Insurance News - November 2003
November 1, 2003
Insuring Against Technology Risks
Companies purchase insurance coverage as part of their risk management strategy to attempt to spread the risk of unforeseeable, harmful events that cause them damage. Accordingly, insurance is extremely relevant to organizations supplying or using various computing resources, including those conducting e-commerce over the Internet, which expose them to an assortment of first party and third party losses.
First party losses are damages suffered by the insured itself, including loss of data or access to data, data recovery costs, loss of computer functionality, business interruption caused by computer down time (due, for example, to power blackouts), loss of profits due to lost sales when an e-commerce web site goes down and costs associated with investigating and recovering from hackers or virus attacks.
Third party losses are damages that an insured may cause to third parties, including damages caused by breach of computer security leading to public disclosure of confidential customer data, transmission of a virus to a third party, misuse of a third party's trademark and posting libellous messages to a third party web site.
There are a number of different types of insurance coverage, including commercial general liability ("CGL"), property, errors and omissions, and directors and officers. In many cases, the policy language used to describe coverage has existed substantially unchanged for decades. The drafters of these policies could not have contemplated the plethora of technology risks which now exist. Nevertheless, courts have been asked to interpret traditional insurance contracts in light of new computer-based realities and creative lawyers have had some success in convincing courts to find coverage. For example, in a limited number of decisions from Australia and the U.S., "property damage" coverage under CGL policies has been extended to encompass software and data, notwithstanding the fact that this coverage is often expressly defined as applying only to "physical" or "tangible" property damage.
"Advertising liability" coverage may also prove fertile ground for creative lawyers attempting to "pigeon-hole" technology risks. Advertising liability coverage is generally available as an optional endorsement under CGL policies, and is primarily intended to cover damages caused in the course of advertising. There is already rapidly growing case law regarding whether this coverage can be extended to subsume various forms of intellectual property infringement and actions regarding intellectual property rights.
Insurance companies are also attempting to respond to the technological revolution by offering new products specifically intended to cover computer and e-commerce-related risks, such as damages caused by computer hackers and corruption to data. Thus far, these policies have not proven particularly popular, likely because they are often quite costly and may require an extensive audit to assess existing risks.
Companies are well advised to reassess their insurance coverage in light of their current operations and today's expanding technology risks.
If a significant part of your business is dependent upon your export sales and if you are sometimes in doubt as to the capacity of your foreign clients to pay for the goods shipped, or if you are seeking new clients in countries where the political climate is uncertain, it could be advantageous to consider subscribing to a credit insurance policy. The goal of this product is to insure the payment of a portion of certain risky debts. However, the business which subscribes to such a product must know that its role as a policyholder will not be restricted to the payment of the premium. If the policyholder does not comply with the numerous conditions of the policy, it risks losing the entire benefit of the insurance. Consequently, the business which chooses to subscribe to a credit insurance policy will have to assiduously manage its obligations under the policy.
In a credit insurance contract, the insurer undertakes to reimburse a pre-defined portion of the debt that a foreign debtor has failed to pay. Two main risks are usually covered: non-payment due to insolvency or bankruptcy of the buyer or due to the occurrence of political risks such as cancellation of an export permit, embargo, war or expropriation. This protection can be worth its weight in premiums if the policyholder remembers that it is imperative that the credit insurer be informed of the details of the policyholder's foreign dealings.
For instance, coverage is generally restricted to debts linked to specific products sold to specific buyers under specific conditions. If one or the other of these conditions is not met in one particular trade, the insurer will have reason to deny coverage. For this reason, it is crucial to advise the insurer when a new line of product becomes available or when a contract is first signed with a new foreign client. This obligation to keep the insurer informed is constant, as it is generally specified under the policy that if one particular client of the policyholder is in default to meet its payments, any new shipment to this client may not be covered.
Moreover, if the existence or validity of the debt itself is contested by the client of the policyholder, or if the latter accepts to modify the initial terms of payment, the insurer may not be liable for this portion of the debt.
Finally, credit insurance policies generally provide for a very short delay during which claims must be submitted. In case of a claim, the policyholder will have to provide detailed information as to the transactions effected with the client, as well as proof of the realization of the risk. This could imply that the policyholder will have to prove the insolvency of the client and the efforts undertaken to recover payment.
It is thus imperative to provide for a system within the policyholder's organization that will allow to identify the information which must be disclosed under the policy and to provide this information, while retaining proof of all communications with the insurer. The insurer will have to be informed of every significative development with respect to the trades of the policyholder and the status of its receivables.
Toxic Mould Litigation - Are You Insured?
Recently in the United States, there has been a surge of mould related litigation. By the end of 2001, there were approximately 10,000 toxic mould suits in the U.S.. Courts there have accepted expert evidence of a relationship between mould exposure and adverse health. Plaintiffs have been awarded multi-million dollar awards for toxic mould contamination in buildings. In the notorious case of Ballard v. Fire Ins. Exch. (Tex. Dist. Ct.) (No. 99-05252), the jury awarded $32 million against the insurer for refusing to clean up a plumbing leak, which then led to mould contamination. The appeal court reduced the award to $4 million (Tex. Ct. App.) (No. 03-01-00717-CV)
Public authorities in Canada are clearly becoming "mould aware" and are willing to act. In the Year 2000, the Province of Ontario paid out $40 million in grants to school boards to correct "mould contamination problems" in schools. More recently, the Alberta Court of Appeal building in Calgary was forced to temporarily relocate their premises to Edmonton as a result of "toxic mould infestation". Early reports suggested that two thirds of the staff were experiencing "mould-related" health problems.
However, in contrast to the U.S., there are relatively few toxic mould cases in Canada. As of April 2003, there were fewer than twenty-five reported cases dealing with mould in any significant way. With few exceptions, these claims involve mould property damage, not adverse health effects. Canadian claimants have been largely unsuccessful in establishing a causal relationship between the presence of mould and adverse health effects. This poses significant problems for claims for personal injury. There have only been two instances, both in the Ontario Superior Court, of a court recognizing that mould can cause illness.
MacDonald v. Dufferin-Peel Catholic District School Board, (1998) 40 O.R. (3d) 379, was an attempt to certify a mould-related class proceedings in Canada. The court found that the Plaintiffs met the very low evidentiary hurdle at the certification stage to support their contention that mould could cause illness. However, the court concluded that a class proceedings was not the preferable procedure due to the number of individual issues. In the recent, significant case of Mariani v. Lemstra, 2003 CarswellOnt 741, the court found that the proliferation of dangerous mould rendered the Plaintiff's house dangerous to inhabit. The Plaintiff led the evidence of several experts including the report of one public health official that found mould samples from the house included a species of mould known to be harmful. Due to the prevalent mould and other defects, the court held that the house was worthless and the Defendants were ordered to pay the Plaintiff $298,000, the amount originally paid by the Plaintiff for the house and the cost of removing the existing structure. This case is currently under appeal.
Currently, there are also several toxic mould claims in "leaky condo" cases in B.C. The toxic mould claims are being made to set out the requirement in Winnipeg Condominium Corp. No. 36 v. Bird Construction Co. that to create the foundation for liability, the premises have to be found dangerous. This issue has yet to work its way to judgment in B.C.
Canadian insurers are responding to the claims and litigation by inserting mould damage exclusions in their property damage policies and inserting biological agents exclusions in their liability policies. A typical biological agents policy exclusion excludes coverage for damage or injury arising out of mildew, mould or other fungi. With respect to commercial liability policies, a policyholder should verify if the policy contains an explicit mould exclusion and if the standard pollution exclusion includes mould in its definition of "contaminant" or "pollutant". If so, although many insurers refuse to contract out of the mould exclusions for an additional premium, thought should be given to the impact of the presence of such exclusions.
Despite the apparent ‘epidemic’ of toxic mould litigation in the U.S. and a growing Canadian preoccupation with mould, mould litigation in Canada is currently relatively uncommon. Mould litigation is likely to become more common especially if the scientific link between mould and adverse health effects is strengthened. At the very least, the Mariani decision suggests that the scientific evidence is now at least sufficient to establish that the presence of mould may constitute a significant health concern. However, given the insurance industry's level of concern about this new threat, we can also expect that it will be more difficult to obtain mould coverage.
Can An Attorney Serve Two Masters? Who Does The Attorney Retained By Your Liability Insurer Represent?
In a liability insurance context where the insurer assumes a duty to defend, the attorney who will represent you will generally be chosen by the insurer.
It can be an awkward situation for the attorney since there exist two distinct relationships. On the one hand, the attorney represents you in the action but, on the other hand, he also represents the insurer. The courts have qualified the situation as a double mandate. Generally, this does not create any problem. However, where the interests of the insurer and those of the policyholder diverge, for example, when the insurer wants to settle a case out of court whereas the policyholder wishes to pursue the case to trial or when the insurer requests the attorney's opinion with respect to the insurance coverage, the attorney finds himself in the middle of a conflict and cannot continue to serve his two masters. The attorney may be put in a situation where he may have to cease to represent the policyholder and cease to counsel the insurer.
It is important to emphasize that while the double mandate is maintained, the attorney is governed by the rules of his professional ethics with respect to both principals. If the policyholder makes any declarations to the attorney, which could be prejudicial with respect to the insurance coverage, these declarations cannot be divulged to the insurer, unless the policyholder agrees. Furthermore, the attorney may have to cease both representation on the basis that a conflict has developed.
The Québec Court of Appeal1 recently applied the aforesaid duty of loyalty in a matter where the insurer had assumed the defense of its insured in a litigation during a period of three years and thereafter decided to deny coverage alleging that certain information had not been disclosed when it decided to assume the defense. It added that new information had come to light modifying its position as to the insurance coverage. The policyholder retained its own attorneys and instituted an action in warranty against the insurance company.
The Court of Appeal determined that, for the trial on the action in warranty, the policyholder had the right to obtain the reports of the claim adjustor retained by the insurer for the investigation as well as any and all opinion reports written by the attorney, named by the insurer, to represent the interests of the policyholder. Even if certain opinion reports addressed to the insurer could contain information with respect to the insurance coverage or other subjects which did not concern the defense of the policyholder, the Court of Appeal authorized access to these reports since the insurer was pleading his lack of knowledge of certain facts to justify its decision of having assumed a defense during a period of three years.
In summary, the Court of Appeal determined that the attorney/client privilege with respect to the insurer could not transgress the duty of loyalty of this attorney with regard to the policyholder.
When your insurer retains an attorney to represent you, you must keep this double mandate notion in mind and clarify the situation as much as possible with the attorney. In many cases, it is preferable to ask that the attorney who represents you, not be the one who will act for the insurer on coverage issues. By clarifying his role, you may be able to avoid having your attorney cease representing you in the case of a dispute between you and your insurer. This may be crucial, especially where your insurer has asked your regular attorneys to represent you.
Novelties In The D&O Policy World
The recent corporate scandals and bankruptcies have had impacts on the litigation involving directors and officers' liability. In order to respond to the directors and officers' concerns to have an adequate protection, insurers are coming up with new products. It is important to note that some of these products are not yet offered in Canada. However, these new products are now offered in the United States and it may only be a matter of time before they are offered in Canada.
Some insurers now propose a product known as the "No entity coverage". The insurance policy offers no coverage for the corporation. The coverage aims exclusively at protecting the individual directors and officers. This new product was put in place to ensure that independent directors and officers have adequate protection. Indeed, in many cases, the entity coverage erodes or exhausts the limits of liability available under directors and officers liability policies and individual directors are left without protection.
In bankruptcy situations, directors and officers can be found without any coverage available to them if their policy becomes an asset of the bankrupt estate and is, therefore, unavailable to protect their personal assets as independent directors.2
The insurers that propose this type of policy suggest that it offers to better protect personal directors' liability by protecting the insured person's personal assets for each independent directorship that he or she chooses to designate for insurance purposes. The insurance policy has some interesting features such as pre-set allocation clauses. These clauses predetermine how much the D&O policy will pay on behalf of the individuals.
The D&O policies can also include a severability provision which will protect an innocent director in the event that one or more insureds made misrepresentations in the application to obtain the insurance policy.
As well, some insurers have also developed a non-rescindable policy to protect all innocent directors and officers. This coverage will protect the independent directors who were unaware of the actions that subsequently jeopardized their D&O coverage. As a result, in the event of a rescission or application of an exclusion under the primary policy, the excess policy will drop down and will protect all innocent directors and officers.
Some insurers also propose independent directors and officers insurance policies that are non-cancelable (except for nonpayment of premiums).
These are few of the new products that are offered in the American market. These products were created to protect and defend the personal assets of directors and officers in a world where litigation claims have increased and where protection available to directors and officers individually must be adequate in order that individuals continue accepting Board positions. The future will tell us when and if these new products will be made available here in Canada.
1. Groupe DMR Inc. v. Kansa General International Co. Ltd., (2003-08-18) QCCA 500-09-012340-022; 500-05-056941-006
2. For more information on this subject, please refer to "Will you benefit from your D&O policy if the company goes bankrupt?", Insurance News (June 2003), /article_detail.aspx?id=1374