Coverage for business interruption caused by COVID-19 continues to be the hot-topic in the current insurance market – both in Australia and around the world. There have been a number of developments over the course of the last two years in relation to claims of this kind as a series of test cases are explored before the Courts.
What are the key issues?
As described in last year’s edition, claims of this kind depend on particular non-damage extensions to the traditional coverage provided by ISR policies (ie coverage for physical damage and resulting business interruption). In relation to any such claim there are fundamentally three key issues when considering cover for a COVID-19 business interruption claim:
- Trigger Issue: Have the specific requirements of the relevant
‘non-damage’ extension been met?
- Exclusion Issue: Do any exclusions apply?
- Causation Issue: Can the insured prove that the relevant trigger caused its loss? In particular, to what extent do the broader effects of the pandemic,
or government actions to supress the pandemic, need to be taken into account? Did the insured trigger cause the loss, or were there broader reasons?
What are some common non-damage extensions?
The non-damage extensions come in a range of forms, but the most common extensions can be broadly grouped into:
- Disease Extensions which provide cover for business interruption caused by an outbreak of a disease occurring at or within a stated distance of the property.
- Prevention of Access Extensions which provide cover for business interruption caused by the action of a government body which (variously depending on the clause) closes or evacuates a property or restricts, hinders, or prevents access to the property.
- Hybrid Extensions which provide cover for business interruption caused by such a government action in response to such a disease.
- Catastrophe Extensions which provide cover for loss caused by a government body acting to prevent or retard a ‘conflagration or other catastrophe’.
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What test cases, relevant to Australia, have occurred?
Over the past few years, there have been several test cases (both nationally and internationally) which have explored various aspects of these extensions. For Australia, the most important of these are:
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UK FCA Test Cases |
In an action brought by the UK Financial Conduct Authority (the relevant Complete, no further appeals regulator in the UK), the UK High and Supreme Courts considered whether a representative range of non-damage extensions were triggered. The case also decided a key causation issue – where a loss is concurrently caused by the insured event (eg the occurrence of the disease within the stated area) and an uninsured event (eg the occurrence of the disease outside of that area or the authorities’ response) and those events are caused by the same underlying event (the pandemic) the insured’s claim is not reduced to reflect that the uninsured event would have caused it loss anyway. Our summary of this decision is available here. |
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First ICA Test Case |
This was the first test case proposed and funded by the Insurance Complete, no further appeals Council of Australia. Many Australian policies contained outdated exclusions clauses which excluded quarantinable diseases under the ‘Quarantine Act 1908 and subsequent amendments’. However, the Quarantine Act was repealed in 2015 and the Biosecurity Act was introduced (which lists COVID-19 as a ‘listed human disease’). In a 5-0 decision the NSW Court of Appeal held that references to the Quarantine Act could not be read as references to the Biosecurity Act, with the effect that the exclusion did not apply. The High Court refused special leave to appeal. Our summary of this decision is available here. |
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Star Casino Case |
This independent claim brought by the Star Casino tested a ‘Catastrophe Extension’ and was decided in August 2021. The Chief Justice of the Federal Court held that in the context of the policy ‘loss’ required there to be ‘physical loss’ and that the term ‘other catastrophe’ was a reference to events capable to cause physical loss or destruction to property. This decision is under appeal. Our summary of this decision is available here. |
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Second ICA Test Case |
This was the second test case proposed and funded by the Insurance Appeals from both these Council of Australia and consisted of 10 separate cases considering a decisions were heard together range of issues, circumstances and wordings, all selected by the by the Full Federal Court in insurance industry. In the Federal Court, 9 out of 10 of the cases were November 2021 with a decision won by insurers. However, this was essentially due to 2 key findings: anticipated in early 2022.
finding, the Court found that there would have been cover; and
The case also decided a range of additional issues, many of which were decided in favour of policyholders. Although this matter is currently being appealed (and as such may substantially change) there remains the possibility of successful policyholder claims despite the seeming success of insurers in this matter. Our summary of this decision is available here. |
What’s next?
The Full Federal Court (3 judges) heard the appeals of the Star City Casino and Second ICA Test case in the week commencing
8 November 2021. Judgment was expected before Christmas but was not so is now expected sometime in early 2022 (and may have been issued by the time of publication of this article).
Whoever loses that second round will inevitably apply to the High Court for special leave to appeal, and it would be a strange result if the High Court did not consider the issues to be of sufficient importance for special leave to be granted. On that basis, we doubt there will be any finality to the COVID-19 business interruption cover issues in Australia until late this year.
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D&O insurance and class actions
Market update
The last few years have seen a significant hardening of the insurance markets, with a particularly pronounced effect on the availability and cost of D&O insurance.
Driven by an increase in claims over the last 3-5 years resulting from shareholder class actions and increased regulatory activity, corporate policyholders have experienced significant increases in premium, reductions in the availability of insurance (leading to reduced limits of liability) and the need to take on more significant deductibles, either at the insistence of the primary insurer, or to make the premiums more economically viable.
Off the back of this trend we have observed that policyholders (particularly those which are ASX-listed) are giving more detailed than usual consideration to the value proposition of their D&O insurance programs, including:
- whether Side C cover (for shareholder class actions against the company) provides value for money given the significant premiums and deductibles (and whether a self-insurance arrangement such as a captive may offer better value);
- whether Side B cover (for the company’s liability to indemnify directors) offers good value if the company has a significant capital base;
- what appropriate limits are for Side A only cover (for the director’s exposure that is not indemnified by the company) given the typical breadth of deeds of indemnity offered to directors.
While a number of commercial insurance brokers have indicated that premiums are stabilising and premium reductions may be viable in the short to medium term as new capital enters the market while premiums are high, we anticipate that policyholders will continue to scrutinise the ongoing value of their D&O program more closely while pricing remains relatively high compared to past experience.
One development which may assist with class action risk and therefore D&O pricing is legislative reform. Over recent years, various bodies have explored the class action landscape and the potential for change, notably the Australian Law Reform Commission (2017-2019) and the Parliamentary Joint Committee on Corporations and Financial Services (2020).
This culminated in the introduction of the Corporations Amendment (Improving Outcomes for Litigation Funding Participants) Bill 2021, introduced into the House of Representatives for the first time on
27 October 2021. The overarching purpose of the bill is to “ensure class
members are better protected and to ensure returns to litigation funders out of claim proceeds are ‘fair and reasonable’”. The bill seeks to achieve this purpose through:
- introducing a new type of managed investment scheme specific to the funding of class action litigation; and
- additional regulation and Court involvement in the distribution of any return to scheme members and the funder, including a rebuttable presumption that a funder distribution will not be fair and reasonable if it exceeds 30% of the claim proceeds.
At the time of publication, the Bill has passed through the House of Representatives and is before the Senate. Time will tell what impact any legislation has on the underlying class action risk to policyholders, and in turn the D&O market.
In addition, two decisions of relevance to D&O insurance in the context of class actions were also handed down in the past year. While the second case did not arise in a class action context, allocation issues frequently arise in that context, and there is relatively limited jurisprudence on the application of allocation clauses.
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Don’t cry over spilt milk (Murray Goulburn Co-Operative Co Ltd v AIG Australia Ltd (2021) 389 ALR 453)
Facts
Murray Goulburn Co-operative Limited (MGCL) (then Australia’s largest dairy foods company) raised funds from external investors through a newly created Murray Goulburn Unit Trust (MGUT), for which MG Responsible Entity Limited (MGRE), a subsidiary of MGCL, was the trustee. Units could be acquired in the Trust off-market prior to listing, and on-market after it was listed on the ASX on 3 July 2015.
AIG Australia Limited issued a D&O insurance policy with Side C cover (entity securities coverage) for MGCL with a retrospective date of 3 July 2015 (the Trust listing date).
Two class actions were commenced by Endeavour River Pty Ltd and Webster, with each alleging misrepresentations and
non-disclosure of material information in the Product Disclosure Statement (PDS) and subsequent ASX announcements in 2015 and 2017. On 24 June 2019, the Endeavour River class action settled for $42 million and on 1 November 2019, the Webster class action settled for $37.5 million, with no admission of liability in either proceeding.
AIG denied cover on the basis that:
- the class actions were not Securities Claims because the units in MGUT were not Securities (being “any security
representing a debt of or equity interest in any Insured Entity”); and
- if they were Securities Claims, they were excluded by:
- two professional services exclusions – on the basis it was asserted that the claims arose from professional services provided by MGRE; and/or
- an exclusion for any matter arising out of an offer made in a PDS.
Decision
The Federal Court rejected all the arguments raised by AIG.
First, the Federal Court held that the units in the MGUT were equity interests in the unit trust on the ordinary meaning of the relevant words. The policy provided that a “Trust” fell within the definition of “Insured Entity”, so the class action claims fell
within the meaning of “Securities Claim” under the policy.
The Court had regard to correspondence between the insurer and the policyholder’s broker in relation to, amongst other things, backdating the policy to the date of listing and increasing the premium to reflect the introduction of cover for “Securities Claims” under the policy. This was relevant evidence of surrounding circumstances which provided context for the construction of the policy and assisted to resolve any ambiguity as to the meaning of “Securities Claim”. The Court specifically rejected the insurer’s reliance on its underwriter’s subjective understanding of various policy terms.
Secondly, the professional services exclusions did not apply because the services provided by MGRE were not professional in nature (or, at least, the insurer had failed to identify the relevant profession) and were not provided to a “third party” – at best, MGRE was providing services to MGCL, also an insured under the D&O policy.
Finally, claims in the class actions for units acquired pursuant to the PDS pre-listing were excluded from the policy (which was accepted by the policyholder). The question was whether claims in respect of units acquired after the date of listing were acquired pursuant to the PDS.
The Court held that the exclusions did not apply to the subset of class action claims where the relevant acquisition of units occurred in the secondary market after the date of listing (being the date from which D&O policy cover incepted). The objective intention and effect of the exclusions was to exclude only the claims of people who purchased their units ‘off-market’ pursuant to the offer in the PDS.
Supporting this conclusion was the mutually known commercial context for the purchase of the D&O policy, including that it was procured to insure against loss arising from trading the units on the ASX, and that it was procured as part of a ‘back to back’ insurance program (with a public offering of securities insurance policy).
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Casey v AIG Australia Limited
[2021] FCA 553
Facts
Community Work Pty Ltd (in liquidation) was a charity which provided out-of-home care services to at risk indigenous youths. The bulk of those services were provided by a sub-contractor, Alpha Support Services. The agreement with Alpha required Community Work to transfer all its
after-expense funds to Alpha, meaning that substantial payments were made to Alpha over a series of years.
The policyholders were directors of both Community Work and Alpha. The liquidators of Community Work alleged that by entering the Alpha sub-contract and approving the payments the policyholders breached:
- their duty of care owed to Community Work; and
- their fiduciary duties to not act in a position of conflict or potential conflict and not to profit.
The policyholders brought a claim under Community Work’s Management Liability Policy, including for their defence costs.
The insurer admitted liability for defence costs for the duty of care allegation, but argued that the breaches of fiduciary duties were not covered because they related to actions done for the directors’ own benefit and for the benefit of Alpha, not Community Work, and the definition of ‘manager’ in the policy applied ‘only when and to the extent that [the] Manager is acting for and on behalf of’ Community Work. On this basis, insurers argued that the allocation clause applied to make the policyholders responsible for 30% of the costs.
Decision
The Federal Court rejected the insurer’s argument as giving an ‘overly refined interpretation of the definition of manager’. Rather, the policy required ‘one to ask whether the director was acting for and on behalf of the company as a director in the acts he or she was doing’.
The allegations of breach of fiduciary duty depended upon the policyholders acting in their capacity as directors of Community Work. Therefore, to the extent that the policyholders caused loss to the company acting in their capacity as directors, the policy prima facie responded.
The Court went on to note that defence costs could be withheld if (but only after) it was proven the policyholders engaged in impropriety, dishonesty or fraud. However, fiduciary duties can be breached without any allegation of impropriety or personal criticism. The underlying proceedings in this case did not allege any impropriety, dishonesty or fraud and therefore
cover attached.
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Rectification a patchy solution
Quintis Ltd v Certain Underwriters at Lloyd’s London (2021) 385 ALR 639; Quintis Ltd v Certain Underwriters at Lloyd’s London (no 2) (2021) 150 ACSR 639
Facts
The policyholder was a sandalwood plantation investment company the subject of two shareholder class actions. Although subject to a Deed of Company Arrangement, the policyholder had in place Investment Managers Insurance policies which would respond to the class actions through their Side C “securities claim” coverage.
The policies relevantly included:
- a $10m primary policy held with 3 insurers;
- a $20m first excess layer policy held with 3 insurers; and
- a $20m second excess layer policy held with 7 insurers.
The Side C coverage was however stated to be sub-limited at $10 million. The policyholder alleged, and it was not in dispute, that it had intended to obtain
$50 million in Side C coverage. The policyholder therefore argued that either by construction or rectification of the policies
$50 million in Side C coverage applied.
Decision
The Federal Court succinctly rejected the construction argument finding that the policies were unambiguously subject to a
$10 million sub-limit. However, in relation to the rectification argument, the Court undertook a detailed factual analysis of the evidence to determine whether each of
the parties had a common intention that a
$50 million limit applied.
Importantly, the Court held that each insurer’s interest in each layer was a separate contract of insurance. This meant that for each contract a common intention only needed to be found between the policyholder (and its brokers) and the relevant insurer.
For the most part, the Court found the insurers either did not have the relevant common intention or that there was not sufficient evidence of the common intention. However, two insurers — one of the first excess insurers and one of the second excess insurers — had been sent a pair of emails which together made clear
that the aim of Quintis’ renewal was to have up to $50 million of Side C cover.
For these insurers, the Court concluded that a common intention could be inferred
- this was despite there never being an ‘express statement’ between the parties as to the precise nature of the Side C cover to be provided.
As such, the Court ordered rectification of only the contracts with those two insurers
- ie effectively holding that those insurers would be liable for their contracted exposure to $50m, but other insurers would not. The rectification was ordered by way of a follow up decision in which the Court rejected insurers’ submissions that such an order was beyond the limits of equity and would result in a ‘patchwork tower’ that no party intended.
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Drinks (and insurance) are on me
MOS Beverages Pty Ltd v Insurance Australia Ltd (t/as CGU Insurance) [2020] FCA 1716
Facts
MOS Beverages was an importer of beverages. It would store its goods from time to time and in varying quantities at a warehouse operated by Admiral International Pty Ltd. A fire at the warehouse destroyed MOS Beverages’ goods.
MOS Beverages had not insured the goods, but Admiral had an Industrial Special Risks policy which contained the following ‘Interests of other parties’ clause:
The insurable interests of only those lessors, financiers, trustees, mortgagees, owners and all other parties specifically noted in the records of the Insured shall be automatically included without notification or specification; the nature and extent of such interest to be disclosed in the event of damage.
The policy also contained a ‘SALESXB4’ clause which provided that the policy ‘extends to insure goods belonging to the Insured’s customers at the Premises, to the extent that such goods are not otherwise insured.’
MOS Beverages therefore sought to bring a claim under Admiral’s policy as a
third-party beneficiary (pursuant to s 48 of the Insurance Contracts Act 1984 (Cth)).
Decision
Both the Federal Court and the Full Federal Court (in a 2-1 decision) found in favour of MOS Beverages, declaring that it was entitled to indemnity by reason of the ‘Interests of other parties’ clause.
The insurer argued that ‘lessors, financiers, trustees, mortgagees, owners’ should be limited to parties where there was a mutuality of interest between the insured and party – for example a mortgagee with an interest in the property insured.
However, the Court accepted that MOS Beverages, as a customer storing goods at a
warehouse, was an ‘owner’. As a customer, MOS Beverages was not on the peripheral or near the outer boundaries of the scope of the clause. Rather, such customers were at the core of Admiral’s business.
The insurer also argued that Admiral’s records needed to ‘specifically note’ the interest of the Insured by reference to the policy. The records relied on by MOS Beverages consisted of correspondence, a sublease and invoices but not a specific register of interests to which the policy would apply. However, the Court concluded that the documents established that MOS Beverages was a customer who, from time to time, and in variable amounts, kept goods at Admiral’s warehouse. A specific register was not required by the policy.
The ‘SALESXB4’ clause provided a basis for Admiral to recover the full value of its customers’ goods, whereas the ‘Interest of other parties’ clause enabled the customers to claim directly.
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Diamonds aren’t forever
Diamond World Jewellers Pty Ltd v Catlin Australia Pty Ltd [2021] NSWSC 1431
Facts
The policyholder’s jewellery store was robbed. In addition to the stolen jewellery, some jewellery was damaged by smashed glass. The policyholder had all of the jewellery in smashed cases melted down to be remade. The policyholder was insured for its stock of jewellery and brought a claim for its loss in relation to both the stolen jewellery and the melted down jewellery.
The insurer approached the claim with scepticism because the insurer considered that the policyholder did not have ‘proper records’ clearly showing its stock and did not have proof that all of the melted down jewellery was damaged. In this respect, at trial, the policyholder conceded that
30-40% of the melted down jewellery had not been damaged.
The insurer ultimately became satisfied that some of the stolen jewellery claim had been substantiated but:
- on the basis of clauses which required the policyholder to have sufficient records to substantiate a claim, argued that an obligation to keep ‘proper records’ was a condition precedent to the insurer’s liability and required better quality records to be kept;
- refused to update its assessment of the claim after the expert reports it relied on were demonstrated by the policyholder’s records to be erroneous;
- refused to pay to the insured the amount it considered had been substantiated; and
- failed to explain to the policyholder the basis for its assessment of the claim and the material taken into account.
Decision
The Supreme Court of NSW concluded that the insurer could not insist on a better quality of records than the policyholder had and that, on the basis of the records the policyholder did have, the claim for the stolen goods had been substantiated. The
claim for the melted goods had not been substantiated, as the insured had failed to substantiate which items had been damaged (or their particular values).
Both the insurer and the policyholder had breached their duty of utmost good faith:
- the policyholder for continuing with a claim for the melted goods, despite not all the goods having been damaged by the robbery; and
- the insurer for the way it handled the assessment of the claim (in particular failing to disclose what it took into account in arriving at its assessment), and for failing to pay that part of the claim it determined had been substantiated.
However, the Court rejected the insurer’s argument that the policyholder’s breach of the duty of utmost good faith entitled it to refuse to pay the claim. The Court therefore made an award in favour of the policyholder.
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Notification laid bare
P & S Kauter Investments Pty Ltd v Arch Underwriting at Lloyds Ltd [2021] NSWCA 136 and Darshn v Avant Insurance Ltd [2021] FCA 706
In claims made and notified policies, coverage is triggered once an insured notifies an insurer of a potential claim against it. In doing so, the policyholder risks the notification impacting subsequent renewals of their policy. Policyholders may be tempted to downplay the risks in disclosing relevant facts prior to renewal. However, two recent cases highlight the dangers for policyholders of being less than candid in their disclosures.
P & S Kauter Investments Pty Ltd v Arch Underwriting at Lloyds Ltd [2021] NSWCA 136
Between 2006 and 2009, a financial planner advised clients on a number of investments which he put through a company in which he was the sole director and shareholder. Some of the money invested was mishandled, and no payments of interest, principal, dividends
or distributions were ever made to the clients. In 2014, the clients sued the financial planner’s professional indemnity insurers directly.
The financial planner was potentially covered under two insurance policies – one which was current in 2013 and the other current in 2014. Prior to renewal for the 2014 policy, the financial planner made a disclosure to the following effect:
- a small number of clients had invested/ lent funds to property investments and/ or companies that had to date been unable to repay those funds in total.
- At the time of the investment all appropriate disclosures were made and clients invested/lent funds with full knowledge of the circumstances at
the time.
- At the time of notification, no loss had crystallised and no claim or complaint had been formally lodged.
- There was a chance of a claim against the company in relation to any loss that may be incurred.
Decision
The first instance Court held, and the Court of Appeal recently confirmed, that the disclosure given was “no more than bare possibilities” and was insufficient to amount to a notification of “facts that might give rise to a claim” which would have triggered cover under the 2013 policy.
Further, the statements made in the context of renewal were misleading and constituted a fraudulent misrepresentation of the facts, given the financial planner’s knowledge of what had really happened, meaning there was no cover under the 2014 policy either.
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Darshn v Avant Insurance Ltd
[2021] FCA 706
The second case concerned a cosmetic surgeon who performed certain surgeries at The Cosmetic Institute Pty Ltd’s (TCI) premises. The surgeon held ”claims made and notified” policies with Avant from September 2011 to June 2019, and with MIGA from July 2019 to June 2021.
In 2017, a class action had been commenced against TCI for any surgeries which took place in its premises. The surgeon was joined to those class action proceedings in June 2020. The surgeon initially made a claim against MIGA for coverage of legal costs and any liability. MIGA, however, denied the claim on the basis of various exclusions in the policy so the surgeon sought to claim cover under the prior policies he had held with Avant.
Avant refused his claim on the grounds that no “claim” had been made against him during his period of cover, ie September 2011 to June 2019 (as the surgeon was not joined to proceedings until 2020).
While he had been covered by Avant, the surgeon had made various notifications in relation to individual claims brought by individual patients, some of whom later fell within the represented class of the class action.
Decision
The Court held that the notification of an individual claim by a patient who fell within the class of patients the subject of the class action, did not constitute sufficient notice of the class action, as it only referred to the individual’s standalone claim. However, by early 2019, the surgeon’s lawyers
(defending the individual’s claim) were writing to the insurer pointing out that the surgeon might be joined to the class action, and this was considered sufficient notification of facts giving rise to a claim. Avant was therefore liable to indemnify the surgeon in respect of the class action.
The surgeon had also sought advice from the insurer in relation to a subpoena served on him in the class action proceedings prior to being joined himself. The surgeon did not provide Avant with a copy of the subpoena, which the Court found would have constituted valid notice of facts giving rise to a claim. In failing to advise the surgeon of what was required to be able to rely on s.40(3) of the Insurance Contracts Act, the Court found that Avant breached its duty of utmost good faith.
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Insurer confirmed to have waived its rights goodbye
Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2021] FCAFC 121
Facts
In 2014, Delor Vue Apartments became aware of a range of defects in the roof of its apartment complex. In 2017, while the defects had still not been repaired, a new property damage and public liability policy was taken out. The roofing defects and repair works being conducted were not disclosed.
Five days after the policy was entered into, Cyclone Debbie caused significant damage to the apartment complex including its roof. The pre-existing defects quickly became apparent to the insurer in adjusting the claim, but nevertheless the insurer informed the policyholder by email that ‘despite the non–disclosure issue’ the policy would still be honoured. Ultimately, the parties could not reach agreement on the measure of indemnity, culminating in the insurer making a ‘take-it-or-leave-it’ settlement offer and threatening to decline the claim entirely if the offer was not accepted.
Decision
At first instance, the Court held that the policyholder had breached its duty of disclosure and that the insurer would have otherwise been entitled to reduce its liability to nil. However, the policyholder’s claim succeeded because of the express confirmation in the email that the insurance policy was to be honoured despite the insurer being aware of non-disclosure issues. The Court also held that the insurer had breached its statutory duty to act with utmost good faith by making a ‘take-it–or- leave-it’ deal.
On Appeal to the Full Federal Court, the Court engaged in a detailed analysis on the doctrines of election, estoppel and waiver, each of which applied. The doctrine of election applies where a party is required by law to make a binding choice. This means that the doctrine would not ordinarily apply where the insurer is investigating the claim and is yet to uncover relevant facts.
However, it was held to apply here, where the insurer knew it had the right to refuse
indemnity for non-disclosure and chose not to exercise that right.
In relation to estoppel, the Court held it was not necessary to play out a counterfactual of what would have occurred had the insurer denied the claim from the beginning to establish reliance by, and detriment to, the policyholder. Instead, reliance may be established by reference to the representation and conduct of the insurer and evidence of what actually occurred.
The longer the state of affairs induced by the insurer’s representation went on, the more likely it was that there would be detriment because of the length of time the matter was in the hands of the insurer rather than the policyholder.
The Court also upheld the first instance decision that the insurer had breached its duty of utmost good faith. In doing so, the Court rejected an argument that there could not be a breach of the duty of good faith in
circumstances where the insurer would have ultimately succeeded on the legal issue they sought to rely on.
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Cyber Update
The Australian Cyber Security Centre’s annual Cyber Threat Report for the 2020-21 financial year found that the ACSC received a 13 per cent increase in cybercrime reports from the previous year (up to 67,500). This is consistent with general industry experience of an increase in cybercrime and consequential hardening of the insurance market for cyber risks. Despite this, litigated cyber insurance claims are still
rare in Australia with the United States continuing to be the main location for such claims. What follows is a round-up of significant claims.
Ransomware: G&G Oil Co of Indiana v Continental Western Insurance
The policyholder paid a ransom following a ransomware attack and sought to recover on a Commercial Crime Coverage policy. The policy covered loss ‘resulting directly from the use of any computer to fraudulently cause a transfer’. At trial and on appeal the Court had granted summary judgment to the insurer on the basis that the ransomware was not fraudulent in that there had not been perversion of the truth or deception.
On appeal to the Indiana Supreme Court, the Court concluded that ‘fraudulent’ simply meant ‘to obtain by trick’. There was not yet sufficient evidence to conclude whether the ransomware had involved a trick and as such summary judgment was not yet appropriate. The Court further held that despite being a ‘voluntary’ payment of the ransom, it was done under duress and therefore resulted ‘directly’ from the use of the ransomware.
This is topical in the Australian context.
A report by the Cyber Security Cooperative Research Centre has recently argued that insurance covering ransomware should be banned as it risks breeding complacency and may lead to organisations becoming lax about cyber security. The Australian
Government has also released a Ransomware Action Plan which proposes a number of operational and legislative reforms to more effectively respond to ransomware attacks.
Social Engineering Fraud: Star Title and Mississippi
A common type of cybercrime continues to be email scams where fraudsters impersonate suppliers to direct legitimate invoice payments to compromised bank accounts. But these sorts of ‘cyber’ claims are generally not covered by cyber policies.
In Star Title Partners of Palm Harbour v Illinois Union Insurance, a settlement agent was tricked into transferring a mortgagee’s share of settlement proceeds to a different bank account. The agent had express coverage for social engineering fraud, but its coverage was subject to two requirements:
- first, that the perpetrator was purporting to be an employee, customer, client or vendor – none of which described a mortgagee; and
- second, that the transfer be verified in accordance with the agent’s internal procedures – the agent’s procedures required verbal confirmation of the account details, which had not occurred.
As such, the Court granted summary judgment to the insurer demonstrating the importance of obtaining broadly worded coverage and following internal processes to minimise risks.
In Mississippi Silicon Holdings v Axis Insurance, the Court of Appeals for the Fifth Circuit affirmed a decision we reported in last year’s Policyholder Highlights. In this case a CFO was tricked into changing a vendor’s payment details and paying over $1 million to the false account. The policyholder’s policy provided $100,000 in coverage for Social Engineering Fraud. However, the
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policyholder sought to claim the full
$1 million under separate Computer Transfer Fraud Coverage which provided cover for computer fraud which causes the transfer of funds without the insured’s knowledge or consent.
The Court held that the mere receipt of an email is not computer fraud. Although access was gained to the company’s email system, the fraudsters did not manipulate the computer system to make it act upon electronic data. It was therefore not computer fraud. The Court also held that, although the policyholder did not know of the fraud, it knew of the transfer, and therefore the clause did not apply.
Stolen Data: Target Corporation v ACE American Insurance Company
In 2013, Target’s computer system was breached and the details of payment card data and personal contact information of its customers was stolen. The banks who issued the cards had to cancel and re-issue them to customers. The banks then sought to recover this cost from Target, which claims Target settled. Target sought to make a claim under two commercial general liability policies which provided cover for property damage, defined as ‘loss of use of tangible property’.
The Court gave summary judgment to the insurer on the basis that the claim had to be based on the loss of use of the cards. There was no evidence before the Court as to the value of the use of the cards. As such there was no evidence that the settlement sums related to the value of the use of those cards. Coverage was therefore not established.
LMA5400 – Cyber Endorsement
This year in response to the UK regulator's demand to avoid ‘silent cyber’ issues (whether an ISR policy covered losses arising from ‘damage’ to data from a cyber
attack), insurers have been required to state whether such damage is covered or not under ISR policies.
This typically resulted in insurers requiring the inclusion of a London Market Association endorsement known as LMA5400, which is very broad and arguably goes beyond what it is intended to exclude. It reads (in part):
1. Notwithstanding any provision to the contrary within this Policy or any endorsement thereto this Policy excludes any:
…
1.2 loss, damage, liability, claim, cost, expense of whatsoever nature directly or indirectly caused by, contributed to by, resulting from, arising out of or in connection with any loss of use, reduction in functionality, repair, replacement, restoration or reproduction of any Data, including any amount pertaining to the value of such Data...
The problem with the clause is that it potentially excludes all claims where data is lost – and data loss is a common occurrence in almost every claim. Even a typical fire claim will destroy the computers in the building and on a strict reading of this endorsement insurers might (wrongly) argue that the BI loss is excluded as a loss indirectly caused by a loss of use of Data, which surely is not what is intended. We encourage policyholders to ask their brokers to negotiate a revised version of this endorsement rather than accepting it blindly. Even if the process results in assurances that it is not intended to be applied to data loss arising from physical damage, that is better than nothing to rely upon at all.
18 POLICYHOLDER INSURANCE HIGHLIGHTS 2021 HERBERT SMITH FREEHILLS
Band 1 Chambers Asia Pacific
We would like to thank our clients and friends in the industry for their feedback to the industry benchmarking guide “Chambers and Partners” which has ranked our policyholder team as “Band 1” (the top ranking in their guide). Chambers had this to say about our team:
Herbert Smith Freehills offers a comprehensive insurance service, including representation in high-profile disputes as well as advice on regulatory compliance and risk management. Acts predominantly for corporate policyholders on claims across a number of industries, including the financial services, construction and resources sectors. Also provides risk advice relating to transactional insurance issues and the transfer of insurance assets. Abstains from
pursuing a contentious insurer defence practice, so as to provide policyholders with a conflict-free service against insurers, and leverages the resources of its global network to advise on insurance issues with cross-jurisdictional aspects, both within and beyond the Asia-Pacific region.
Mark Darwin offers over three decades' experience in the contentious insurance space, being particularly well known for his representation of policyholders making business interruption and other claims upon their insurers. Identified as "one of the best policyholder lawyers in the market" by more than one practice area commentator, he is praised by a client, not only for his "deep knowledge and ability to distil complex coverage issues into plain English," but also
for his development of "robust and defendable coverage arguments which can generally be leveraged by insureds to secure an equitable commercial settlement."
Guy Narburgh acts extensively for policyholders on contentious, advisory and transactional mandates, being particularly well known for his knowledge of D&O liability issues. Characterised by a market source as a "really terrific and very clever lawyer whom I rate highly," he is singled out by a client for combining "great knowledge and understanding of the insured’s insurance position" with "appreciation of the commercial realities of ongoing relationships."
