© 2014 Hunton & Williams LLP 1
Year In Review: Insurance Developments In 2014
2014 was a busy year for insurance practitioners, legislators and jurists. The year brought one of the first
court decisions concerning the availability of insurance coverage for losses arising out of a data breach.
It also came with clarification as to when an insurer may (and may not) rely on policy exclusions after
wrongfully refusing to provide a defense. Courts also added breadth to instances where insurers must
indemnify administrative response costs. 2014 also was not without its fair share of legislative and
regulatory developments, such as the Flood Insurance Reform Act of 2014, which addressed the flood
insurance cost increases that resulted from the Biggert-Waters Act. Likewise, the year saw the
introduction and passage of legislation and regulation requiring minimum amounts of insurance for
ridesharing companies like Uber and Lyft. Each of these developments, and more, is discussed in the
annual recap below.
Coverage For Data Breach Is No Game
A New York state judge issued one of the first court decisions regarding the availability of insurance
coverage for losses due to a data breach. Zurich Am. Ins. Co. v. Sony Corp. of Am., No. 651982/2011
(N.Y. Sup. Ct. Feb. 21, 2014). In Sony Corp., the trial court found that two insurance companies had no
duty to defend Sony in cases arising out of a 2011 cyberattack on Sony’s network that connects users to
play video games. From an insurance standpoint, the critical issue was whether the claims brought
against Sony following the breach involved “oral or written publication in any manner of material that
violates a person’s right to privacy,” as required by the policy. The court decided that this language did
not provide coverage for Sony because the “oral or written publication . . . was perpetrated by the
hackers” and not by Sony. The bottom line for the court was its conclusions that the policy required that
the policyholder “perpetrate or commit the act” and that the policy “cannot be extended to include third
party acts.” Sony’s appeal of this decision remains pending in the New York intermediate appellate court.
New York’s High Court Descends From Its Earlier Decision In K2
The New York Court of Appeals also ranks among the courts making notable rulings in 2014. In K2
Investment Group, LLC v. American Guarantee & Liability Insurance Co., 6 N.E.3d 1117 (N.Y. 2014) (K2
Investment II), New York’s high court ruled that an insurer could enforce policy exclusions to escape
liability even after the insurer breached the policy by failing to provide a defense. In doing so, the court
took the rare step of vacating and reversing its own prior decision, where the court had reached the exact
opposite conclusion. 993 N.E.2d 1249 (N.Y. 2013) (K2 Investment I) (holding that “when a liability insurer
has breached its duty to defend its insured, the insurer may not later rely on policy exclusions to escape
its duty to indemnify the insured for a judgment against him”).
In K2 Investment II, the court determined that its earlier decision “fail[ed] to take account of a controlling
precedent.” The court reached this conclusion upon recognizing that its position in K2 Investment I was
irreconcilable with its earlier holding in Servidone Constr. Corp. v. Sec. Ins. Co. of Hartford, 477 N.E.2d
441 (N.Y. 1985). Accordingly, faced with either overruling Servidone or following it, and having found no
justification under New York law for overruling Servidone, the court followed the Servidone rule in K2 © 2014 Hunton & Williams LLP 2
Investment II. It therefore concluded that the insurer in that case could rely on policy exclusions to escape
its duty to indemnify even though the insurer had breached its duty to defend.
New York Court Of Appeals Reminds Lower Courts That Statutory Standard Applies Only When
The New York high court also was busy in 2014 reconciling intermediate appellate decisions addressing
when and under what circumstances an insurer has waived its ability to assert a late notice defense. The
court resolved the conflict in KeySpan Gas East Corp. v. Munich Reinsurance America, Inc., 15 N.E.3d
1194 (N.Y. 2014), in which it determined that several intermediate appellate court decisions on waiver of
late notice defenses were wrongly decided insofar as they required insurers to disclaim coverage based
on late notice of a claim “as soon as reasonably possible.” The state high court found that the “as soon as
reasonably possible” requirement relied upon by the intermediate appellate courts stems from New York
Insurance Law § 3420(d)(2), which applies only to “insurance cases involving death and bodily injury
claims arising out of a New York accident and brought under a New York liability policy.” As the court
explained, if the statute does not apply, the insurer’s “delay in giving notice of disclaimer should be
considered under common-law waiver and/or estoppel principles.” The court concluded, therefore, that
the lower court decisions finding an obligation to disclaim coverage based on late notice “as soon as
reasonably possible” where § 3420(d)(2) did not apply were wrongly decided.
The KeySpan decision is important clarification of New York law that can limit policyholders’ ability to
contend that insurers have waived their late notice defenses where the insurers failed to raise those
defenses “as soon as reasonably possible.” When the statute does not apply, policyholders will need to
rely on common-law waiver, which requires a voluntary and intentional relinquishment of a known right.
Contractual Liability Exclusions Are Not Big In Texas
The Supreme Court of Texas issued a much-anticipated decision concerning insurers’ ability to rely on
contractual liability exclusions. Ewing Constr. Co. v. Amerisure Ins. Co., 420 S.W.3d 30 (Tex. 2014). In
Ewing Construction, the Texas high court rejected an insurer’s attempt to rely on a contractual liability
exclusion that operated to exclude coverage for liabilities stemming from damage to property. The
insurer argued that the policyholder’s liability arose “by reason of the assumption of liability in a contract
or agreement” and therefore fell within the contractual liability exclusion. The court held, however, that the
exclusion would apply only if “the insured has assumed a liability for damages that exceeds the liability it
would have under general law.” Analyzing the facts giving rise to the policyholder’s liability, the court
found that the liabilities arose from the insured contractor’s failure to exercise ordinary care in connection
with its work. Accordingly, the court concluded that the contractual liability exclusion would not apply in
that case because the general contractor did not “enlarge its duty to exercise ordinary care in fulfilling its
contract” by agreeing “to perform its construction work in a good and workmanlike manner.”
When Excess Becomes The New Primary
2014 also brought several opinions concerning the availability of excess coverage when policyholders
settle with underlying insurers for less than full policy limits. As one might expect, those opinions, issued
by different judges in different jurisdictions, reach different conclusions. Compare Forest Labs., Inc. v.
Arch Ins. Co., 116 A.D.3d 628 (N.Y. App. Div. 2014) (finding that excess coverage is unavailable when
policyholder settled with underlying insurers for less than full policy limits where excess policy provided
that it would pay “only after the insurers of the Underlying Policies shall have paid in legal currency the full
amount of the Underlying Limit”), with Plantation Pipe Line Co. v. Highlands Ins. Co., 444 S.W.3d 307
(Tex. Ct. App. 2014) (finding that excess coverage is available when policyholder settled with underlying
insurers for less than full policy limits where excess policy provided that it would pay “only after the
Underlying Umbrella Insurers have paid or been held liable to pay the full amount of their respective
ultimate net loss liability”). Consistent with prior opinions, these decisions demonstrate that the availability
of excess coverage in these situations is highly dependent on the relevant policy provisions.© 2014 Hunton & Williams LLP 3
Coverage For Complying With Subpoena In Criminal Investigation
Although it came on the eve of 2014, a New York court’s decision regarding coverage for costs to comply
with subpoenas issued as part of a criminal investigation is too notable to pass over in our recap of this
past year’s decisions of significance. In Syracuse University v. National Union Fire Insurance Co., 112
A.D.3d 1379 (N.Y. App. Div. 2013), Syracuse University was served with six subpoenas for documents
from the grand jury investigating sexual abuse allegations against an assistant basketball coach at the
university. The New York appellate court found that Syracuse was covered for its costs in responding to
the grand jury subpoenas because the subpoenas amounted to a “claim” under the policy.
Bad Faith Abound
The year also was not without its fair share of opinions on bad faith insurance issues. For instance, the
Fourth Circuit held that a policyholder may recover damages under West Virginia law for “aggravation and
inconvenience” resulting from its insurer’s wrongful refusal to defend an underlying liability action.
Graham v. Nat’l Union Fire Ins. Co., 556 Fed. App’x 193 (4th Cir. 2014). And, in a departure from prior
case law, a Florida appellate court found that a policyholder has a viable bad faith claim as soon as it is
determined that coverage is owed, even where the insurer has not breached the insurance contract.
Cammarata v. State Farm Fla. Ins. Co., 2014 WL 4327948 (Fla. Dist. Ct. App. Sept. 3, 2014). These
decisions, along with many of the other bad faith decisions observed in 2014, illustrate that bad faith
insurance law continues to evolve.
Superstorm Sandy – Still Wreaking Havoc
Even though it was the fall of 2012 when Superstorm Sandy ravaged the northeastern United States,
insurance coverage litigation arising from Sandy continues in 2014. That ongoing litigation resulted in
several significant decisions involving business interruption coverage in the past year. See, e.g., Newman
Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co., 17 F. Supp. 3d 323 (S.D.N.Y. 2014) (finding that
loss of power leading to closure of business office was not “direct physical loss or damage” necessary to
establish business interruption coverage). In addition, more than 1,000 cases arising from Sandy and
filed by property owners against insurance companies are now pending in consolidated litigation in
federal court in the Eastern District of New York. The court has undertaken significant efforts to resolve
these cases through mediation, including holding a training course tailored for Sandy mediators.
At least two of the Sandy cases pending in the consolidated litigation in the Eastern District involve
apparently unscrupulous contractors engaged in adjusting claims arising from the tragedy. In a recent
decision, the Eastern District of New York found “reprehensible gamesmanship by a professional
engineering company that unjustly frustrated efforts by two homeowners to get fair consideration of their
claims.” In Re Hurricane Sandy Cases, 2014 WL 5801540 (E.D.N.Y. Nov. 7, 2014). More troubling was
the court’s finding that “evidence suggests that these unprincipled practices may be widespread.” In
particular, an engineering firm retained by one of the defendant insurers secretly rewrote its engineer’s
written report that Sandy had damaged beyond repair the property at issue. The rewritten report
concluded that Sandy had not damaged the property and that long-term deterioration caused the defects
in the home. Based on the rewritten report, the defendant insurer refused to pay for any structural
damage to the property. The court found these practices “reprehensible” and “startling” and ordered the
defendant insurers in all the Sandy cases to disclose any similar reports.
In addition, based at least in part on these practices, an insurance company, its consulting firms and its
law firms were just hit with a class action complaint containing racketeering allegations. See Dweck v.
Hartford Ins. Co. of the Midwest, No. 1:14-cv-6920 (E.D.N.Y.) (filed Nov. 25, 2014).
2014 also provided important insurance-related decisions in a variety of other areas. For instance, the
Sixth Circuit held in William Beaumont Hospital v. Federal Insurance Co., 552 Fed. App’x 494 (6th Cir. © 2014 Hunton & Williams LLP 4
2014), that a hospital’s insurer must pay for the settlement of antitrust class action claims brought by
nurses against the hospital for allegedly keeping wages down after the Court found that the settlement did
not constitute disgorgement under the terms of the hospital’s insurance policy.
In Executive Plaza, LLC v. Peerless Insurance Co., 5 N.E.3d 989 (N.Y. 2014), the New York Court of
Appeals refused to enforce a two-year suit limitation against a policyholder where doing so would require
that the suit be filed before the loss was complete.
In PNC Financial Services Group, Inc. v. Houston Casualty Co., 2014 WL 2862611 (W.D. Pa. June 24,
2014), a Pennsylvania federal court held that an insurer must indemnify an insured bank for amounts paid
as attorneys’ fees and related costs incurred in settlement of class action claims.
In Louisiana Generating LLC v. Illinois Union Insurance Co., No. 10-516-JJB-SCR (M.D. La. Sept. 30,
2014), a Louisiana federal court held that a general liability insurer must indemnify its policyholder for civil
penalties incurred pursuant to a consent decree with federal and state environmental agencies because
the insurance policy’s punitive damages exclusion did not apply since the court determined that civil
penalties were not punitive.
In St. Paul Mercury Insurance Co. v. Michael S. Hahn, 2014 WL 5369400 (C.D. Cal. Oct. 8, 2014), a
California federal district court ruled that an insurer must defend former directors and officers of a defunct
bank who were sued by the FDIC as the receiver for the defunct bank, rejecting the insurer’s reliance on
the “Insured v. Insured” exclusion and joining the majority of courts throughout the country that have held
that the “Insured v. Insured” exclusion does not unambiguously exclude from coverage lawsuits by the
And, last but certainly not least, in Gregory Packaging, Inc. v. Travelers Property Casualty Co. of
America, 2014 WL 6675934 (D.N.J. Nov. 25, 2014), a federal court in New Jersey recently held that
contamination of a factory by ammonia gas constituted “direct physical loss of or damage to” property
under a policy of commercial property insurance even though no structural damage or other alteration
occurred to the insured property.
Courts’ New Year’s Resolutions For 2015
Finally, also notable is what 2014 did not bring. Several important cases remain pending in the courts,
including Fluor Corp. v. Superior Court of Orange County, which presents the question of whether the
Supreme Court of California will overturn its controversial decade-old decision in Henkel Corp. v. Hartford
Accident & Indemnity Co., 29 Cal. 4th 934 (2003). In Henkel, the court disapproved of the transfer of
insurance rights by operation of law in connection with a corporate transaction where the policies at issue
contained a so-called “no assignment” clause. Henkel held that where liability is contractual, and does
not arise by operation of law, insurance coverage likewise does not transfer by operation of law. Because
Henkel had not obtained the insurer’s consent, the court held under California law that the attempted
contractual assignment was ineffective. At the beginning of the year, Fluor appeared in Law360’s list of
insurance cases to watch in 2014. Yet, as we near the end of 2014, insurers, policyholders and
practitioners still wait in anticipation of a decision.
The Supreme Court of Pennsylvania also is poised to rule in a noteworthy case involving the
interpretation of a “separation of insureds” provision that may have implications for additional insureds in
Pennsylvania and elsewhere. Mut. Benefit Ins. Co. v. Politopoulos, 75 A.3d 528 (Pa. Super. Ct. 2013),
appeal docketed 60 MAP 2014 (Pa. 2014).
And, as noted above, the Sony v. Zurich decision involving coverage for data breach losses remains on
appeal in the New York intermediate courts.
Hopefully, adjudication of these and other significant pending issues is at the top of the courts’ lists of
New Year’s resolutions for 2015.© 2014 Hunton & Williams LLP 5
LEGISLATION AND REGULATION
In addition to important developments through court decisions, federal and state legislatures and
regulators passed or implemented significant changes in 2014.
Ride Companies And Their Passengers Are Now Protected (In Some States)
As the use of ridesharing companies like Uber and Lyft continues to rise so does public criticism that such
companies are not subject to the same rules and regulations that govern taxi companies and similar
services. In response to both issues, several states passed legislation concerning, among other things,
minimum amounts of insurance that must be obtained. For example, California passed a bill requiring
that ridesharing companies or their drivers maintain at least $100,000 of insurance protection. That
coverage must apply as soon as the driver connects to the company’s software, usually a smartphone
application. The coverage must increase to $1,000,000 once the driver agrees to pick up a passenger.
The statute also provides that the driver’s personal auto policy will not apply while the driver is connected
to the company’s software unless the policy expressly provides otherwise.
Mopping Up Flood Insurance Cost Increases
Congress also passed insurance-related legislation in 2014 when it acted to address issues caused by
the previously passed Biggert-Waters Act. The Biggert-Waters Act, among other things, caused
increased flood insurance costs when it took effect in 2012. According to Senator Joe Manchin’s office,
the Flood Insurance Reform Act of 2014 eliminated those increases by suspending “insurance premium
increases for grandfathered rates, all new subsidized policies initiated after enactment of Biggert-Waters,
and all subsidized properties sold after enactment of Biggert-Waters.”
No Action Yet On Terrorism Risk Insurance Act
In contrast to its work on flood insurance, Congress has yet to act to extend the Terrorism Risk Insurance
Act (TRIA), which is again set to expire on December 31, 2014. Congress enacted TRIA in November
2002 in response to the lack of capacity in the insurance market for coverage for terrorism losses
following the September 11 terrorist attacks. It has extended the act twice but has yet to extend TRIA
beyond 2014. However, according to recent media reports, Congress looks set to extend the act for
several years after a compromise between competing Senate and House views of the extension.
Federal Government Slaps MetLife With Unwanted SIFI Label
In September, the Financial Stability Oversight Council preliminarily designated MetLife as a systemically
important financial institution (SIFI). MetLife has challenged that designation, and the Council held a
hearing in November. It has yet to issue a final decision. If the SIFI designation stands, MetLife will join
AIG and Prudential as the only insurance companies subjected to the additional regulation by the Federal
Reserve and additional capital requirements that come with the SIFI designation.
Capping The Use Of Life Insurance Captives
In 2013, the New York Department of Financial Services (DFS) issued a report documenting the use of
captive insurance subsidiaries, or “shadow insurance” as the DFS put it, and highlighting the risks of the
use of shadow insurance as perceived by the DFS. The DFS recommended consideration of a national
moratorium on approval of new “shadow insurance transactions” pending further investigation. While the
DFS’s recommendations were not adopted, the Executive Committee of the National Association of
Insurance Commissioners (NAIC) adopted a framework in 2014, for some additional regulation in this
area. According to the NAIC, the framework adopted by the NAIC’s Executive Committee “would not
change the statutory reserve requirements; rather, it would change what types of assets or securities are
needed to back those reserve liabilities.” It would also “require the ceding company to disclose the assets
and securities used to support the reserves and hold a [Risk-Based Capital (RBC)] cushion if the captive © 2014 Hunton & Williams LLP. Attorney advertising materials. These materials have been prepared for informational purposes
only and are not legal advice. This information is not intended to create an attorney-client or similar relationship. Please do not send
us confidential information. Past successes cannot be an assurance of future success. Whether you need legal services and which
lawyer you select are important decisions that should not be based solely upon these materials. 6
does not file RBC.” However, much is still to be done before any regulations are in place. Going forward,
“numerous groups will develop the details to create the framework for subsequent consideration by the
entire NAIC membership.”
Governing Corporate Governance Practices
The NAIC did not limit its contributions to regulatory development to the captive arena described above. It
also adopted a model act requiring insurers to provide additional information to state regulators about
corporate governance practices. The required disclosure includes information about the company’s
“corporate governance framework and structure,” the “policies and practices of its Board of Directors and
significant committees,” the “policies and practices directing Senior Management,” and how the company
ensures “an appropriate level of oversight to the critical risk areas impacting the insurer’s business
activities including risk management processes, the actuarial function, and investment, reinsurance and
business strategy decision-making processes.” According to a NAIC representative, the disclosure
requirements “will ensure that state regulators have a comprehensive understanding of the corporate
governance structure, policies and practices utilized by the insurer.”
The Affordable Care Act – Experiencing Growing Pains
Finally, 2014 was the first year in which the Affordable Care Act required individuals to maintain health
insurance and in which the insurance exchanges were open for business. The law and its
implementation continue to garner their fair share of press. That attention will undoubtedly continue as the
Supreme Court hears argument in King v. Burwell, a case involving IRS regulations that permit federal
subsidies in states where the federal government rather than the state government operates the
insurance exchange. A decision in the King case is expected in 2015.
Walter Andrews is a partner with Hunton & Williams. Michael Levine is counsel with Hunton & Williams.
Patrick McDermott is an associate with Hunton & Williams. All are based in the firm’s McLean, Virginia
office and all are members of the firm’s Insurance Coverage Counseling and Litigation practice.
The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its
clients. This article is for general information purposes and is not intended to be and should not be taken
as legal advice.
Walter J. Andrews
Lon A. Berk
Lawrence J. Bracken, II
John C. Eichman
Robert J. Morrow
Syed S. Ahmad
Michael S. Levine
Sergio F. Oehninger
William T. Um
Patrick M. McDermott