Category: General Counsel / In-House Counsel

Cyber Coverage Watch: Louisiana Dispute Over Ascent Cyberpro Policy

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NEW ORLEANS, March 30 – Eustis Insurance Company and its insured, New Hotel Monteleone, remain embroiled in litigation over coverage for a 2014 cyberattack, centering on the insurability of exposures Hotel Monteleone faces in the wake of the attack, including fraud recovery and operational reimbursement expenses.  The case, venued in the Eastern District of Louisiana, is a signal example of the non-standard nature of cyber-coverage, and the need for experienced counsel on all sides when policies are formulated, bought, and sold.

This week, the dispute became even more complicated when Eustis  filed a third-party complaint against wholesale insurance broker, R-T Specialty, Inc., alleging that R-T failed to properly explain to the Hotel Monteleone the precise coverage of the policy, issued by Certain Underwriters at Lloyd’s, London (Lloyd’s), subscribing to Ascent Cyberpro (the Ascent) policy.  The hotel previously initiated the suit against Eustis and Lloyds In December 2015 seeking complete coverage for its losses under the Ascent Policy

Eustis engaged R-T after the Hotel Monteleone approached Eustis about cyber coverage following an earlier, 2013 cyber attack on the hotel, for which there was no insurance coverage.  Eustis did not have broad experience with cybercoverage, and brought in R-T based on R-T’s alleged representations that it was conversant in procuring such insurance.

The Ascent Policy issued through Lloyds and R-T had an overall limit of $3 million.  The coverage, however, was restricted substantially relating to costs incurred by an insured which constituted fines or penalties.

The third party complaint against R-T Specialty alleges that the broker failed to  inform Eustis that fraud recovery and operation reimbursement might be considered to be a fine or penalty, or that a $200,000 sub limit appearing in the policy’s Payment Card Industry Fines or Penalties Endorsement may apply to fraud recovery and operational reimbursement expenses arising from the cyberattack.

The case illustrates the murkiness of the current cybercoverage market, the great variability in individual coverage, and the possible exposure of agents and brokers for failing to properly produce or explain the coverage they secure for their customers.

New Hotel Monteleone, LLC v. Certain Underwriters at Lloyd’s of London, Subscribing to Ascent Cyberpro Policy No. ASC14C00944, No. 2:16-CV-00061-ILRL-JCW (Eastern District, Louisiana 2016)

 

 

 

Streamlining Insurance Litigation Discovery With Predictive Coding

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It has been a year since Southern District of New York Magistrate Judge Andrew J. Peck issued the latest in a line of significant e-discovery opinions approving the use of predictive coding in generating document productions in Rio Tinto v. Vale, — F.R.D. —-, 2015 WL 872294 (S.D.N.Y.) .  Predictive coding, also known as “Technology Assisted Review” (TAR) is the use of keyword search, filtering and sampling to automate portions of an e-discovery document review.   Most importantly, insurers can use TAR to reduce both the internal and external financial burdens of the discovery process in insurance coverage and bad faith litigation.

Here is a one paragraph primer on TAR:  A small “seed sample” of documents undergoes manual review by inside or outside counsel and/or a discovery management unit, and is assigned coding in terms of responsiveness to a given discovery request. That seed sample is then converted to an algorithm which is then used to run an automated search on a large set of potentially responsive documents, and the process yields a subset of responsive documents which are then reviewed and  provided in discovery.  Parties generally cooperate in the TAR process, and agree on a TAR protocol.   This process does NOT relieve litigation counsel of the obligation to review the documents which are going to be produced, but it is an efficient means of culling responsive documents, and it has become a recognized, acceptable method of electronic discovery under the Federal Rules of Civil Procedure.

Peck wrote in Rio Tinto that “it is now black letter law that where the producing party wants to utilize TAR for document review, courts will permit it.” (citing to cases from the federal tax and district courts in Arkansas, California, Nebraska, New York, and Tennessee, as well as Virginia and Delaware state courts).  He noted that  the courts have split where the requesting party has sought that the producing party use TAR and the producing party has resisted, but also cited to Dynamo Holdings Ltd. P’Ship v. Comm’r of Internal Revenue, 143 T.C. 9, 2014 WL 4636526, at *5 (U.S.T.C. Sept. 17, 2014), where the U.S. Tax court declined to follow an argument by the IRS that TAR was an “unproved technology,” and further holding that “the technology industry now considers predictive coding to be widely accepted for limiting e-discovery to relevant documents and effecting discovery of ESI without an undue burden.”

Judge Peck stressed the need for cooperation and transparency between adverse parties when developing a TAR protocol, and pointed out that TAR was at least as valid as keyword or manual searches of documents.

The line of thinking seen in Rio Tinto can be of great value to insurers in defending insurance and bad faith litigation.  Automated searching is now an approved method of culling through a large volume of potentially responsive discovery documents, and insurers can and should take advantage of both the technology, and the emerging body of case law approving of its use.  Predictive coding can save time, money, and manpower when it comes to answering discovery.

For more information on using predictive coding to reduce your discovery burdens in bad faith, insurance coverage, and any other litigation, reach me at chaddick@dmclaw.com or 717-731-4800.

Demand For Cyberinsurance Widening, Marsh Says

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NEW YORK, March 24 –   Purchases of cyberinsurance by customers of insurance brokerage Marsh has increased 27% since last year, according to a report published by the broker last week.  Manufacturing and technology companies are among the largest sectors of buyers of the coverage, according to the report.

Marsh attributes the growth in demand to simple evolution:   “In the face of an evolving risk landscape and an aggressive regulatory environment, organizations no longer treat cyber as a problem to be fixed, but rather as a risk to be managed,” the report says.

There is now developing a demand for cyberinsurance coverage  among infrastructure industries like healthcare and transportation insured, Marsh reports.  And new coverages for cyber losses are evolving to cover losses such as business interruption and disruption of control systems by service providers, such as power companies.

Coverage limits are increasing with the demand for such coverage, Marsh reports.  The current average limit of coverage in 2015 was  $16.9 million in 2015, up from $14.7 million in 2014, the brokerage said. The highest average business sector limit was in the technology/communication sector, at $86.7 million, according to the report.

Marsh also reported that no new major insurers entered the cyberinsurance market during the last quarter of 2015, but that this is likely to change going forward.

Are You Getting Enough Extras From Your Outside Counsel?

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For insurance company legal departments, the retention of outside counsel is now done very much in a buyer’s market, perhaps more so than any time in history, and  certainly more than any other time in the twenty five years I have practiced law.  Tasked by their management teams with delivering better results faster and for less, legal departments have become discerning and discriminating buyers.

Good outside law firms worthy of hiring do not rage against this development — they accept and embrace it, and craft what they offer to fit the needs of the clients they want to continue to serve. If your outside lawyers aren’t offering you the following services regularly, you are probably not taking advantage of the enormous buying power you now enjoy.  This buying power entitles you to things like:

  • regular courtesy calls from outside counsel to make sure the service they are delivering meets with your expectations of that service, including the billing process;
  • seamless access to your outside counsel via phone, email, text messaging so that you do not have to wait either to ask a question or make an assignment;
  • several hours per week of no-charge access and client support for quick legal questions, even a request for a minor bit of research or document review (any outside lawyer who does not recognize that this is the least he or she can do for a good client does not appreciate the value of your business).
  • regular offers to provide no-cost continuing education your legal departments and claims staff, either via in person lunch and learns, or  via webinar, whichever you, not they, prefer.
  • regular no-cost updates on significant legal rulings and industry developments, so that you can 1.) stay abreast of the legal landscape at no cost to you; and 2.)  ensure that your outside counsel is current as to the same landscape; and
  • regular offers to discuss and collaborate on alternative billing programs, so that legal departments can ensure they are getting outside counsel legal services in the most efficient manner possible.
  • ‘NO-CHARGE” invoice entries for  minor phone calls and emails on simple questions or requests –  your outside lawyers should encourage you to contact them, not discourage you.

As we said above, it is a buyers’ market for in-house legal departments.  Many outside firms who have enjoyed the comfort of the status quo for decades have been caught unaware, and have not responded to legal climate change .  But there are good outside law firms who are none too aware of the sea change in the marketplace, and who are crafting their representation to recognize that fact by providing no-cost extras to their clients.

For more information on providing your legal department the benefits of  extra services and client support at no additional cost , reach me at chaddick@dmclaw.com or 717-731-4800.

 

Alternative Fee Spotlight: The Outside General Counsel Arrangement

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In the rapidly changing environment of the delivery of legal services to clients, including insurers, third party outside general counsel providers have begun to offer as-needed office of general counsel staffing to insurers and other businesses.  Insurers and businesses, however, can find the same benefit in the outside law firms they have been dealing with for years.  There is a way to have the best of both worlds.

The arrangements vary widely, from counsel actually occupying the physical space of the client on a full or part time basis, to a looser arrangement with outside counsel staying at her outside firm.  The arrangement offers the flexibility legal departments now require to meet their obligations as efficiently as possible.  The General Counsels’ offices get the benefit of the knowledge and experience of an outside lawyer but at a far greater control over the cost of such services.

Outside General Counsel arrangements generally involve fixed fees for a set amount of time based upon how much of the outside counsel’s workweek the insurer will utilize.  The outside lawyer’s time is utilized as the legal department sees fit.  In practice, it oftentimes involves outside counsel providing coverage opinions, and coverage and bad faith litigation support and representation , but the relationship can expand to such diverse matters as regulatory compliance, claims handling, and fraud investigation.   The duration of the arrangements can be short term, long term, month to month, or ad hoc — again, the beauty of the arrangement lies in its inherent flexibility.

The arrangement provides the additional benefit of outside counsel getting to know the procedures and operations of the legal department  to which she is deployed from a much closer vantage point than she would otherwise have.  Outside counsel even get a sense of the business and mission goals of the both the insurer and in-house legal department — benefits which can and will extend far beyond the duration of the outside general counsel arrangement.

For insurers with legal departments looking to stay flexible and to retain cost controls over the use of outside expertise, the outside general counsel option could be the puzzle piece needed to control legal spending, and ensure access to outside expertise and jurisdictional familiarity.

For more information on providing your legal department the benefits of an outside general counsel arrangement on shorter or longer term bases , reach me at chaddick@dmclaw.com or 717-731-4800.

Bullet-Proof Insurance Coverage Opinions – Part II

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In Part I of this post we looked at the beginnings of a good coverage opinion – clear identification of the issues, and a comprehensive matrix of facts upon which the coverage opinion is based.  In Part II, we examine the remaining building blocks of a bullet-proof coverage opinion.

 Include The Policy Provisions At Issue

In order to launch into the meat of the coverage opinion, the applicable provisions of the policy should be included in the coverage opinion.  I prefer to actually “snapshot” .pdf cuts of the actual policy terms into the body of the opinion so that the reader sees not just the provision, but how it appears in the policy.  This is by no means mandatory, but verbatim inclusion of the policy provisions at issue is, however.

The opinion writer should take care to not only produce coverage terms, but applicable exclusions, and exceptions to the exclusions, so that all of the tools are in full view of the reader.

Analysis and Discussion of Applicable Law

There is nothing totally new under the sun, which means more likely than not the policy provision on which outside counsel is providing opinion has been interpreted in prior opinions.  These prior rulings provide the important, and in some cases binding, context in which the applicable policy terms will be viewed.

Any judicial guidance of the same or similar coverage issues  is useful, but the best guidance comes in the form of cases with similar factual backgrounds (yet another reason for a comprehensive discussion of the known facts near the top of the coverage opinion).   While the opinion writer needn’t necessarily provide an answer to the coverage question in this phase of the opinion,  good analysis of applicable law may start to orient and point the reader in the direction the opinion is going to read.  As we said, there is nothing really new under the sun.

While jurisdictional case law is obviously ideal, outside counsel should also include opinions from other jurisdictions which bear factual similarity to the coverage analysis  being undertaken.

Tying It Together: Legal Analysis and Opinion

With the groundwork laid, outside counsel can now gather all of the materials she has collected in the opinion, and provide a logical analysis of the coverage question presented to outside counsel by the client.  The conclusion of the opinion letter should be the culmination of the facts, the policy provisions implicated, and the applicable law.

This is not the time for surprise endings:  a good coverage opinion will logically flow to the conclusions drawn.  Conclusions which are incongruent with anything that has come before, whether it be the facts, the policy provisions, or the law, is a sign that something is amiss, either with the predicates to the conclusion, or the conclusion itself.  It is not the kind of disconnect a client is looking for, so during the draft phase, the inconsistencies must be reconciled for the opinion to be reliable.

Going The Extra Mile:  Providing for Contingencies

The best outside coverage lawyers anticipate the needs of their clients.  They also recognize, in cases where investigation is ongoing, that further developments might impact the opinion.  Such possibilities should be included in the coverage opinion, so that the client knows how the validity of the opinion could be impacted by newly developed facts.  It is also a good reminder to the legal department requesting the opinion that the process is a fluid one, and an updated opinion might be the best course after new, significant information is learned.

Insurance company legal departments want solid coverage opinions which will withstand scrutiny of not just themselves, but others should that become necessary down the road.  For that reason, a comprehensive statement of facts, of the applicable policy, and of the relevant law should be provided.  The analysis of coverage and conclusion should flow from these elements, and the client should be notified that there may be contingencies in an ongoing investigation which could impact the opinion, requiring supplementation.

 

Bullet-Proof Insurance Coverage Opinions, Part I

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In this post, we begin a brief look at the building blocks of a bullet-proof legal opinion on an insurance coverage issue.  Legal departments should look for these elements and insist on them in written coverage opinions from outside counsel, and outside counsel should make sure to use these elements as touchstones, in order to provide the most reliable coverage opinion possible.

Identify and Clarify The Precise Coverage Issue(s) Examined

Clarity and precision are required up front — if they are not, the entire opinion will falter and fail to provide what the client is asking for.  This seems obvious, but I am continually surprised by how often I get the question (or at least of piece of it)  wrong during the first phone call from general counsel or a claims executive.  It should be mandatory for outside counsel to state verbally or in a preliminary note to the client what she believes the coverage issue to be.  Why?  Because it is the first and best chance the client will get to make sure it is going to get what it believes it is asking for.  And it is the first and best chance to clear the legal opinion of any  confusion, mistake, and misunderstanding.

Another reason for this exercise is to identify sub-issues, or follow-on coverage issues which may present themselves.  If the client wants an opinion on Exclusion A, might it also want opinion on Exclusion D, as well as the exceptions to exclusions A and D?  Should it want one?   Not only does this ensure that the client gets an opinion on what it wants, it ensures the client gets an opinion which serves the purposes behind it:  advice and protection.   A partial coverage opinion which ignores related issues is likely to be criticized as myopic or artificially crafted in favor of insurer.    A complete coverage opinion, on the other hand,  covering all related issues, is much less assailable down the road.

Once the issues are clarified and refined, they should be stated at or near the outset of the written coverage opinion.

Identify  and Lay Down the Factual Matrix of the Coverage Opinion

A good legal opinion contains a thorough recitation of all known, relevant  facts germane to the coverage determination.  The written opinion should also advise the insurer that if there are additional facts the legal department would like outside counsel to consider, those facts should be provided to counsel and a supplemental opinion offered.   While this serves to protect outside counsel in the proffering of an opinion, it also ensures again that the client gets precisely what it wants from outside counsel.  It provides the legal department seeking the opinion to make sure that all of the facts it wants considered  to be taken into account, and ensures that mistakes can be fixed before the coverage opinion is provided.

All key facts should be stated in the written coverage opinion.  This also implies that facts which are peripheral, irrelevant, and unnecessary to the coverage determination need not be continued.  Heft does not equal value, and no in-house general counsel is going to appreciate you providing a 20-page  coverage opinion when 8  would have done the job just as well.  The coverage  opinion will only be as good as the foundation of facts upon which it is based, and set down in the opinion itself.

In Part II of Bullet-Proof Coverage Opinions, we will take up the importance of inclusion of the applicable policy terms and conditions at issue, analysis and discussion of applicable legal precedent interpreting those provisions, thoughtful legal analysis, and providing for contingencies in the opinion.

Use Privilege Logs To Win Bad Faith Discovery Battles

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There is no more critical or touchy stage of discovery in a bad faith case than the request for the claims file.  It will color the rest of the discovery course, including, most notably, depositions of claims personnel.  Inevitably the request for the file comes, seeking every bit of data, electronic and hard copy, which ever existed in the claims file.  The request contains no restrictions, and no reasonable bounds – the bane of insurance company counsel’s existence.  How to respond, yet again, without having to fight World War III?

A well-prepared privilege log provides insurance company counsel with an opportunity to frame and present argument on discovery motions before they are ever filed.  And yet this opportunity is overlooked — passed over for  rote, form privilege log entries like “Not Discoverable:  Attorney Client Privilege” and the like.  These bland entries will neither  satisfy plaintiff’s counsel, nor a judge.  So take a step back and look differently at the privilege log which accompanies your initial  claims file production.  Look at the opportunity as a chance to file a free discovery brief, and treat it as such.  Get the jump on making valid arguments to protect those portions of the claims file which need not be disclosed under the applicable jurisdiction’s discovery law.

First, a quick look at an example regarding the discovery of claims reserve information, and then a review of the basic elements of privilege log entries which will persuade judges and protect portions of the insurer’s claims file:

Bad Privilege Log Entry Example:  “Objection.  Claims Reserves Are Not Discoverable”

Much Better Privilege Log Entry Example:  “Reserve information is non-discoverable work product and/or is irrelevant and disclosure of information will not lead to admissible information. See, Safeguard Lighting Sys. , Inc. v. N.Am. Specialty Ins., 2004 WL 3037947 (E.D.Pa. 2004); Union Carbide Corp. v. The Travelers Indemnity Co., 61 F.R.D. 411 (W.D.Pa. 1973); Fidelity & Deposit Co. of Maryland v. McCulloch, 168 F.R.D. 516 (E.D.Pa. 1996); and Williams v. Nationwide Mut. Ins. Co., 750 A.2d 881 (Pa.Super. 2000). Reserving is an insurance accounting instrument largely designed for purpose of regulatory compliance, and not evidence of an insurer’s opinion as to either the actual value or settlement value of the claim.  See, id.”

The differences in the two privilege log entries is apparent, but it is not simply the size — don’t confuse length with persuasive substance.  The better privilege log entry contains the following elements:

  • specific reference to the discovery sought, identifying it with as much particularity as possible;
  • Comprehensive statement of case law and rule of procedure which supports insurance company counsel’s position that the discovery sought is protected from discovery.
  • Where possible, additional identification of important public policy principles which weigh in favor of protecting the discovery sought.  Common sense and logical arguments can also appear here.

In addition to providing a jump on the opposition should the dispute make its way to a judge, it demonstrates to the reviewing judge that the objections were not “knee-jerk” or form objections not worthy of the judge’s consideration.  It sets up the insurer’s counsel as credible and thoughtful in the mind of the Court , which will not hurt the insurer, of course.

Good insurance company counsel do not look at privilege logs as merely something to be thrown together as part of preparing discovery answers.  They look at logs instead  as an opportunity to advocate for the protection of discovery at a key point in the bad faith or coverage case.

CJH

 

 

 

 

Alternative Fee Spotlight: Fixed Fee Coverage Opinions and Bad Faith Claims Audits

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Within legal departments today, the most common barriers to obtaining knowledgeable outside counsel for non-litigated matters are cost and uncertainty.   Outside counsel is seen nowdays as an expense which must be scrutinized, limited and reduced.  But there are ways to enjoy the benefit of the independent, objective opinion of outside counsel without worrying that doing so is an unnecessary extravagance, or yet another trip down the black hole of a running meter.

The truth is that most non-litigated matters handled for insurance company legal departments don’t need to be handled  via hourly rate.  Costing such projects is easy and predictable.  And the legal marketplace no longer operates under a single, monolithic pricing model.  Good lawyers are available for reasonable, flexible, affordable fees.

Coverage opinions and claims file audits can be performed by experienced outside counsel via fixed fee, quoted arrangements.  A legal department can get the benefit of a coverage opinion or claims file review for a low, fixed sum, quoted after only a brief review of the scope of the matter.  This small investment in an outside opinion can save an insurer many multiples of the fixed fee cost in coverage or extra-contractual exposure later on.    There are even more savings available with volume discounts or “block” fee quoting for multiple non-litigated  matters.  The options are virtually endless.

Traditionally, the return on investment which a coverage opinion or claims file audit brought was not sufficiently predictable:  the hourly rate arrangement made the initial investment in an outside opinion unclear, and therefore made the benefit hard to measure.  Under a fixed-fee arrangement, six and seven figure exposures can be identified and prevented with small four figure investments.

For more information on providing your legal department the large investment return on fixed fee coverage opinions and claims file audits, reach me at chaddick@dmclaw.com or 717-731-4800.

Badfaithadvisor.com Launches Best Claims Practices and Bad Faith Avoidance Training and Continuing Education

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Badfaithadvisor.com has launched both online and onsite continuing education services at no cost to insurers and other related businesses.  For more information on the benefits and options of this no- cost training and continuing education service, click here.