HOT TOPICS IN INSURANCE COVERAGE

HOT TOPICS IN INSURANCE COVERAGE Cassandra S. Franklin Dickstein Shapiro LLP Los Angeles, CA Susan A. Stone Sidley Austin LLP Chicago, IL Lorelie S. Masters Jenner & Block LLP Washington, DC Andrea B. Tecce Navigant Consulting, Inc. Washington, DC Mary Kay Vyskocil Simpson Thacher & Bartlett LLP New York, NY

Coverage Issues in Climate Change Litigation Susan A. Stone Sidley Austin LLP - Chicago, IL

BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C. CLIMATE CHANGE LITIGATION COVERAGE ISSUES THE DISPUTE HEATS UP SUSAN A. STONE PARTNER

Overview of Climate Change Litigation Potential defendants Government agencies Private entities producing greenhouse gases Theories of legal liability Suits involving government agencies o Regulatory suits o Violation of the statutory duty to consider environmental impacts Suits against private companies o Nuisance claims based on harmful effects of greenhouse gases o Breach of statutory/fiduciary duty by corporate officers and directors o Private class actions alleging health problems or property damage

American Electric Power Co. v. Connecticut, 131 S. Ct. 2527 (2011) Several states brought suit against power companies under federal common law public nuisance and state tort law claims The U.S. Supreme Court considered whether the states and private citizens can seek redress for climate change under a federal common law nuisance claim In an 8-0 ruling, the Court concluded that the EPA s commencement of rulemaking pursuant to the Clean Air Act displaced the plaintiffs federal common law nuisance claim

Implications of AEP v. Connecticut The holding precludes future plaintiffs from asserting federal common law nuisance claims to limit the greenhouse gas emissions. Because displacement issue in AEP was dispositive, the Court did not address whether the CAA preempts plaintiffs state law nuisance claims. Future plaintiffs in climate change litigation may seek redress for climate change injuries under state law nuisance claims. Climate change litigation will continue.

Key Legal Issues in Climate Change Coverage Litigation Focus is on third-party coverage under CGL policies But could also give rise to D&O insurance claims and first-party insurance claims Key issues to consider for third-party CGL claims: 1. Pollution Exclusions 2. Expected or Intended 3. Number of Occurrences 4. Determination of Trigger

1. Pollution Exclusions The 1973 Pollution Exclusion: No coverage for bodily injury or property damage arising out of the release of irritants, contaminants, or pollutants into the environment, except when the release was sudden and accidental Question whether greenhouse gases would be considered irritants, contaminants, or pollutants The 1986 Absolute Pollution Exclusion No coverage for bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release, or escape of pollutants Ambiguity remains as to whether the exclusion applies only to long-term environmental pollution, or also to emissions contributing to global warming U.S. Supreme Court s Expansive Determination of Pollutants In Massachusetts v. EPA, the U.S. Supreme Court held that greenhouse gases (carbon dioxide) are air pollutants within the meaning of Clean Air Act Not determinative for pollution exclusion purposes

2. Neither Expected Nor Intended Courts adjudicating coverage for global warming claims under an occurrence policy must determine whether global warming fits the definition of an occurrence Meaning of occurrence Post-1973 policies define occurrence as an accident, including continuous or repeated exposure to conditions, which results in bodily injury neither expected nor intended from the standpoint of the insured No coverage if the policyholder expected or intended the accident or occurrence Two questions 1. What is expected or Intended the results or merely the act itself? majority: must intend results like sea level rise, ice pack melt, etc. (coverage expanding) minority: intent to emit greenhouse gases sufficient (coverage reducing) 2. What standard should apply in establishing intent? majority: actual subjective intent must be shown (coverage expanding) minority: objective intent is sufficient (coverage reducing)

3. Number of Occurrences and Trigger Theory What constitutes the occurrence? Each separate omission? The decision to engage in greenhouse gas emission? Similar to debate in asbestos non-products and environmental cases Same dispute over trigger theory as in asbestos/pollution context: Exposure Trigger Manifestation Trigger Injury-In-Fact Continuous or Triple Trigger

AES v. Steadfast, 283 Va. 609 (2012) The first state high court ruling on whether commercial general liability policies cover global warming injuries The underlying complaint and the insurance dispute A village of Kivalina in Alaska brought a suit against 24 oil, energy, and utility companies alleging federal and state nuisance claims. Energy company AES then requested Steadfast to provide insurance coverage. Steadfast sought a ruling on whether its CGL policies provided coverage for global warming property damage claims.

The Court s Analysis in AES v. Steadfast Application of eight corners rule in VA The court took the allegations in the underlying complaint at face value and compared them to the terms of the Steadfast policies. The policies defined an occurrence as an accident, including continuous or repeated exposure to substantially the same general harmful condition. The underlying complaint alleged AES: intentionally released carbon dioxide into the atmosphere intentionally or negligently created a public nuisance The complaint further alleged a scientific consensus that the natural and probable consequences of such emissions is global warming. Court found the gravamen of the complaint was that the damages suffered were the natural and probable consequences of AES s intentional emissions.

The Court s Holding in AES v. Steadfast The Virginia Supreme Court held that Steadfast owed no duty to defend AES because the alleged intentional GHG emissions did not constitute an occurrence under the policy. The disputive issue is not whether the action undertaken by the insured was intended, but rather whether the resulting harm is alleged to have been the natural or probable consequence of the insured s intentional act. The court held that an if a result is the natural and probable consequence of an insured s intentional act, it is not an accident. Therefore, even if the environmental damages were not intended, the damages are not accident or occurrence if they are natural and probable consequences of the greenhouse gas emissions.

Implications and Limitations of AES No CGL coverage if the underlying complaint in climate change litigation alleges the emission was intentional and that the injury was the natural and probable consequence. Limitations The AES court applied VA s eight corners rule Narrow holding limited to one particular policy Narrow holding based on allegations in one particular complaint Uncertainty about the pollution exclusion Because the court did not find an occurrence, the court never addressed whether the pollution exclusion applies to the GHG emissions

What Is On The Horizon More climate change litigation likely Innovative legal theories Attention to insurance coverage implications when drafting complaints Focus on state courts Underwriting response New insurance products (carbon credit insurance, etc.) Disclosure of company s emissions of greenhouse gases at time of policy application Global warming exclusions More climate change coverage litigation

Stringfellow Decision Cassandra S. Franklin Dickstein Shapiro LLP - Los Angeles, CA

State of California v. Continental Insurance Co. What does the California Supreme Court s recent decision add to the existing allocation landscape and what questions does it leave open for further debate? COPYRIGHT 2012. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Existing Allocation Landscape Continuous Injury & All Sums Circumstances: Progressive or continuous injury over course of successive policy periods. California adopted continuous injury trigger of coverage in Montrose Chemical Corp. v. Admiral Insurance Co., 10 Cal. 4 th 465 (1995). California adopted all sums allocation. See Aerojet- General Corp. v. Transport Indemnity Co., 17 Cal. 4 th 38 (1997). Montrose and Aerojet duty to defend cases. 18 COPYRIGHT 2012. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Existing Allocation Landscape Stacking No prior California Supreme Court decisions directly addressing stacking. Some earlier lower courts had held that, under all sums approach, policies on loss could not be stacked. Instead, insured had right to pick and choose year and recover up to policy limits in that year. 19 COPYRIGHT 2012. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

State of California Continuous Trigger & All Sums State of California reaffirmed these principles in the context of indemnity. On Continuous Trigger: The fact that all policies were covering the risk at some point during the property loss is enough to trigger the insurers indemnity obligations. On All Sums: [E]ach insurer is severally liable on its own policy up to its policy limits so long as some of the continuous property damage occurred while its policy was on the loss. 20 COPYRIGHT 2012. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

State of California To Stack or Not to Stack On Stacking: Absent a specific anti-stacking provision, the insured may stack the insurance coverage from different policy periods to form one giant uber-policy with a coverage limit equal to the sum of all purchased insurance policies. 21 COPYRIGHT 2012. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Questions Left Open What types of damage will warrant all-sums-withstacking? Can insurers effectively counter rule in policy language? Can policyholders still pick and choose a particular year of coverage? How will the decision impact allocation between insurers in the equitable contribution context? How will decision impact other jurisdictions? 22 COPYRIGHT 2012. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Data Breach and Privacy Lorelie S. Masters Jenner & Block LLP - Washington, DC

Lorelie S. Masters Jenner & Block LLP 1099 New York Avenue, NW Suite 900 Washington, DC 20001 Tel (202) 639-6076 Fax (202) 661-4924 lmasters@jenner.com www.jenner.com

CGL coverage Issues of property damage Advertising/Personal Injury Coverage Issues of covered offense First-party property insurance Direct physical loss Types of coverage: Business interruption, contingent business interruption, etc. Specialty or cyber tech coverages 25

Pre-2001 standard CGL policies ISO Pre-2001 Definition of property damage : Property damage has historically been defined in standard CGL policies as either: (a) physical injury to tangible property, including all resulting loss of use of that property, or (b) loss of use of tangible property that is not physically injured. (ISO form CG 00 01 01 96). Is there property damage? Defined as physical injury to tangible property Is computer damage a virtual loss or physical injury? Is it tangible? Post-2001 ISO CGL policy language covering technology liabilities 26

Property damage means: a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the occurrence that caused it. 27

2001 definition of property damage : Electronic data is not tangible property. Electronic data is further defined as: [I]nformation, facts, or programs stored as or on, created or used on, or transmitted to or from computer software, including systems and applications software, hard or floppy disks, CD- ROMS, tapes, drives, cells, data processing devices or any other media which are used with electronically controlled equipment. (ISO Form CG 0001 10 01). In 2004, Exclusion p added, stating: p. Electronic Data: Damages arising out of the loss of, loss of use of, damage to, corruption of, inability to access or inability to manipulate electronic data. (ISO Form CG 00 01 12 04). 28

Enforcing coverage Lambrecht & Assocs., Inc. v. State Farm Lloyds, 119 S.W.3d 16, 25-26 (Tex. App. 2003) (CGL): injury to computer server, software and data were physical. Computer Corner v. Fireman s Fund Ins. Co., 46 P. 3d at 1264, 1266 (N.M. Ct. App. 2002) (CGL): Lost data on a hard-drive physically damaged or destroyed. Rejecting coverage Am. Online, Inc. v. St. Paul Mercury Ins. Co., 347 F.3d 89 (4th Cir. 2003): Temporary disordering of data could be reoriented; therefore, tangible hardware not damaged. 29

Enforcing coverage Am. Guar. & Liab. Ins. v. Ingram Micro, Inc., 2000 WL 726789 (D. Ariz. 2000): Destruction of computer circuitry, and loss of access, loss of use, and loss functionality is physical loss. Mental Health Ctr., Inc. v. Pac. Ins. Co., Ltd., 439 F. Supp. 2d 831 (W.D. Tenn. 2006): Corruption of programming info, custom configurations constituted physical loss. NMS Servs. Inc. v. Hartford, 62 F. App x 511 (4th Cir. 2003) (concurrence): Data rearranges atoms or molecules of a disc or tape; injury is physical to effect the formation of a particular order of magnetic impulses, and a meaningful sequence of magnetic impulses cannot float in space. AOL dissent agreed with NMS. 347 F.3d at 102 (Traxler, J.). Rejecting coverage Ward Gen. Ins. Serv., Inc. v. Employers Fire Ins. Co., 7 Cal. Rptr. 3d 844 (2003): Loss of information in a database not a direct physical loss. 30

Case law classifying electronic data as intangible, rather than tangible, property in the context of insurance coverage migrated to other areas of the law. For instance, in Ferrington v. McAfee, Inc., 2010 WL 3910169 (N.D. Cal. Oct. 5, 2010), the court held that the plaintiffs could not maintain a claim under the Consumers Legal Remedies Act ( CLRA ), which requires, inter alia, the sale or lease of goods. In concluding that software was not encompassed by the CLRA s definition of a good, the court noted Ward General court s approval of the concept that computer data, software and systems were not considered physical or tangible. Id. at *8. 31

Enforcing coverage Retail Sys., Inc. v. CNA Ins. Co., 469 N.W.2d 737 (Minn. Ct. App. 1991) (CGL): Computer tape and electronic information were tangible property. Rejecting coverage State Auto. Prop. & Cas. Ins. Co. v. Midwest Computers & More, 147 F. Supp. 2d 1113 (W.D. Okla. 2001) (E&O): Computer is tangible ; data on computer disk is not. Compaq Computer Corp. v. St. Paul Fire & Marine Ins. Co., 2003 WL 22039551 (Minn. Ct. App. Sept. 2, 2003): Data not tangible property, even if sent by fax machine, telephone, computer, etc. Eyeblaster, Inc. v. Fed. Ins. Co., 613 F.3d 797 (8th Cir. 2010) (CGL): Software, data or other information that [was] in electronic form not tangible. However, court found coverage for loss of use of a computer ( tangible property ) due to data corruption. Relied on AOL and State Auto. 32

Enforcing coverage Cincinnati Ins. Co. v. Professional Data Servs., Inc., 2003 WL 22102138 (D. Kan. July 18, 2003): Relied on both AOL and Midwest Computers finding that allegations of loss of use of software and corruption of data therein, without loss of use of hardware, did not assert a claim resulting from injury to, or loss of use of tangible property. Neither software nor data had physical substance or were perceptible to the senses. Eyeblaster, where the court, relying on AOL and Midwest Computers found coverage for loss of use of computer ( tangible property ) due to data corruption. See Ingram Micro (first party), where the court noted the loss of use and functionality of the policyholder s computer systems. See Wakefern (first party), where the court concluded physical damage could include temporary loss of use. Consider lost data : E.g., Computer Corner (loss of use would have been covered). 33

Coverage is triggered by an offense during the policy period. Definition of advertising and personal injury coverage includes oral or written publication of material that defames or disparages another or violates a person s right of privacy. 34

AOL, 347 F.3d 89 (4th Cir. 2003), aff g America Online, Inc. v. St. Paul Mercury Ins. Co., 207 F. Supp. 2d 459 (E.D. Va. 2002): No duty to defend because [t]he insurance policy in this case covers liability for physical damage to tangible property, not damage to data, software, i.e., the abstract ideas, logic, instructions, and information. Decided on summary judgment below; on de novo review, court pointed to obvious factual findings requiring deference to court below. 35

Burden is on the insurer to demonstrate that the exclusion applies. Some courts have used exclusions to deny coverage without deciding whether the data was tangible property. E.g., Magnetic Data, Inc. v. St. Paul Fire & Marine Ins. Co., 442 N.W.2d 153, 156 (Minn. 1989): Control of property exclusion precluded coverage because property damaged at policyholder s premises. 36

Network Security Liability Privacy Liability Data Loss Liability Coverage 37

Media Liability Coverage Part: Covers third-party (liability arising out of website publishing activities. The broader policies cover all electronic publishing (such as email) and the best policies will extend coverage to cover incidental off-line publishing activities (such as books). Network Security Liability Coverage Part: Covers third-party liability arising out of virus transmission, unauthorized access, unauthorized use, and other computer attacks. The better products provide network wide protection and include coverage for intentional and accidental acts of third parties and employees. Electronic Asset Protection Coverage Part: Covers first-party property loss from damage to data or software from viruses, unauthorized access, unauthorized use, or denial of service attacks. The better products provide network wide protection and include coverage for acts of third parties and employees committed with or without malicious intent. Electronic Business Interruption Coverage Part: Covers first-party business interruption loss from viruses, unauthorized access, unauthorized use, extortion, and denial of service attacks. Good policies cover and others will extend coverage to all network dependent revenue (not just ecommerce sales). Again, the better products include coverage for acts of third parties and employees committed with or without malicious intent. Review the retention options carefully. Electronic Crime Coverage Part Computer Crime covers electronic theft of money, securities, and cyber property. Some insurers offer coverage only for theft directly through the Web site while others extend the coverage for the entire computer network as well as computer networks of service provides (such as banks). Extortion Coverage Part Extortion coverage includes investigation expenses, negotiation expenses; extortion payments, and business interruption arising out of a threat to commit computer theft, damage electronic data, or disclose private information. 38

Lorelie S. Masters Jenner & Block LLP 1099 New York Avenue, NW Suite 900 Washington, DC 20001 Tel (202) 639-6076 Fax (202) 661-4924 lmasters@jenner.com www.jenner.com

Hydro-Fracking Liability Coverage Andrea B. Tecce Navigant Consulting, Inc. - Washington, DC

Hydraulic Fracturing Andrea Tecce 202-973-4532 atecce@navigant.com D I S P U T E S & I N V E S T I G A T I O N S E C O N O M I C S F I N A N C I A L A D V I S O R Y M A N A G E M E N T C O N S U L T I N G

Overview 1. Hydraulic Fracturing Process 2. Fracturing Overview 3. US Market and Companies Involved 4. Alleged Liabilities 5. Insurance Issues and Questions

Hydraulic Fracturing Process Page 43

Fracturing Overview 1. Hydraulic Fracturing has been used for over 60 years 2. Large scale gas production using horizontal drilling began in the late 1980 s and 1990 s as the technique became more cost effective. 3. Increase in demand for gas caused more complex fracking operations near residential areas leading to greater scrutiny. 4. Several fracking related lawsuits have been filed against well operators and drillers alleging groundwater contamination. Issues similar to those raised in the toxic tort litigation of the 1990's. 5. Causation debate continues.

How Big is the US Market? Page 45

Who is Involved?

Alleged Liabilities 1. Environmental Contamination Most lawsuits involve allegations of groundwater contamination Fracking fluid escapes well casing or cement failure Migration of fracking fluid into groundwater aquifer Leaking or runoff of stored fracking fluid 2. Other Areas of Concern Earthquakes Subsurface Trespass Claims Ground Subsidence or Sinkhole Claims Health Hazards to Workers Air Pollution Excess Noise Statutory or CERCLA claims Page 47

Insurance Issues and Questions 1. GL Policies Sudden & Accidental and Expected and Intended exclusions Fracking Fluid: product or pollutant Occurrence Definition Energy Pollution Liability Extension Endorsement 2. First Party Coverage Business interruption: Loss of use due to contamination Direct physical loss of or damage to insured property Collapse Coverage 3. Specialty Coverage 4. Allocation Issues Number of Occurrences Aggregates Trigger Page 48

Coverage for Sexual Abuse and Molestation Claims Mary Kay Vyskocil Simpson Thacher & Bartlett LLP - New York, NY

Coverage for Sexual Abuse and Molestation Claims Mary Kay Vyskocil Simpson Thacher & Bartlett LLP New York, NY 50

Intentional Act Exclusions and Expected or Intended Injury An accident, including continuous or repeated exposure to general conditions, resulting in bodily injury or property damages neither expected nor intended from the standpoint of the insured. 51

52 Duty to Defend

Trigger of Coverage 1. Exposure 2. First Encounter 3. Manifestation 4. Continuous 53

54 Number of Occurrences

55 Policy Exclusions for Abuse and Molestation