Insured Success provides cutting-edge commentary on a range of insurance coverage issues affecting commercial policyholders. Reed Smith insurance recovery lawyers and guest speakers from around the world discuss emerging trends, legal developments and insurance best practices and provide timely insights to assist your organization.
Listen to episodes
29 recent
July 28, 2026Episode 2918 min
AI in the boardroom: Is it the next D&O claim?
In this episode, Ellie Ruiz and Emily McMahan explain why AI is now a board-level governance issue. Directors and officers liability depends on how boards authorize, oversee, and document AI use – not on AI’s mistakes alone. They discuss the risks of moving too fast or too slow with AI adoption, the threat of AI-related securities claims, and how regulatory fragmentation complicates compliance for multinational companies. They also examine how AI-related scenarios are testing traditional D&O insurance policies, and why boards should stress-test their coverage now.
June 24, 2026Episode 2824 min
Prediction market claims and insurance: Don't gamble on your coverage
In this podcast, Reed Smith’s Carolyn Rosenberg and Kalid Knox and HUB International’s David Garrigus engage in a topical discussion on insurance coverage, claims handling, and underwriting implications associated with the increased growth and scrutiny of prediction markets.
June 9, 2026Episode 2734 min
Build Smart: Insurance secrets before the first beam
Reed Smith's Chris Kuleba , Chris Mosley and Jessica Gopiao provide a fast-paced breakdown of today’s construction insurance landscape, from OCIPs vs. CCIPs to surety bonds and wrap manuals. Learn what to lock in before building begins and how to handle claims like a pro when things go wrong.
May 8, 2026Episode 2629 min
Middle East Conflict: Considerations for Policyholders
In this podcast, Catherine Lewis and Eleanor Ruiz discuss the implications of the current conflict in the Middle East for insurance placement and claims. We cover general insurance considerations for businesses affected by the conflict, with a particular focus on the marine, aviation, energy and natural resources, and cyber sectors.
February 10, 2026Episode 2515 min
Rate hikes, risk shifts: Are tariffs insured?
Tariffs are back in the headlines—and they’re quietly reshaping property insurance outcomes. Join Reed Smith’s Nick Insua , Esther Kim and Maame Boateng as they unpack whether tariff-driven construction cost increases are covered under first-party property policies with replacement cost provisions. We translate doctrine into dollars: why the answer is generally “yes,” how timing and location of loss matter, and what policyholders need to do now on limits, timelines, and premiums to avoid unwelcome surprises when rebuilding costs outrun expectations. We also discuss tariffs and their impact on insurance policies in general.
November 12, 2025Episode 2414 min
The Third Parties (Rights against Insurers) Act 2010: 2025 case law – more light in the tunnel?
Mark Pring and Claudia Gwinn examine the Third Parties (Rights against Insurers) Act 2010, focusing on 2025 decisions relating to notification of conditions precedent (Makin v QBE; Archer v R ’N’ F Catering) and disclosure requirements (AmTrust v Endurance). They highlight practical points regarding, in particular, ensuring compliance with policy terms and using “extended disclosure” applications to address “information asymmetry.”
August 13, 2025Episode 2343 min
Key insurance concepts and issues for data center construction projects
In this episode focusing on data centers, real estate partner John Simonis and insurance recovery partner Chris Mosley join Paul Sovik-Siemens , senior VP and managing director for project risk at Lockton, to explore critical insurance considerations, challenges, and best practices for data center development and construction projects. The panel discusses the nuances of builder’s risk and liability insurance, the importance of wrap-up policies, and strategies for structuring insurance programs to protect large-scale data center investments. ----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: Hello, everyone, and welcome to Insured Success, a segment of our Reed Smith Data Center series. Today, we will be discussing insurance-related considerations and best practices for data center construction projects. My name is John Simonis. I'm a real estate attorney and co-chair of Reed Smith's Global Data Center subgroup. I specialized in data center transactions development for many years, including a negotiation of numerous design and construction contracts. Today, I'm joined by my partner, Chris Mosley, and by Paul Sovic-Siemens, who is a senior vice president and manager of project risk at Lockton Companies. Lockton is one of the top insurance brokerage firms for substantial construction projects in the U.S. Both Chris and Paul have extensive experience structuring and negotiating insurance programs for data center and other substantial construction projects. Chris, can you share a bit more overview on your background? Chris: Thanks, John. So I'm Chris Mosley. I'm a partner in Reed Smith Insurance Recovery Group. I have been representing businesses in insurance-related matters for more than 30 years. I have a particular specialty in representing owners and contractors in construction-related matters, and that work includes the assistance in negotiating insurance policies and the appropriate insurance provisions in general contracts and subcontracts on the front end, as well as handling claims that may arise after the fact, which most people see when we sue insurance companies. But the bottom line is that for the entirety of my career as well as my team, we've been helping businesses that are involved in the construction of large-scale projects from the beginning through the end of the project and then through claims that may occur thereafter as well. Paul: My name is Paul Sovik-Siemens. I run our project risk department in the west for Lockton. My career has spanned over 20 years in construction-related insurance. I spent the first several years on the carrier side, most recently joined Lockton, and in the last five years, I've worked in our group that focuses primarily on setting up construction-related insurance for projects. A lot of our projects recently have been focused on data center clients, and so we've had a lot of experience lately structuring deals and negotiating with the contractors and figuring out the best way to cover these data center assets. John: Thanks for the background, gentlemen. So data center construction projects are large, complex, expensive projects, often costing hundreds of millions of dollars or even billions of dollars. And the insurance costs can be several million dollars as well. So from an insurance coverage standpoint, they're obviously very complex. But maybe we can start with a little bit of an overview on the coverages that would typically be negotiated in an insurance program from a data center project. Chris, maybe you can start by giving a little overview on the differences between the builder's risk aspects of the project versus the liability insurance. Chris: Sure. So when insuring a project like a data center, there's really, as a general overview, two basic types of coverage. What we call in the insurance trade first-party coverage or third-party coverage, first-party coverage being things like builder's risk, third-party coverage being things like liability insurance. But what are those policies and what do they do? Well, the simplest way to understand it is to think about having two data centers next to one another. Say, John, you own one data center and Paul owns the other. And there's a tower on John's property, call it a cell tower or whatever the case may be, and it falls. If that tower falls on your own data center, say John's data center, then John's going to call his first-party property carrier and say, this tower fell upon my building. There was a significant amount of damage to my building. I need you, the insurance company, under your first-party policy to pay for that. And first-party policies can look like builder's risk during the course of construction or a commercial property policy after construction is complete. Now let's take the other situation where the tower on John's property falls onto Paul's data center and damages that data center. Now, Paul has sustained a significant amount of loss because of the damage to the data center and perhaps some other damages that flow from that, and Paul sues John. One thing to understand about a liability policy, and this is true with any liability policy, it is a lawsuit policy. So anytime you hear liability policy, it's a lawsuit policy designed to protect you against lawsuits filed by third parties. So when Paul sues John, John contacts John's liability carrier and says, I've been sued because my tower fell on Paul's data center. Please protect me and provide me the two benefits under the liability policy is, which are paying for my defense, that is giving me a lawyer and paying for it, and then paying for any judgment or settlement that may occur thereafter. Those are the two basic types of policies that are intended to cover a project like a data center, both before and after the project completes. John: So with that background, Paul, maybe we can jump to the liability insurance and in particular, maybe one part of the liability insurance that I have often found to be misunderstood, the completed operations coverage. Paul: Happy to hit on that. So if we were talking about liability related to a construction project or construction operations, think of it in two different buckets. The first bucket are the premises or operations of that construction site. An example of a scenario where that would be triggered is if I'm walking by Chris's job site and Chris drops a hammer and it hits me, that's a liability during their premises and operations. So I would turn around and sue Chris and his job site. As Chris mentioned, it's a legal policy to where we're going to recover damage through the premises operations. The second bucket of a construction policy is called the Products Completed Operations and Construction Defect Coverage. Now, that coverage starts after the project has been put to its intended use, is finished, certificate of occupancy. Any of those triggers can set it into the post-construction completed operations phase. Now, what does that give you? That gives you construction defect claims for problems that arise sometime between post-completion and generally the statute of repose. So an example like that would be that you build your building, you've got no problems, it's operating no problem the first two years, and then all of a sudden, year three, you're figuring out that there seems to be some water penetrating and perhaps creating some damage. Water damage is a huge component and a driving loss in the construction defect phase. And this general liability policy is there to cover resulting damage from that construction defect water loss. Chris: And John, the only thing I would add, I think Paul described it perfectly. As an oversimplification, your premises and ongoing operations occurs until you get to the CO point, and thereafter, you're in the completed operations coverage, which hits the construction defect coverage Paul was talking about. John: And I guess similarly, your builder's risk policy, which would be your property coverage during construction. At some point transitions to your traditional property insurance on an operating facility, correct? Paul: That's correct. And that policy operates differently than the liability policy. As Chris mentioned, it's a first-party policy just during the course of construction. And when you're talking about building a construction project and when you want to get that coverage in place and the builder's risk, you really got to focus on the construction schedule. You want to start it when there's something there to insure, meaning if you've gone out and you've done some grading or you've brought materials on site. Anything that can sustain property damage, you'll want to have your builder's risk policy in place at that point. Fast forward towards the end of the project, builders risk carriers are not interested in covering your operations. So as you approach the completed phase of your construction project, you've got to make sure that you're coordinating with your permanent property carrier to transition that policy off so that there is no lapse in coverage on the builder’s risk. John: Paul, you touched on one thing I think is worth some emphasis, and that is that supplies, materials, equipment that's delivered on site and stored before it is incorporated into the improvement itself. I think that's becoming a bigger issue. Recently did a podcast on tariffs in data center construction. And one of the things that was emphasized during that discussion was that to avoid tariff uncertainty and tariff increases, a lot of developers are focusing on potentially doing early procurement. But if you do that early procurement, you really have to focus on making sure that whatever you, the delivered materials, delivered equipment is appropriately covered in the interim until it's incorporated into the improvement. Paul: That's correct. And that's a focus you'll need to have when you put together a builder's risk policy, because within that policy, there are a lot of different sublimits that will extend to different materials that are stored onsite, stored offsite. They're not always clear on where that coverage falls. So when you are. Setting up your builder's risk program, it's important to know that equipment purchase, when it's arriving, where it's being installed, and making sure you have adequate coverage for it. John: And who typically carries the builder's risk insurance? I've seen it both ways. Sometimes the contractor, sometimes the owner. What is most typical? Paul: In our experience, we see the owner bringing it a lot. But the reason for that is that there are sometimes coverages that are more important to the owner, such as loss of income coverage or loss of rents. Usually the owner has a better grasp on that, and they will want to customize the insurance to match their risk tolerance. Chris: John, I'd like to add one point to what Paul was saying in terms of the transition from the builder's risk to the standard property policy. that transition can't be under-emphasized. I've certainly been in multiple lawsuits which would involve my client, typically the owner, the builder's risk carrier, and the property carrier. And the big fight is when did the damage occur and is there a gap between the builder's risk and the commercial property? One of the biggest things that I've seen, some of the biggest problems I've seen for owners who have builder's risk coverage is they like to set it and forget it and just let it go until things get to the end. But if it becomes pretty apparent that the project is going to be delayed and needs to be extended, it's something that someone like Paul can go and talk to the insurance companies about, but you really need to get way ahead of that, like several months, five, six months in advance to give the builder's risk carrier a time to get comfortable with the reasons for the delay and the extension. But you really don't want to get caught with some sort of lapse between your builder's risk carrier coverage and your commercial property coverage. John: And one other thing that might be worth noting on the builder's risk coverage, I think, is who is actually insured by that. And I know I see a lot of that get heavily negotiated in the construction documents because the builder has an interest in the builder's risk coverage as it relates to the having to reconstruct improvements that have been damaged. And the owner obviously has an interest as well because it's its facility. So usually both insured, but I guess where I see more debate is who gets to negotiate and settle the client, right? Paul: That's a fair statement, John. The contractors that will go on to a project and perform construction operations will have access to that builder's risk policy just as the owner has named insured status. But the difference is first named insured status, they're the ones that will be able to drive the claim outcome and the ones that will receive the funds from the carriers in the event of a claim. John: Great. Now, let's jump to professional liability. Those doing the transactional side of these deals have typically seen requirements for professional liability insurance in their contracts. The professional liability, the underlying professional liability insurance that is maintained by the architects, the engineers, by contractors when they are doing professional services, engineering work, build-a-suit work, and subcontractors that do that. We always put requirements in for those parties to carry your builders' risk insurance, but one misunderstanding, I think, from people who are not in the risk management side of things is that that insurance does not run to the owner. That insurance, the typical insurance that's carried by those parties, it runs on a claims-made basis. So it's not when it occurs, it's when the claim is made. So you need to negotiate a tail period where that coverage will remain in effect. And it also goes to the party. So it goes to the architect, to the engineer, to the contractor, not to the owner. The reason the owner cares is that there's somebody standing behind the indemnity obligations and the potential liability under the construction contract. Those policies are typically umbrella policies. So they run across the contractors, the architects, many projects. So, you know, we want to have covenants in that they renew that. But the coverages that are provided, at least in my experience, and I'd ask you both if you see similarly is $2 to $5 million, occasionally $10 million for a very big player. But the smaller players don't like to carry large amounts because they think it invites litigation. And they usually marry up the coverage under the professional liability to the limitations of liability to negotiate the contract. So with that said, I know a lot of owners on these substantial data center projects looked at a separate owner's policy covering potential professional liability that runs in favor of the owner called an Owner's Protective Professional Indemnity Policy, OPP. Paul, you want to give a little more background on that? Paul: Absolutely. The OPPI, is a policy in the name of the owner. And what that policy does is it adds a layer of protection exclusively for the owner in the event that those underlying architects, engineers, subconsultants don't have enough insurance. Those policies that you mentioned earlier, John, that they bring $2 to $5 million in coverage, those policies are in the name of the subconsultant or the architect or the engineer. When they get a claim, those limits go away quickly. And when you're talking about a scale of a data center, there's a chance that you're going to run out of limits from all of those designers fairly quickly. So what this OPPI policy does is it sits above all of them and provides excess coverage only for the owner for design-related claims. John: And I guess the last type of coverage to touch on, which is workers' compensation and employers' liability, which we all see as a requirement of these contracts. I'm not sure that there's a lot of nuance to that, but anything that you guys see that is subject to significant negotiation in that space? Paul: When we're looking at data center projects, we generally see the contractors controlling the workers' comp. And so we haven't had a ton of experience, at least from the owner's side, on the workers' comp employer liability. John: So let's jump to how the program is structured. I think in a traditional setting, in a traditional construction setting, you'd see a contractor carry its own insurance, subcontractors carry their own, the architect and consultants carry their own. But on this scale of a project, we often see what's called wrap policies or wrap-up policies. Paul, can you give a little overview on that and the differences between a wrap policy and traditional insurance? Paul: Traditional insurance, let's start with that. Traditional insurance is a method where Chris is the owner. He goes out and he hires a general contractor, John, who then goes out and hires subcontractors, myself. In that scenario, John says, okay, I'm going to go get all these subs to actually do the work. All of those subs are going to bring their own insurance, and I'm going to bring my insurance too. And Chris says, okay, as the owner, I understand that. Something goes wrong. Look, John, I'm going to look to you. You're the general contractor. It's your item to deal with. If there's a loss, you've got to chase down the subs. If you get into litigation with your subs, it doesn't matter to me. I'm expecting you to do that. You told me that everybody would bring insurance. That's a typical way of typical setup within the traditional method. One thing to note on that approach is that all of those insurance policies, the general contractors, the subcontractors, all of those policies include projects outside of Chris's. So they're doing work for different owners, different general contractors, and they're bringing those same limits to each of those construction projects. How does that compare, contrast to what an OCIP is or a CCIP is? For this part of the conversation, I'll just call it a CIP, which is a controlled insurance program. The CIP is the liability that covers that specific project with dedicated limits and covers every contractor that enrolls into that project. So what does that mean? That means John is a named insured as the general contractor. That means I'm a named insured as an enrolled subcontractor. And we all have access to that one insurance policy with dedicated limits for that specific data center project. Chris: And John, I would add, colloquially, we call it a wrap because the policy essentially wraps in everybody on the project into the policy. And so frequently you'll hear an owner-controlled insurance program or contractor-controlled insurance program referred to as a wrap, and that's the reason for it. John: And on large-scale complex projects like this with many participants, I see wraps almost invariably on them. And so, Chris, maybe you can touch on the benefits of using a wrap on a large complex project like this. Chris: Sure, happy to do so. In my experience, and Paul can chime in on this. The wrap market or the CIP market is really a mature market. It's something that has developed over the last 20-odd years or so and is commonly used by the insurance industry to insure these types of projects and commonly used by owners and contractors on these types of projects. There are a number of what I would consider to be pros for OCIPs and CCIPs. Paul touched on one of them, and that is the dedicated limits to the project. And something that we'll touch on briefly later, the purpose of the wrap program, the purpose of the insurance program is to protect the bottom line profits for the owner developer and for the contractor and everybody else involved in the project. And so the best way to make that happen from a limits perspective is to make sure you know how much of insurance is available on this project. As Paul mentioned, in a traditional program, the general contractor may have myriad projects all covered under the program, and there's no way to tell which projects may run into problems in the future, which may suck off some of the limits on the contractor's policy. You're fighting with 50 other projects for those policy limits. So that's one of the major advantages to an OCIP. The other is to understand that the OCIP really comes into play when there's a claim, when, as Paul indicated, water starts getting into the building and causing all sorts of problems. Under the traditional program, I, as the project donor, would go to John and say, John, we have a problem. Notify your insurer. And so John would notify his insurer as the general contractor to get involved. And then John would contact Paul and the 19 other subcontractors that were involved in this. And each of those parties would contact their own insurers. And this is truly what used to happen on a regular basis. Every insurer that was involved would point to every other insurer and point to every other party involved as the party at fault. And, Each one would hire its own lawyers to represent the subcontractor, the general contractor, and sometimes you'd get two or three lawyers representing the same party, and the thing becomes a big web and a big mess, and then you need to hire the, each side has to hire a coverage lawyer to try to figure out how all the pieces fit together. It's a huge, complex mess. Under the OCIP and the CCIP, all of that goes away because you have a single policy under which all of the parties that are part of the construction are insured. Every wrap policy I've ever seen has what we call an insured versus insured exclusion, which precludes parties from suing one another with limited exceptions for the whole purpose of having a single unified defense. Frankly, one of the reasons why the insurance industry wanted to have the wraps was to save the cost on all these defense lawyers. So it significantly simplifies the claim process. And so those are some of the reasons why I think that they're very important. The third one that's particularly important for the owner slash developer is the fact that the owner doesn't have to worry about being an insured or an additional insured under someone else's policy. Every general contract under a traditional program is going to say, general contractor, you're going to make me the owner and additional insured under your policy, and you're going to require all the subcontractors to do the same. And then that's what's going to show up in the subcontracts. All of that is fine and dandy until you actually get to the claim. And I think what's really important to understand is the general contract and the subcontract do not define the terms of the policy. All they do is define what the general contractor and subcontractors are supposed to get. If the general contractor or subcontractor gets the right AI coverage, great, the owner is covered. If the general contractor or subcontractor does not get the right AI endorsement, additional insured endorsement, then the owner is not an insured under that party's policy. You may have rights against the general, you may have rights against the sub, but you don't have any rights under the policy. And the additional insured issue is one that is being hotly contested across the country and construction projects. All of that goes away in an OCIP. And that's another one of the major advantages of having a wrap program, be it an OCIP or a CCIP. Paul: I want to expand on Chris's second point, where the coverage web comes into play of attorneys representing subs and general contractors. Two things to note. One, not all of the subcontractors have the same coverage. My coverage might be good one year and it might change the next year at the time of a claim you as the owner are not going to be confident in my insurance and then it's actually going to respond to your project so that the OCIP eliminates that by having uniform coverage applying to all of the subcontractors that go on to that project the second component that's connected to that is that if I as the sub go bankrupt in five years and John has no idea how to track me down to figure out how this claim is going to be covered, kind of out of luck. Then John's policy is going to be responding and then there's going to be a lot of back and forth about this because he didn't really do the work and now he's trying to pay a claim that somebody else is out of business on and OCIP eliminates all of those outstanding exposures or risks that may not appear at the beginning of a project. Chris: And let me add one last point, because this is one of the objections, the most common objection I get from owners with respect to wrap policies. I am a huge wrap proponent, and for a variety of reasons, but the objection I hear is it's expensive. Maybe. What's expensive to one person is not expensive to another. But I do think the wrap market is sufficiently mature these days that at a macro level, it accurately prices out the risk, the liability risk, construction defect liability risk for these types of projects. So folks need to kind of understand, again, the purpose of the policy and the like, but that's another advantage to me of the wrap policy covering everything and the price is market-driven. John: Chris, you beat me a little bit to the punch because as the deal guy, I was going to make the comment I was surprised that the cost element wasn't brought up. But under a traditional model, the owner ends up paying for the subcontractor's insurance. The owner ends up paying for the contractor's insurance and its own insurance. It's an additional insured on all those policies, but it all does get paid. And if you use just a very broad rule of thumb of somewhere in the range of 1% that the subcontractors are throwing on their contract and somewhere in the range of 1%, bigger projects, maybe a little less. But there's a multiplier that's going on for the contractor's insurance. When you start taking the cost of a wrap policy that covers all of that into account, I think there's a good argument that when you compare apples to apples, you might be saving money. Paul, I imagine you have some thoughts on that. Paul: We do run into this quite a bit. And John, I think you're right that all contractors pad in a little bit when they're submitting their insurance line item. And in your scenario, the owner at the end of the day is going to be paying for that one way or another. The contractor will put that within their GMP, pass it on to the owner. And so the owner is paying that premium and likely a markup on top of that. John: Let's shift to one other item. You both have referenced OCIP and CCIP in this discussion, and I don't think we've really given a background on that, but OCIP being the owner's controlled insurance program and the CCIP being a contractor controlled insurance program where the contractor manages the program for the benefit of the owner and the contractor. So, Chris, maybe you can talk a little bit about the pros and cons of those two approaches. Chris: Sure. So the question I get asked frequently by my clients is, what's better, an OCIP that's run by the owner or a CCIP that's run by the contractor? Now, recognize when I'm representing my clients, I'm out to look specifically and exclusively for my client's best interests. So I will say it depends on who my client is. If my client is an owner, I want an OCIP. If my client is a contractor, I generally want a CCIP, but if we're going to go with an OCIP, I want to be heavily involved in the negotiation preparation of that policy. Now, if I take that, if I telescope out just a little bit and give a broader picture of what I think is the better approach, as a general proposition, I think OCIPs are better than CCIPs, and here's why. A contractor is generally expected and generally does complete a project, but from time to time, a contractor cannot complete the project. The contractor chooses to leave, the owner forces the contractor to leave, and the like. When an OCIP is in place, it's the owner's policy easy enough to bring in a new contractor and slide that contractor into the OCIP. But with a CCIP, a contractor-controlled insurance program, that policy goes with the contractor. So if the contractor goes, the policy goes, and the owner has to find a new coverage program midstream, which is difficult to do. And it's one of the things that Paul and his crew and folks like him can go and do, but it's a very hard thing to do. So if I were looking at this from a straight objective perspective, I think an OCIP is always the better way to do it. And if I were a contractor, I would just tell my owner, I want to be involved in it because I want to know what I'm getting. and if I think there's something I need and that I want to have the ability to participate in the negotiation of that policy. John: And I think often the arguments made by the contractors for using a CCIP is they take the management burden away from the owner. But I think the market is very well developed with folks like Lockton where the large brokerage firms will act as administrator of the program for the owner. So it's not the owner's risk management department that has to manage the profit. Right, Paul? Paul: In our experience, administering an OCIP does not require any client to hire somebody to actually work on it and implement an OCIP. A good broker will be able to have the resources to support that client to make sure that that OCIP is done correctly and executed and negotiated with the contractor, any sort of lenders that are involved, partnering with Chris, anyone that comes to the table, the broker really should be able to advocate on behalf of the owner. John: So you touched on timing, Paul. And in my experience, getting out ahead of this early in a project is super important, not only to make sure that we get the requirements and commitments of the contractor and all of the subcontractors and enrolled parties into the construction documents, but also to get the terms of the coverage, the amounts of the coverage out in front of everyone at the bid stage while they're still leveraging the negotiations. I think one of the benefits of an owner-controlled insurance program is the control portion for the owner. And if there's going to be any debates about coverage amounts, if there's going to be any debates about how claims are settled, I think you want to be out ahead of that. And from the standpoint of being a person who often is drafting the construction contracts, I think getting the commitments and requirements of not only the contract, but all the other project participants into the construction documents is critical. So what do you usually see in terms of how that's managed in terms of getting the teams together? I think probably on data center projects, because of the sophistication of the parties building them, I think it's better coordinated. And they all usually have risk management departments and all of the participants on the insurance side become their own work group. Is that what you usually see as a best practice? Paul: From our perspective, the projects that go the smoothest are the ones that start this conversation early and often. And I'll let Chris chime in as he related to the contract details and how critical those are. But from just a partnership perspective, partnership perspective between the owner and the general contractor, the earlier, the better that you set out the roles and responsibilities and who's going to be procuring the insurance, the smoother the process. Because you can work through coverage changes, deficiencies, requirements. All those things are better sorted out at the beginning because they all spill into the actual contract. And Chris, maybe you can talk a little bit about how important that contract language is. Chris: Yeah, I think it becomes critically important. And I agree with Paul that the team, and we'll talk a little bit later about what that team looks like, should start the process as soon as possible. I have certainly been involved in projects where I get a call where someone says, can you take a look at the insurance program that were proposed for this? And I said, sure. When are you guys expecting to go into the ground? And they said, like, Monday. And that becomes very difficult to try to negotiate things that we may want to improve the policy on if you don't have such a short time. I think it's also critically important to get the policy before finalizing the terms of the general contract and any subcontract, and in particular, the insurance terms. Because I have seen situations where the insurance terms in a contract have been agreed to and a contract finalized before the owner or whoever's going to get the policy gets the policy, and suddenly the market doesn't provide the coverage that is promised in the contract. And at that point, whoever was supposed to get in contract is in breach of the agreement. Usually when there's a dispute between an owner and general contractor, the insurance isn't going to be the central piece, but lawyers are going to get involved and they're going to find everything that's out there. And that's a problem. And I have certainly seen the failure to get the right insurance to be a significant problem. All that, and it becomes a six-figure lawyer fee to try to figure that out. All of that gets wiped out. If you go and get the policy first, get the best policy that you can, and then you draft the insurance provisions in the contract, the general and the subcontract, consistent with the policy, and then you're in very good shape. John: Well, I think there's a big advantage to laying out the program when you're getting bids. So you're comparing apples to apples, so you eliminate hidden profit centers with your contractors. But sometimes it does come after, particularly it sometimes comes after you have subcontractor bids. Paul, in that instance, how do you manage negotiating the appropriate deducts if you're providing a wrap policy that provides the insurance for the subcontractor? Paul: It's a good question and one that comes up a lot because it ties into the cost. And if we're looking at this from an ownership perspective, and we've got an OCIP quote that has X amount of premium attached to it, what the common question is, is how much am I going to get back in deducts? And before we answer that, we always like to say, look, there are two different ways you can have the contractors bid this. One is called gross, which is tell your general contractor to include insurance in there, have them line item it, and have us tell them, have that contractor explain what's included in their insurance so that we can create an apples to apples comparison. The other way of the bid method is called a net bid, which is essentially, I trust my general contractor, I trust my subcontractors, I'm going to tell them we're doing an OCIP, leave out your insurance costs in your bid. And so that bid comes in net of insurance, meaning there's nothing included in that bid package for insurance. How does this get managed? How do you how do we figure out what the if it offsets? The only way to do that is to do a gross bid to where you tell all the contractors include your insurance in there, tell me how much it's gonna you're gonna charge me for the insurance, and then what at least Lockton does, is our administration team will go in and verify that that amount through a review of the contractor's insurance pages. We'll go in and calculate what they should have charged for insurance. And then we'll turn around and hand that back to the owner and say, hey, this is what they need to deduct from their bid. Go ahead and change order this reduction because they're removing their insurance from their bid. And then when you add all of those, that's how you truly measure the deducts and if they've offset the premium that you paid separately for your OCIP. John: So obviously cleaner to do a net bid and have the bid be excluding the insurance being provided by the wrap policy. But if you have to go do that process, is there usually much pushback or is it you able to negotiate changes? Paul: If it's a gross bid, it's fairly straightforward and scientific to where the sub submits their rate pages and says, here's how much I'm paying for insurance we go in and do a calculation to show what they would have paid had they used their program and we say this is what your deduct is and we don't get a ton of pushback at that point because the numbers are the numbers. Where we do run into some interferences from subs is if. They say they can't net it out because they're running into minimum premiums on their program or they've, They've already maxed out their bid, and they can't take away the insurance costs from it because it's covering all the other coverages that wouldn't be included. Those are some of the pushbacks that we get from the subs. John: But generally, a better rule to maintain all parties, all project participants should be enrolled parties unless approved by the owner? Paul: I strongly encourage anyone that's working on that construction project to be enrolled. I think Chris would agree with me in that sense, because if you don't enroll some folks, then you're setting up a claim problem somewhere down the road. Chris: Big claim problems because your sub's not, the OCIP carrier is then going to want to drag the sub and the sub's carrier, and you start down the road of the old spiderweb problem of the traditional program, and it just makes life way more complicated to resolve the claim. John: Well, gentlemen, it's been a pleasure hosting the conversation with you. I realized this with a 10,000-foot overview of these very complicated and complex insurance programs. Before we sign off, any final thoughts or key takeaways for our listeners? Paul: From the insurance side, I'd encourage everybody to communicate often with your broker and with your attorney because these assets are large in value and the insurance programs that become available to protect your data centers are critical. You're investing a lot. There's a high dollar amount associated with these data centers, and you can eliminate a lot of your future exposures if you set up your program correctly at the beginning. Chris: And I would echo that. The purpose of an OCIP is to protect the project profits in the event of a catastrophic event. So it's very, very important to get the right protection for your profits, just as you would set up protection for any other measure on your project. And the best way to do that is to get the right team together. That's going to be the appropriate risk management people with the client. It's going to be the construction attorney, real estate attorney like John. It's going to be the broker like Paul. It's going to be the coverage lawyer like me, because we all bring something specific to the table to help put that policy together. The OCIPs aren't perfect off the shelf. You want to make them as good as they can. But if you get ahead of it up front and you put in the requisite work, then you've got the best chance to protect your project and its corresponding profits from any sort of catastrophic event that may occur down the road. So it's like anything else, put in the work up front and you're going to get a much better protective project on the back end. John: Great insight, gentlemen. I want to thank you both for joining me today. This has been our Bytes and Rights Data Center Series podcast on key insurance related considerations, issues, and best practices for data center development and construction projects. Please visit the Reed Smith website at reedsmith.com for additional information regarding our speakers and to access a broad range of podcasts and articles in our Global Data Center series that provide thought leadership from around the world on topics and issues impacting the data center industry. Thank you all for listening, and goodbye. 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.
July 1, 2025Episode 2227 min
Insurance coverage for data centers: Navigating emerging challenges in a slowly adapting marketplace
Reed Smith insurance attorneys Amy Koss, Stephen Raptis and Anthony Crawford survey the unique risk landscape facing data center owners and operators. Because no off-the-shelf “data center policy” yet exists, the trio explores how traditional coverages – property, cyber, technology E&O, and general liability – can be layered to safeguard both the bricks-and-mortar infrastructure and the critical information coursing through it. If you build, host, or rely on data centers, this episode is your blueprint for intelligent risk transfer. This is latest episode in our Data Center series. ----more---- Transcript: Hello: 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. Amy: Welcome to Insured Success and our Data Center series. My name is Amy Koss. I'm an Insurance Recovery associate attorney in Reed Smith's Philadelphia office, and I'm joined today by Steve Raptis, an Insurance Recovery partner in our D.C. Office, and Anthony Crawford, an Insurance Recovery partner in our New York office. As part of the Insurance Recovery Group, we represent policyholders in complex insurance disputes and counsel corporate policyholders on coverage issues. In today's episode, we're going to discuss the unique risks that data center owners and operators should consider when purchasing their insurance coverage. Data centers have been popping up all over the place, and they're really being integrated into our way of life. For example, very recently, OpenAI launched its Stargate project, and as part of that project, OpenAI intends to invest over $500 billion in building and supporting AI infrastructure over the next four years. And these infrastructure efforts are only going to continue to increase as technological advancements like AI and the Internet of Things become enmeshed with the way that we live our lives and the way that we do business. And much like anything else, with big investment comes big risk. So we're going to talk today about what owners and operators of data centers should consider as they look to ensure their risks, especially those risks that are unique to data centers. Stephen, Anthony, how are we doing today? Stephen: Hi, Amy. Doing well. Thank you. Amy: Great. So as I mentioned, data centers carry a unique set of risks. What should data center owners look for when shopping for insurance and reviewing different policy options? Stephen: It's a great question, Amy, and I know from personal experience where I live in northern Virginia, data centers are everywhere, and every large piece of unused property seems to be in the process of being transformed into a data center. So it is just including what we hear in newspaper reports and trade press about this being an expanding industry. There's no doubt about it. Everywhere you look, there are more and more data centers coming up and AI is only going to increase that demand over time. And we know that the insurance industry is usually pretty good about coming up with specialized products once an industry hits a certain critical mass, they will start to produce specialized insurance products for that industry. And one might think that the data center industry is large enough now that it would have its own specialized insurance products. But in fact, we have not seen that. And we've talked to a number of insurance brokers to see if they might be aware of specialized products that are out in the marketplace. And they told us that they're not, at least not yet. So where that leaves data center owners and operators is that they need to take traditional off-the-shelf, for the most part, insurance policies and make those fit into their risk management portfolio in terms of how do we protect our assets, how do we protect our business. There aren't data center-specific policies. So they need to go out the marketplace and buy their traditional policies, but try to get those crafted as well as they can to their particular situation. And the good thing is that a lot of these policies that have traditionally been out there, including cyber policies, errors and omissions policies, those kind of policies are not written on a standard form, and so they tend to be more negotiable, whereas your property, general liability policies, those are written on standard industry forms and may be a little bit harder to negotiate, but even those can be changed in the endorsements. Amy: Thanks, Steve. So, in terms of some of the risks that these data centers are facing that are particular to data centers, what do some of those include? Stephen: The first kind of risk that may be the most prevalent risk is with respect to property, and that's the data center's physical operations. How does it protect its actual physical workings at a particular data center? And then there is sort of the more technical insurance, which would include errors and omissions coverage and cyber coverage, which is intended to protect largely against liability. But there is some first party coverage in the cyber as well that we'll talk about. And then finally, there's general liability coverage that covers property damage and bodily injury that might occur as a result of the data center's operations. Amy: So in terms of protecting the actual physical assets of the data center, what kinds of coverage are we talking about? What can data center owners and operators look for? Anthony: That's an excellent question. And, you know, the simple answer is starting out, the data center owners are going to look at their property policies. So, you know, these property insurance policies generally cover both the physical structure of the building as well as the assets inside of the building, which, you know, this is going to be something that is going to be significant and important to policyholders. Now, these policies traditionally cover loss due to physical damage from events such as, you know, it can be either sort of natural events such as earthquakes, some type of flooding, or it could be other man-made events such as fires. You know, also thinking about things such as water in truth. These property policies, as I said before, also look at sort of the assets inside, which is going to play into it hugely when we're talking about data centers, because you're talking about a lot of computer and electronic components that are going to be there. Data centers and the physical structure of the data center itself. We also, there is a component of property insurance that includes coverage for business interruption losses. And basically, this is where some type of physical loss has occurred at a business property, and there is an associated loss of business income because of that damage. So traditionally, you see where a fire burns down a factory or damages a factory, they're not able to produce the widgets that they do. They're able to get coverage for the lost income because they're not able to sell their widgets. They'll be looking at something similar here with data centers. Now, there are some unique components in terms of looking at property coverage for data centers because traditionally, these things, these policies cover sort of tangible assets. Well, one of the biggest components of a data center is that they have a lot of soft data that they're storing on the physical computer components within the structure. That data in and of itself, it may or may not be covered under the traditional policy. So policyholders may need to look to other policies or looking to look to get some type of endorsements added to their property policies in order to make sure that there are no gaps in the coverage because, you know, arguably one of the most important aspects of the data center is the data itself. There are some other considerations that we should look at, policyholders should look at when looking to insure their data centers. And that's concerns about a traditional extra coverage that's usually not sort of thought about or discussed heavily and negotiated in the underwriting process, and that's service interruption coverage. By their very nature, it's pretty clear that having uninterrupted access to electricity is pretty important to data centers. So policyholders need to look specifically at this coverage that's traditionally found in property policies and sort of work with the insurance company and the brokers to tailor that coverage so that it provides meaningful coverage for service interruption losses at the data center. And, you know, there can be different components of that. So, for example, some may provide coverage when there is a damage to the power supply or it may provide only coverage if there's sort of a power surge. But, you know, at the end of the day. This is something that policyholders will have to heavily scrutinize to make sure that they are not going to lose out on coverage if, for instance, there is some type of interruption with the service provided by the utility companies. Another thing that property holders need to take in consideration are sort of risk mitigation requirements that may be found in policies, specifically when talking about making sure that there's fire suppression systems and how that language is worded in the policies. Because traditionally, these policies require or may specify that there need to be sprinkler systems in place. But if you think about the nature of this risk with data centers. Having traditional water sprinkler systems in place may not necessarily be the best solution for data centers in that these fire suppression efforts may cause further damage using water. So policyholders should look to negotiate with their insurance carriers to make sure that they can use alternative means of fire suppression and have sort of that coverage or that understanding written into the policy. So something that would be more inert that would look to suppress any fires, but at the same time, not damage the computer equipment inside, which would occur if you were using traditional water sprinklers. Stephen: Anthony, those were terrific thoughts. One other type of coverage that we've seen with respect to property policies is, It's not unique to data centers because, again, there's not really unique data center coverage, but there is a specific coverage that is often available for coverage that attaches to property policies or can be purchased as a separate policy called specialized electronic data processing. Sometimes it's referred to as EDP coverage that will specifically apply to lost data. But regardless of whether or not you buy that EDP coverage, one thing that you really need to make sure that you're careful about is reviewing your property policy next to your cyber policy. And we haven't talked about cyber policies yet. We will. But it's important to do that because traditionally the property policy has covered the hard assets, the computer hardware, and it's carved out coverage for data. That's not always the case, but sometimes it is. And the cyber policy will pick up to replace the lost data. But again, cyber coverage may not, it may only respond where there's been a third party act or an exfiltration, that kind of thing. it may not respond to a natural disaster. So it's very important that you look at those two policies together as a data center operator to coordinate them and make sure that both your hard assets and your soft assets are being covered to the fullest extent possible. Amy:Really great points. So, and you guys previewed this a little bit just now, but how about the equally important non-physical side of running a data center? For example, technology errors and omissions coverage. What should data center owners look for there? Stephen: Just for a little bit of background, errors and omissions coverage, it's sometimes referred to as professional liability coverage. And what that does is it covers the policy holder for providing for any errors and omissions that may occur in the course of providing professional services. So if you own or operate a data set and you're doing data processing, data maintenance. Data storage, whatever that may be, for third parties, then it's important that you have errors and omissions coverage in case something goes wrong in the course of providing that service. And long before data centers became as prevalent as they are now, there is a specialized product that's developed in the insurance marketplace. It's often referred to as technology E&O or technology errors and emissions coverage. And it's really focused largely on technology companies and trying to write coverage that fits the type of services that they provide a little more cleanly than perhaps traditional E&O coverage did. And so, for instance, technology, you know, coverage is often. Well, it's certainly cognizant of the fact that in the technology industry, that the actors, the service providers in that industry are often dependent on services provided by others, particularly utility services. And as Anthony alluded to earlier, power services in the data industry, that's the lifeline. And so we've seen these technology errors and emissions policies. Generally speaking, they're intended to cover service outages from the insured to its customers. But there are often exclusions where the cause of the problem was the failure of third-party services provided to the policyholder, the data center owner. Now, if those... If those failures are within the data center's own control, they're often covered. For instance, if the cooling system breaks down, that's likely not to be excluded in terms of any liabilities that the data center owner may have to its customers. That's likely to be included within the coverage. But if it's a failure, a blackout or a failure by the power company to supply adequate power, and as a result, the data center can't do its job and therefore customer servers don't run and that kind of thing, and customer service customers are seeking some kind of liability against data center owner, that's likely to be excluded. And so when data center owners and operators buy this coverage, they need to be very cognizant. They need to very carefully read those exclusions to figure out, okay, what kind of outages are going to take me outside coverage in terms of liability to my customers and what's going to leave me inside the scope of coverage? And again, these are the kind of policies that tend to be more negotiable. And so to the extent that the language is not good, there may be an opportunity there for the data center owner operator to try to negotiate either the exclusion out of the policy or narrow the exclusion in a way that shifts more liability back to the insurer. Amy: Great. So it sounds like there's some room for these owners to get the coverage they need, even if it's not built right into the product off the shelf. So cyber insurance has been a hot topic in the insurance industry recently. Is there anything specific that data center owners should consider when purchasing their cyber coverage? Anthony: That's an excellent question. Yes. You know, first and foremost, there are some extra considerations that data centers are going to have to look at. First and foremost, they need to look at, you know, what kind of data are they dealing with and storing and, you know, what's the potential liabilities they face there. And that will depend on kind of what they're doing and what the nature of that data is. So, for example, you know, if it's hosting, you know, if it's a situation where the data center is only hosting the company, you know, the policyholder's data itself, its own data. So there's no third authorities involved. You know, there could be some type of liability that they may face for, you know, breaching their customer or their employees data, for example. When you look at other things, such as, you know, if this is, for example, something that's hosting sort of Bitcoin data or, you know, some type of blockchain operations and stuff. The liabilities change and the value of the data becomes very, very, very important. And, you know, there is no real sort of off the shelf answer to this because it's, you know, as we've been reiterating throughout this podcast, you know, this is new kind of new territory, sort of older, you know, in some traditional ways, but also new territory in terms of, you know, the data that we're looking at. So how do policyholders and insurance companies price out this type of insurance when looking to protect the data? Those are going to be questions that, you know, ultimately the industry and policyholders are going to have to work out together. What policyholders should be cognizant of is looking carefully at any exclusions or limitations to coverage such that, you know, they are they're not basically buying a policy that doesn't cover the risks that are associated, particularly the unique risks associated with their specific operations. And avoiding those coverage gaps. And I think that time ultimately will tell how that shakes out and whether or not the insurance industry can get to some sort of standardized policy or policy language. But for now, it is likely going to continue to be sort of bespoke manuscript policy endorsements at a minimum. Amy: So policyholders should really keep an eagle eye out to make sure that the coverage they're buying covers exactly what they need. Great. Anthony: Absolutely. And, you know, as with the property coverage, the other coverages that are discussed here, this is, you know, it's going to require a little bit more effort on the part of policyholders and their brokers to ensure that, you know, the proper coverage is being put in place specifically to those, you know, areas that would traditionally not necessarily be captured in the more standard form policies. Amy: So, what is often thought of as the catch-all of insurance, the general liability coverage, how can data center operators leverage their general liability coverage to maximize their risk protection? Stephen: Maybe just for a little bit of background, general liability coverage is the oldest coverage, insurance coverage, that's around for companies. And what it's intended to do is protect against property damage and bodily injury. And so, primarily anyway. And so companies always bought this for anything from slip and falls to some sort of accident that was caused by their operations where people were injured or property was damaged. That's the background of that coverage. You look at data centers, they're big, clean, neat-looking operations, and you wonder, well, how is general liability coverage implicated there? And I think the answer that we're seeing, at least where I live in Northern Virginia, is that a lot of the neighbors are expressing displeasure in being neighbors of data centers for various reasons, including that they sometimes say that they're noisy and that they emit fumes that may be toxic from time to time, including diesel fumes and other things from the operation of generators and so forth. And they're concerned that there may be other emissions that they're not aware of that may be causing long-term health problems or may make their property harder to sell, ultimately diminish its value. And I think it's probably only a matter of time until those generalized complaints become lawsuits and legal action and. And traditionally, those were the kinds of things that general liability policies protected against. With one big caveat, that after the mid-1980s, those policies started containing specific exclusions for pollution, and pollution was broadly defined. And so the challenge for data center operators is what can they do to protect against that risk from an insurance perspective if their general liability policy is going to cut out most of the coverage for certainly substances that are coming out of the facility, but possibly arguably also noise and other things we may not generally think of as pollution, and pollution is very broadly defined. So one thing that they can do is they can try to negotiate back the scope of those exclusions when they're buying the coverage. The other thing they can do is buy specialized pollution liability policies that have been around for a long time that are specifically designed to protect against liability if there is some sort of pollution event that ends up causing damage or allegedly causing damage to a neighbor's property or causes some kind of bodily injury or disease, that's the kind of thing that's intended to protect against that risk. Again, it's not unique to data center risks because we don't have unique data center policies yet, but it's a policy that's been around for quite a while that can be adapted well for that purpose. Amy: So it sounds like the big takeaway from this is that these data center owners and operators should really be on the lookout to make sure that the policies they're buying match the coverage that they need for their unique situation. Anthony and Steve, do you guys have any final thoughts you want to share before we wrap up? Anthony: Yeah, sure. I mean, one of the biggest takeaways from this discussion that we've had is that policyholders need to be vigilant in working with their brokers and the insurance companies to make sure that they actually are getting the coverage in place that they need to protect themselves and their assets, given the unique nature of data centers. So it's important that policyholders work with insurance professionals to make sure that they are getting that coverage. And when I say insurance professionals, I also include sort of ourselves and those attorneys that specialize in insurance coverage issues to sort of act as an extra set of eyes, extra set of an advisor to make sure that not only are they getting the best prices for the coverage that they're looking for, but they're also getting coverage that's going to actually respond if something should happen that they need the insurance coverage to respond to. Amy: As we wrap up here, a big thank you to Anthony and Steve for the wealth of information they shared, and a thank you to the folks who tuned in to listen. Be sure to look out for our next episodes in our series, and if anyone out there would like to discuss anything you heard today, all of our attorneys are on our website, and we'd be glad to hear from you. Take care. Stephen: Thank you, Amy, as well. Amy: Thanks, Steve. 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.
April 2, 2025Episode 2134 min
Where there’s fire, there’s smoke: The evolving LA wildfire claims landscape
While the devastating Los Angeles wildfires earlier this year were extinguished, the risks associated with those fires – and wildfires more broadly – continue to affect policyholders. In this episode, Nick Insua , Matt Weaver and Kya Coletta discuss important topics related to wildfires, including recent insurance updates, smoke damage remediation, the threat of mudslides, the California FAIR Plan and the process of rebuilding after a loss. ----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. Nick: Welcome everyone to the Reed Smith podcast Insured Success. My name is Nick Insua. I’m a partner in the New York and New Jersey offices of Reed Smith and I’m in our insurance recovery group. I primarily work on first party property and business interruption insurance claims although my practice is varied on liability coverage disputes as well. I'm joined for today's podcast by my partner, Matt Weaver. Matt is a partner in our Miami and Dallas offices, and a significant part of his practice involves dealing with the aftermath of natural disasters. And finally, we are joined by Kya Coletta. Kya is an associate in our Los Angeles office, and she primarily focuses her practice on representing corporate policyholders in insurance coverage disputes and does have a particular focus currently on losses relating to aviation clubs. And today we're going to be talking about some of the current legal and different coverage developments related to the terrible wildfires that struck the Los Angeles and greater Los Angeles area early in this year of 2025. We did want to acknowledge the devastating losses that many families and the communities there are facing due to these recent wildfires. Our hearts continue to go out to everyone affected. And we hope to provide some useful insights today and resources to assist those affected in recovering. Our firm, along with many, not only in the West Coast, but around the country, work very closely with an organization called United Policyholders. They're a nonprofit organization that provides invaluable information and support for policyholders navigating insurance claims and recovery efforts. Homeowners should visit their website for guidance on filing claims, negotiating with insurers, and accessing disaster recovery resources. United Policyholders is based in California and has a lot of experience dealing with natural disasters and their aftermath from an insurance perspective, and in particular on wildfire claims. Our podcast today is going to hit on a few key topics. The key areas of focus will be smoke damage remediation, mudslides, the fair plan, rebuilding after a loss, and some recent insurance policy updates. The reason why these topics matter is because there is and we've seen an increased risk of wildfires. Not only these in California, but others in California. We've now seen some subsequently in southwest of the United States. This is a risk that's growing in frequency and severity. Insurance policies, terms and conditions are evolving, and there's a lot of change in policy terms and how those might apply to losses. And we've also seen some recent court rulings from California, and there will be others, undoubtedly, that all policyholders and lawyers working with them should be aware of. So with that, we're going to step into some substantive segments of our podcast. Our first segment is going to be key initiatives by Insurance Commissioner Ricardo Lara since our last podcast. And the first topic in that segment is going to be provisional approval of State Farm's rate increase request. And I'm going to ask Kya if you would chime in on what's behind the 22% emergency rate increase approval? Kya: Thanks, Nick. As of last week, the Insurance Journal reported that insurance companies have so far paid out more than $12 billion for losses from the Los Angeles area wildfires. This figure nearly doubles the $6.9 billion in claims reportedly paid out last month. State Farm General, the company's California-only subsidiary, has cited increasing payouts and rising reinsurance expenses as justification for the rate hike to pay out future policyholder claims. This request by State Farm would raise rates by 22% for homeowners and 15% for renters. The commissioner's approval is provisional, meaning State Farm must not only pause policy cancellations in the interim, but also present supporting data during an April 8th public hearing before full approval is granted. If State Farm is unable to substantiate the validity of these rates at the hearing next month, the commissioner has stated that State Farm will have to issue full refunds with interest to the impacted policyholders. This emergency rate increase approval reflects broader concerns about the financial stability of insurance companies in California's high-risk wildfire zones and seems to be an attempt to keep State Farm from withdrawing from the state. We should know more after the April 8th hearing, which is held before an administrative law judge and Commissioner Lara, so stay tuned. Nick: Great, thank you. And there's also a directive for comprehensive investigations of smoke damage claims. Can you tell us a little bit about that new directive? Kya: Sure. Many policyholders were fortunate that their homes remained standing during the L.A. wildfires. However, many of these homes are uninhabitable due to unclean air, unsafe drinking water, and lingering harmful substances. Despite this, insurers have pushed back on smoke damage claims, arguing that smoke damage does not constitute, quote, physical loss or damage to, unquote, property. Earlier this month in response, on March 7, 2025, Commissioner Lara issued Bulletin 2025-7, which provides guidance on the handling of smoke damage claims for properties affected by the LA wildfires. It clarified the Department's position on insurance coverage for smoke damage and outlined the expectations for insurance companies in processing these claims in three major ways. First, the Bulletin advised that it expects insurers to handle smoke damage claims in compliance with applicable laws, regulations, and best practices. This includes adherence to California Insurance Code Section 790.03(h), which requires insurers to adopt and implement reasonable standards for the prompt investigation of processing claims, as well as adherence to Section 2695.7(d) of the Fair Claims Settlement Practices Regulations, which essentially mandates insurers to conduct and diligently pursue a thorough, fair, and objective investigation of claims. It is also unreasonable under this section for insurers to require policyholders to incur substantial costs to investigate their own claims. If professional testing is warranted, insurers are expected to contract and pay for these services. Second, the department encourages insurers to consider the distribution of low-cost, commercially available at-home test kits for things like asbestos and other smoke-damaged contaminants as a reasonable first step in responding to and investigating certain smoke-damaged claims. Then, depending on the results of these at-home test kits, further investigation and processing may be warranted. And third, the bulletin addresses the implications of recent court cases on smoke damage claims to stress that whether a particular claim is covered depends on the specific policy language and unique facts of each claim. My colleague Matt will go into these wildfire cases more in depth later, but to close the loop on the commissioner's directive, the cases noted are the California Supreme Court's decision in Another Planet, a COVID-19 case that sets the standard for direct physical loss, and the California Court of Appeals decision in Gharibian v. Wawanesa General Insurance Company, which notably involved ash and soot damage rather than smoke damage. Importantly, the Bulletin 2025-7 emphasized that the Gharibian decision should not be interpreted and applied as a blanket rejection for coverage of smoke damage. Rather, where a particular claim is covered depends on the specific policy language and the unique facts of each claim. This directive can be seen to ensure that claims are not dismissed based on superficial inspections, and insurers must now provide detailed documentation and consider the full extent of smoke damage before denying coverage. Any policyholders with questions or concerns about their smoke damage claims are encouraged to contact their insurance company or the department directly. Nick: Thank you. And our fourth point is approval of the $1 billion assessment to support the fair plan. And my question is, how is California supporting high-risk policyholders? Kya: Sure. So the California fair plan was established to meet the needs of California homeowners who were unable to find insurance in the traditional marketplace. It is a syndicated fire insurance pool comprised of insurers licensed to conduct property and casualty business in California. Last month, the Fair Plan Association reported that it had paid more than $914 million to policyholders to cover claims related to the Palisades and Eaton fires. The Fair Plan's accounting subcommittee and governing committee each recommended an assessment of $1 billion to enable the Fair Plan to access additional available layers of reinsurance and maintain operators. To address this, the Commissioner approved the $1 billion assessment on member insurance companies to stabilize the program. This step by the Commissioner is meant to ensure that homeowners in fire-prone areas can still access insurance, even as private insurers scale back their offerings or leave the market entirely. But for a more extensive list on what the Insurance Commissioner has ordered or recommended, please review Reed Smith's 2025 California Wildfires Relief Resource Guide, which is available on our website. Nick: We're now going to move into our second segment, which is areas that are ripe for focus. And I want to start with mudslides and post-fire risks. And Matt, would you be able to tell us why mudslides often follow wildfires and what homeowners should know about that possibility? Matt: We've seen, and people in California have experienced this before, anyone who is living around the Montecito area after the Thomas fire knows all too well the risk of mudslides and why fires can lead to that extremely dangerous, extremely life-threatening problem. You know, you have a situation where, you know, all the vegetation on the side of a hill or in a particular area may be burned away. And what you're left with is a lot of loose material. And then once you get large rains, as happened after the Thomas fire, you can have devastating problems. Most homeowners policies and a lot of business policies as well, will speak to the issue of whether mudslides are covered, usually in the context of earth movement. And you're either going to find that peril excluded or you might find coverage for it depending on the particular policy. So from the perspective of policyholder, always understand what your coverage is. And if you have questions about it, speak to someone who can explain it to you. Nick: And is there anything policyholders can do to try to ensure that they are covered for this mudslide risk? Matt: Right. I mean, make sure that you're documenting all your damage. I mean, if you have wildfire damage documented early, make sure that you have all the evidence gathered that you can, whether it be pictures, videos, if it's possible to have, if you have smoke or soot or ash damage, have a hygienist come out if that's possible. Your insurance carrier often will send someone like that out if you're reporting that type of damage and make sure that that's done as quickly as you possibly can. And we're going to talk about, when we go into some of these cases that Kya mentioned, we're going to talk about why that's important. Also think about flood insurance. I mean, if you may be in a situation now as we're sitting a couple months out from the fires where it may be problematic to add that risk on, but in the future it's something you should consider because oftentimes flood insurance will have provisions that cover mud flows. So understanding the type of coverage you have is important and then documenting your damage as soon as possible is always a good idea. Nick: Yeah, I would just say I always tell policyholders that we're cursed and blessed to have mobile video units in our pockets where we can, if you're unfortunately have one of these horrible losses, you can, you know, as Matt was just saying, document, take video, whatever you can to show what the loss was. Matt: And don't be shy with your insurance carrier either. The sooner you're telling them about whatever issues you're having, the better. Nick: Absolutely. All right, great. Now I want to ask Kya about smoke damage remediation. And in particular, you were just talking about some of the cases that discussed COVID-19 losses, smoke losses, ash and soots. I want to ask you, how does smoke damage differ from some other types of property damage? Kya: So often when we think about what covers a house, we can think about dust and debris, and those are things that simply can just be wiped away. Smoke damage, on the other hand, involves microscopic particles, and they penetrate porous materials such as drywall, insulation, fabrics, other materials. Smoke damage can leave behind corrosive residues, leave persistent odors, and chemical changes to the property itself. So this makes remediating a property a bit more complex when it involves smoke damage and often requires specialized cleaning techniques and oftentimes material replacements. As Matt will get into later, smoke damage is physical damage. Judge Corley of the Northern District of California in Bottega v. National Surety concluded that smoke causes physical contamination that can alter property. Nick: All right, great. And Matt, I wanted to ask you if you could explain to us what the distinction is between an accessible property and a habitable one and why that's important. Matt: Right. So this deals with not necessarily the structural integrity of the property, but whether it's safe to be inside of, or if you're a business, whether it's safe to operate your business. The case law, even after a lot of developments during and following the pandemic, still generally says that if your property is structurally sound yet uninhabitable for reasons that have to do with contamination, that is still considered physical loss or damage. The issue then becomes, what is contamination? Does COVID-19 contaminate the property? Does smoke contaminate the property? Does soot and ash contaminate the property? That's where the battle lines really have been drawn in these cases. And again, you're going to have carriers arguing that a structure can still be accessible to avoid paying for further remediation. And we've seen that play out even in cases before these current fires. So that's going to continue to be an issue as we go forward. Nick: All right. What about cleaning versus taking it down to the studs? Kya, can you tell us when is simple cleaning sufficient versus requiring a full teardown? Kya: Yeah, that's a good question. Surface level soot and some minor smoke damage can sometimes be addressed through deep cleaning, air filtration, and repainting. But when smoke damaged particles seep into the walls and the insulation and the HVAC systems, this kind of simple cleaning is just insufficient. So taking it down to the studs just simply means removing all impacted materials down to the framework to ensure that no lingering toxins remain. This is particularly important in cases where prolonged exposure to smoke has led to irreversible chemical changes in the property materials and the soil. Nick: What about rebuilding after a loss? What should homeowners do after their claim has been submitted? Kya: So immediately after the incident, and Matt and Nick, you both touched on this, the policyholder should take detailed images and photos of the damage caused by the smoke, ash, and soot and submit these forward to the insurer with the claim. Likewise, after submitting the claim, policyholders should keep detailed records of all communications with the insurer. They are recommended to get a contractor estimate, if not multiple, for rebuilding their home to ensure they receive fair compensation under their claim. And this also can include maintaining comprehensive records of all cleaning and repair activities, including dates, costs, and the extent of the work done. Any reports from third-party experts might also be helpful to substantiate the claim. If possible, the policyholder should avoid taking remediation actions without at least notifying their insurer and giving them an opportunity to inspect the premises and consent to the plan work before moving forward. And of course, if the policyholder experiences delays with their company, their insurance company, they may need to escalate their claim with the state insurance department or seek legal advice. Nick: Okay, and are there any steps homeowners can take to ensure they receive full insurance benefits for rebuilding? Kya: Well, policyholders should definitely review their policy to understand their coverage limits, and this includes any additional living expenses or ALE for temporary housing, and they should also ask for policy extensions if any reconstruction is going to take longer than expected, and this is particularly important to ensure that they are compensated for any sort of code-compliant upgrades required by their local building laws. Nick: Great. We're now going to go to our third segment, and this will be a discussion of some of the recent case law that we've already mentioned a couple times so far, but right now I want to turn it over to Matt and if you would talk about how some of the recent legal cases impact insurance claims on smoke damage. Matt: So Kya's already mentioned these cases. They are the Bottega case from the Northern District Californian Federal Court and the Gharibian case from the Second Appellate District, which is California State Appellate Court. One of the things that lawyers always talk about is bad facts make bad law and good facts make good law. And these cases are prime examples. You heard Kya talk about the commissioner's bulletin in relation to Gharibian. When I talk about that case, it really is going to ring true why the commissioner is now telling all these carriers that you can't use that case as grounds to deny smoke claims. Bottega is interesting because it's a business interruption claim. Bottega is a restaurant in Yountville in Napa Valley. They suffered smoke and soot damage from the 2017 North Bay fires, and they had to close for about 10 days. Now, their business closed. In other words, they couldn't serve customers, but they actually were able to clean all the smoke and soot off their restaurant really in about a day. And then they started serving first responders. This is all noted, by the way, in the opinion. It gives you a sense of where the case might be going. So they immediately submitted a claim for business interruption of about $108,000. And then a year later, they had an industrial hygienist who came to the property and identified smoke damage. So from a policyholder's perspective, this is exactly what you want to do. I mean, these are good facts, right? This is how you would want to see a claim handled. Maybe you could have the hygienist out there a little bit sooner, but you still want a professional doing that work. So there were two real issues that I think are worth discussing that Judge Corley focused on in finding that, yes, this is a covered loss. The first, and it's important, I think, as we talk about these wildfire cases, California law, at least under a business interruption policy requires that the operations of the business be completely closed or a complete cessation of operations. Yes, the court found there was a complete cessation of operations here, even though the smoke was able to be clean and even though the restaurant was still serving first responders within 24 hours. The key here was they couldn't operate a business. There were restrictions on access to the property in addition to the fact that fires were still burning nearby. But the key issue and why the case is important is that it looked at some cases from the COVID-19 context. It didn't really mention Another Planet, even though that's probably the most important case in California on the issue. And really it said, listen, in light of these cases, there's got to be some physicality to the loss, right? Whether it be physical alteration, physical contamination, or physical destruction, right? It can't just be something that doesn't cause a physical problem for the property itself. And the other thing that's very important in this case is what actually happened in the litigation was extremely important. The carrier national casualty admitted in discovery responses that the smoke damage caused physical loss or damage. Then when it came time to actually decide on motions for summary judgment, whether Bottega could win the case, it argued the opposite. And any lawyer can tell you that most federal judges are not going to like that. And Judge Corley was no exception. So what I find interesting as a lawyer who practices in Florida is Judge Corley cited one of my least favorite cases from Florida, which is a case called Mama Joe's, also involving a restaurant about five miles south of where I'm sitting right now in Coconut Grove in Miami, that filed a business interruption claim because of the presence of road construction dust on its restaurant. The federal judge down here in Florida, Judge Moore, and then the 11th Circuit said, you can just wipe away construction dust. This doesn't actually cause any physical alteration to the property. And here, Judge Corley in Bottega said, you know, COVID is more like construction dust. But smoke is more like asbestos or some type of gas that would physically alter or contaminate the property. And from my perspective, I'm interested to hear if Nick or Kya have anything to add. That analysis is exactly right, but it's important. What was very important here was the industrial hygienist opinion backing that up. I mean, lawyers are not scientists. I can't sit here and tell you with any type of certainty how smoke and soot and ash physically affect the property, but there are people who can. Nick, Kya, anything you want to add to that? Nick: Yeah, I would just add that it's always helpful to have scientific evidence or experts to support your opinion on the facts. Obviously, not all homeowners are going to have access to that, but to the extent you can, to the extent you can find resources that would bolster the science that can make these distinctions that, as Matt just described, can be dispositive to whether you get coverage or are denied. Kya: I agree with what Nick said, and I think where possible, getting various expert opinions, not only in different areas, but on the same type of smoke damage, I think that that could really benefit bolstering the claim to say that this smoke damage did cause physical loss. Matt: Right, and that's a perfect segue to what happened in Caribbean, which was very different. So, Gharibian was a homeowner's claim from the 2019 Saddle Ridge Fire in LA County. Again, like the property in Bottega, the fire did not burn the house, but there was some debris and soot and ash and smoke damage, or at least the smell of smoke. The insurer testified that two months later, the smell of smoke was gone, and they did all the cleaning of the property themselves. They also hired an attorney within weeks of the fire who wound up handling the whole process, the whole claims process for them. The carrier, Wawanesa, came out, prepared a cleaning estimate, was willing to pay several thousand dollars for that. The insured never took the carrier up on that work. Then there was an industrial hygienist who was hired by the insured, found the presence of soot and ash, but opined that the presence itself of those materials did not physically damage the structure. So again, the carrier said, all right, well, you have soot and ash, we'll offer you some money. In this case, they revised their estimate for cleaning upward to $20,000 and the insured never used that money. So again, from the perspective of the court, these are not great facts, right? You have an expert who's not giving the opinion that can support a finding of physical loss or damage, and you have an insured who's not really taking the opportunity to back up what they're saying by putting their money where their mouth fits, for lack of a better term. So the court, in deciding whether or not this was physical loss or damage, cited another planet for the standard under California law, which is there's got to be some injury or impairment to property. And also found that that standard is not limited to COVID-19 cases, but then said, listen, there's no evidence of this on these facts. You have an insured who said there was no noticeable smoke within two months. You have an expert who did not find the presence of actual damage. And you have a situation where everything was cleaned without the need for any, from the insurance perspective, without the need for any experts or specialists. So, you know, the insured tried to argue that prior payments. Prior offers or payment were somehow relevant. The court said, no, that's not enough. Those payments were made under reservation of rights. So, you know, takeaways for me, policy language always matters in these cases and facts always matter. You're not going to be able to get away from the type of facts that are unique. And that's why, you know, Commissioner Lara has said you can't rely upon Caribbean because it's a unique circumstance to just summarily deny these claims. But in a situation where you have facts like Caribbean, you have to be careful. Nick, Kya, anything to add to that? Kya: Yeah, I mean, we're sitting here now three months into 2025, and you have gone through two cases that have the opinions been issued in 2025. So we have these two opposite ends of the spectrum that policyholders now have these guns in their holsters to differentiate their facts between these two sides of the spectrum. And I think it's a really important time for policyholders to be aware of these cases and how they can use them to help argue for coverage under their own claims. Nick, anything to add? Nick: No, I just think that everything that you guys have said is spot on. The facts matter, and you have to pay extremely close attention and get expert assistance if it's available. All right, so our fourth segment, I'm going to ask Kya. You were just talking about this a bit, you know, arming policyholders to pursue their claims. But what should policyholders do if an insurance company denies their claim, citing a lack of physical damage? Kya: Right. So if the insurer denies the claim and says that the smoke or other contaminants do not constitute physical damage, I recommend that any policyholder should first request a written denial letter explaining why the claim was rejected. Receive that from the insurer. Second, as Matt mentioned, gather any sort of expert assessments from industrial hygienists, contractors, environmental specialists to help demonstrate the extent of the physical damage. Third, cite any sort of legal precedents that we discussed today in any claim denial appeal and emphasize how the court ruled in favor of recognizing smoke damage and also differentiate the facts to help your own claim. Fourth, demand a proper investigation from the insurer. This will make sure that the insurer does not dismiss the claim based on any sort of superficial inspection. And finally, file a complaint with the state insurance department if this policyholder believes that their claim and or appeal was unfairly denied. If any policyholder continues to experience roadblocks, my advice is to consult with an experienced coverage counsel to address these issues and determine how they should be repackaged to the insurer. Nick: So we are now just going to have a few concluding remarks. I would say some of the important takeaways are to make sure that as a policyholder, you are trying as best as you can to stay updated on legal developments. We saw or was heard earlier today about developments and directives from the insurance commissioner. Kya talked about resources on our website where you can follow along for some of these updates. I wanted to mention again United Policyholders as a resource to not only stay updated on developments, but also to provide support and other resources where possible. And, you know, as Matt said too, facts matter, policy language matter. So make sure you take account of the facts related to your claim, document damages, and the amount of damages. Look over your insurance policy documents as closely as you can. Policy language might change from year to year. Make sure you understand that you have the full policy. You don't just have a declaration page or evidence of coverage. You have the actual policy to look at. You want to advocate for your claim. Make sure you communicate in writing and you get responses from your insurance company in writing. And if you do run into, as Kya just said, roadblocks that become difficult or insurmountable, seek assistance. United Policy holders, other organizations, or counsel to help advocate for your claim. Matt, Kya, anything to add? Matt: Agree with everything Nick said. Thank you, everybody. Kya: Thank you for joining us. Nick: Yeah, thanks very much, and good luck. 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.
March 6, 2025Episode 2023 min
Cryptocurrency: New risks – does the cover fit?
In this podcast, Peter Hardy , Eleanor Ruiz and Claudia Gwinn provide an introduction to cryptocurrency insurance, including key issues such as crypto-related risk coverage (i.e., theft, hacking, fraud and operational mistakes), considerations in respect of valuation wording and notification requirements to the insurer in the event of loss. ----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. Claudia: Welcome back to Insured Success. My name is Claudia Gwinn and I'm a junior lawyer in Reed Smith's insurance recovery group and I'll be in conversation today with my colleagues in the London team, partner Peter Hardy and counsel Ellie Ruiz. Today we're going to be discussing the cryptocurrency insurance market and in particular the types of crypto policies available and the risks they seek to cover, insured considerations as to the policy wording and them respective disclosures. And finally, making a claim under a crypto policy. So to start off, what does the cryptocurrency insurance market look like currently? What kind of policies are available? And what are the risks currently attaching to cryptocurrency and digital assets? Ellie: Hi, Claudia. So when we're talking about cryptocurrency insurance, there's probably two broad categories. There's coverage for assets that's available to consumers, For example, your individual, your corporate investor, and then there's insurance for the key stakeholders within the crypto industry, and that would include crypto custodians or exchanges. There's then various types of assets that crypto insurance might cover. There's a type of custodial insurance that might protect against sort of general loss as a result of hacking, theft, loss of funds. There's also the option to look under crime insurance policies. That's more directly relating to theft, potentially crime-related events, individual insider involvement. And then you can also look for some types of specific policies targeting risks that are directly related to being in this cryptocurrency environment. For example, a specific type of policy that addresses theft of an element of the software or hacking in particular based on the, relevant industry rather than a broader concept of crime or of general custodial insurance. The risks that we're looking at, those risks that are inherent when you're holding crypto assets, some of them are very new. It's a relatively new area and they're quite specific risks to this area that have to be considered. Those might include that this is an area where there's a lack of regulatory oversight. There's definitely market volatility that everyone is aware of that really affects the value of the cryptocurrency that might be being held. And there are also a whole different host of security concerns around encryption, how assets are held, and particularly on cryptocurrency platforms, that makes these systems vulnerable to a different type of attack than you might think about assets held in a bank account, particularly the collapse of FTX in November 2022. That made, I think, crypto asset holders and the public generally more aware of those risks and that there's a real need to protect these digital assets in as many ways as possible. And one of those ways is to look at taking out insurance. And it'll come as little surprise, I think, that one area that we've seen particular activity is that these crypto exchanges are a tempting target for hackers. There's the high value nature of the assets that are involved. And as I mentioned before, new potentially untested security. There might be new vulnerabilities that haven't yet been provided against. And that's all in the balance between an insured and their insurer trying to get ahead of any of those risks and make sure that an insured in this space is protected. Peter, is there anything else you thought you wanted to add there? Peter: Thank you, Ellie. Just a couple of additional comments for me, perhaps. I think, as you've indicated, this is very much a new and still developing sector of the market. We've seen a lot of new wordings coming into the market. We've even seen new insurance capacity provided by insurers dedicated to this particular market sector. So we're all learning about how the market is developing and we're learning about how these policies might respond. I mean, the cryptocurrency cover that one might buy, I think, is increasingly likely to be found in bespoke, standalone, dedicated crypto policies. But it might also be found in more general business and liability covers, often perhaps by way of endorsing. So I think that the fact that the insurance options are continuing to evolve and the range of new wordings that are potentially available present both opportunity and challenge for insurers. It's very important for an insurer to fully understand what cover it's actually bought. I think often there is a temptation to think that because there is cover in the market it's cover you must have but what you really need to understand is what you have for and whether that is what you think you are looking for now that this loss has arisen because it might be the case that you bought perfectly appropriate cover but the loss that's arisen is excluded for one or other reason by the particular policy you brought It's taking time to understand, I think in particular in discussions with your brokers. What isn't available and what you bought is essential if you're going to be able to assess the nature of your insurance protection in the event that the loss arises. And it's also important to note, I think, that because this is a new market sector, these wordings, these policies are largely untested in terms of their claim systems. As Ellie mentioned, cryptocurrencies are particularly susceptible to fraudulent activity and market manipulation, in particular to schemes such as pump and dump schemes where the value of an asset is artificially inflated through misleading and false statements, only to find that the asset is then dumped at the inflated price. So I think the wildly fluctuating value of cryptocurrencies can create problems for the policyholder going forward. There's no doubt about that. Claudia: So given this crypto asset price volatility, are there any particular considerations that the insured should keep in mind as to valuation provisions under the policy? Peter: It's a good observation, Claudia. I think the fact that the value of the crypto asset, the value of crypto assets frequently fluctuating makes it important for there to be an accurate valuation methodology in the policy. And it might be provided in one or other ways. But it will hopefully be a valuation methodology that recognises the balance sheet value of the lost asset to the policyholder. There are several options. The market value option, which will base the coverage on the value of the asset at the time of the loss. There's the historic cost approach, where coverage will be based on the price of the assets when they were acquired, which might be some time prior. And there's the average value which will base coverage on the overall average value in the market over a specified period of, say, three or so years. But it is important to recognise that even when evaluation is fixed by reference to the date of loss, it may significantly be different to the value attributed to the lost asset on the balance sheet in current time. And this could have a real impact on insurers' rights and subrogation and recovery and on their perception of the value in those rights. Claudia: Thank you, Peter. And speaking more generally, what kind of information or disclosures is a crypto asset business likely to have to provide to their insurers? Ellie: I think I can take this one. This is something we're always talking to insured clients about because it's a way of getting ahead of any future problems down the line before you've got any claims. When the policy is being placed under the Insurance Act 2015, we always start with there's a very important duty of fair presentation that requires that the insured provides the insurer with a full and accurate disclosure of all material information to the risk which it knows or ought to know before entering into an insurance contract. In the context of cryptocurrency, that can be an extensive burden particularly when you're talking about an area. In which perhaps insurers are less au fait. You as the insured client might have a much better detailed understanding of the information you're handing across. The information can vary, the nature of the duty can vary, but some of the minimum areas that we've experienced and things we'd expect that an insurer of a crypto asset policy might be requiring include an explanation of the type of crypto assets that are being held. So that's whether it's the different type of coin, Ethereum, Bitcoin, Litecoin, what's being held, what's being traded, because different assets in this area have got different risk profiles. There's a question of the value of holdings, as Peter's just covered, that fluctuates, but the value at the time, the profile of that value as it's changed over time. And then from a security perspective, there's an issue around storage methods. Some elements of holding cryptocurrency involve some physical storage. Then there's also some online storage. There's offline storage. There are various different types of wallets in which information is kept. And all of that is information that your insurers will want to be right across because it directly impacts their assessment of the security measures. All the details of security measures are something that insurers are going to want to understand and there's usually an obligation that no significant changes would be made to those security measures that are in place over the life of the policy. That's all about preventing theft, preventing hacking, preventing unauthorized access. There might be specific types of measure that an insurer will want to see in place or request that are put in place. It's all about. Ideally, ensuring that these risks are minimized before any policy is actually put in place so that your insurer's got a better opportunity of calculating the risk that's being faced. And then there's a question of a claims or a loss history. As with any insurance policy, insurers in this space are going to find it relevant if there have been previous breaches of security, previous claims made on these types of policy. And interestingly previous claims made in this sphere but under other policies as Peter's pointed out this kind of coverage is evolving and it's not necessarily that you'll have held this specific type of cover for multiple years you may have held different types of cover under which you've already claimed for similar types of losses so it's worth looking across the picture there. I think it's I think it's fair to say that crypto custodians are likely going to be subject to more in-risk disclosure requirements than some types of investors, partly because of, people building up a knowledge about this area. Crypto asset holders in particular are holding large amounts of assets of particularly high value, so there's a lot of responsibility for safeguarding and significant total that might be at stake. Due to the scale of those operations, custodians might be required to evidence things like strong risk management. They'll want details of security protocols at inception and at renewal. And one other key point to keep in mind as any type of crypto policyholder is that you will need to communicate that information, be that verbally over meetings or be that in documents, in a particularly clear way. As I pointed out, there just might not be parity of understanding of crypto asset terminology in particular between insured and insurer. And we want insureds to feel comfortable and confident that they've been making accurate and clear disclosures should the issue arise down the line. Claudia: Thank you, Ellie. So moving from the insured's disclosure obligations at inception to the insured's notification obligations when making a claim, what kind of information will the insurer expect to be provided with when an insured event takes place? When is the obligation to notify triggered? Ellie: Thank you. That's obviously, it's one of those first questions people come to us with. Do I need to notify? That's almost always what Peter and I will get asked first. what constitutes a claim or a potential claim and those obligations about notification you should be able to find those clearly in the policy it's one worth checking when it's placed so that there's somebody in the business particularly in these crypto businesses that might be relatively new it's not necessarily the case there'll be somebody in that business who's got a direct responsibility for insurance as their whole job so allocating somebody the task of identifying when the insurance should be called upon and to understand those notification provisions is really important. Under a crypto insurance policy, the right to make a claim that might be triggered by the hacking event itself, theft or fraud of an asset or negligence identified by the custodian that proves a risk. For example, a security breach, even if there's not a potential loss identified right at the outset, it's one of those things that is likely to have to be notified to insurers. Following an event, if there's an insured event, it's important that those notification provisions are complied with really specifically. There's often a very specific time period in these kinds of policies when we're talking about crypto assets. That's partly because of the nature of the asset, as you'll be aware, they can move very rapidly. And the more time that has passed since the event, the more difficult it can be to get information, the more difficult it can be to trace. So, in most scenarios, the sooner the better to notify insurers and that way there's no delay which might have undermined insurers' ability to mitigate or investigate the incident. When you make a notification, as with most policies, you'll follow up with a proof of loss and the information provided to an insurer in the proof of loss document presentation that should be as detailed as it can possibly be and substantiated with as much documentation or forensic evidence if necessary at that stage it's a good point to bring in investigators or forensic accountants people who can produce a report that collates all of that information so that nothing gets lost given as i've said how quickly things can move on So things like date, time of incident, type of incident, assets compromised, and then all of the investigation carried out to date and the ongoing investigation that might proceed after that point. Is there anything else you had on that one, Peter? Peter: Yeah, thank you, Ellie. Just again, a couple of comments. I think like all assets, the value of an insurance asset can go up or down depending on how well you look after it. And I think understanding the notification obligations under your policy and your requirements in that respect are key to preserving the value of your insurance asset. I would assume one of the most key features of doing that. I think it's very important as well to understand the importance of the broker's role in this regard and how much support you can get, will get from your brokers. If you report to them that you believe you've got a matter that needs reporting to insurers under the policy, they will understand the notification reporting requirements very clearly. They will work with you to make sure you comply with your obligations. I think the nature of a cryptocurrency loss means that there is quite often going to be other activity around the circumstances of the loss. Other investigations may well be ongoing, in particular criminal investigations may have resulted from the nature of the loss that you suffer, particularly if, as Ellie was describing earlier, we put a crime or a theft-related loss. So a policyholder should be aware that that parallel investigation might perfectly legitimately compromise your ability or one's ability as an insurer to investigate the nature of the circumstances behind the loss and report it to insurers. So I think a policyholder will need to explain to insurers very clearly what constraints they may be working under in order for insurers to retain confidence that the insurer is giving them a full explanation of what it knows about the circumstances of the loss. I think that's very important to protecting the relationship with insurers during the progress of pursuing this loss to a client. It's also, one may often have heard that the expression of a policyholder being required to act as a proven uninsured, which means effectively taking steps to protect insurers' position in the event that insurers ultimately pay a claim and taking steps to act as if it was uninsured in the way it investigates its claim and manages the options available to it at this point in time. So how does that manifest itself? Protecting assets to the extent that it's possible to do so, avoiding further losses and making clear that the circumstances of the loss have been recognised by the insurer in terms of removing assets from hot-cold storage and transferring to cold storage, freezing accounts, making sure that any apparent investigations can be continued, any quote-unquote bad actors can be identified and pursued and not released from liability because that's something that the insurers will be very keen to see is protected. The insurers will want to know that the insured is protecting the rights that they may have by way of subrogation or other recoveries to recover any amount that it in fact pays out under the policy. And very often acting as a prudent uninsured is doing just that. That is protecting the rights of the insured in the event that your claim that you submit to the policy is successful and is paid. And as Ellie has already mentioned, we're seeing increasingly now specialist forensic. Investigators and crypto investigators who are dedicated at types of very niche investigations that are likely to provide for the most success in both making the claim on the policy and recovering the value from the lost asset. Ellie, any further comments from you on those? Ellie: No, I agree with all of that. It's definitely not an obligation that ceases when you make that notification, bearing in mind the idea of acting as a prudent, uninsured, and protecting the value in your insurance policy is something we really want to emphasize and make sure that people appreciate the value in an insurance policy in this sphere. Peter: And although very often we are required to take issue with insurers, that should very much be the point of last resort. And you should be looking to work with your brokers, looking to protect the interests of insurers, making sure insurers know that you're looking after their interests because you believe you've got to pay to pay them policy. So I think, you know, until the point where it is absolutely clear that there has been are falling out there isn't one and you work together to recover the best for you as the insured under the policy protecting insurers interest going forward which will provide you with the quickest way of recovery. Claudia: Well thank you Peter and Ellie you've identified some really excellent tips for policyholders of cryptocurrency insurance you know in particular ensuring that you understand the language and terminology attached to the crypto asset so you're able to make clear disclosures or claim notifications. And of course, as Peter pointed out, with the assistance of your broker, and also that you have as much detail or information as possible relating to the crypto asset at your disposal, keeping in mind that there may be investigation limitations in the event of criminal or regulatory investigations running in parallel. Well, thank you for listening today and Peter and Ellie for being in conversation with me. If you have any questions about the topics discussed in the podcast, please contact our speakers, Peter Hardy and Ellie Ruiz. 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.
Is this your show?
Claim this listing to keep it up to date, reach guests who want to pitch you, and manage bookings with Guestify.
