is twofold. So we have immediate market reactions, where there's riots and civil unrest, which results in business interruption. And you also have long-term policy implications as a result of government policy changes, which can cause more permanent implications for businesses. So let's look at how coverage can be triggered by elections. So elections inherently introduce a level of volatility that can disrupt business operations and financial stability. For instance, the anticipation of regulatory changes or shifts in foreign policy can lead to market volatility, which can ultimately then impact investment decisions and corporate strategies.  Katherine: Right. And as you can see, there are many types of political risks that can be addressed through political risk insurance. For many businesses, the most relevant types of coverage that could be called upon as a result of losses experienced due to election fallout would be business interruption, expropriation, or political violence coverage. However, organizations based in or with assets in traditionally less stable regions may also require political risk coverage for losses experienced due to, for example, forced abandonment of assets or forced divestiture from an affected location.  Emily: So, turning to ex-appropriation, this type of cover caters to losses experienced due to government acts which interfere with fundamental ownership rights of the insurance investment in the relevant region, which include but are not limited to confiscation and nationalization. This can occur when the new government enacts policies or takes actions to confiscate assets of the insured or chooses to nationalize an industry previously run by privately owned businesses which the insured participates in. This cover can also address the ex-appropriation of an insured's funds by a new government which are held in a deposit account in the affected country. This type of cover can also be triggered if the new government imposes laws or restrictions that selectively and discriminately apply to a company or category of companies, which includes the insured. And political violence insurance provides cover for the insured's losses due to physical damage to investments and assets, usually located in a particular area, and where those losses have been caused by political violence, such as war, revolution, terrorism, insurrection, riots, strikes, sabotage. Such causes can emanate from an election or be in direct response to an election result.  Katherine: So while ex-appropriation and political violence coverage may be triggered as a result of events following the election of a new government, the most likely type of political risk coverage that would become relevant in relation to an election cycle is business interruption insurance. Business interruption insurance provides coverage for financial losses experienced by the insured, which are caused by the insured's business operations having been interrupted by the covered political risk. So, for example, political tension surrounding an election could lead to rioting, looting, arson, and other violent acts that could force an insured's business to close or potentially lose revenue or suffer property damage.  Emily: So, we will now discuss some examples to highlight why political risk insurance is an important consideration in light of this super-cycle election year.  Katherine: That's right, Emily. So even in stable democracies, the election of new governments can produce losses for uninsured. Consider the 2016 United States presidential election and the election of Donald Trump. His tenure in office brought significant policy change, particularly in trade and foreign relations. Both U.S. and international businesses involved in global trade practices face new tariffs and regulatory hurdles. And these changes force companies to re-evaluate their risk management frameworks and in many cases increase their reliance on political risk insurance. In fact, there are legitimate concerns that should President Trump be re-elected this November, the U.S. could withdraw from international organizations like NATO, which would have widespread geopolitical consequences. There are also concerns regarding rioting and other public disturbances related to the U.S. Election this November. According to the U.S. Attorney's Office, the riots after the 2020 U.S. elections alone caused approximately $3 billion worth of damage. And the unpredictability of the upcoming U.S. Election this November emphasizes the necessity of robust risk management strategies.  Laura-May: And political upheaval due to elections is not limited to the U.S. For example, according to the French government, the anti-government yellow vest movement in France in 2018 caused over 200 million US dollars worth of damages. Kenya also experienced significant rioting and violence following its general elections, most notably after the 2017 presidential election. That election, which took place in August 2017, resulted in widespread unrest due to allegations of vote rigging and irregularities. The results were in fact later annulled, which led to further tensions and violence. And the exact quantification of the total loss varies, but the financial impact of the 2017 post-election violence in Kenya was extensive, and it affected multiple sectors, and it slowed down the country's economic growth.  Emily: So, as we have discussed, not only can elections result in short-term reactions, such as political violence or rioting, but can in turn result in longer-term shifts in government policy and regulation. Political risk insurance can help provide a buffer against the unpredictability of a new government's priorities following an election, which is why it is integral for companies to assess their exposure in this super cycle year and assess whether their current insurance suite is sufficient.  Katherine: So now that we understand both what political risk insurance can cover and the potential impact elections can have on a business that could trigger losses which may need to be met by this type of insurance, let's discuss what companies can practically do to ensure they're catering to the risk posed by a super-cycle year.  Laura-May: Companies should adopt a practical approach to managing political risk insurance during election cycles by undertaking comprehensive risk assessments. And this can be done internally at the business or through the engagement of external political analysts and risk consultancy firms who develop scenario-based evaluations, providing a spectrum of potential outcomes and their implications for the insured.  Emily: And once a comprehensive view is established of your company's risk exposure to political risks, companies will also need to ensure that those risks are met, either through strategic business changes or mitigation measures such as insurance. Laura-May Scott: Yes, and tailoring a company's insurance policies to align with the specific risk exposure identified and the geopolitical landscape of a business is crucial. It's something that we always come back to when we're talking about insurance. Cover needs to be tailored to a business's risks. Insureds must adopt a multifaceted approach to risk management. And this involves not only securing appropriate political risk insurance, but also doing other things like diversifying investments, staying abreast of political developments, and continuously refining risk assessments based on emerging data and trends.  Katherine: And given that one of the most common types of losses a business may face due to an election is business interruption, companies should specifically review their business interruption policies to ensure that it would respond to the risks identified by each individual business.  Emily: So on that topic of business interruption, when you review your company's current business interruption insurance, we recommend that you consider the following questions. First, does access to the business's premises have to be entirely prevented, or is it sufficient that access is merely hindered to trigger cover? Second, are there any geographical limitations to cover that could limit the cover available? On that note, we recommend reviewing definitions such as vicinity or similar types of geographical terms. Third, are there any monetary thresholds, monetary deductibles, or time deductibles for accessing this cover? In other words, is there a period of time or an amount of loss that is for the insurer to account for before insurance kicks in? Fourth, what is the definition of damage and is it wide enough to cover possible losses? And lastly, consider definitions like the definition of civil unrest or other relevant terms that operate within the specific political risk cover. The political landscape is constantly changing, and with the increasing prevalence of disinformation and social media, there is a risk that losses experienced by a business due to an election may not fit neatly into some of the legacy language in a political risk policy. We recommend that businesses think creatively about what types of events emanating out of an election could give rise to losses to ensure they are appropriately covered. With that said, elections also present opportunities. A sophisticated risk management strategy encompassing diversification and comprehensive insurance coverage presents an opportunity for businesses to grow and prosper.  Laura-May: Exactly that, Emily. Use the political landscape change to ensure that your business is appropriately covered from an insurance perspective. So in summary, political risk insurance is an integral component of strategic planning for businesses and investors, particularly during election periods. The volatility and uncertainty elections bring can significantly impact various sectors, and being equipped with robust risk management strategies is critical.  Katherine: So what are some key takeaways for companies in this super cycle election year that can help ensure potential risks are identified and also mitigated? First, it's crucial to continue to stay informed on political developments, polling data, and potential policy changes in the regions affecting your business. Second, businesses should regularly evaluate the relevant political landscape and its potential impact on business operations. Thirdly, businesses should also ensure that they're diversified, and they can do that by spreading their investments and operations across different regions to mitigate localized potential risks. Finally, it's imperative that companies review their insurance programs, specifically their political risk coverages, to protect against significant uncertainties. We also recommend that companies speak to their insurance brokers who are well placed to ensure that any identified political risks are properly mitigated through the right insurance policies. But in addition to speaking to insurance brokers, businesses can also consider engaging other external experts, such as political analysts and risk assessment firms that can help develop an even more robust risk management strategy.  Emily: Great. Thank you, Kat. And thank you, Laura-May. And thank you, listeners, for turning into this podcast. If you enjoyed this episode, please subscribe, rate, and review us on your favorite podcast platform and share your thoughts and feedback with us on our social media channels.  Laura-May: Yes, indeed. That's all for now. Bye, everyone.  Katherine: Thanks, everyone.  Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's insurance recovery group, please contact insuredsuccess@reedsmith.com.  Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.  All rights reserved. Transcript is auto-generated.

In this podcast, Bert Wells, Cristina Shea and Adrienne Kitchen of Reed Smith’s Insurance Recovery Group delve into the critical topic of insurance coverage for supply chains, highlighting the significant risks and disruptions that can impact global logistics. This episode explores how events like political instability, cyberattacks and natural disasters can disrupt supply chains, and highlights the essential role insurance plays in mitigating these risks. The team shares real-world examples of supply chain disruptions and the insurance lessons learned from these cases, emphasizing the importance of understanding risks and ensuring adequate coverage. ----more---- Transcript: Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's Insurance Recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist.  Adrienne: Welcome to Insured Success. My name is Adrienne Kitchen. I am a senior associate in Reed Smith's Insurance Recovery Group. Joining me are Bert Wells, a partner from our New York office, and Cristina Shea, a partner in San Francisco. Today, we're talking coverage for supply chains. Supply chains are relationships between a seller or manufacturer of goods and the supplier of those goods or things like the materials incorporated into products, raw materials, component parts, things like that. Supply chains can be disrupted by numerous things, whether price changes, transportation or storage failures, labor shortages, political instability, man-made physical losses to plants like fires, storage facilities, stores or cyber attacks, all of which pose a significant risk to businesses. A disruption in any part of the chain can cause losses in other parts of the chain. Insurance has become central to managing risk in global supply chains and logistics, particularly as they grow increasingly complex and vulnerable to disruption. Some types of insurance that may help cover losses to supply chains are contingent business interruption, supply chain, and trade disruption or cyber insurance. Other coverage types may cover some potential gaps in these insurance types. Global supply chain risks also is a focus of national policy and security. Cristina, would you like to discuss some of those?  Cristina: Yeah, thank you, Adrienne. So focusing on the U.S. first, you know, going back about, I don't know, 12 years or so, the U.S. Department of Homeland Security really started to recognize and understand the importance of securing the global supply chain. And along with that was recognizing, you know, its vulnerabilities and how it was susceptible to external forces. So to ensure that the global supply chain continued to function smoothly, the Obama administration adopted a national strategy in 2012. And that was designed to bolster and support the efficiency, I guess, of the insecurity of the global supply chain and ensure that it was able to withstand evolving threats. And then, you know, during the pandemic, the strain on the global supply chain really, it was, you know, front and center. It was under a microscope. And following the pandemic, the Biden administration really greatly enhanced some of that implementation of that strategy. And they took that program and addressed some of the acute supply chain crisis that had arisen due to the pandemic. And in the context of that, the Biden administration created a council on supply chain resilience and it implemented the use of the Defense Production Act that allowed U.S. Manufacturers to start creating essential medicines in the U.S. in order to mitigate some of the drug shortages. And all along throughout both the Obama and the Biden administration, the real focus has been on implementing security measures to shore up the supply chain and to protect its infrastructure. And then similarly, the European Union has been developing its own regulatory initiatives that have gone, you know, hand in glove with a lot of the U.S. initiatives as well.  Adrienne: Thank you, Cristina. Recent cyber attacks highlight the scale and vulnerabilities related to the supply chain concerns. So now let's discuss some recent examples that have hit the news. Bert, would you like to start off?  Bert: Yes, thanks, Adrienne. In fact, it's not limited to cyberattacks. In fact, disasters of various physical sorts are also very much a reason for supply chain interruptions that cause loss. And I want to speak for a moment about the tragic collapse of the Francis Scott Key Bridge in the port of Baltimore in March of this year, 2024. And as our listeners will no doubt remember, that not only shut down the bridge itself, but prevented entry and departure from the port of Baltimore by shipping traffic. So it had an obvious and an immediate and extreme impact on parties that were shipping materials into or outside the port of Baltimore, which is not only a major port on the East Coast of the United States, but as I understand it, probably the largest port in terms of handling automobile deliveries to the East Coast. So it's a very significant interruption in supply chains for those that were expecting some material to pass through the port itself or that for some reason needed to rely specifically on the Francis Scott Key Bridge, although there were other routes around the missing bridge for vehicular traffic. And in this connection, I'd like to mention two types of coverage that are often found in property insurance policies that could well relate to the Key Bridge collapse and cover losses that arose from it. I think the most obvious example is the so-called ingress / egress coverage that is found in many property policies, which is intended to protect a policyholder that can no longer enter or depart its premises. And it's triggered if there's a physical loss or damage to a property that is used to access the premises of the policyholder, preventing that access. So in the Port of Baltimore case, although this is a very obvious kind of coverage to apply, and it very directly applies, it would be a relatively limited number of policyholders that lost ingress and egress, let's say, specifically through the bridge or specifically through the port. That is, businesses that had properties actually in the port that could not get access to shipping or departing. Thinking, though, about the broader impact of the loss of the bridge on parties that transship materials through the port and don't necessarily have properties adjacent to the bridge or the port, there's another type of coverage that is found in many property insurance policies called contingent business interruption insurance. The purpose of contingent business interruption coverage is to protect the policyholder from losses that arise when there's a physical loss, that is to say, loss of or damage to physical property at the premises of someone else in the supply chain that gives rise to a loss. And an example here might be a party that was trying to ship automobiles to a dealership, let's say, through the Port of Baltimore, which could no longer gain access that way or had to wait months for access to additional inventory of automobiles. The idea of contingent business interruption is that one of your suppliers has suffered a physical loss and therefore the type that's covered in the insurance policy and that there are ensuing losses to business income, for example. Well, an interesting facet of this is who exactly is the supplier of the services at the Port of Baltimore? And does that supplier constitute a supplier for purposes of insurance? This was a question that came up in a case by a caption, Archer-Daniels-Midland versus Phoenix Assurance several years ago, in which it was held that various authorities that managed the Mississippi River in that case were indeed suppliers for purposes of insurance. And here, we would expect that entities such as either the state of Maryland or the Port of Baltimore, which is one of its agencies, or the federal authority responsible also for keeping the port open, might be considered a service provider, therefore triggering contingent business interruption for this particular collapse of access through the port and across the bridge. Adrienne, did you want to talk about Colonial Pipeline?  Adrienne: Yes. Thank you, Bert. That was an interesting discussion and interesting issues that you might not expect. So the Colonial Pipeline attack in May 2021 was one of the first high-profile corporate cyber attacks that originated with a breached employee password as opposed to a direct attack on the company's systems. The Colonial Pipeline originates in Houston, and it carries gas and jet fuel to the southeastern U.S. and delivers about 45% of all fuel to the East Coast. In May 2021, a threat actor called DarkSide penetrated Colonial Pipeline's network security using a compromised VPN password. The threat actors stole some 100 gigabytes of data and infected Colonial's network with ransomware. In response, to contain the attack and due to fears the DarkSide might have information that would allow them to carry out further attacks on vulnerable parts of the pipeline, Colonial shut down its operations. That's a flow of more than 100 million gallons of fuel every day across thousands of miles of pipeline. It caused fuel shortages along the eastern seaboard, led to fuel prices hitting a seven-year high. The attack also led to emergency declarations by several states and the federal government and some various agencies. On May 9th, the Federal Motor Carrier Safety Administration issued a regional emergency declaration for 17 states and D.C. President Biden declared a state of emergency temporarily suspending the amount of petroleum products that could be transported by road and rail domestically. Ultimately, with FBI oversight, Colonial Pipeline did pay the ransom. It was some $4.4 million. DarkSide then provided a tool to restore the system, but it took quite a while to get everything back in working work. Six days after the initial attack, Colonial Pipeline was able to restart operations, and three days after that, operations had returned to normal. Although the DOJ recovered $2.3 million of the Bitcoin used to pay the ransom, Colonial Pipeline also suffered significant losses - investigation costs, loss of income from the multi-day shutdown, reputational damage, class actions alleging negligence and violations of consumer protection laws. One lesson learned from these attacks is the importance of various kinds of insurance, including cyber. Cristina, what are some other lessons learned from the trenches?  Cristina: So just using, you know, real world examples that we have handled here for our clients, we have a client that manages supply chains for restaurants around the world. And one of that that client's key business associates had a breach of their network systems and through that breach the threat actor was able to access our client's network system and caused a complete shutdown of its network and a shutdown of its supply chain throughout Europe and the U.S. So the client itself had a cyber policy and we filed a claim under that policy. The problem here was that the losses were in the $13 to $14 million range, but the policy had a deductible of $15 million, meaning the client had to cover the first $15 million of its losses before coverage under the policy would kick in. So then we looked at some of the agreements between our client and its business associate or vendor. And through those agreements, the vendor was supposed to have added our client as an additional insured under its own policies. So effectively, that would have allowed the business associates policies to cover our client. But it turned out that the business associates insurer had canceled its policies the year before the incident. And the business associate either didn't realize that or realized it and didn't tell our client. But either way, our client was not able to recoup the benefits under those policies either. Long story short, our client had an interest in maintaining its business relationship with that vendor. So we ended up reaching a settlement with them, but it was a long protracted process. It really put a strain on the business relationship and it was a real distraction to both businesses. So, you know, I think that's a really good example of some lessons that we all learned from that. Number one being it's really important to understand, for every enterprise to understand where your risks lie, understand financially how much it's going to cost you if your systems are down for two days, two weeks, two months, and then determine whether your deductibles are set at the right place and whether additional policy limits are needed. You know, some companies make an intentional decision to set high deductibles and cover the first, whatever, $15 million, $20 million in the event of this type of breach. But, you know, that's fine if there's a certain logic to that for some businesses. But other businesses often buy policies straight from a broker without understanding the, you know, what the implications are and how it would look in effect if they were to have some sort of breach and disruption of their supply chain. And I think the other important lesson here to be learned is that if you are a business that has entered into these business associate agreements with vendors that require the vendor to insure you, those should be reviewed annually just to make sure that everybody still understands what is supposed to be provided under those agreements and that everything that was intended to be provided, like in this case, being an additional insured, is still intact and still effective.  Bert: That's a great point. And I would add that just, I'm sure you've seen this too, that in many business associate or counterparty relationships, you'll see requirement of notice if insurance is canceled, as well as a requirement that it be maintained. Although a breaching party in one respect might breach in another respect as well. So that's no guarantee that the insurance will remain in place.  Cristina: Yeah, you know, my recollection is, Bert, that they did have an obligation under this agreement to notify, but it wasn't entirely clear that anybody at the vendor knew that the insurance that was supposed to be provided to our client had actually been canceled. So again, it was a massive distraction and they'd wanted to maintain this business relationship. So we tried to get past it as quickly as possible.  Bert: Well, continuing with the theme of sort of lessons learned from client experiences, I'd like to briefly share the experience of a client that I won't name that is in the consumer products industry. It supplies retailers, its product is in constant demand, and it operates or leases warehouses across the country in order to be able to continually restock retailers with their requested orders. Well, this is a classic complex supply chain scenario in which retailers are connected to the manufacturer through a distribution network passing through warehouses. And among the facets of that distribution system is something that seems very prosaic, a piece of software that tells warehouses what products to pick and what pallets to pack them on and what trucks to load them into and in what order. And my client was in the unfortunate position of having adopted an update to its picking and packing software, well having i should say having written it having designed it and having tested it extensively in what they call in the trade a sandbox to ensure that there were no glitches or bugs in that software so that it would operate properly when rolled out to numerous warehouses across the country. And lo and behold, the sandbox, I guess, wasn't big enough, didn't have enough sand. And when the software was rolled out, it froze. It offered nothing to the warehouses, no guidance at all. So warehouses across the country found themselves inundated with orders from retailers, but no capacity to fill them efficiently at all. And in some cases, just completely unable to fulfill the orders. This is a classic story of for want of a nail, the shoe was lost. For want of a shoe, the horse was lost. For this client, the consumer products manufacturer, this was an eight-figure loss, even though it took less than a week to get most of the warehouses up and running again. But fortunately, in its cyber insurance, it had selected an option, which many policyholders don't pick, in my experience, an option for a type of coverage called system failure coverage. And this is exactly the moment that system failure coverage is called for. There's no cyberattack here. There was no malicious intent. Instead, an accidental operation of the system. Indeed, an accident with the software that occurred after extensive testing, which was believed to be sufficient for the purpose, resulted in the freezing of a wide swath of operations and a big loss for the client. Anyway, as I say, fortunately, they had good coverage. They had this system failure feature in their cyber coverage. The deductibles and the waiting period, the time waiting period that also acts as a kind of deductible before such a loss can be collected, were actually rather small. So we were able to prepare a proof of loss and with a very significant demand for that client that was squarely within the scope of coverage. So the lesson learned is simply think about the options. These things cost additional money, but consider, too, the risk that you as a policyholder may face for the failure of a critical piece of software. And that additional premium you may ultimately decide is very worthwhile. Well, Adrienne, we spent a lot of time talking about examples so far. Why don't we get into some of the coverage types that are available for the many different ways that supply chain disruptions can manifest themselves? Would you like to tackle that?  Adrienne: Sure. Thank you, Bert. And thank you both. Those are great examples and demonstrate how complicated supply chain disruptions can be, the various ways insurance can be implicated, and the importance of managing risk sort of beforehand as well as after. So thank you both for those. Several policy types may provide coverage. Bert, you talked about contingent business interruption, CBI, a little bit before. You specifically mentioned that it covers suppliers, and I just wanted to add that it can also cover purchasers and properties that attract customers to the policyholder's business. There's also something called specialized broad supply chain insurance. And it is broader coverage than CBI for supply chain disruptions. Supply chain insurance is sometimes called trade disruption insurance. These are specialized named peril policies that generally cover the loss of net profits and costs caused by physical or political perils. They may also cover losses from risks such as natural disasters, industrial accidents, a bridge collapse, production issues, employment and labor issues, infrastructure, riots, public health emergencies, a wide range of events. And cyber insurance is also a key insurance that may cover supply chains, particularly as the businesses in the supply chain rely on the internet, rely on software to make their supply chain work. Cyberattacks like denial of service attacks, extortion, and the resulting data loss can all affect the supply chain, more so because supply chains are increasingly reliant on computer systems for continuity of operations. Cyberattacks and other cyber disruptions, like the one you mentioned, Bert, can interfere with communication among those in the supply chain. So your manufacturers and your suppliers and your shippers and your warehouses, no one can talk to one another, so the supply chain shuts down in that way. Cyber insurance may cover a supply chain disruption caused by a computer virus, a malicious attack, or the resulting data loss. Third-party cyber insurance may provide some cover to businesses further down the supply chain if a cyber attack or system malfunction affects the supply chain and the policyholder is sued or has to indemnify a third party. Other coverages may help to fill some of the gaps in the more common ones that we've been discussing. Things like political risk and special contingency coverage. Political risk insurance is a specialized first party insurance that covers risks in politically risky parts of the world and may expressly insure against specified perils like nationalization of property, confiscation of assets, war, things like that. Cargo Marine covers the transportation of goods over the ocean or land, as well as any damage to the conveyance. Marine insurance may provide some indirect coverage for supply chain disruptions, things like coverage for equipment, merchandise, or goods that are in transit or being stored that may not reach their destinations on time or even at all. Port blockage, for policyholders whose supply chains depend on access to navigable waters, you may get time element coverage for a loss resulting from vessels being denied access to or egress from an insured facility or other property. They're the inability to deliver cargo from a vessel that does reach the facility if there's an issue with the cargo delivery. Civil authority and ingress / egress coverage. Bert, you mentioned ingress / egress a bit earlier. First-party property policies generally contain civil authority coverage, which covers business interruption losses and, in some cases, necessary extra expenses caused by the orders of local, state, or federal authorities, things like evacuation orders, curfews, and highway closures. There's also Directors and Officers coverage, which may protect board members, executives, directors, managers, and the companies they serve for claims and investigations of investors, third parties, and regulators. For instance, after a supply chain crisis, the officers and directors could be accused of failing to take proper measures to protect the business or third parties. Okay, so given how soon the U.S. election is now, we decided to play exit poll, in which our panelists will be asked a question that definitely has not been asked on any other poll, exit, or otherwise. Cristina and Bert, NASA launched Europa Clipper, its most expensive planetary probe ever, to explore an icy moon of Jupiter named Europa. Clipper's five-year journey will include gravitational ricochets around both Mars and Earth to slingshot it into the outer solar system, where it will eventually orbit Jupiter and repeatedly fly by Europa, but not land. NASA hopes the probe will detect chemical signatures of the contents of the water ocean under the moon's 10-mile-deep icy surface, giving clues as to whether some form of alien life may be present in that ocean. My question for you is, what type of supply chain insurance does NASA need now that this package is on its way to this distant icy moon?  Bert: Okay, well, I have some thoughts. I guess what occurs to me is that we have various suppliers here, and not just the suppliers NASA was counting on to get its probe ready in time, but I think Mars is a supplier here because Mars has to give a gravitational boost to the Clipper probe. And if Mars is a little late or a little early, that probe is not going to get exactly the gravitational boost it needs. That's the ultimate example of just-in-time supply chain strategy, if you ask me. Now, as to whether I would have insurance for that, I don't know. I think Mars' appearance is probably a pretty safe bet. If NASA's looking for insurance there, I think we should all be pretty worried.  Cristina: So I took a different approach. The way I saw this hypothetical was that if NASA is going to be navigating this ocean on the icy moon of Jupiter, then it should be looking to its marine insurer to cover the transportation and risks that are there under its supply chain. Bert: Well, thank you. And thanks, Adrienne, for moderating this. This was everything I could have expected and hoped for.  Cristina: Yeah, thank you, Adrienne.  Adrienne: You are very welcome. And hopefully the listeners, if they have any questions, will reach out to us and they can see that we in IRG love insurance and we also have a good time in coverage disputes.  Cristina: Thanks, everyone.  Bert: Thank you.  Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean and Reedsmith.com. To learn more about Reed Smith's Insurance Recovery Group, please contact insuredsuccess@reedsmith.com.  Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.  All rights reserved. Transcript is auto-generated.

From “greenwashing” to “greenhushing,” from sustainability goals to boardroom debates, ESG exposures are fluid and formidable. Learn from Carolyn Rosenberg and Jennifer Smokelin how claims have morphed and how pro-active strategies, including insurance, can be implemented to lower the temperature. ----more---- Transcript:  Intro: Hello and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist. Carolyn: Hi, everybody, and welcome back to Insured Success, where today our topic is It's Not Easy Being Green, ESG Claims and Potential Protections. I'm Carolyn Rosenberg. I'm a partner in the Chicago office of Reed Smith in our insurance recovery group, where I work with policyholders in connection with insurance review, as well as handling insurance coverage disputes and all kinds of risk management and corporate governance. My partner, Jennifer Smokelin, who is a partner in Pittsburgh, is steeped in energy and ESG and related issues and is one of our leaders in our ESG initiative. We're delighted that she is here today to help inform us and discuss these important issues. We've certainly talked about all the acronyms, ESG, DEI. Most people are familiar with greenwashing claims and, of course, the newest claim of green hushing. So, Jennifer, to try to hallucinate this a little bit further, when companies are talking about ESG and green hushing, what is the landscape? What is green hushing? Jennifer: Thanks, Carolyn. Companies are talking less these days about ESG in earning calls and marketing materials. But they are mentioning it nearly as frequently as ever in their financial reports and disclosures. The apparent disconnect here suggests that companies haven't fully shelved their sustainability-related goals. They're just talking about them less. There's a number of data points over the past year that indicate that investor interest in ESG has cooled down. Many companies in the last year have exited the Climate 100+, an initiative pushing companies to address environmental issues. However, many companies still recognize that investing in sustainability is important for long-term value creation. So they keep doing the initiatives related to sustainability, just not specifically labeling them as ESG. Companies have adjusted their terminology. As I said, they don't use ESG. They might refer to sustainability instead. We're even seeing some companies talking more in the language of clean air, clean water, and economic opportunity, effective and apparently palatable terms other than ESG. This trend, nicknamed green hushing, stems from a recent tide of ESG backlash and mounting legal considerations. Carolyn: What are some of those mounting legal considerations? Jennifer: In three words, Carolyn, litigation and regulation. From shareholder suits to regulatory actions to class action litigants that have lodged greenwashing claims against companies they accuse of releasing rose-tinted marketing materials. To those of you listening, we strongly recommend you talk to us or the lawyer you regularly deal with at Reed Smith regarding how to address these litigation and regulatory risks. Let me highlight some examples of legal risks and quick upshot regarding specifics to talk to Reed Smith about. First, there is a risk regarding NGO suits. These are suits brought against public companies for allegedly misleading climate change with regard to ESG. The up shot here is that it's important to regularly act on any given ESG commitment in meaningful ways that are grounded in science, regardless of how many years away a particular deadline for an ESG goal might be. We also recommend publicly sharing clear updates on progress towards any ESG goal. From a regulatory risk standpoint, we are still seeing a risk with regard to SEC regulatory action. This despite the fact that the public company climate disclosure rules are currently stayed due to a pending litigation in the Eighth Circuit. For example, the SEC has recently brought enforcement action for allegedly inaccurate representations of recyclability. The upshot here is that recyclability, as interpreted by the SEC, is not simply a matter of the materials used. There must be a process in place to facilitate the act of recycling the item. It is important to be aware of and consider recycling practices wherever a company operates and sells to ensure statements with regard to recyclability are accurate. Another takeaway here is that the SEC is willing to go after fines and civil penalties for such representations. On the DEI side, California may require employers to report voluntary social compliance audits. If adopted, this bill, called AB3234. Would essentially mean that if an employer voluntarily conducts a social compliance audit, that employer must then publish a clear and conspicuous link on their website to a report detailing the findings related to compliance with child labor laws. The upshot here is that this bill is likely to be adopted. AB3234 has received broad bipartisan support, easily passing in both the State Assembly and the Senate at the end of August in California. Governor Newsom is expected to sign the bill soon. The final risk we want to highlight is shareholder suits. We have seen these both offensively, that is, brought by shareholders, and defensively, brought by the company, to fend off shareholder proposals with regard to ESG issues from going to vote at a company's annual meeting. The upshot here is that, ideally, there is a shared desire to better a company between both the shareholders and the leaders of the publicly traded entity. However, these legal battles illustrate that there is a tug between activist groups and company leadership that is rife with legal risk. Carolyn: What about from a global perspective? I know we've been speaking about principally the U.S. I know there's much going on in the world. Can you tell us a little about that? Jennifer: Carolyn, we see even more potential liability across the pond. As an example, in France, there is a criminal complaint linked to contributions to climate change filed against an energy company and its directors and officers in France, from which the upshot suggests that there is a possibility of criminal liability for major decision makers at companies. Another takeaway point from this case is using timing of shareholder suits to influence shareholder meeting outcome. This complaint was filed a few days before the energy company's annual shareholder meeting, which included a climate-focused shareholder proposal. The criminal complaint would likely influence the voting shareholders regarding that climate action. So speaking of corporate and corporate officer liability, Carolyn, how can insurance help? Carolyn: The important thing about insurance is I think we start with the premise of looking at a director's and officer's liability insurance policy because that is typically where you would see coverage for an individual director officer's liability. And if you're a public company, D&O policies typically cover securities claims. So it depends if one of these suits led to stock drops or derivative shareholder lawsuits or claims against directors and officers in the company could very well be a house for that claim in a D&O policy. Private company D&O policies have broader coverage for the entity. And a key question to look at, which is what we do a lot of in reviewing insurance policies and negotiating for the most enhanced terms and conditions working with your in-house legal risk management and outside brokers, is that you want to also look and see whether there is potential coverage for investigations. For subpoenas, for regulatory actions against both individuals or if they're requested to provide documents, books, and records, as well as look in your policy to make sure there's no pollution exclusion. Although the claims against directors and officers are not for pollution, and therefore even if there were a pollution exclusion, it should not apply, it's best to look at your policies for any potential exclusions that could apply. Another important takeaway is that. When you are applying for insurance, typically you may be filling out a renewal application if you're renewing the insurance, but you may also be filling out longer questions and questionnaires if you're looking at insurance for the first time, or you may be looking at a broad panoply of options. And in looking at applications, you should be thinking about and being very careful about how you're answering. If there are questions asked about ESG initiatives, about DEI, about all kinds of what we would call under the rubric of environmental, social, and governance issues. That's because potentially insurance applications could be discoverable if considered part of the insurance policy. And, of course, insurers may be screening applications not just for underwriting but for purposes if there is a claim to determine whether or not there was any sort of alleged misrepresentation or omission in how the risk was presented to the insurer for purposes of the insurer turning around and using any sorts of exclusions or other terms and conditions against the policyholder. The important takeaway here is to have the insurance applications as well as the policies reviewed by knowledgeable coverage counsel. But D&O insurance is really the starting point. It's not the ending point. You could potentially have coverage for ESG-related claims under other policies, depending on how the claims are alleged and the causes of actions they're in. You could have environmental coverage claims. You could have coverage under general liability and business interruption. You could have employment-related claims and look under your employment practices liability policy. You could also potentially have coverage under a cyber or data tech and privacy policy, depending on, again, the tentacles, the allegations, the causes of actions that are alleged. The important takeaway here is to review your coverage before a claim, demand, or investigation or regulatory action occurs, and then if there is an issue, to take a look very carefully, work with knowledgeable counsel to determine when and how to report that claim, and then how to maximize coverage, not just for the defense costs of defending the action, but of course for any potential judgments or settlements. Those are some thoughts on how to access insurance in addition to good risk management reporting, regarding making sure your representations are careful and considered, as Jennifer was discussing. Jennifer, any last take away from your perspective? Jennifer: Carolyn, I think you did an excellent job giving an overview of insurance, and we discussed green hushing and the mounting legal considerations with regard to ESG claims. So, no, I have nothing further. Carolyn: Thank you. Well, thanks everybody for listening. Please reach out to us if you have any questions and we look forward to having you listen in on our next podcast. Thanks again. Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's insurance recovery group, please contact insuredsuccess@reedsmith.com.  Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.  All rights reserved. Transcript is auto-generated.

Most large U.S. companies buy catastrophic liability insurance through a Bermuda Form, a unique policy with many features designed to protect the selling insurance company. Further, Bermuda Forms require arbitration in London or Bermuda, under English procedural law and modified New York substantive law. John Ellison, Richard Lewis and Catherine Lewis explore how best to incorporate the Bermuda Form into policy programs, as well as the unusual hurdles to recovering under the Bermuda Form. ----more---- Transcript: Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policy holders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist.  John: Hi, everybody, and welcome back to Insured Success. our continuing podcast series of important insurance topics. And today's topic is the Bermuda Form Part 1. This will be part of a two-part series we're going to do on this unique insurance product. And today's focus will be on the history behind the Bermuda Form and its development, and then some of the key policy terms. And then in our next episode, which will be coming out shortly, we will discuss how to perfect coverage under the Bermuda Form and issues relating to the unique dispute resolution provisions that are in the form. Today, our presenters are going to be my colleagues, Rich Lewis, who's a partner in the New York office, and Catherine Lewis, who is a senior associate in our London office, and I am John Ellison, a partner in the Philadelphia office. The three of us work together often on these Bermuda Form matters, as do many members, other members of our group. And due to our firm's geographic setup, depicted today by Catherine in London and Rich in New York, you'll learn that our firm is uniquely qualified and situated to handle these types of issues. So, Rich, I'm going to turn it over to you to give us some of the history and overview of the Bermuda Form. Rich.  Richard: Okay. Well, I don't know, obviously, our listeners' experience with coverage disputes, but policyholders in the 70s and 80s started buying a lot of liability insurance, and that had to do with developments in tort law in the United States. And if you've ever been involved in a case involving those policies, they typically were occurrence forms triggered by injury or damage in the policy period. And the coverage charts, as you got later in the 70s and through the 1980s looked like ski jumps. Companies were buying hundreds of millions of dollars of insurance in the late 70s and the early 80s. This also, as I'm old enough to remember, accelerated a lot in the early 80s because of the high interest rates that insurance companies could get. It was something called cash flow underwriting, where they would underwrite lots and lots of policies just to get the premiums in to invest the income. The bill came due in the mid-80s for a couple of reasons. One, there were a number of coverage decisions in the asbestos context that said that multiple policies could be triggered by the same injury to one person. So that meant that in an asbestos case, many, many years of coverage from the early 60s through the time when asbestos exclusions were more common in the early 80s could be triggered. The second reason was circled liabilities from environmental cases. And as a result, everybody was recovering under these policies that had been sold for not very much premium so that the carriers could get the money in the door. And what happened was the liability insurance market crashed. You literally could not buy liability insurance from any of the major players in 1985. So what happened was a number of Fortune 50 companies got together with Marsh & McLennan and they created a Bermuda form company called ACE. And that started in 1985 and it would, it, it, provided liability insurance above $100 million. So true catastrophe liability coverage. And as Catherine will discuss, the core development of the Bermuda form as introduced and rolled out with ACE in 1985, and then another company, XL in 1986, was that it confined coverage to one year. So carriers weren't being held liable for years and years of coverage when they sold decades of coverage to somebody. The second part of the Bermuda form, which we will also talk about, is it allowed policyholders triggering that one year to spike their coverage all the way up a Bermuda form tower. And now I'm turning it back to Catherine.  Catherine: So as Rich said, the North American market policies were often written on an occurrence basis, and the Bermuda form is a departure from this. So for occurrence-based policies, their coverage is triggered on the occurrence of some event, for instance, when the bodily injury was suffered or the property damage occurred. And the other type of policy we're all familiar with is a claims-made policy. And this is one where the policy response is linked to the time at which the claim is first made by the underlying plaintiff. And it is the time of the claim made against the policyholder and not the time at which the underlying injury or damage occurs that triggers the policy response. And subsequent acts or omissions by the policyholder might affect the cover available, but the link of the policy to the underlying injury or damage is the time at which the claim is made. The Bermuda form is what's called an occurrence first reported form. And as the name suggests, it's a hybrid of the two. For an occurrence first reported form, it's the report of the occurrence to the insurers that triggers cover and the crucial report or notice is the first notice of such occurrence and the wording of the policy which we will come on to is such that notice is a mandatory condition to cover.  Richard: Which leads us into our next topic, which has always been a funny one for me, that when the forms were first rolled out in 85 and 86, as we will talk about later, and they're still controlled by New York law, but they also have a provision that says that the only thing you can look at is the policy language. You can't look at it in extrinsic evidence if something is ambiguous. The problem that the Bermuda Form Company soon discovered in ’85 and ’86 was that New York law was a, with regard to notice was a no prejudice state, meaning a carrier did not need to show that they were prejudiced by late notice to escape payment. And so policyholders recognizing New York law controlled ended up flooding Bermuda form companies with notice of every little claim because they didn't want to get poured out. So what ACE and XL did is they generated these things called notice guidelines that said essentially only give us notice of events that are likely to impact our layer, which I've always been amazed at the cheek of the insurance company, the Bermuda form companies to do that. Because if there is one body of people who are unlikely to look at something extrinsic to the policy, especially when the Bermuda form forbids you from looking at extrinsic evidence, it's the English barristers who are going to be on your panel. But anyway, it's now accepted that New York law has since changed. It's now accepted that you You only need to give timely notice of events that are likely to impact the policy. The next issue we're gonna talk about is batching and integration. Batching and integration, as I hinted before, is it's the flip side of the fact that only one policy period is triggered by a notice of an occurrence. What you can do under a Bermuda form policy is you can give notice of an integrated occurrence by designating a bunch of injuries as being related to an integrated occurrence or being related to each other. What that does is it pulls all of the injuries, regardless of the year in which they occurred, and regardless of the fact that you may have given notice in a previous annual period of an injury from a related occurrence as a separate occurrence. It pulls all of the injuries into the year in which you give notice of an integrated occurrence. There are some questions that will arise that we'll talk about in part two as to what happens if some of the injuries in your integrated occurrence happen before you bought the policy or what you do with regard to injuries that continue to occur after you give notice of an integrated occurrence. We'll talk about some of the devices that address that latter issue later. But what you need to know about an integrated occurrence is it's different from the ordinary common law concept of one occurrence and how you determine whether there's one occurrence or multiple occurrences. New York law on that is terrible. It doesn't bunch related injuries into one occurrence necessarily. And, Also, it's important under the Bermuda form that injuries that occur more than 30 days apart are deemed to have been caused by separate occurrences. So you have to be very aware of whether injuries that are caused by a common event or a common drug, whether you're going to aggregate them when you give notice of them.  John: So now let's come on to some of the specifics of the Bermuda form and kind of the basic coverage grant and coverage provisions. Provisions as Rich and Catherine were explaining this policy form has largely become a substitute for the what we call the historic occurrence forms and so in in that sense it it largely covers the same types of claims that a policyholder may face which are ones that allege either personal injuries or property damage or some type of advertising liability but within that broad scope, there are some unique concepts that differentiate the Bermuda Form from the old occurrence forms. And Catherine, let me pass it to you to start to walk through some of those.  Catherine: All right. So the Bermuda Form is, at its basic level, an insurance against legal liability. This is set out in the coverage clause. A policyholder must prove an ultimate net loss. This is obviously most easily satisfied by amounts that the policyholder has actually paid. There must be a legal liability to pay the ultimate net loss. That legal liability term is not defined and is therefore a matter for the governing law. It must also be in respect of damages, which is a defined term. Those damages must be on account of personal injury, property damage or advertising liability, as John said. The definition of damages is restricted to those which the policyholder is obligated to pay by reason of judgment or settlement for liability. As you can imagine, this is potentially challenging for policyholders where there is a commercial settlement and no liability. The final limb of the coverage clause is that the liability is encompassed by an occurrence, which we will come on to in a bit more detail shortly. But I guess the key takeaway from this sort of coverage clause is that the key to two, unlocking cover is actual liability. How that liability is established is a matter of New York law, which we can come on to and will depend, of course, on the particular facts at issue.  John: And we will dive into this a little more deeply in phase two of our Bermuda Form podcast. But one of the big differences between New York law and English law, for example, is what needs to be demonstrated by the policyholder to establish legal liability that would be covered by the policy. And fortunately for policyholders that buy the Bermuda Form, New York law does not require actual liability to be established in order to trigger the coverage. but we'll dive into that a lot more deeply in the next go-round. But Catherine, why don't you take us back then into some of the details of occurrence and how that works under the policy?  Catherine: Sure. Thanks, John. So we discussed already at a high level that the Bermuda Form is an occurrence first reported form, and the occurrence definition is therefore pretty important. It's also fair to say that it's a pretty complex definition, and it's performing a number of functions. And certainly in our experience, as a consequence of that, it can lead to certain coverage debates. But just taking a step back, the definition of occurrence seeks to achieve a number of things. It fixes the temporal limit of cover. And by that, I mean whether the policy responds to historic issues and how far it's forward looking. The definition also contains aggregation language and the extent to which claims can form a single loss. The definition defines the types of losses or the ensured perils. And finally, it deals with issues of intentional harm and fortuity. And I think Richard's going to come on to that in a moment. And so part of the complexity also stems from the broad type of harm that the policy is intended to respond to. And that includes where the actual harm has occurred or where it's only alleged. The policy can also respond to cases where there is injury of a prolonged period of time or where there's a single catastrophic event. And there will also be cases where liability is alleged but never proven and where the underlying facts might be disputed. So a fairly complex structure in that sense and the definition is rather than assessed in two limbs. The first limb applies to anything other than product liability claims and the second part applies only to product liability claims. Taking the first limb there must be an event or continuous intermittent or repeated exposure to conditions which event or conditions commence on or subsequent to the inception date and before the termination date which cause actual or alleged personal injury, property damage or advertising liability. And the second limb responds to actual or alleged personal injury to any individual person or actual or alleged property damage to any specific property arising from the insured's products that takes place on or subsequent to the inception date and before the termination date. Both limbs therefore require an actual or alleged personal injury, ] each as defined in the policy and for the product liability claims so limb two that injury or damage must simply arise from the products and there is no further qualification about how that injury should arise. The first limb which is anything other than product liability claims is on its face at least more specific as to how the injury damage or liability is said to occur as it seemingly requires a more concrete causal link to the event that said there is a reference obviously to alleged which suggests that the first limb does capture alleged injuries suffered even when none on the facts were so suffered. We discussed at the start of the podcast the difference between claims made occurrence-based and occurrence-first reported policy forms and it is in this definition of occurrence that distinction becomes very clear between the types of policy forms. It is in the definition that the timing of the occurrence is relevant and we can discuss in more detail the timing of when a claim is made when we discuss notice provisions later on and again in part two.  John: Yeah, and just to add one brief comment, Catherine, to your remarks, this is definitely one of the tricky areas of the Bermuda Form and it really is important when it comes to the point at which you're making a claim because often there are challenges from insurance companies about the scope of the occurrence or what falls within an occurrence that is noticed by a policy holder. So framing the occurrence and tying it to the specifics of the insuring agreement that Catherine just walked through is really critical. But we will, as Catherine said, we'll come back to that in a lot more detail in part two of this podcast. But now to make things even more complicated, Catherine, why don't we segue here into the integrated occurrence concept where we talk about how, you know, how we pull what would normally be considered a bunch of separate occurrences potentially under New York law into one giant integrated occurrence. How does that work?  Catherine: Thanks, John. And you're right, it just takes the complexity to another level, perhaps. And Rich touched on this earlier. But treating multiple losses as a single occurrence is a key feature of the Bermuda Form policy. The integrated occurrence language is not interchangeable with traditional aggregation language, but it is related. And parties to complex insurance programs generally will be well aware of the coverage disputes that can arise about the extent to which underlying claims are to be treated as a single claim for the purposes of the policy response and accessing limits of liability. So an occurrence under a Bermuda Form policy can be included in an integrated occurrence where there is an occurrence which we've discussed encompassing personal injury, property damage or advertising liability to two or more persons or properties commencing over, first, a period longer than 30 consecutive days, and second, attributable to the same event, condition, cause, defect, hazard, and or failure to warn of such. Quite a mouthful. To take full advantage of the integrated occurrence wording, the noter should be specific that the occurrence is an integrated occurrence. So if the aggregation is permitted under the language, then one looks to the aggregating language in the cause. This is very broadly drafted and requires only that the injury or damage is attributable directly, indirectly, or allegedly to the same actual or alleged event, condition, cause, defect, etc. So the question isn't what the injury or damage is, but what caused the injury or damage. And this broad aggregation language can enable a policyholder to aggregate a wide number of claims to take advantage of the full limits of liability and pay only a single deductible. And a fundamental issue that we see arising out of integration occurrences under the reform is whether the cause or defect is the same.  John: And again, just to reiterate, because this cannot be overstated or said often enough, These terms, occurrence and integrated occurrence, are critical to understand when presenting your claim to the insurance company so that the description of it is framed properly and as broadly as possible to encompass as much of the risk and the loss that the policyholder is facing. Fall within the scope of the claim that is being presented. Again, we're going to come back to this a lot in phase two of the podcast. But Rich, why don't we turn to some other issues that arise under the form that have some unique aspects, especially under New York law?  Richard: Well, the Bermuda Form states flatly that any injury, actual or alleged injury that is expected or intended will not be part of an occurrence. And this is a common issue that has arisen in New York law for decades. And New York law couldn't be better if I'd written it myself. Essentially, there's an old learned hand case where he said, you can drive around New York running every red light and know that eventually you will get in a crash, but the specific crash you get in won't be expected by you. And that's essentially the standard in New York. You have to to specifically intend, the policyholder has to specifically intend to intend the injury to the specific person to which the injury is actually or allegedly occurs. Whose knowledge is it? Well, ordinarily under New York law, it would be a member of the control group. One thing that has arisen in a couple of our Bermuda Form cases recently is that in the later versions of these Bermuda Forms, and we're on version four for XL and version five for ACE, the carriers changed expectation or intent of the insured to expectation or intent of an insured. And that can be an issue. We had a case a while ago in which that involved unnecessary surgeries. And the issue is whether the hospital expected or intended the injuries to the patients. But, you know, The carrier argued, well, obviously the surgeons did, and the surgeons are uninsured. And we had to litigate the issue of whether the surgeons were essentially on a frolic and detour or their actions were not attributable to the insured being the hospital. Yeah. The question of whether it's a subjective or an objective intent, this comes up almost in every case. Obviously, the policyholder will say, well, it can't be objective because an objective intent is just negligence and liability policies are supposed to cover negligence, so it has to be subjectively intended by the insured. Then the issue arises sometimes of the timing of the determination and the policyholder will say, well, the timing of the determination has to be the first day that I bought Bermuda Form coverage because technically Bermuda Form policies are a single policy that's renewed from annual period to annual period. What the carriers will say is that it's a rolling inquiry, especially like in a drug case where you continue to sell a drug and it continues to, you know, there are minor levels of injury, and then there's a great deal of injury. Carriers will say at some point on this rolling inquiry, you expected or intended injury from the drug if you continue to sell it. Another issue is what's called a maintenance deductible. That is a mechanism in the Bermuda Form that recognizes that a policyholder that sells drugs or sells toasters will inevitably. Have injuries every year from that product if they sell a bunch of them. And so what the maintenance deductible says is, you know, the ordinary level of injuries caused by your product, won't cause an eventual spike in injuries in a particular year to be deemed to be expected or intended, just that the policyholder will have to eat a maintenance deductible of essentially the noise level of claims. The final issue is what have been in since I think the third ACE version, which is a commercial risk exclusion, or actually XL4 and ACE5, I think. And the commercial risk exclusion deems injuries from a product to be expected or intended if those products are released into the market after notice of an integrated occurrence. It does accept injuries that are vastly greater, vastly different or that are different or vastly greater in magnitude by order of magnitude. And ordinarily the carriers say that means 10 times as big. Back to Catherine for some exclusionals.  Catherine: I’m going to talk briefly about the known occurrence exclusion. And this goes to the issues of fortuity and the fact that the issue must be unexpected and unintentional. So there's no express exclusion in the standard form that mentions fortuity or known loss or known risk and one argument for the rationale for that is that those purchasing insurance and this type of insurance in particular do so because they expect an element of risk or loss and provided that remains uncertainty as to the type and level of loss it will not offend the fortuity principle. As always and as Rich said earlier the timing of the increasing claims or or awareness of the potential claims and the potential loss, is an area that we see being challenged by insurers. All that said, there is a known occurrence exclusion endorsement which provides as a condition precedent that a policyholder was not aware of such occurrence prior to the date specified within the endorsement. And very similar to other discovery type provisions, this then requires an analysis of the knowledge of the relevant directors, officers or managers in risk management, insurance or legal departments and to establish who was aware of an occurrence and when. This type of wording or exclusion is not a particularly unusual concept and is intended to ensure that notices are made to the proper year and that policyholders with this wording we would always remind them of the importance of making any notifications prior to renewal. And I think Rich is going to pick up on some of the other exclusions in the policy.  Richard: I’m going to talk about two other types of exclusions that will preview a little bit of the second podcast. The first is what is labeled the securities, antitrust, etc. Exclusion, which seems pretty harmless, but it has a free-floating term in there of fraud. And I've seen it pled in almost every Bermuda Form case I've been involved that some part of the injury is due to fraud because almost every complaint, tort complaint, will allege fraud. This is not usually a terrible issue for reasons we'll get to in the second broadcast, but essentially under New York law, there can be an allocation of what you settle or an allocation of any judgment and very little of what policyholders end up paying even in a complaint that alleges fraud is due to fraud. The second issue is what I'll call laser exclusions. And you'll see these exclusions appended to the policy form as, again, it is just renewed from annual period to annual period. And what will happen is the Bermuda Form carriers will see a number of their policyholders making claims for a particular type of thing, whether it be asbestos, silica, or MTBE back in the day, and they will add a laser exclusion for the renewal. Which just means that your insurance department has to be on its toes. And when you are renewing and a laser exclusion is being added, you're going to have to give notice of an integrated occurrence under the expiring policy form if you have those types of exposures.  Catherine: Great. Thanks, Rich. We're going to talk a little bit now about the law of construction, which we discussed briefly earlier, and regarding the interpretation of the Bermuda Form. And this is where things get quite interesting for practitioners and potentially quite complicated for policyholders. The form is unique in terms of the applicable law. It is to be construed in accordance with New York law. However, the general principles of New York law are modified. So for instance the recovery of punitive damages may be prohibited. The biggest challenge however is the modification insofar as the construction and interpretation of the policy is concerned. The policy does not introduce a different system of law for construction for instance English law but seeks to modify the principles of New York law. I'll hand over to John and Rich very shortly as there will be very few people on the planet who know more about this than them but I wanted to highlight a few points to note. So firstly, the policy is to be construed in an even-handed fashion, and that includes in cases of ambiguity, and so therefore it disapplies the principle of contra proferentum. And there's also to be no reference to the reasonable expectations of either party, any reference to parole or other extrinsic evidence when it comes to interpretation. And finally, to the extent that New York law is rendered inapplicable by virtue of the points I I just mentioned, then English law applies.  Richard: Yeah the one thing I will raise on this, and maybe John wants to talk to it too, is that this can be a huge thing. John and I had a case involving an unusual exposure that the carrier said was barred by a pollution exclusion, and it didn't involve traditional environmental exclusion. And John and I had collected all these cases, and the case law couldn't have been better for us that unusual exposures that aren't traditional pollution are not barred by a pollution exclusion. And on the first day of the hearing, the panel said, well, yeah, those are all right out because they all mention ambiguity as a backup reason. And so it can be a hugely impactful thing, the manner of the construction provision and the Bermuda Form policy.  John: What I will say is that that is not the right conclusion that should be drawn on how New York law should be applied and interpreted in these arbitrations, that is an argument the insurers are likely to raise. But I think it's fair to say that other panels have not gone the way as the one that Rich just mentioned. And just because a New York case happens to mention ambiguity doesn't mean it should be thrown out the window for all purposes. But we're going to come back to this a lot in phase two. So let's leave that there for the moment. But what I think this does amount to, especially for a U.S. Company, is that you really need to look at these claims and any disputes that arise about the claims in a different manner because the arbitration becomes much more of an English law exercise in some respects because you're not able to introduce things that you routinely introduce in a U.S. Litigation like parole evidence or other types of information that might inform the court's interpretation of the policy, you really need to take the policy as it's written and argue from that as you would in an English court. And that's where the barristers come in, you know, and we often work closely with them in crafting our arguments because coming at it from a U.S. perspective is helpful, but it then needs to be translated, so to speak, using air quotes around translated, into the English version of what New York law is. And that really requires cross-ocean effort to get the message presented in the best way possible. And as I just mentioned, the dispute resolution procedure here is arbitration before three arbitrators, typically in London, but sometimes in Bermuda or Toronto. And we're going to get into a lot more detail on that in the Bermuda Form Part 2, which will be coming out shortly. But we thank you all for listening to us today. Any of us are available to answer any questions by email or otherwise. And we hope you join us again for the next Insured Success Podcast, Bermuda Form Part 2. Thanks very much.  Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's insurance recovery group, please contact insuredsuccess@reedsmith.com.  Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.  All rights reserved. Transcript is auto generated.

With hurricane season underway and wildfires ravaging parts of California, understanding how to go about an insurance claim after a natural disaster is as important as ever. In part one of a two-part series on the topic, Matt Weaver, Chris Kuleba and Jessica Gopiao take listeners through many of the issues commonly faced by property owners immediately following a loss or potential loss and offer important advice for anyone in such a situation. ----more---- Transcript: Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policy holders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist.  Matt: All right, welcome back, everyone, to the Insured Success Podcast. My name's Matt Weaver. I'm a partner here at Reed Smith in the insurance recovery practice in Miami. I'm joined here by two of my favorite people, my partner, Chris Kuleba, who also sits with me in the Miami office, and my colleague, Jessica Gopiao, who splits her time between California and South Florida. It's hurricane season. It's also, unfortunately, wildfire season. We're here to talk today about some practical things and some important pieces of advice for anyone who's facing a loss or a potential loss due to any one of these events. Jess, Chris, you want to say anything more about who you are?  Chris: Sure, Matt. Thanks, and thank you for everybody for tuning in. My name is Chris Kuleba. As Matt mentioned, I'm a partner at Reed Smith in our insurance recovery group. I'm based in Miami. I've been doing insurance recovery work essentially my entire career. I was barred in 2013, so I'm going on 11 years now. I'll turn it over to Jess.  Jessica: Hello, everyone. My name is Jessica Gopiao. I am a senior associate and member of the Reed Smith's Insurance Recovery Group. As Matt had mentioned, I split time between South Florida and Southern California. Back in June, I chatted with Rich Lewis and John Ellison about navigating insurance claims after natural disasters. And with hurricane season being amongst us and the record-breaking wildfire season, we are now going to talk more about that.  Matt: So I think the goal here for everyone is to focus on what we, in our experience, have seen as key issues in these cases and these claims that drive outcomes. A lot of things can happen in the course of an insurance claim. Some of it is important. Some of it, candidly, is not. But we want to talk a little bit about things from our perspective that tend to really matter and tend to push these claims in one direction or the other. So Chris, you want to start us off?  Chris: Sure. And as Matt mentioned, this is by no means an exhaustive list. What we'd like to do is sort of take you through some of the sort of big picture, significant driver issues, starting from the beginning of a loss through the claims process and then through a process that's called appraisal, which is a alternative dispute resolution process found in most property insurance policies, though the nature and the scope of those provisions can vary based on the text of the policy. But first, if it's okay with everybody, I'd like to start with some causation issues. And by that, I mean when an insured or a property, I should say, suffers a loss, what is the relevant cause of that loss for purposes of determining coverage? In the instance of a hurricane or a wildfire, that is often very obvious, at least with respect to some of the immediate damage. But you'll find, as many of us have, that when submitting a claim, an insurance company will often point to damage, maybe that preexisted a hurricane or preexisted a fire in the case of a partial loss and seek to find ways within the policy to deny coverage for all or part of a loss. And one of the key drivers in terms of coverage when it comes to causation is what state or what causation doctrine, I should say, is applied in the particular state. In Florida, we follow something called the concurrent cause doctrine, which is one of two predominant causation doctrines in states throughout the United States. The other, which is particularly relevant for wildfires, since this is a California doctrine, the efficient proximate cause doctrine. Generally speaking, the concurrent cause doctrine at bottom says when there are two or more causes of loss, one of which is covered and one of which is not. That combine to cause a loss, the loss is covered absent some specific policy language called anti-concurrent cause language that we'll talk about in a minute. And the reason that's important is going back to that example of pre-existing damage. If you have, say, a hurricane that damages part of the house, an insurance adjuster comes out and says, well, some of this looks like it existed prior to the hurricane. We see some of this is new, but we're only going to pay for the part that we see is brand new and not things that were made worse by the hurricane. An example could be leaking windows. You had windows that maybe weren't built correctly or they're older and they had very minor leaks prior to a hurricane. And a hurricane comes, the windows are suddenly leaking large amounts of water. They're no longer sealed. And if in that situation, an insurance company may point to either a faulty workmanship, construction defect type exclusion. It might point to a wear and tear exclusion, it might point to a pre-existing damage exclusion. But under the concurrent cause doctrine, because the hurricane, being a covered cause of loss, exacerbated that existing damage, the loss should be covered. Under the efficient proximate cause doctrine, in contrast, you look to the predominant cause of the loss, the one that puts the sets the others in motion. And that doesn't have to be the first cause and it doesn't have to be the last cause in the causal chain. It just has to be the predominant cause. For example, if you have a say you have an old house that settled naturally over time and was then coated with ash from a wildfire and an insurance company will come out and say, well, the cause of the ash, the predominant cause of the ash is certainly the fire. But what if the ash from that fire clogged the property's drains and a rainstorm, say, came in, and because the rain could not drain through those drains, it backed up into the house and around the house and caused water damage in the house? In that instance, what would the efficient approximate cause be? Would it be the rain or would it be the fire? Now, this may not be the best example because typically both of those causes, both rain and both fire, are going to be covered. But let's say in this particular policy, rain is excluded, but loss caused by fire is covered. The insured would argue, and in my opinion, they would be right, that the efficient proximate cause of that water damage is actually the fire. Because without the fire and the after clogged drains, the water would not have backed up into and around the house, causing that water damage. So the predominant cause in that instance would be the fire. Now, before I continue, I'll take this over to Matt or Jess, if there's anything you want to add so far.  Matt: So maybe, Jess, you can talk a little bit about why this issue is important and why, from the policyholder's perspective, this can really make a difference, depending on what standard applies and depending on the causes you're dealing with in a particular loss.  Jessica: So the reason why I think we had started this episode talking about causation is because we are focusing on wildfires and hurricanes. And the first question when presented with a coverage issue under a policy is, what caused the damage? And what Chris is talking about is answering the question of, did the hurricane cause the loss? Or in his hypothetical, did the fire cause the loss? So when presented with certain damage to property, the first question is, what actually caused it?  Matt: Chris, I mean, in your experience, I think there's an issue here that's important about burden of proof and scope of loss that tends to show itself later down the line. Do you want to talk a little bit about that?  Chris: Sure. And I'm glad you brought that up because burdened proof is a really important topic. So speaking in very broad terms here, there's two different types of property policies. And it doesn't matter if it's residential or commercial. The two types of policies I'm referring to are one, what's called an all risk policy. The other is a enumerated or specified peril policy. And an all risk policy, all causes of loss are covered, except if they're specifically excluded in the policy. So in that in that type of policy, the scope of covered causes of loss is defined not necessarily by the coverage grant, but by the exclusions themselves, because everything is covered unless it's not. In a enumerated or specified perils policy. It's a bit different because there's only certain perils and those are set forth in the policy that are actually covered. So if a loss was caused by peril, I mean a cause of loss, and using the examples we've been using, a hurricane is a peril, a fire is a peril. So unless the loss was caused by one of those perils set forth in the policy, it's not going to be covered. And this is an important distinction, one, because all risk policy provide very broad coverage. They're more policyholder friendly. And it also has an impact on the, quote, burden of proof in terms of who bears the burden of proving what the cause of loss is. Under an all-risk policy, as long as the insured can show that there is property damage during the policy period, the burden should then immediately shift to the insurance company to prove that the loss is excluded. And the reason for that is, as I mentioned, all causes of loss are covered unless they are specifically excluded. And the insurance company, as a writer of the insurance policy in most instances, is going to have the burden to prove that an exclusion applies to the entirety of a loss. Under a specified or enumerated peril policy, the policyholder, the insured, is going to have to prove that one of the enumerated perils caused the loss. And when it comes to litigation and when it comes to supporting a claim, that burden of proof can be very, very important.  Matt: Yeah. And to kind of bring this back a little bit big picture, when we talk about burdens of proof and we talk about what's covered and what's excluded and framing it and what's going to drive your success on your claim, the less burden the insured has, the easier it will be to prove. And that sounds a little bit obvious, but that's why these rules are so important. If the insurance carrier has a higher burden, in other words, under a concurrent cause situation. Let's say there's covered hurricane damage or covered wildfire damage for that matter, and you've got a building that also has construction defects, it's not going to be enough for the insurance company to come along and say, oh, well, guess what? The construction defects, which are excluded, contributed to your damage. Therefore, we have no coverage obligations. Under the concurrent cause doctrine, if you've got that covered peril and that covered peril contributes to your damage, the entire loss is covered, regardless of the presence of an excluded peril. So when you're talking about ease of proof and ease of burden, it's very, very important at the outset to try to understand, one, what are the different causes of your loss? And two, which one of these rules is going to apply?  Jessica: And to kind of loop it back to the all-risk versus named peril distinction, if it is an all-risk policy, one argument that we like to put forward is that if it is all-risk, then as Chris had mentioned, if there was just damage that had happened during the policy period, then the insured, the policyholder, had met their burden of proof. And then it's up to the insurance company to point to something that is excluded under the policy to completely deny coverage outright.  Chris: One thing I'll add to that, and for those of us listening to this podcast who are not like the speakers here, major insurance nerds and aren't familiar with standard policy language, there is an exception to this concurrent cause doctrine. And I touched on it briefly before. If there is policy language that precedes a particular exclusion, or in most cases, it'll precede an entire section of exclusions. And that language purports to get rid of that concurrent causation doctrine. In other words, remove it from application to a particular loss because it excludes any loss in which a particular exclusion contributes at any point in the causation chain. That language is going to be enforceable and the concurrent cause doctrine is not going to apply. If you're looking at your policy, the language is fairly standard across the board, but there are some variations. One example would read something like this. We do not cover, quote, any loss that is contributed to, made worse by, or in any way results from the below exclusion, regardless of any other cause or event contributing concurrently or in any sequence to the loss. So if you see language like that that precedes an exclusion, call it a, it's not typically in front of this particular exclusion, but say you have that language and then following that is a construction defect or faulty workmanship exclusion. Typically, if under the concurrent cause doctrine in the absence of this language, as Matt mentioned, if a loss is caused by a covered event, call it a fire, call it a hurricane, in part, and in part a construction defect, In that example I gave with the leaky windows, let's say the windows weren't built correctly or they weren't installed correctly. Under the concurrent cause doctrine, if that hurricane made that construction defect worse and the resulting damage worse, that would be covered. ] if because the construction defect contributed in any part of that causal chain, regardless of any other cause contributing concurrently or in any sequence of a loss, that loss is not going to be covered. So if the insurance company drafts the policy in a way to defeat the concurrent cause doctrine, that's going, at least in Florida, that is going to be enforceable and that doctrine will not apply to support coverage in that case. And similarly, for the efficient proximate cause doctrine, that is a doctrine, again, it's in a lot of states, California, I'll use it because we're talking about law of fighters. There is a prohibition in California law against contracting around the application of the efficient proximate cause doctrine. So in the example I gave earlier with the fire and the ash and the water, if there's an exclusion that says, well, if the policy covers fire, but there's an exclusion that says, well, we don't cover fire to the extent it combines with water to cause water damage, there's a good argument that that type of language is an attempt to contract around the efficient proximate cause doctrine. And under California law, any attempt to do that is forbidden and policy will not be enforced in that way.  Matt: All right. So let's assume that we've got our claim. We've looked at our policy. We have some understanding as to how these causation standards are going to work. Now it's time to start dealing with the insurance company. Chris, you want to talk about that a little bit?  Chris: Sure, sure. And what Matt's referring to is sort of, okay, what happens after a law? What are the conditions required? What are the obligations of the policyholder, the claimant, the insurer, the person making the claim to the insurance company? What must the policyholder do to, one, perfect, to make a claim, perfect coverage and ensure that during the claims process, they're doing everything that they are contractually required to do to avoid any excuse by the insurance company to deny coverage aside from the actual existence of coverage itself? The first step is obviously going to be notice. And Jess and Matt can vouch for this. I can't tell you how many times we've come across cases where, for one reason or another, notice was not timely provided to the insurance company following a loss. And under property policies, they're called their occurrence-based policies. And not to get into the weeds, but what I mean by that is there's occurrence-based policies where, in a property context, the relevant policy is the one in which the property damage took place during that policy. So when the property damage occurred during one policy, that's the policy that's triggered. And typically, the notice provision under that type of policy is going to be to provide notice as soon as practicable, as soon as reasonably practicable. Occasionally, you'll see the requirement that notice be provided immediately upon discovery of a loss. And that should be distinguished from claims made and reported policies in the sense that, well, notice is still required finally and it seems practicable if a claim is made during a policy period and not reported to the insurance company during that policy period or some extended reporting period that's purchased, then there's not going to be any coverage. You don't have that same claims made and reported in the policy period issue that you do for current type policies like property policies, because many times the loss isn't even ascertainable immediately. So typically, the notice requirement is going to be as soon as practical after a loss. And most it's going to be after you after you discover the loss. Now, the law on that in terms of when a notice obligation accrues can vary by state. So you'll want to check that. But generally speaking, that's the requirement under a property policy. So assuming notice is timely, the insurance company is inevitably going to ask for information. They're going to ask to come out to inspect the property. Of course, they're going to ask you most likely for documents in the event of a case where you're dealing with allegedly pre-existing damage. They're going to look for receipts and invoices for prior repairs. They may look to your email, the correspondence, you know, identifying the prior damage. They're going to send engineers out to investigate. Most policyholders, if they're in a dispute with their insurance company, they're going to want to hire their own engineers. They're going to ask for documents. They're going to inspect the property. They may ask you for what's called an EUO or an examination under oath, which is kind of like a deposition in a case, except there's no rules of evidence applicable. And an insured compliance with these requirements is critical because if there's not at least substantial compliance with these what are called post-loss conditions, the insurance company may have ground high coverage, even if the loss is covered. If you don't cooperate with their investigation, if you don't provide documents, or if you don't timely notify them of the claim, there are bases to deny cover. Now, one point I want to focus on is the document request, because the candidate insurance companies and their counsel often have a tactic, if you will, of requesting documents. You pull together everything, you send it over, followed by another document request upon another document request. And seemingly that process will never end. The insurance company will never be satisfied. And sometimes you just don't have a document, right? In most property policies, the requirement is not that you produce documents to the insurance company. It's that you make your books and records available for examination at the insurer's request. And the reason that's important, and I'll use the example of a condo association. Right. If a condo association, rather than digging through their own files, putting together everything they can and sort of dealing with serial requests for additional information from the insurance company, if instead they simply allow the insurance company to come in and access the files directly. The insurance company, more often than not, cannot complain that they didn't either get the information or if you don't have it, there's nothing you can do about it. But in my experience, having the insurance company come out and do the digging through the files themselves cuts short the document process significantly, even with most of the requesters on the insurance side. The one piece of advice I'll give for condo associations in particular is a lot of times you'll have resident personal files, whether it was the application process, you may have financial information, other personal information, social security numbers and things like that. You'll want to be sure you enter into one silo that information in a different place and make sure that you're communicating with your insurance company or council about that issue. And more often than not, they're not going to have a problem with that. So silo the confidential information, get a confidentiality agreement, and then make the balance of the files concerning the property available for inspection. You'll save yourself a lot of time and headaches.  Matt: So let me just comment on a couple things Chris said, and I want to get Jess, your reaction, and Chris, your reaction to this. There's a tension in my experience between what the policyholder is required to do under the policy and what basic claims handling standards and duties of good faith require the insurance company to do. Obviously the parties here have divergent goals. I've never met a policyholder who doesn't want their money yesterday and want the claims process done as fast as possible. Not to say it happens all the time, but sometimes insurance companies have incentives to see things and do things a little bit different. So I'll pose this to you guys. How can a policyholder successfully navigate, those competing interests while also complying with what they have to do under the policy?  Jessica: Well, I do think one thing that some policyholders maybe assume or are quick to assume but don't realize is that while they do have some general duty to cooperate, there's also sometimes an explicit duty of cooperation in policies. But that doesn't exist in every single policy. As long as the policyholder is cooperating in the sense that they are trying to assist the insurance company with their investigation through as reasonably as they possibly can, usually that is sufficient to comply with the general duty of cooperation. When it comes to document requests, and Chris had kind of talked about it already, but it is true that insurance companies tend to just constantly ask for and request documents over and over and dig deeper into it and just you kind of get into this cycle where you need to start producing as many documents as possible. But the key question I think that is worth asking is, is this actually material to the claim itself? And if it is, then absolutely send that over to the insurance company as soon as possible. But if they start asking for things like condo owners, documents, or other kinds of irrelevant materials, it might be worth maybe pushing back on that a little bit.  Chris: Just to add to that, in general, I think the best way to navigate the balance between getting paid immediately if you're the policyholder and making sure the insurance company is satisfied with the information they have is to be an open book. My philosophy generally with these claims is that there's nothing to hide. If the insurance company wants to come out to inspect the property, come on out. Try to get it done in as few visits as you can, but come on in. Take a look. In terms of the documents, I think what I mentioned before is probably the single biggest time saver in terms of cutting through the brush on these issues, letting the insurance company come out and do their own inspection of books and records. That way they see everything that's there. They pull what they want. If they didn't pull something, then that's not your fault for not producing it. It's theirs for not getting it. So I think that's a huge, huge step towards making sure that the process runs efficiently. And then, you know, in the event they ask for an examination under under oath of the policyholder, you know, you have to sit for it and they don't always ask for it. And another tip as well. Read the policy language. It's not every sometimes insurance companies will ask for EUOs of people other than the insured. Not every policy allows them to do it again in the spirit of cooperation. You may very well want to, but if it becomes the insurance company requests become onerous and unreasonable, you would have grounds to push back if they're asking for an EUO of somebody who is not one of the people that the policy requires an EUO be provided. So keep that in mind as well. The other thing is it's called a proof of loss. I haven't mentioned that, but in a lot of some some policies require proof of loss automatically and X number of days from the date of loss called 60. Others require proof of loss within X number of days, call it 60, from the insurance company's request. So keep an eye out for that. Provisions that... Begin automatically can be trapped for the unwary policyholder. They may not realize it's there. So always read your policy. But more often than not, it's going to be based on the insurance company's request. And there will be a form that you fill out. And what you should do to connect with that is provide all. If you know the amount of the claim, if you have estimates, provide that number, provide the backup. And the more information you provide, the smoother the process goes, generally speaking.  Matt: And before we move on to what you might expect after the investigation obligation is over. I just want to remind the audience, it is the insurance company's duty to investigate. Not to say that as an insured or policyholder, you should sit back and do nothing because you absolutely should not. But just remember that you need to be doing things in order to allow the insurance company to fulfill its obligations and to force them to fulfill their obligations. You know, being an open book like Chris described is one of the best ways to do that. If you remove any legitimate excuse for the insurance company not doing its job, then you're going to move your claim much faster along than you otherwise would. So with that said, Jess, do you want to talk about some of the things that happen after the investigation is over and after a claim decision is made?  Jessica: Sure. So, I mean, one thing that happens when, for example, there is no dispute that there is coverage of a claim, but there may be a disagreement as to the value of the loss. Chris mentioned this pretty briefly at the beginning of the episode, but appraisal is an informal process that can help determine the amount of the loss. So it's a great option when there is a disagreement as to the value of the loss, but there is an agreement as to there being a covered loss. We did talk about this pretty briefly in the natural disasters episode back in June. So if you want more information on that, feel free to go back there. Matt, I don't know if you wanted to talk about some additional things to look out for within the context of appraisal.  Matt: In the appraisal process for things that can slow the appraisal process down. Appraisal is designed to be an informal dispute resolution mechanism. It's designed and intended to be cheaper and faster than litigation. It can, however, be more expensive and slower than litigation. I think we've probably all seen that happen. So just be on the lookout during the appraisal process for things that might be slowing it down. There are ways to combat a slow appraisal process. You can agree to appraisal protocols, memorandums of appraisal that govern the rules. Generally, appraisal, absent some agreement between the parties for a set of rules, is pretty much a no-holds-barred affair. It's generally up to the appraisers and the other member of the three-person panel called the umpire, to set the parameters for how long the appraisal is going to take, what the appraisers are going to do. Whether they need to hear from any experts or witnesses who might be relevant to the issues that they're trying to decide. Think about that as you move into the appraisal process. Do you need some type of formal guardrail on the process to speed things along? Or if you have experienced appraisers, and I think all three of us have seen this before, there is a sizable stable of very experienced appraisers all over the country that do this all the time. A lot of times, They work together. They are frequent players in disputes across from one another. I think generally, in my experience, that is usually helpful to the process. And you want to see if you can set up a situation or at least get an agreement with the other side that maybe can utilize some of those more experienced folks. Chris, anything else you want to add?  Chris: I do. Let me just take a step back. As Jeff mentioned, generally speaking, appraisal is appropriate where there's a dispute over the, quote, amount of loss. What constitutes a, quote, amount of loss dispute may vary depending on the state. I'll speak from the perspective of Florida. Let's say an insurance company comes in and says, all right, I see you have a $10 million claim here. I think $9 million. First of all, we disagree with the number. We don't think that there's $10 million in damage here, but we think there's maybe a million dollars in damage caused by the hurricane. There may be other damage, but that was pre-existing or that's a construction defect, so we're not going to worry about that. In that case, where the insurance company has acknowledged that there is some cover damage, there's typically an appraisal provision in the policy that allows either side to demand appraisal. And if either side in the insurance company or the policyholder does that, it's mandatory. And the result, in terms of the appraisal panel's finding of the amount of loss, is going to be binding on both parties. The way the process will go is somebody will demand appraisal, and they'll designate their appraiser. Say the policyholder says, hey, insurance company, I want appraisal. I want to nominate so-and-so as my appraiser. And then per the terms of the policy, the insurance company will be required to respond and designate their appraiser within a certain number of days, 20 days, say. But once there's two appraisers selected, those two appraisers will, between themselves, select a third appraiser or the umpire, who, in the event there is not an agreement during the appraisal process on the amount of loss between the two party-selected appraisers, the umpire will decide. That'll be the deciding vote, if you will. And as long as an appraisal award is signed by two out of the three, then it's a done deal and it's binding on both parties. In terms of what constitutes or what's what the scope of appraisal is in Florida, an amount of loss dispute can include the cost. So, for example, you can get an appraisal award that says, I find that there is X million dollars in damage caused by Hurricane Beryl, using a recent example. In that case, the appraisal panel's determination of the amount of loss caused by Hurricane Beryl is is part of the amount of loss dispute. view. It is pure issues of coverage. In other words, whether a loss is excluded or covered under the insurance policy, that is not fair game in the appraisal process. That is an issue that has to be resolved by the court. I should also mention that just because the parties participate in the appraisal process and there's a binding appraisal award does not necessarily mean that the loss is covered. An insurance company may very well turn around and say, OK, great. The appraisal panel said there's $10 million in loss here, but we don't think it's covered. And then in that case, you're going to be either going to resolve it with the insurance company or you're going to be in court. So the appraisal process in many instances where there's at least where there's a clear cause of loss and clear and conceded cover damage in part is a great and efficient process, like Matt mentioned, to get a quick and timely resolution. But it may not be the end all be all in terms of the insurance company's decision to pay.  Matt: I think a key point and a key takeaway on appraisal is it can be something very helpful to the policyholder, but it's not for every dispute and it's not for every case. You've got to analyze several different issues as to whether the appraisal route or perhaps litigation route is more appropriate if you find yourself in dispute. We talked a little bit, I mentioned a little bit earlier about insurance companies behaving badly, and we don't want to spend, I don't think too much time on this, but it is a consideration for the policyholder as you go through a claim. Regarding what you can do about that unfortunate circumstance. Jessica, you want to talk a little about first party bad faith?  Jessica: Yeah, just to quickly talk about bad faith. As Matt had mentioned, sometimes insurance companies just don't act with due regard for their policyholders best interests, and they owe a duty to policyholders to act in good faith and for the benefit of the insured. And when they don't, you know, what would they lie if they intentionally misrepresent policy language, if they underpay on claims, if they don't communicate with the policyholder, or if they abuse or intimidate the policyholder, these are all grounds to sue in a bad faith lawsuit. We are running out of time today, but I think that Matt, Chris, and I will reconvene and maybe talk a little bit more about bad faith insurance lawsuits and insurance coverage litigation as well. So thank you so much for joining us on today's episode, and we look forward to talking with you about that in another episode.  Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's Insurance Recovery Group, please contact insuredsuccess@reedsmith.com.  Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.  All rights reserved. Transcript is auto-generated.

Reed Smith partners Luke Sizemore and Andy Muha address challenges posed by mass tort litigation and discuss strategies for permanently resolving mass tort claims through bankruptcy and corporate dissolution. They also analyze the role of insurance recoveries in these strategies. ----more---- Transcript: Intro: Hello and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policy holders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist. Andy: Welcome to another episode of the Insured Success podcast. This is Andy Muha, a member of Reed Smith's insurance recovery group in Pittsburgh. And I'm joined today by my colleague Luke Sizemore, also of Pittsburgh, and from our firm's restructuring and insolvency group. Thanks for being here, Luke. Luke: Of course, Andy. I'm happy to be here. Andy: Luke and I are here to discuss an issue that intersects our two practices, insurance recovery and restructuring and insolvency. That is how to develop a permanent solution for the challenge of mass tort litigation. And I think the best way to start would be to talk briefly about the dimensions of the challenge. Mass tort litigation has been a part of the American legal scene for several decades. The term mass torts generally refers to claims for bodily injury arising from exposure to a product or continuously repeated conditions or behavior. Often, they involve a latency element, the period after the conduct that caused the injury, but before the injury manifests itself. And because of that latency period, mass torts typically pose the specter of an unknown number of future claimants. Bodily injury claims for asbestos exposure are the prototypical mass tort, but they also include claims for injury caused by talc, opioid painkillers, silica, defective medical products, and even institutional sexual abuse. Litigation of mass tort claims is expensive. Mass tort claims are typically filed in state courts, which are becoming more unpredictable and more plaintiff-friendly by the day. Claims are often filed in a variety of jurisdictions, and coordination of the defense efforts spread across multiple states adds expense and complexity. Historically, mass tort defendants have sought to cover the costs of both defending mass tort claims and paying for settlements or judgments on those claims by relying on liability insurance, whether in primary, umbrella, or excess policies. But many defendants face a troubling reality. If the mass tort claims at issue continue to be asserted indefinitely, the cost of defending and resolving those claims may exceed the limits of available insurance. That risk often is compounded by the fact that insurers themselves actively seek ways of evading coverage obligations that the policyholder defendant believes to be unassailable. Companies with healthy operating businesses may nevertheless find themselves beset by mass tort claims arising from long-since discontinued operations or from business units that were acquired recently or distantly. And despite a healthy operating business, mass tort problems can cast a pall over the company's overall prospects for growth. And they may be an impediment to strategic mergers, acquisitions, or other types of business combinations that the company may wish to explore. Given that it's typically impossible for a company to predict when the mass tort claims against it may come to a natural ending point, it can be difficult for mass tort defendants to make long-range plans that account for those mass tort liabilities in a realistic and reliable way. So, is it possible to find a permanent solution for mass tort claims in a way that puts a final stop to the financial blood loss those claims so often cause? The answer is yes, at least in some situations. And perhaps more importantly, companies that are willing to invest in long-term planning to resolve mass tort claims can maximize both the number of options that may be available to them and to enhance the potential effectiveness of those options. And Luke, why don't you talk about some of those options? Luke: Sure. Thanks, Andy. Strategies to permanently resolve mass tort liabilities generally center around a few central steps. The first step is confining the liability to a specific entity, to the extent that's possible. The second step is identifying and marshaling assets designated to pay claims, such as proceeds from a sale of company assets, proceeds from settlements with parent or affiliate entities, insurance proceeds, and even future distributions and dividends. And the third step is effectuating a hard stop on the claims themselves. Now, there are a number of potential options for achieving that third step, the hard stop on claims. They include several options under the bankruptcy code, ranging from a Chapter 11 reorganization to a Chapter 7 liquidation, as well as dissolution under state law. And I'll briefly touch upon each of these options at a high level. As you might expect, there are nuances with respect to these strategies that we won't delve into today. To start, the gold standard when it comes to resolving mass tort liabilities and bankruptcy is a Chapter 11 reorganization utilizing the tools provided by Section 5-24G of the Bankruptcy Code. Section 5-24G of the Bankruptcy Code establishes a specific process for permanently resolving all current and future asbestos-related personal injury and wrongful death claims. First, this process requires the appointment of a legal representative or holders of future mass tort claims. Those are the claims that have not yet been asserted, but may be asserted in the future based on past conduct. And the purpose of that appointment is to ensure that the interests of those future claimants are represented throughout the bankruptcy process. Second, the 5-24G process requires the debtor to propose a Chapter 11 plan of reorganization that has the support of more than 75% of the current claimants that actually vote on that plan of reorganization. That plan is going to require the establishment and capitalization by the debtor of a settlement trust, and that settlement trust will resolve and pay mass tort claims into the future. If the debtor can satisfy those and other procedural hurdles, all present and future mass tort claims against the debtor and certain related entities that contribute to the trust will be permanently channeled to that trust, and the debtor will be permitted to reorganize and emerge from bankruptcy with continuing business operations free from the bankruptcy mass tort overhang. Now, this strategy is likely to be more expensive and may take longer than any of the other strategies we'll discuss today. But again, the result is the highest level of protection to debtors and related parties. And although Section 5-24G was drafted only to apply to asbestos claims, bankruptcy courts have approved Section 5-24G-style resolutions for non-asbestos claims by invoking a bankruptcy court's general equitable powers. The second strategy to put a hard stop on claims is a more traditional Chapter 11 reorganization that doesn't resort to the processes set out in Section 5-24G. As I just mentioned, Section 5-24G is designed specifically to allow debtors to address potential future tort claims to the appointment of a future claimant's representative. In the event that the mass tort at issue, however, is isolated to a known set of individuals with current claims, and the debtor is reasonably confident that there are no future claims, a more traditional Chapter 11 reorganization plan is possible. That is chapter 11 case without the appointment of a future claimant's representative and the need to specifically follow the dictates of section 5-24G of the bankruptcy code such a plan would involve the creation of a separate class of tort claimants the creation of a pool of funds or other assets from which the tort claims could be compensated and the establishment of procedures by which tort claims would be settled or otherwise liquidated assuming that the reorganization plan is approved by the requisite majority of creditors, but not the 75% that's required by Section 5-24G of the Bankruptcy Code, the pre-petition tort claims would be discharged under the plan. And what would remain would only be the reorganized debtor's obligations to pay settled or liquidated claims pursuant to the terms of the plan of reorganization. And unlike in a liquidation case, which we'll discuss next, the debtor's business should be able to continue operating post-bankruptcy. That takes us to the third option for putting a hard stop on asbestos claims, and that's a Chapter 11 liquidation case. Although Chapter 11 of the Bankruptcy Code normally is thought of as the reorganization chapter, a company also may liquidate in Chapter 11. A liquidating Chapter 11 case normally involves a bankruptcy sale of any remaining operating assets, followed by the creation of a liquidating settlement trust established through confirmation of a Chapter 11 plan to resolve all current tort claims. But this process does not help with future claims. Once the bankruptcy process is complete, however, the debtor will be left as a judgment-proof entity that can dissolve under state law. And as a result, any future claimants would be left without a viable legal entity to pursue. Throughout this process, and unlike in a Chapter 7 liquidation case, which we'll discuss next, the debtor will retain control of its assets and the bankruptcy process. This process offers a path to permanently resolving derivative claims against a debtor's parent and affiliate entities to a court-approved settlement, but it also requires mass tort claimants to vote on a Chapter 11 plan. Obtaining creditors' votes in favor of a plan can require significant time and effort, which can increase the cost of liquidating a Chapter 11 case. The fourth option for putting a hard stop on claims is a Chapter 7 liquidation case. This strategy will result in the complete liquidation of the debtor and the termination of its corporate existence. Although that is the same result as a Chapter 11 liquidation case, the Chapter 7 option is often seen as less desirable because the process is not controlled by the debtor, but rather by an independent court-appointed trustee that may seek to pursue derivative claims such as bail-piercing and fraudulent transfer actions against the debtor's parent or affiliates. Although those claims can be settled as part of the Chapter 7 proceeding, the central role of the trustee in this context, plus the lack of a discharge of debts at the end of the Chapter 7 proceeding, makes this option relatively less attractive. Fifth and finally, a debtor facing mass tort liabilities could dissolve under applicable state law. Dissolution statutes vary from state to state, and within each state for different types of business entities. But many of these statutes do include a bar of repose of any claims not filed within a certain time after the entity dissolves. And so the aim of this strategy is to dissolve the entity with the liability, and then take advantage of the statute of repose to cut off all remaining claims. Our Mass Tort Resolution Practice team at Reed Smith has assisted clients with implementing strategies involving dissolution, liquidating Chapter 11 cases, Section 5-24G model Chapter 11 cases, and traditional Chapter 11 reorganization cases. And in every one of these engagements, we've been able to leverage not only the firm's experience in restructuring and reorganization, but also its insurance recovery practice. Because as Andy will discuss next, insurance is intrinsically intertwined with resolving mass tort liabilities. Andy? Andy: That's right, Luke. As we mentioned earlier, mass tort defendants traditionally have relied heavily on liability insurance to fund the defense and resolution of mass tort claims in the tort system. And one of the greatest concerns posed to many mass tort defendants by their mass tort litigation challenges, especially where the the mass tort at issue is anticipated to give rise to an undetermined and unpredictable number of claims into the future, is the possibility that the claims the defendant faces now and will face in the future ultimately might outlast whatever insurance the defendant has for those claims, whether as a result of the exhaustion of coverage limits or due to risks of insurers prevailing in disputes over whether they have to provide coverage for those mass tort claims. As such, insurance is almost always a significant factor, if not the most significant factor, in an analysis of how a defendant should try and deal best with its mass tort claims. The importance of insurance recoveries in these kinds of situations is probably obvious. Insurance recoveries are usually the chief source of funding for a defendant's strategy to permanently resolve its mass tort claims. And to one extent or another, each of the strategies that Luke discussed just a minute ago offer potential benefits for the insurers that may incentivize them to be willing partners in the policyholder's quest to achieve permanent resolution of those claims. For example, Section 5-24G model bankruptcy cases offer the highest level of protection not only to the debtor policyholders themselves, but to participating insurers as well. Section 5-24G of the Bankruptcy Code expressly provides that the channeling injunction issued for current and future claims can be extended to protect a debtor's insurers. Insurers most insurers view this protection as being more extensive than an injunction the insurer could receive by repurchasing insurance rights from its debtor insured through a bankruptcy court approved settlement which i'll discuss in more detail in a moment for that reason insurers may be willing to pay more for the protection they receive in a section 5-24G model case than in other types of bankruptcy cases. Non-section 5-24G model liquidating bankruptcy proceedings, that is a Chapter 7 case or a liquidating Chapter 11 case, offer the promise of an effective end to claims though without a permanent channeling injunction. This positions an insurer to better assess its total potential exposure for coverage of those claims and then to reach an agreement that liquidates and resolves that coverage exposure fully and finally. Possibly even more attractive to the insurer is the ability to buy back the insurance it issued to the insured, subject to the approval of the bankruptcy court. Under the bankruptcy court's provisions governing sales of property of the bankruptcy estate, which would include the insured's insurance rights, the court order approving that kind of agreement can include an injunction that protects the settling insurer from any claim that any party can make against the settled policies. In this way, the insurer can get its own finality with respect to the policies at issue. And I want to note that these benefits are also available in traditional Chapter 11 cases for situations involving a finite number of tort claims, as Luke described before. In the context of a corporate dissolution, the effect of the legal bar of repose against mass tort claims will mean that once the bar takes effect, no new claims can be asserted against the defendant insured. And as in the context of a liquidating bankruptcy proceeding, this will enable an insurer to more easily and accurately quantify its exposure to coverage for claims the insured would make for those underlying mass tort claims. And that, in turn, will give the insurer confidence that its own exposure for coverage obligations will have a definite endpoint. And this may encourage the insurer to support the insured through its dissolution process, such as by agreeing to a coverage-in-place agreement to fund the defense and resolution costs for all non-barred claims, or by agreeing to a policy buyback settlement that is priced according to the exposure that is limited now by the legal bar of repose. Because the bar alleviates uncertainty about the number, duration, and cost of future claims, an insurer may be more willing to cooperate with its insured in reaching an endpoint for both itself and its insured. Once again, our Reed Smith Insurance Recovery Attorneys have been active in recovering insurance to facilitate permanent mass tort solutions for a host of clients over the years. Not only do we know the issues, we know the insurer counsel who very often are involved in many of these cases. Our experience has been seen by clients as a significant value add to their process of effectuating a permanent solution to their mass tort issues. Luke: Andy, I think it's important to note for our listeners that the strategies we've discussed today aren't necessarily a good fit for every mass tort defendant. The feasibility and attractiveness of these strategies depend on a host of factors that are specific to each defendant, and those factors must be evaluated before a defendant adopts and implements any particular strategy. Andy: That's a good point, Luke. And I think it's equally important to note that defendants themselves can take actions that could make one or more of these strategies more feasible and more attractive. But this is truly only if the entity begins evaluating and planning before the number or severity of the mass tort claims at issue become overwhelming, and well before the entity finds itself running short of insurance or other assets to pay for the defense and resolution of those claims. For example, in some cases, advanced corporate restructuring may be needed to isolate the irrelevant liabilities and assets within one part of the corporate organizational chart without creating or enhancing risks of extended liability on theories like veil piercing and fraudulent or voidable transfers. In other cases, corporate families that are seeking to expand through acquisitions may need some guidance on structural issues where the target may be bringing along mass tort liability exposure so that the risks from that exposure can be contained for potential resolution after the acquisition is complete. Luke: I agree, Andy. There's a lot to think about when it comes to a company facing these liabilities. And in light of all of this, I think one thing should be clear. Timing is really of the essence. Companies that begin thinking about these issues earlier rather than later will find themselves with more options, which are more attractive and feasible. By contrast, those who wait too long, such as until the number of pending claims is rising while their insurance for those claims is nearing an end, will have fewer uniformly less attractive options and will be forced to choose the least worst one. Andy: That's right, Luke. And I think if one were to look for a single takeaway from our discussion today, it would be this. For any company with mass tort issues, issues the message is don't wait until tomorrow to start thinking about how to permanently resolve those claims start working on that problem today. So with that i want to thank all of our listeners for joining us and i want to encourage them if anyone has any questions about mass tort claims, challenges and potential permanent resolutions for those challenges to please contact Luke or I and we would be happy to discuss that with you. For the Insured Success Podcast, this is Andy Muha and Luke Sizemore. Thanks for listening. Outro: Insured success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcast, Google Podcast and reedsmith.com. To learn more about Reed Smith's insurance recovery group please contact insuredsuccess@reedsmith.com. Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. All rights reserved. Transcript is auto-generated.

Lisa Szymanski and Catherine Lewis are joined by Elizabeth Vieyra to discuss topical issues related to insurance towers and how policyholders can take steps to manage the issues that can arise in complex insurance programs. ----more---- Transcript: Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policy holders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist. Lisa: Good morning, and welcome back to Insured Success. My name is Lisa Szymanski, and I am joined by my colleagues Catherine Lewis and Liz Vieyra to talk about some topical issues relating to insurance towers and how policyholders can take steps to manage what can often be very complex towers of insurance. On this podcast, we are sharing our views across international offices. Great to have you both here with us. So the majority of Reed Smith's clients are international clients operating across jurisdictions and seeking insurance for a wide range of risks. Our clients very often have a need for high limits. For example, they may operate in particularly risky sectors, by way of example, the energy sector or the transportation sector, where a loss has the potential to be catastrophic and therefore pierce multiple layers of a tower. Capacity reasons may make it necessary to approach multiple insurers in multiple markets. There may be limited capacity in certain markets. For example, D&O has seen high claims volume of late, and some years have high numbers of natural disasters, which squeeze the property market. Accordingly, it is not uncommon to have a range of London market, Lloyd's Syndicates, Bermuda, and U.S.-based insurers on any given risk. There may be local law issues which require placement of a primary policy in a certain jurisdiction, which is then reinsured in one or multiple global reinsurance markets. We will split this podcast into a few sections. First, we will discuss issues relating to continuity of cover. Second, we will look at issues regarding continuity of approach in the event a dispute occurs. For example, issues of governing law and forum. And finally, we will summarize our top tips for policyholders. But before we get into the detail, Catherine, could you tell us what we mean when we talk about an insurance tower?  Catherine: Right. So I'm going to assume that our listeners are all familiar with insurance generally. What we typically see is a primary policy or even a captive policy, which will respond to the first amount of loss over any deductible up to an agreed limit of liability. As you say, Lisa, the majority of our clients are major international companies with complex insurance arrangements. A single policy and a single limit of liability may be unlikely to provide them with the full cover that they need. And as you said, Lisa, there's a whole range of reasons why a policyholder may need more cover than a single insurer is able to provide. So these additional policy limits might be achieved by purchasing additional individual policies with different insurers which sit above the original policy. So for example, a primary policy might provide 50 million US dollars of cover, the next layer might be a further 25 million US dollars in excess of the original 50 million. And you might have a further layer providing an additional 50 million in excess of the 75 million dollars we've already talked about. So on that analysis, the tower would provide 150 million dollars of insurance cover in total. Ideally, the policies higher up the tower, but not always, which are written by different insurers are done so on identical terms as the primary policy. But I mean, we can discuss this in some more detail in a moment. There are some problems that can arise.  Lisa: So as I mentioned earlier, the first topic we are going to discuss concerns continuity of coverage and issues that might arise where the scope of coverage is different in different layers and different policies. Liz, could you you tell us a little bit about your experience of these types of issues that can arise?  Elizabeth: Sure. So if I had to kind of bracket it in two buckets, I think the two areas of discontinuity I've seen are regarding coverage terms, so the substantive coverage terms, and also regarding dispute resolution terms. So regarding coverage terms, I've seen towers in which certain layers of coverage above the primary incorporate unique requirements or limitations. Limitations so an example of a unique limitation might be an exclusion incorporated in one layer of coverage that's not in the primary another kind of unique requirement for example might be a requirement for attachment so it's not uncommon that a layer of coverage would include a requirement that underlying coverage have paid full limits of liability before it attaches but that kind of requirement might not necessarily be in an underlying layer an underlying layer might say something like, just that the policyholder have had to incur cover laws before attachment of limits. So this kind of continuity, a policyholder would have to be mindful of it when thinking about settling underlying layers. And as to dispute resolution, it may occur that policies in the same tower are subject to different laws and different jurisdictions. So as both you and Catherine discussed, insurers are often from different jurisdictions, and that insurer might might have a requirement that the policyholder agree to accept the law of its jurisdiction. But if the primary policy has a different law in a different jurisdiction, the policyholder might find themselves in a situation where they can't join all the insurers in a single action in a single forum because of the differing requirements.  Catherine: That's incredibly interesting, Liz. Thank you. I mean, just from a kind of English law perspective. We see very much similar things and some examples that come to my mind that it's not uncommon for certain jurisdictions for a policyholder to be required to have a local policy in place within its global insurance program. So for example, in Japan. But from our perspective, it's always ways important that where possible, the cover afforded under any local policy is replicated in any sort of further insurance tower or within the global program to ensure the point that Liz was making about having continuity of cover. The other issue I see arising, which goes to the second point, as a matter of English law, policyholders and insurers have various obligations under the Insurance Act. The Insurance Act is a broad topic for another podcast, but in essence, there are various obligations on policyholders to make a fair presentation of the risk that's to be underwritten, which on its face may be more burdensome than in other jurisdictions. However, there are also limitations on the remedies available to insurers and specifically limitations on the circumstances in which an insurer can avoid the policy. So clearly, to have different remedies available under different layers of an insurance tower, depending on the governing law of that policy or indeed different obligations owed to the various insurers when you're placing the policy can cause a policyholder quite a headache.  Lisa: That certainly seems to be the case. So I think the takeaway here from what I'm hearing you both say is that it seems very important for policyholders to work closely with their brokers when their insurance is placed to ensure that the broker fully understands the nature of the policyholder's business and to ensure that the policyholder fully understands the nature of the protection that they have purchased. One point that I can raise in my experience is that you should make sure that you receive the policies promptly after the inception of the policy period. So, for example, I've seen situations where the policyholder thought all of its disputes would be litigated in court based on what binders of the various layers of coverage said. But once the actual policy was issued, and it was issued much later after the loss had occurred, in fact. One of the layers said something different and required an arbitration. Thus, the policyholder was very surprised to learn that it needed to arbitrate in a foreign forum. I've also seen situations, which I think Liz touched on, where a key exclusion appeared in one layer but not in others, and that had quite a big impact on the total recovery throughout the layers. Once a loss happens or once a dispute around coverage for that loss occurs. Policyholders may be in for a surprise if they don't have a solid understanding of how the layers in their insurance tower fit together. So try to be mindful of that on the front end. And the second topic for today's discussion is looking at issues surrounding the continuity of approach in the event of dispute. And Catherine, I think you have some recent experience in this field. Could you tell us what your English law view is?  Catherine: Certainly. In complex insurance tower situations, it might not have been possible, or perhaps, as you say, Lisa, the policyholder might be unaware, well, that there are not the same governing law and jurisdiction clauses in each policy layer. For example, and we've touched on this briefly, the first few layers might have a clear governing law and jurisdiction clause in favour of local courts, but perhaps for capacity reasons, additional cover was obtained in London or Bermuda or other US insurance markets, and insurers in those markets might have insisted on their own law and jurisdiction clauses. In addition, insurers might seek to include either arbitration clauses or insist on the jurisdiction of the English clause, or it might be a Bermuda form policy, which is broadly a New York law governed policy, but the procedural aspects of the arbitration is governed by Bermudian or English laws. Causing that, even if there are consistent arbitration clauses across policies, due to the confidentiality attaching to each arbitration, even if you have what looks like aligned dispute resolution clauses across your programme, a policyholder might find it difficult to read agreement with the insurers to have all of those coverage issues determined together due to the confidential nature of each individual arbitration. In our experience, there is usually very little incentive for an insurer to save the policyholder money if there is a coverage dispute.  Elizabeth: Right. There may also be differences in the procedural requirements across different jurisdictions. So speaking about the costs and the burden on the policyholder, discovery in U.S. courts is typically more extensive as compared to disclosure and arbitration. For example, under some arbitration rules, parties don't conduct depositions at all. rather they just prepare written witness statements. So a policyholder undertaking proceedings regarding the same tower of coverage but concerning different layers of insurance and in different forums may have to duplicate efforts particularly in the area of discovery because of these different procedural requirements.  Catherine: Exactly Liz, as we all know the last thing one of our clients needs when it has suffered a serious loss and where coverage is being challenged is to have to resolve the issue of the governing law or the court in which the dispute should be heard.  Lisa: I totally agree with that, Catherine. I have had multiple proceedings for a client arising out of a single loss over the course of years because the insurers were not willing to proceed in a single arbitration. This is not only costly, but it takes more time for the client to receive payment as the policyholder has to wait until all the arbitration from their force to be paid in full. We should also be mindful of the risk of inconsistent coverage decisions in different jurisdictions. While the decisions of an arbitration panel are confidential, court decisions are not. The additional impact of inconsistent decisions mean that there is a risk of gaps in cover, with some of the loss being suffered effectively being self-insured or uncovered. So, on to some practical tips. This all sounds incredibly daunting for many insurers, but it is possible to navigate some of the challenges. Liz, could you tell us what some of your top tips are?  Elizabeth: Right. So I probably have three big tips that I would give to a risk manager or someone purchasing a tower of insurance. The first one would be to have clear contractual policy documentations in place with all the operative terms in a single agreement. And if that can't be done in a single place. So, of course, it's very common for excess layers to incorporate terms from the primary policy. That's called follow form and is standard and, in fact, probably ideal. Deal and for policy documents to reference schedules or other external documents. So this is a perfectly standard practice, but it's just important for the policyholder to make sure to maintain final copies of all of the operative documents so that there is not a confusion about what terms are incorporated. The second tip is to liaise closely with brokers and make sure the brokers understand the risk and your business. This is just an important step for any kind of coverage, but particularly with purchasing a tower of insurance, the broker has to understand the policyholder's business to align the coverage with what the risks of the business are. And the third tip I give is to align governing law and jurisdiction throughout the tower as far as possible to avoid the fights and the kind of duplicative costs that we described earlier. This might not always be possible. Many insurers require that a policyholder agree to litigate disputes in the insurance company's forum. But to the extent it's possible, it's ideal. And where it's not possible, the policyholder should just be aware.  Catherine: I completely agree with these, Liz. And as you say, I'd add that it's not always practical to avoid approaching insurers in different markets. Sometimes it's absolutely necessary in order to get the best capacity at the best price. When it comes to renewal, the priority is often achieving the lowest premium for the maximum cover and depending on the risk in question a policyholder might have limited options in terms of capacity. As you say it's always key to be aware of what it is that is being purchased and the terms of that. Another tip of mine is to try and maintain some consistency with the insurers on the tower so far as possible year on year. Where I'm coming at in terms of the advantage of this is that it ensures that insurers keep some skin in the game. So if there is a big loss in one year, an insurer will be more motivated to reach an agreement or a settlement on that loss if they are still on risk in other years. Even if it's not possible to keep the same insurers at the same level, so it's not impossible to keep your primary insurer or your first or second excess at that level for numerous years, keeping them in the tower even at a higher access layer might mean that they can be brought to the table to discuss losses on other years.  Lisa: Thanks very much, Catherine and Liz. I think the two ways from this morning's discussion are, first, policyholders should ensure that they work closely with their brokers. They should make sure their broker understands their company's business, as well as its objectives and preferences. Second, at the time of placement or renewal, policyholders should be sure to be engaged in the process. ask questions to ensure that you are making an informed decision about what you are purchasing. And I think this goes to the point that Catherine just raised. For example, we understand that premium considerations are sometimes driving the deal in terms of saving a little bit of premium versus being an insurer who's been on the risk for many years in the tower. You want to make sure you fully understand the costs and benefits of saving some money versus keeping an insurer in the tower who's been there for a long time. And finally, third, in the event of a loss and a subsequent dispute about that loss, neither of which we hope occurs, hers. Policyholders should consult with an insurance coverage team like that at RedMet that has expertise across the globe so that we can, you know, present a unified front and assist you with, you know, a law that may have happened, for example, in Canada, but that implicates policies in the U.S. and London. So thanks, everyone, for listening to today's podcast, and we hope that you enjoyed this episode.  Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean and reedsmith.com. To learn more about Reed Smith's Insurance Recovery Group, please contact insuredsuccess@reedsmith.com.  Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.  All rights reserved. Transcript is auto-generated.

Reed Smith insurance recovery lawyers, Richard Lewis, John Ellison and Jessica Gopiao discuss the complexities of handling insurance claims after natural disasters. This episode covers critical topics such as the nuances of replacement cost insurance, business income coverage, and the impact of wider effects of losses in mass catastrophes. They also discuss the foundational issues in property insurance, the importance of timely communication and documentation, and the role of forensic accountants and brokers in expediting claims. ----more---- Transcript: Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policy holders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist.  Jessica: Good morning, afternoon, or whatever time it is for you, and welcome back to Insured Success. My name is Jessica Gopiao. I am a senior associate and member of the Reed Smith's Insurance Recovery Group based in both Miami and Orange County. I am here with Rich Lewis and John Ellison, and we'll let them introduce themselves before we get started.  Richard: Hi, I'm Rich Lewis. I've been handling property and business income cases for about 30 years. Handled them from 9/11, Katrina, Rita, some of the storms in New York, and I've also written a book on business income insurance disputes that I keep updated and been writing it since 2006.  John: Hi, everybody. I'm John Ellison. I'm a senior partner in the Philadelphia and New York offices in the firm's insurance recovery group. Along with Rich and about 80 others of us, we handle first-party property and business income losses around the globe and have been doing it as long and probably with as much success as any other firm. So hopefully some of our experience today will translate well to assist you if you ever are in the unfortunate situation of having to deal with a natural disaster insurance claim.  Richard: All right, so just as a matter of background, we're going to be talking about first party or property insurance, and that generally covers tangible properties such as buildings and equipment and machinery and intangible property being the expectation of profit or additional costs you have to incur to keep in business. There are a number of foundational issues that come up in most property claims. The first is most people buy replacement cost insurance, And that is insurance that gives you new for old. And there is often a delta between what your property is worth when it is destroyed and how much it would cost to replace it. And what a lot of people discover for the first time with a property claim is that under policies, the insurance company only needs to front you what's called the actual cash value. And you have to arrange to get the replacement cost. And sometimes that is difficult. other issues that come up the carrier may want to repair damaged equipment or and you want it replaced in general you know if the way to handle this is to ask the original equipment manufacturer if they will honor any warranties if the equipment is repaired and they generally say they won't and if you're not put in the same position that you had prior to an event that's not the rule the rule is that you should be put in the same position. And that usually means replacement property, not repaired. As for the time element part of property, the general rule in business income is that it's to do what you would have done, but for the event. And that's, So for business income, that's the profit and the unavoidable continuing expenses. Extra expenses are expenses that you incur to keep in business, and there's usually coverage for extra expenses. One thing to note at the outset, and I think we're going to talk about it a little bit, is that disputes under property policies generally evolve over time. It's not like a liability claim where you may get a reservation of rights or a denial letter that identifies exclusions right up front. Generally, what happens in a property insurance dispute is what will be called the independent adjuster, who is usually aligned with the insurance company, will come out and visit and look at your destroyed property and will say, well, I'm going to be your ally on this. I'm going to help you file this claim. But the problem is that the carrier has the ultimate say. And so often it'll be six months to a year before the The policyholder says, I got hit in the face with a board. Everything was going right. And then the carrier denied coverage or wants to do X or Y is not what we want to do. The last point before I turn it back over is there's relatively little case law in property insurance context. My book has about 1,300 business income cases written up, and that's every business income case that's ever been decided. it. And John can tell you there's probably 1,300 pollution exclusion cases just on one exclusion in the liability context. So that allows both the carrier and the policyholder to have some room for maneuver and some creativity as to how they approach resolving the claim.  Jessica: So the next thing that we're going to talk about is what to do in the short term. As I said before, I'm a part of the Orange County, California office in Miami office. Our practice handles a lot of hurricane claims in Miami, as well as wildfire claims in California. The hypothetical year is say a wildfire or hurricane comes through, what is the first thing that you should do? Review all potentially applicable policies regardless of title. So if you have a first party property insurance policy, that's probably the most straightforward policy that you would look at. But take a look at your entire portfolio and try to see if maybe that could also provide coverage where available. Another thing is to just pay attention to the coverages and limitations relative to that particular type of natural disaster at issue. you. And then understand that policyholders are typically obligated to comply with certain conditions or duties. So the first step, review your policies. The second step, one of the most straightforward and typical obligations that an insured has is to provide notice as soon as possible. So give notice ASAP. A lot of policyholders make the mistake of waiting until they have all the information before providing notice. Just don't do that. When preparing a notice, make sure that it's in writing, and include as much information as you have at that time, and then maybe like a catch-all to provide for all other losses that could be discovered after you do a little bit more investigation. You can always supplement your notice with information as it goes along, provide updates once that's available. Because ultimately, there's no harm in providing notice. But then on the flip side, the failure to do so can preclude coverage. The last thing that I'll recommend before I flip it back over to Rich is we just always recommend immediately gathering whatever documents that you may have for any financial or business impacts caused by the event. Because it's not just property damage that could be covered under your policy, you can also get something like business income coverage, or extra expense coverage. And then just briefly, business income coverage is designed to pay for the policyholder's loss of profits and the policyholder's unavoidable continuing expenses as a result of that natural disaster or whatever that covered event is. In this episode, we're talking about natural disasters. The other one is extra expense coverage. So that pays for both the policyholder's costs to mitigate or avoid or minimize the business income loss. And then And depending on the form of your policy, you could also have coverage for the costs that the policyholder would not have incurred, but for that loss.  Richard: Yeah. And as to highlight something Jessica said, you have to look at every type of policy that might apply. One of my first big property cases was under an inland marine policy, which seems like a contradiction in terms, not something I would have looked at, but that's where the coverage was. Another issue that will come up very early on is whether you need some assistance in calculating your loss. And there are organizations called loss adjusters. And you'll probably, if you have an event like this, they will be ringing your doorbell or sending you emails. They are people who focus in on adjusting the amount of property damage, the amount of business income loss. So the business income is something that John will cover. That's usually a forensic accountant. The loss adjusters can be somewhat shady. You have to maybe ask somebody who's a reputable one, you may or may not need that kind of help, but they certainly know their way around property insurance policies and how to put claims together in a way that insurance companies appreciate.  John: Yeah. And so I'll pick it up there. And Rich just alluded to the use of forensic accounts, which is a pretty common practice for any, sort of sizable claim or if any business is going to be interrupted from functioning at full capacity for any extended period of time, it is highly advisable to look to involve one of the many qualified forensic accountants that are out there that do this kind of work. It's often a complicated exercise to put the claim together, but what forensic accountants who do this type, of work really bring to the table is they know how to format and collect the data and present it to the insurance company in a way that the insurance company expects to receive it. And if you have a good forensic accountant on your team. That can expedite exponentially how fast you'll get a response from the insurance company and just advance the dialogue. But one of the things you have to be careful about with forensic accountants is worry about attorney-client privilege and whether your communications are protected. And we'll get into that a little bit further down the road. But one other point I wanted to add about the policies, I mean, Rich and Jessica both said, read them, but also look for potential internal limitations periods because property claims, unlike other types of insurance, often have a limitations period built into the policy that would be shorter than the limitation period that exists as a matter of law in whatever state you're located. So you don't want to get tripped up and blow a time deadline by not being aware of of those types of provisions that exist in your policy, and they are in virtually every type of property policy. The time periods often differ, but there is almost always an internal limitation period that you need to know about from the get-go.  Richard: Yeah, and that's super important. It's called a suit limitation, and it's counterintuitive because sometimes a BI loss, a business income loss will take two or three years to develop, and the suit limitation says you have to sue within two years of the damage. It's not you have to sue within two years of the denial. It's two years of the damage. And so you have to pay attention to that. You can get an extension of a suit limitation, but it has to be in writing.  John: And always make sure it's in writing. And I wouldn't even take an email, but that's better than nothing. So let's shift quickly and we'll try and cover this really briefly. That's sort of what you do in the short term. Now, what do you do in the medium term after the loss has happened and you're trying to get your business back together? It is critical to designate somebody inside your company as sort of the point person for collecting and collating all data about loss that is being experienced as a result of the impact of the disaster. And that has to start really from almost day one. But as soon as you've sort of figured out what insurance you have and what notice you need to give, the next thing you need to do is start collecting all of the data. If you can set this up internally on your computer system, you know, have some sort of tracking ability where things get tagged or immediately put into files so they're collected in real time as they're happening because the hardest thing you will ever have to do. And unfortunately, we've all had to do this with clients before, is try and go back and recreate the costs that you incurred if you don't do that from day one. Doing that as a backward-looking exercise is unbelievably difficult and time-consuming. So you will save your business and yourself a whole lot of headaches if you set up a process early on in the adjustment of the claim so that you're getting that data collected as it's being generated. And then you have it to pass on to your forensic accountant, to the insurance company, et cetera.  Richard: Yeah, I think John mentioned it, but another thing that we found is that you try to designate someone within your organization who will be present on every call, in every meeting with the insurance companies so they'll know that people aren't telling different things to the carriers and the message remains consistent. And you also want to pick somebody, one of the things we'll say several times in here is you plan for trials so that you can avoid a trial. You don't want to go to court on these things, but if you plan it out and you pick someone who would be a competent, good witness who can take the jury through all the steps in the claim adjustment, that's planning for trial so that you don't have one. Along the same lines, what we always say is just bat everything back over the net. You will get a ton of correspondence from the carrier. Make sure you answer it in a timely manner. Make sure, and that sends a message to the carrier that you're not going to go away. One of the things that Gene Anderson, who taught both John and myself, is insurance companies ration by hassle. They deny everything or they make it very painful to collect and hope that people walk away. And people who can put up with the hassle and keep batting the ball over the net by responding to letters show the insurance company that they're not going to go away and they get paid at the end of the day.  John: Just, Rich, one other thing. Yeah, I mean, the squeaky wheel gets the grease is definitely a phrase that applies in the insurance context. So don't be bashful about seeking the coverage you're entitled to get. One other thing I just want to mention real briefly before Rich moves on to the next topic is make sure you have your broker involved in the dialogue too. Because of the different roles that people play here, forensic accountants, people who work at the company, outside counsel, et cetera, the one entity that can really speak to your insurance company on a business level is your broker. And many of them have some leverage to be used on your behalf to get a claim paid. They also have channels of communication inside an insurance company that other people do not have. So an important part of your team, in addition to all these other disciplines, is your insurance broker. And they often can move things in a way that other entities can't. So make sure they earn their money.  Richard: Yeah. And the last thing with regard to correspondence is what you want to do is preserve your room for maneuver and try to pin the carrier down. I had a case one time that involved one of four cereal manufacturing plants in a city. It burned down and the carrier thought, well, we have to look at all four plants together and what their performance was because the carrier thought, well, the other three will pick up the slack. And that's not what happened. And the disruption caused by trying to get a fourth factory back online caused the other three to lose business. And when we learned that, the carrier was already pinned down by their position in writing. All right, so let's switch over and maybe we talk about other mass catastrophe issues. And maybe John can start us off with, you know, what happens with carrier positions in a mass catastrophe.  John: Sure. Yeah, well, this is a perfect segue from what Rich just said. Often insurance companies, you know, your business will have its one and only, hopefully one and only claim related to a natural disaster. But, you know, let's pick on Travelers today. If Travelers is selling insurance in South Florida when a Category 4 hurricane hits, they are going to have thousands and thousands of claims rolling in at the same time where you have your single claim. So what do you do to sort of advance the ball? One is communicate promptly and regularly to make sure you stay on the radar screen of the insurance company. And the other thing you can do, which was what Rich was just saying, is force them to take a position. In addition, policyholders are entitled to get an answer from their insurance company in a reasonable period of time. We usually qualify that as 30 to 60 days, something along those lines. There is nothing that prevents you from forcing them to answer your questions and take a position on what kind of coverage they're going to provide you or why they are not going to provide it. And again, the squeaky wheel gets the grease. So stay at it. it's not fun to do it takes a lot of commitment and time but believe us from having lived through these claims for decades now and trying to help people get what they're entitled to the more you push the more you're going to get back that's just the way it works.  Richard: One of the big issues that always comes up in a mass catastrophe is something that I call the wider effects of the loss. And the first time I saw this was after 9/11, where I had a client that did a lot of entertainment outside in basketball courts and tennis courts and golf ranges over on the west side of Manhattan. And the carrier came to them and said, well, you know, the first week after 9/11, everybody was watching CNN, so we're going to give you nothing for that week. The second week, we'll give you half of your BI loss because people were starting to get back out. Third week, we'll give you three quarters. And the fourth week, we'll give you the full loss. They had a 30-day civil authority claim. And the policyholder said, well, yeah, okay, that sounds right. That sounds fair. And that is exactly the opposite way in which carriers had handled the wider effects of the loss. lost. Historically, they've looked at the expectation as of the moment before the loss. But this issue can be huge. Look at the way Katrina affected. Almost all the carriers involved in Katrina claims in Houston and New Orleans said, well, there were no people there. Everybody left New Orleans. So we're only going to give you half of your BI claim. And that, again, is contrary to the way the carriers had handled these claims historically. And that is one of the reasons that I'm sure we're going to talk about in a few minutes, why you should consider getting some expert help early on. Because a lot of these issues, these legal issues are not intuitive. They sound, you know, if they're presented to you in a reasonable way, a reasonable business person may say, okay, yeah, that sounds right. But it's contrary to the way in which the law has said these things are to be calculated. Okay. A couple other big issues that sometimes come up, shortages in labor. So, you know, the carrier will say, well, a BI claim is usually measured in the hypothetical time needed to repair something. Well, what about in Katrina or some mass catastrophe where there's not enough labor or materials to build it? That is that you're entitled to consider that. You're entitled to consider that when making your claim. It's not hypothetically, had there been no hurricane, but it's hypothetically based on the conditions that exist on the ground. Another issue that comes up frequently is the value of location. So, for instance, it came up in a famous case called the Duane Reade case, where the Duane Reade had a store in the bottom of the World Trade Center, which was destroyed. And the carrier said, well, we'll give you the time needed to replace the Duane Reade across the street and not in the World Trade Center, which was going to take 13 years to build. I had some involvement in that case. And that one Duane Reade at the bottom of the World Trade Center made as much profit as all of the Duane Reades combined the other Duane Reades in New York. And if you've ever been to New York, there's a Duane Reade every other block. There's probably hundreds of them. And so that was not putting Duane Reade in the position that it existed before. And so you should be entitled to recover based on the value of the original location that was destroyed. So let's switch to what you can do in the long term.  John: Yeah and what I'm about to say is not a commercial for Reed Smith, but it is a commercial for policyholder counsel generally. And that is in a natural disaster situation, you can bet your life that every major insurance carrier that is involved selling insurance in that market has coverage counsel working for it behind the scenes. They're often not visible. You won't see them in the beginning of the claim. You may not see them for a long time as the claim gets processed and the paperwork is exchanged back and forth between your business and the insurance company, but they're there, advising the insurance company on what positions might be available for them to take to minimize the payment they want to make because that's always what they're trying to do.  Richard: I have been involved in lots and lots of property claims and so has John, and I have never seen a reservation of rights letter drafted by an in-house employee. They're always drafted by counsel. So the date you get a reservation rights letter, the insurance company has counsel.  John: That's 100% true. And while I say this, and I mean this sincerely, some clients don't think, believe me when I say it, but when the insurance companies don't know that we're involved in a claim, that's often when we're doing our best work. And what that means is we can help guide the process anonymously as far as the insurance company is concerned to get you through the trappings of the policy and the hurdles and all these other obstacles that we're talking about here. Just by having private conversations with one another, the insurance company doesn't need to know you're having those conversations with us or some other policyholder counsel. And that's exactly what they're doing with their coverage counsel in responding to the things you're submitting to them. So we're really just talking about an equality of arms here. But ideally, the insurance company would never know that the policyholder has counsel involved because with the assistance that they can provide behind the scenes and out of the eyes of the insurance company, that often leads to a quicker and better resolution. The other thing it sets you up for in the event you are going to have a big fight is you can begin to protect your communications under the veil of attorney-client privilege, which would not be available if a lawyer wasn't involved. And that can also protect communications with the forensic accountants and any other sort of consultants you might need to bring in to properly put your claim together to present it in the best way possible to the insurance company. So there's lots of good reasons. It doesn't mean that the policyholder attorney who knows what they're doing won't come marching in and say, you know, like, I'm General Patton now. I'm taking over everything. You work as part of a team. Everyone has their role. And that's the best way to get these claims paid as quickly and as completely as possible. But Jess, I think is going to cover another option here that we sometimes look at, which is somewhat unique to property insurance.  Jessica: Yeah, it's another way to kind of expedite potentially getting some payment under your policy. So it's called appraisal. Appraisal is a method of to determine the amount of loss under a property insurance policy. So determining amount of loss is a pretty important term here because it's not determining coverage. It's usually when an insurance company and the policyholder agree that there is at least some coverage, but they just don't necessarily agree on the specific A lot of the property insurance policies contain an appraisal provision that can be invoked by either the policyholder or the insurance company. And in some states, including in Florida, you can try to compel appraisal by filing suit so long as the policy language determines that the appraisal is mandatory and all post-loss conditions are complied with. There are a lot of, I think, really good benefits of appraisal. Not only is it informal, but it's less time consuming. It's really not as expensive as potentially going to court. I mean, Rich had mentioned previously to prepare for trial to avoid trial. And then it also would involve an expert assessment of what the amount of loss actually is.  Richard: Right. So there is an appraisal clause in almost every property insurance policy. And one of the things you need to weigh is, you know, you don't want to get jumped in an appraisal. You don't want the insurance company to start an appraisal before you filed suit because the court will, in my experience, the court will defer to the appraisal and let the appraisal happen. And the problems with an appraisal from our perspective are, you know, the way it involves, there's an umpire and there's an insurance company appraiser and there's a policyholder appraiser. And there is a vast disparity in the experience level of insurance company appraisers and policyholder appraisers. There's one appraiser named Peter Hagen who works for JS Held who says on his website that he's been involved in 3,000 appraisals. I don't know of a policyholder appraiser who's been in more than 10, and it's very difficult to get any intelligence on who are the good appraisers or who are the good umpires. The other thing that is strange about appraisal is there's no guarantee of discovery. You will not get any files from the insurance company that show how they've valued your claim or what they've done with regard to your claim. But as Jessica said, it is much cheaper, and it is potentially faster. The last drawback on appraisal is it doesn't decide issues of coverage. So it just decides issues of amount. And the carrier can say, okay, well, we've discovered that it would be a $10 million loss, but we're denying coverage on these five grounds. And then where are you? You're stuck in the same place you were before the appraisal.  John: I think that brings us back to the line we've repeated a few times, prepare for trial to avoid trial. I always think of these as prepare for the worst, hope for the best. Most of these cases will not end up in trial. I mean, trials are a single-digit percentage of the number of claims that are made at best. I mean, it could even be less than 1% for all I know. But the insurance company who knows that the policyholder is prepared to see the claim through and is presenting its information and conducting itself in a business-like and serious manner is going to get treated better and is likely going to be able to avoid trial. Because the insurance company knows they're dealing with, in a natural disaster situation, they're dealing with thousands of other claims. We may as well make this one go away because we have plenty of other people we can pick on who aren't doing it the right way. So hopefully what we've said today gives you some pointers and useful information to put your business in the best situation it could possibly be in after suffering a terrible incident like a natural disaster. But we want to thank you for the time you took to listen to us. Jess, Rich, and I are all reachable through the Reed Smith website if you have any follow-up questions, and we'd be happy to chat or email with you. And we hope you enjoyed this version of Insured Success. Thanks very much.  Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's Insurance Recovery Group, please contact insuredsuccess@reedsmith.com.  Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation.  All rights reserved. Transcript is auto-generated.

Carolyn Rosenberg, Stephen Raptis and Jalen Brown explain what “bump up” exclusions in D&O insurance are, and policy considerations when considering or structuring a transaction. ----more---- Transcript: Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policy holders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist.  Carolyn: Welcome to our Insured Success podcast, the bump-up exclusion. I'm Carolyn Rosenberg. I'm a partner in our insurance recovery group on behalf of policyholders here in Chicago. With me today are my colleagues, Jalen Brown, also in Chicago, and Steve Raptis in our Washington, DC office. We'll get right into it. We've talked about the bump-up exclusion, which is a name. Jalen, can you start us off and tell us what do we mean when we say a bump-up exclusion?  Jalen: Yes, thank you, Caroline. So bump-up exclusions have become a hot issue for D&O insurance coverage. Insurers have begun raising these issues regularly in claims involving corporate mergers and acquisitions, insurers assert these bump-up exclusion claims whenever consideration paid in an acquisition is alleged to be too low. And so while a bump-up exclusion is referred to as an exclusion, we won't find a bump-up exclusion in exclusion sections. There is a carve-out for the definition of an otherwise covered loss. And so a bump-up exclusion provisions are often found within a D&O policy's definition of loss, and attempts to exclude the amount of a settlement or judgment that represents an increase in the price paid to acquire an entity where such consideration was alleged to be inadequate. There are a few exceptions to the bump-up exclusion. Virtually all bump-up exclusions carve out coverage for defense costs and side A claims, and I know Steve is going to tell us a little bit more about what side A claims are.  Stephen: Just as a little bit of history, D&O policies were originally put into the marketplace largely to protect the directors and officers from non-indemnified claims, the kind of claims that the company will not indemnify them for or can't indemnify them for legally. Those are side A claims. Many D&O policies also include side B and side C coverage that protects the company. But the side A claims are the non-indemnified claims against the officers and the directors.  Carolyn: So, Jalen had mentioned that these come into play in acquisition situations and transactions. Steve, tell us, where do you think the bump-up exclusions come into play most? What kinds of cases or situations should you be on the lookout for?  Stephen: In my experience, I've been seeing insurers assert that bump-up exclusions apply to really all types of corporate transactions. They haven't limited it to one type. It's become sort of a go-to generic defense anytime there's an allegation in a case that inadequate consideration was paid and consideration with a transaction. And that includes both public and private companies. And we have seen sort of a morphing of these exclusions. It used to be traditionally they would apply to, they would contain language that made them applicable to acquisitions. That was a key word, and often it would be accompanied with acquisitions of all or substantially all of the assets of some other entity, and that was where the exclusion applied. But more contemporary versions we're seeing have really gotten away from that acquisition language. We might call it a restriction. And we know that with most public company transactions, they will be challenged. It's the nature of the beast. And when I say challenged, one side, one set of shareholders or another will claim that either their side paid too much or the other side will claim that they didn't receive enough. And sometimes there are both of those allegations in a single transaction. They can't both be right, but we'll see both sides actually have to deal with those kinds of shareholder suits. The good news is if you're a public company, these are securities claims. These are exactly the kinds of claims that are likely to be covered if you have side C coverage. So that's the good news. And one other thing that policy holders should be aware of with respect to these bump up exclusions is they really are, even in the states where they've been interpreted in favor of the insurers, they are still limited to the language of the exclusion. And that is damages or loss where it is claimed that inadequate consideration was paid. So if the loss or the damages at issue are of a different nature, those should not fall under the bump-up exclusion. And that's something that we should all be mindful of when we're looking at these often long securities complaints that may be 150 pages long. You really need to separate out what falls under the exclusion and what doesn't, because if it doesn't fall under the exclusion, it should still be covered regardless of how the bump-up exclusion is interpreted.  Carolyn: And as you said, Steve, and as Jalen alluded to, even though this is in the definition of loss, it's an exception to the definition of loss, and therefore it is construed as an exclusion. And as we know, applying basic sort of black letter law principles, exclusions have to unambiguously apply, and the insurer has the burden to show that. So, you've told us sort of theoretically and practically speaking what's covered, but let's get into the nitty-gritty. Jalen, you know, who's been winning the coverage disputes in regard to the bump-up exclusion?  Jalen: At this point, Delaware seems to be the only jurisdiction that is scrutinizing these exclusions rigorously. Two examples of this is in February 2021, the Delaware court presented the Northrop Grumman decision, and in this case, the policyholder prevailed under Delaware law. Some of the key facts for this case was that both sets of shareholders voted, neither merging entity survived, and that neither entity obtained substantially all of the assets of the others. The court noted in Northrop that the shareholder claims did not allege inadequate consideration exclusively, and the court construed the bump-up provision, which the court deemed an exclusion, and narrowly and strictly under Delaware law, the court concluded that it applied to a lawsuit claim that alleges only the consideration exchanged, nothing else, as part of only one specific control transaction was inadequate. The court held that the exclusion was inapplicable to the merger because the lawsuit involves more than just inadequate consideration. And also more recently, we have the Viacom decision that just came down a few months ago in August of 2023. And. Again, the court applied Delaware law, and this case involved a merger between Viacom and CBS, and this was a transfer of all of Viacom's assets. The shareholders of Viacom brought a claim against Viacom due to the merger. And in this case, the shareholders and Viacom ultimately settled their claim for $122.5 million, and the insurers refused to pay the settlement because of the bump-up exclusion provision. In this case, Viacom countered the insurers and stated that the bump-up exclusion applied only to acquisitions, and acquisitions was an unidentified term within the policy and was not considered a merger. The Delaware Superior Court found that the bump-up exclusion was ambiguous as it was subject to contrary but reasonable interpretations, that the exclusion applied to acquisitions that are part of a broader transaction, such as a merger, or that it only applied to acquisition transaction. As a result of this case, the court held that the bump-up exclusion had to be interpreted in favor of coverage and that it did not apply to Viacom's settlement of the CBS merger claims. Therefore, Delaware has been the only state so far that has been rigorously construing bump-up exclusions in favor of policyholders.  Carolyn: So it sounds like, Jalen, that Delaware law is favorable, at least at this point, and scrutinizing the specific language and the particular facts are critical. What about the cases where policyholders have not fared as well? What about the cases that have been lost?  Jalen: For the cases that have been lost, those have been found in jurisdictions that have not been applying Delaware law, such as Wisconsin, Virginia, and California. An example of this case would be the Komatsu Mining Corporation decision, which was a Seventh Circuit decision in January of 2023 that applied Wisconsin law. In this case, the transaction at issue was a merger, but the extent to which the merger is an acquisition was not particularly analyzed by the court. The court held that the exclusion applied solely based on the inadequate consideration language and the bump-up exclusion policy. While the court acknowledged the Northrop decision in Delaware, it noted that the exclusion at issue was different and that Delaware law applies more policyholder-friendly rules of policy construction than the Wisconsin courts.  Carolyn: I know there was one other case as well, the Towers-Watson case, right, where the appeal was recently in the Fourth circuit, and that didn't go quite as well as policyholders had hoped.  Jalen: Yes, the Towers-Watson decision came down from the fourth circuit on May 9, 2023. The fourth circuit reversed the district court's decision and applied Virginia law instead of Delaware law. The fourth circuit relied on the dictionary definitions of the term acquisition to conclude that the term applied both both to the actual acquisition of a stock and to mergers. The Fourth Circuit then remanded the case to the District Court to determine whether the bump-up exclusion applied, given these new parameters. The District Court's decision came out on March 6, 2024, and consistent with the Fourth Circuit's opinion, the District Court determined that the contract interpretation in Virginia was distinct and different from Delaware, and that under Virginia law, the bump-up exclusion applied.  Stephen: One thing that I found interesting about the Wisconsin case and the Towers-Watson case were the fact that they found the Delaware law actually applies more policyholder-friendly rules of policy interpretation than the states, Wisconsin and Virginia, whose laws they were applying. That was interesting to me because we normally think of that body of law as universal. In fact, we often refer to it as universal rules of policy interpretation. But I thought in both cases, it was interesting that those courts distinguished the Delaware cases by saying, well, Delaware has a different set of rules of policy interpretation, which was a little bit new to me.  Carolyn: Yeah. And Delaware makes some sense because many corporations are incorporated in Delaware. Delaware seemed to have a body of law where the jurists are quite familiar with. Corporate law, indemnification, bylaws, and also the roles of directors and officers and the ability to look at transactions, look at the various damages alleged, and be able to parse through both the exclusions and elements of loss that would be covered. And although we've been talking about the cases themselves and the very helpful analysis that you both have shared, the real question too is, are there really lessons learned from either successful, partial success, or not success if you're a policyholder that could be applied when you're purchasing insurance or renewing your D&O policy or structuring a transaction or considering it. Steve, can you share some of your thoughts on those issues?  Stephen: Yeah, I guess the first thing that I would say is that this is an evolving issue because this is not an exclusion that has been interpreted in average state, or not even close to it yet, this is a book that's still being written in terms of the ability of policyholders to really effectively be able to recover under their policies with respect to transactions. But there are a few things that I think that we can take away from where we are on the current state of the law. The first thing, and just to sort of go one level higher, is that D&O policies for people who have not negotiated them, they aren't written on a standard policy form like you might have with your general liability policy or your property policy. There's not much room to negotiate those policies because the insurance industry has a form that everybody uses. D&O policies aren't like that, which means that each insurer has its own version of policy. There's a lot of similarities between those versions, but they're not the same. And as a result, depending on how the market conditions are at the time, certain provisions within your D&O policy may be negotiable. And we have no reason to believe, given that There really is no typical bump-up exclusion. That language has really evolved over time and continues to evolve over time. We don't have any reason to believe that that's not one of the provisions that may be more on the negotiable side than the non-negotiable side. But regardless, when the policyholder at renewal or if they're buying a new policy altogether, they really need to look at that language, whether it be in the specimen policy, if they're buying it from that carrier for the first time, or whether it's in their current language that they would renew. new. They really need to review that language carefully at renewal so that if adjustments need to be made, that can happen. That's the right time to do it. A couple of the things that they can look for that we've highlighted already today, if you can find, if it's still available, a version of the exclusion, it still has the traditional acquisition language in it. We mentioned earlier that that might be thought of as a limitation. That's a good thing with exclusions. If you can still get a version of that bump-up exclusion, that's a good place to start. As Jalen mentioned earlier, bump-up exclusions traditionally always carved out defense costs expressly. Now we don't always see them carved out expressly. If you can get a version of the policy that carves them out expressly, that's better than relying on certain language that may be within the exclusion that can be interpreted as carving out defense costs. We want to make sure that language is expressed. And then finally, you want to make sure that that side A carve out, which should be in every bump up exclusion, is stated very expressly. In your exclusion, maybe it says that the side A claims are carved out. Maybe it says it only applies to side B and C coverage. Either way, you would be well advised to make sure that that carve out is in there. The final thing that I would say is that a lot of times in structuring transactions. One of the last considerations that the negotiating or the transacting parties have is insurance. What we might propose is under certain circumstances, insurance maybe should be more of a driver than an afterthought. And especially, say, for a public company, it's highly likely because of the visibility of the transaction that it will be challenged on one side or both. So maybe since you know you're going into the transaction with a high likelihood that it will be challenged, maybe D&O insurance and the recoverability of D&O insurance should really be more at the forefront of the thinking. Can you structure your transaction in a way that preserves the D&O coverage if the transaction is ultimately challenged? And as we talked about a little while ago, Jalen talked about the fact that Delaware has shown itself to be a friendly place. Two different types of burgers have been held by Delaware courts not to be subject to the exclusion. So, if all other things are equal, why not structure your transaction in a way that takes you outside the bump-up exclusion, at least arguably, by structuring it, if you're a Delaware corporation, in a way that's consistent with the case's finding coverage? Anyway, we don't want to suggest that the tail should wag the dog, but D&O proceeds in these transactions, like Jalen talked about with Viacom, $122 million in D&O insurance proceeds. That's a lot. And so it's something to take into account when potentially when you're structuring a transaction, especially if you're a public company, especially if you're a Delaware corporation.  Jalen: That's a great point that you mentioned that an insurer should really consider the language of the policy that they purchased. That's exactly what the Onyx decision focused on, where the court held that and relied on the assumption that there was more favorable policy language available in the marketplace, and that was not purchased by the policyholder when finding that the bump-up exclusion did apply.  Carolyn: And clearly, bump-up exclusions are not going away anytime soon, at least not for the short term. So it's really important to both know what jurisdiction you're in, do what you can on the negotiating front and structuring the transaction, and of course, understand where the case law is and is going and really get into the facts to be able to make the arguments that put you in the best place to overcome the exclusion if and when it is raised. I want to thank both Steve and Jalen for elucidating the topic for us today and would invite you to tune in to additional episodes of Insured Success. Thanks so much.  Stephen: Thank you, Carolyn. Thank you, Jalen.  Jalen: Yeah, thank you both. It was great talking.  Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's Insurance Recovery Group, please contact insuredsuccess@reedsmith.com.  Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.  All rights reserved.  Transcript is auto-generated.