Insurance – NY Duty to Defend: Take the DJ

Insurers know their duty to defend under a policy, is broader than their duty to indemnify. They err on the side of providing a defense, in part, fearing a bad faith judgment and unfair claim settlement practices regulatory penalties. The New York Court of Appeals in K2 Investment Group, LLC et. al. v. American Guarantee & Liability Insurance Company, 213 N.Y. LEXIS 1461, June 11, 2013 just offered an additional reason. Failure to defend may require the insurer to indemnify, regardless of policy exclusions. The Court of Appeals reinforced the liberal duty to defend set forth in its 2006 decision in Automobile Insurance Company of Hartford v. Cook, 7 N.Y.3d 131. Liberal construction is required if the complaint pleads a claim that is reasonably possible to cover. It does not matter how groundless, baseless, or false the suit might be.

In K2 creditors had sued Goldan, LLC for defaulting on $2.83 million in loans. One of the principals in Goldan, Jeffrey Daniels, was a lawyer, and purportedly represented the plaintiff creditors in their transaction with Goldan. They alleged as one of their claims that Mr. Daniels committed legal malpractice by failing to record their mortgages. Mr. Daniels requested that the Defendant provide a defense under his E&O cover, but the Defendant disclaimed defense or indemnity obligation. A default judgment was taken against Mr. Daniels. He assigned his rights under his E&O policy to the plaintiffs who then sued under the policy for breach of contract, as well as for bad faith, demanding the $2 million policy limit and the default judgment in excess of the policy limit. The Supreme Court awarded summary judgment to the plaintiffs for the policy limit on the basis of breach of contract. A majority of the Appellate Division, First Department affirmed, finding that the “insured status” and “business enterprise” exclusions relied upon by the Defendant were inapplicable to the malpractice action upon which the default judgment was taken. The New York Court of Appeals did the same.

While public policy might benefit an insurer who refuses to defend, it is an unreliable perch. The better practice is to take the DJ. The larger implication is whether policies are essentially litigation expense covers in NY and need to be rated as such, regardless of loss costs. While this loss would fall within the insurer’s reinsurance retention, a larger judgment may have faced a denial by its reinsurers. It would not neatly fit within ECO or XPL, given that breach of contract and not bad faith was the basis for the default judgment. Claims departments handling NY claims might want to listen to Take the A Train and just substitute for the title Take the DJ just as a reminder when they review complaints.



There are three Bills in the House of Representatives that would extend TRIA: H.R. 2146; H.R. 508; and H.R. 1945. Ten year extensions through December 31,2024 would occur under H.R. 2146 and H.R. 1945; five years to December 31, 2019 under H.R. 508. H.R. 2146 is the most recent Bill and has many of the same sponsors as 508, so it is likely more viable. H.R. 1945 currently has only one cosponsor. H.R. 2146 is essentially an extension of the term of the current law (hereinafter, TRIA and all its extensions are referred to as “TRIA”). It remains to be seen if the Financial Services Committee will permit amendments for budgetary or other reasons such as indexation of caps, deductibles, aggregate retentions, and as in H.R. 508, recoupment, over the 10 year extension.

An “act of terrorism” has to be certified by Treasury, in coordination with the Secretary of State and the Attorney General. H.R. 1945 would limit certification to Homeland Security in concurrence with Treasury, rather than visa-versa. The House Financial Services Committee would be stripped of jurisdiction over future TRIA renewals under this Bill. Given that the TRIPA extension eliminated the requirement that the terrorism act needed to be committed on behalf of a foreign person or interest it might seem logical to delete concurrence by the Secretary of State. The replacement of the Attorney General could be more problemmatic. It would imply certification without having the capability of civil prosecution, either because of jurisdictional or evidenciary difficulties, or because military tribunals would be hearing the case. There is a risk of politicalization of certification, as it is easier to declare and certify an “act of terrorism” than to prove it. Biological and chemical weapons, agents or vectors, can be more difficult to prove. The initial anthrax event in Washington, D.C. brought numerous government declarations that it was a terrorist event, which declarations were modified over time. There were only 5 deaths and really no economic costs so TRIA was unaffected. A $5 million insured certified loss event could create coverage uncertainty if after certification the event is not considered terrorism. TRIA has no provision for withdrawal of certification, so the government would likely be prudently silent and not certify such an event until it could be proven. Insurers may to avoid bad faith cover bodily injury and business interruption losses given the government’s silence. Subsequent adjustments would then have to be made should the event be certified.

The definition of “Act of Terrorism” under TRIA does not expressly refer to NBCR, cyber-terrorism, or cyber-war. It is:

(a). an act of terrorism,
(b). which is a violent act, or an act dangerous to human life, property or infrastructure;
(c). which is part of an effort to coerce U.S. civilian population or influence U.S. policy,
(d). which causes damage in the U.S. or to a U.S. airline or mission, and
(e). which act is certified as an act of terrorism by Treasury, in coordination with Secretary of State and Attorney General.

It is the “act” and not the effect of the act of terrorism that controls this circular definition. As written, it is singular; although insurers and reinsurers will consider it in the context of broader “occurrence” language. It may be difficult to assign a biologic or cyber act to which $5 million of aggregated insured losses are attributable, particularly if the viral infiltration is self-replicating. Would disruptive, but not “dangerous” cyber-terrorism attacks be covered? What does “act of terrorism” mean in “(a)” above such that it is qualified by “(b)” and “(c)” in order to be certified? TRIA as likely be broader in practice than the verbiage. The government will control the evidence, and what is “certified” will be an “Act of Terrorism”. Nonetheless, the “Act of Terrorism” definition would benefit from broader regulatory interpretation and if legislatively feasible, amendment.

Certification by the Federal government is a principle benefit of TRIA. In the quest for property coverage it is often overlooked when renewal is questioned. Nuclear, biological, chemical and radiological (“NBCR”) are not defined in TRIA. Imperfect NBCR definitions in other Federal statutes and international treaties are not referenced in TRIA. Certification does not require a declaration that the event is an NBCR event. Such certification below the $5 million threshold might be useful to avoid disputes for smaller NBCR events. NBCR as a matter of insurance contract will otherwise be defined and determined under state law(s).

After 9/11 and before TRIA, terrorism and in particular NBCR were excluded by reinsurers and insurers. Subjective determination of coverage of terrorism or NBCR was based on the issuer’s assumption about the event as if it would be as self-evident as 9/11. Cyber-terrorism was not a concern. Biological terrorism was not as self-evident chemical, nuclear, or radiological. After 9/11 I successfully negotiated a unique NBCR exclusion. It was tied to objective NBCR related Federal definitions and required a Federal indictment in order for the event to be considered terrorism. The concern then, as now, was that the government might not reveal the evidence it had to the public, so reinsurer and insurer “assumptions” might be wrong. Rational arbitration would be a challenge. Economic reasons aside, TRIA needs to be reinstated because Federal certification avoids unsupportable subjectivity.

Biological and cyber-terrorism and cyber-war will likely be substantial terrorist risks over the next 10 years. Each can be developed and executed by a lone wolf, but with asymmetrical consequences. The U.S. recognizes that its defenses to each are substantially lacking. In the case of biological terrorism, its facility to replace Plum Island will not be operational until 2020-21. Biologic agents, vectors and diseases can be self-replicating, developed synthetically, and are subject to plausible deniability as public health events, allowing the terrorist time to escape detection and the U.S.. Ricin is easy to produce; H5N1 has been modified by scientists so that it is now transmittable by humans; variants of small pox are being created. The technology is moving faster than our preparations and the law, as with cyber-terrorism, is lagging.

The exposure from a one day cyber-terrorism caused internet blackout will not be small. However, it pales against other exposures. The 2008 financial crisis caused an estimated 20% drop in U.S. GDP. According to Ted Lewis, Executive Director of the Center for Homeland Defense and Security (see, the average impact on U.S. GDP from the following events, are:

Earthquake: 0.48%
Hurricanes: 0.25%
1993 Eastern Storm: 0.11%
Oakland California Fire: 0.10%
2003 Blackout: 0.10%
Flood: 0.9%
Tornados: 0.9%
One Day Internet Blackout: 0.5%
Mount St. Helen’s Eruption: 0.4%

These numbers are imprecise. They reflect only a part of the exposure. Strategically important infrastructure and businesses have their own networks. State sponsored cyber-espionage has penetrated these; so have non-State actors. The cyber-related business or contingent business interruption exposure is growing. Concentration of hubs (so-called “peers”) and of bandwidth (mostly all controlled from outside the U.S.) make broad attacks more feasible (and protectable). In the case of state sponsored cyber-espionage, the line between theft, terrorism and war can be blurred. Here Secretary of State participation in certification, is as or more important than Homeland Security. Perhaps TRIA should be amended to require Homeland Security coordination as well. If cyber-war is to be covered under TRIA, the restriction of TRIA war coverage to workers compensation is anachronistic and needs to change.

Getting anything through this Congress is a chore. Obtaining only an extension of TRIA may be the path of least resistance. Unfortunately, it ignores TRIA deficiencies and what are likely to be real exposures during the extension period.

As always, your thoughts and questions are most welcome.




Commercial Lines Rating Update: Deregulation

NAIC: At the Spring Meeting of the NAIC, the Commerical Lines (EX) Working Group of the NAIC again was charged with studying deregulation of rate and form for commercial lines. Large commercial insureds were the beneficiary of a prior study undertaken in 1998, so like locusts this issue has arisen. The new study may result in multi-state standardization of the treatment of exempt commercial policyholders.

NY: Insurers have had to organize separate subsidiaries in order to maintain separate rating plans. This has increased internal administration and expense, expanded pools, complicated mergers and divestitures, and impacted reinsurance. Section 2349 of New York’s Insurance Law permits a NY admitted insurer to have multi-tier rating plans for personal auto. The New York State Senate has been trying to do the same for commerical insurance. On April 29, 2013 the Senate almost unanimously passed S.2891 which now resides with the Insurance Committee of the Assembly. The Bill, as currently drafted, would amend Section 2352 of the Insurance Law. As with personal auto the new rating plan is subject to prior approval and applies to new customers after that approval, or to customers that were subject to a terminated rating plan. Non-renewal, conditional non-renewal, and depopulation caps are rating plan specific.

Be sure to plan any changes in an insurer’s premium volume with other regulatory constraints in mind. Deregulation offers both opportunity and pitfalls, if not thought through. As always, your thoughts and questions are most welcome.





Bowman v. Monsanto Co.: What really is being sown?

The U.S. Supreme Court unanimously upheld Monsanto’s patent of a genetically modified seed  against a claim of patent exhaustion by an Indiana farmer, who knowingly bought from a silo soybean seeds intended for consumption with the intention of planting them to produce Monsanto’s Roundup Ready seeds on an off-license basis by weeding out the untreated seeds through  application of Monsanto’s herbicide Roundup, to which Roundup Ready seeds were resistant. The Supreme Court’s Opinion chose not to expansively address the reach of patent protection to self-replicating biologics, limiting their decision to the facts of this case. If Mr. Bowman did not have intent to replicate the patented seeds the case may not have reached the Supreme Court; although the Court held that such reproduced seeds were copies of patent protected seeds and not subject to patent exhaustion. The case impacts farmers who like Mr. Bowman must pay almost twice as much for Monsanto’s seeds even to use them in more risky late season planting. In the New York State Assembly there is proposed AB 5323, which if passed would create an affirmative defense against infringement if there is a showing of a lack of knowing and intentional introduction of genetically engineered or modified organisms into the farmer’s plants, seeds, or on the farmer’s property, without the farmer’s knowing gain from that introduction. Inadvertent or unknowing usage of generic seeds that are stacked with other patented  traits might pose liability or expense to farmers. Such stacking is common.

The Supreme Court did not have to grant certiorari in this case. Roundup Ready seeds, which account for  about 90% of the U.S. soybean seed market, is effectively coming off patent in 2015. This domination of the soybean seed market accounted for farmer Bowman’s strategy of ultimately producing plants with only Roundup Ready (glyphosate resistant) seeds, by purchasing commodity seeds and applying Roundup (glyphosate) to eliminate non-Roundup Ready seeds. Monsanto’s lawyers had not thought of this strategy and did not  limit secondary sales and later plantings, nor  address the risk in its contract with Mr. Bowman. Mr. Bowman complied with his license agreement connected to his purchase of Roundup Ready seeds, so only the secondary purchase of commodity seeds were in issue. It is not clear if Monsanto  amended its contracts after suing Mr. Bowman to limit its downside from secondary sale of commodity seeds. Monsanto clearly would have lost money if Mr. Bowman won the case, but the loss could have been mitigated and Monsanto more than recouped its investment.

The back story to the Court’s decision is the regulatory system supporting the $40 billion annual biotech agricultural export system of genetically modified grains. It is dependent upon Monsanto and other patent holding signatories to the Accord that the Biotechnology Industry Organization (BIO) and the American Seed Trade Association (ASTA) crafted in 2010. Regulatory import approvals must be maintained with foreign markets to export. Accord signatories (“Proprietary Regulatory Property Holders”) agree under the Generic Event Marketability and Access Agreement (GEMMA) to give access to proprietary regulatory approvals and data, either cost-free until generic providers assume responsiblity; subject to a joint responsibility agreement; or cost-free only for seven years. In the case of Roundup Ready, Monsanto will stop responsiblity after the seven years (i.e., 2021). Generic producers will have to undertake the time and considerable expense of convincing U.S. and foreign governments of the safety of their seed, or reach an agreement with Monsanto, who controls the data. At present there is no simplified regulatory approval system for generic biotech agriculture as there is for pharmaceuticals. Product development and regulatory approval in the seed industry is between seven to ten years, so Monsanto has considerable leverage.

When Roundup Ready 1 (RR1) comes off-patent it will be the first time a major biotech plant patent has gone generic. Monsanto will only market Roundup Ready 2 at that point, so farmers are saving RR1 seeds for its one planting year life and will not run afoul of their contract with Monsanto. As engineered “terminator seeds” second generation RR1 seeds are sterile, so Monsanto’s licensing program was necessarily annually renewable. Dupont Pioneer has variety plant patents which it still can and will assert after Monsanto’s genetic patent on RR1 ends. Another limiting factor for farmers is that there is an increase in glyphosate resistant weeds which may make Roundup and therefore Roundup Ready seeds less useful to farmers, unless augmented by new products and genetically engineered seeds. Stacking old seeds coming off patent, with new traits, creates an evergreen effect for expiring patent holders.

An inside baseball aspect of the Bowman case is that Justice Kagan read the Opinion of the Court. She was no stranger to Monsanto or Roundup Ready, having submitted an amicus brief in support of a Monsanto’s position to the Court on behalf of the U.S. government as Solicitor General of the U.S. (Monsanto Co. v. Geertson Seed Farms).  While it was her  professional duty as a lawyer to do so and the brief concerned a procedural issue about the appropriateness of the lower courts’ award of injunctive relief based on their understanding of irreparable harm, it is surprising given the lopsided result in the Bowman case why she had not recused herself, to avoid any appearance of conflict and chose to deliver the Opinion in Bowman.

The Monsanto Roundup Ready alfalfa case for which Solicitor General Kagan offered the government’s brief, concerned a  District Court judge injunction against growing genetically modified alfalfa until the USDA conducted a proper environmental assessment of the cross-pollination risk and made a final determination whether to deregulate such alfalfa because it did not present a plant pest risk.

The risk of future court enjoinment was permanently stopped by Congress in March, 2013 when HR 933, the appropriations Bill that kept the government functioning, was enacted. Section 735 of that Bill, in what has been dubbed “The Monsanto Protection Act”, permits farmers and other users to continue to use such genetically engineered organisms by allowing the Department of Agriculture to issue temporary permits despite court injunctions, while it undertakes environmental impact analysis.

The U.S Department of Agriculture’s Animal and Plant Health Inspection Service (APHIS) on May 10, 2013 surprisingly announced it would require environmental impact statements (EIS) for two genetically crops resistant to herbicides Dicamba (Monsanto/BASF) and 2,4-D (Dow). Both of these would augment Roundup by killing weeds that have become resistant to glyphosate. It will take a year or longer for the EIS, so if approved, planting will not occur until 2015, when Roundup Ready comes off patent. If approved, there will likely be lawsuits, but given Section 735 under H.R. 933, temporary permits could be issued despite any court injunction. Farmers could also continue to spray the herbicides, which the EPA has permitted since the 1940s. APHIS’ authority under statute is only to evaluate the plant risk from genetically engineered crops, not the risk to humans, for which the USDA and EPA have more authority. 2,4-D was along with the more active 2,4,5-T an ingredient in Agent Orange and some studies have found some linkage to non-Hodgkin’s lymphoma. Both herbicides are prevalent and long used without definitive evidence of human health risks.

Genetically engineered herbicide resistant seeds increase the appeal of the related herbicide and from a health standpoint may not present a greater human or animal exposure than the herbicide already applied to the plant. These genetically modified plants are pervasive in feed and food, given market shares of about 90% and possible seed contamination.

Will a generic Roundup Ready soybean seed market be an insurable market? Monsanto presented a homogenized risk, with extensive data, and a capital base to self-insure. The pervasiveness of the genetically engineered seeds and of glyphosate to a limited extent in drinking water, creates the classic toxic tort and environmental occurrence and allocation issue from a potential latency standpoint. For a generic manufacturer, on a market share allocation basis, Monsanto would likely continue to be the proverbial deep pocket. Recall and other regulatory expense risks would be inherent in new product production and distribution. Internationally, foreign countries may have their own companies manufacturer generics, if there is less resistance among their populace. This could reduce the importance of GEMMA for those countries. About a quarter of Roundup Ready seeds are exported to China. Generic manufacturers may also limit production and distribution to countries which are less litigious than the U.S. if there is sufficient scale. Monsanto may offer these countries low-priced or free seeds to maintain market control.

Generic bio-agriculture is an insurable exposure worth considering. In developed countries there is fear about such products which may enable a higher premium than merited by the risk.

I welcome your thoughts and questions.