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The Brave New World of Cybercrime Insurance Coverage Disputes

Posted Monday, August 27, 2018 by McKean J. Evans

Computer crime and data breaches have become a reality for most businesses. Words like spearphshing or ransomware that were obscure five years ago are now in the headlines on a regular basis. The FBI calculated over $1.4 billion in reported losses from hacking and similar computer crime in 2017. A data breach can cause serious monetary consequences for businesses, besides the goodwill hit of having to notify customers and colleagues of the intrusion.

Accordingly, business have tried to mitigate the risks of a data breach or hack through insurance coverage. Since cybercrime coverage is in its infancy, it’s unsurprising disputes have arisen between businesses and insurers regarding the extent of coverage under these policies.

Emerging caselaw shows that cybercrime coverage is not immune from the traditional conflict between the insured’s interest in being made whole after a loss and the insurer’s interest in paying as little as possible on claims. A good example is the recent decision by the U.S. Court of Appeals for the Sixth Circuit in American Tooling Center, Inc. v. Travelers Casualty and Surety Company of America. American Tooling Center (“ATC”), lost over $800,000.00 in a phishing scam. Hackers first infiltrated ATC’s email servers and obtained the names of ATC’s contacts with ATC’s Chinese subcontractor. After ATC wired certain payments to its subcontractor, the hackers posed as the subcontractor’s agents and claimed to have never received the payments. ATC canceled its initial wire transfer and re-sent the funds to the hackers. ATC realized what had happened when the genuine subcontractor called to demand payment.

ATC tendered the claim to its insurance carrier, Travelers, under ATC’s coverage for “computer crime.” ATC’s policy provided Travelers “will pay the Insured for the Insured’s direct loss of, or direct loss from damage to, Money, Securities and Other Property directly caused by Computer Fraud.” ATC requested Travelers cover the over $800,000.00 it lost in the phishing scheme.

Travelers refused to pay. Relying on the words “direct loss,” Travelers claimed ATC hadn’t actually lost the over $800,000.00 it wired to the hackers. Instead, Travelers argued ATC only had a “direct loss” in the amounts it had to pay to its subcontractor over and above those amounts it paid to the hackers. Since the subcontractor (presumably sympathetic to ATC) had settled for a reduced payment, Travelers claimed it need only pay ATC the amount its subcontractor agreed to accept.

The court had little trouble rejecting Travelers’ argument, stating:

A simplified analogy demonstrates the weakness of Travelers’ logic. Imagine Alex owes Blair five dollars. Alex reaches into her purse and pulls out a five-dollar bill. As she is about to hand Blair the money, Casey runs by and snatches the bill from Alex’s fingers. Travelers’ theory would have us say that Casey caused no direct loss to Alex because Alex owed that money to Blair and was preparing to hand him the five-dollar bill. This interpretation defies common sense.

Separately, Travelers also argued the phishing attack was not covered under ATC’s computer fraud coverage. Travelers claimed coverage only existed where the perpetrator actually caused the transfer, not where the hackers deceived employees into transferring money unwittingly. The court observed that if Travelers wanted to restrict coverage thusly, it could easily have made that explicit in the policy - indeed, the court pointed out many policies do restrict coverage in this way using language absent from Travelers’ policy.

The ATC decision underscores the emerging issues in cybercrime coverage disputes and the bases insurers will use to deny coverage for phishing, hacking and other computer crime causing losses to businesses.

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Court of Appeals Reiterates Insurer’s Obligation to Protect Policyholder From Lawsuit

Posted Thursday, August 16, 2018 by McKean J. Evans

When a driver crashes into another vehicle and is sued for damages, the driver’s insurer typically has an obligation to defend the lawsuit and act in good faith to protect its insured’s interests. When the insurer fails to do so, the driver likely has legal recourse under Washington law.

Washington’s Court of Appeals recently reiterated this principle in Singh v. Zurich American Insurance Company. In Singh, the Court of Appeals ruled Singh’s insurer, Zurich American, was liable for failing to settle and defend claims against Singh in good faith.

On July 20, 2011, one of Singh’s employees, driving Singh’s semitruck, allegedly caused a 16-vehicle crash by failing to slow down for congested traffic. Persons injured in the crash, and the families of those killed in the crash, sued Sing for damages. Because of the dramatic injuries and deaths allegedly caused by Sing’s employee, the plaintiffs quickly advised Singh that they saw their damages recoverable from Singh as exceeding the limits of Sing’s insurance policy. In other words, Singh knew that, if he lost the court case, he would have to pay significantly more money than his Zurich American insurance policy would cover.

Singh’s insurance policy with Zurich American obligated Zurich American to defend Singh in the lawsuit. Zurich hired a lawyer to defend Singh. Zurich’s lawyer recognized it was in Singh’s best interests to pay the entire insurance policy limit to settle the large monetary demands of the persons injured and killed in the crash. But the attorney also recognized that disbursing the entire policy limit to the first plaintiffs to sue Singh would leave Singh without insurance coverage should later claimants seek damages from Singh.

Accordingly, Zurich’s lawyer proposed to reserve some of Singh’s policy limits to protect Singh from future claims arising from the crash. However, Zurich ignored its lawyer’s advice and ordered the lawyer to settle the existing claims with the full policy limits. Zurich’s lawyer did so.

Later, another person sued Sing claiming injuries in the crash. Zurich refused to defend the lawsuit because Singh’s policy limits were exhausted from the prior settlement. Singh paid for his own counsel and ultimately paid $250,000.00 to settle the new claims.

Singh then filed suit against Zurich alleging Zurich acted in bad faith and violated Washington’s Insurance Fair Conduct Act (“IFCA”) and Consumer Protection Act (“CPA”). The jury found in Singh’s favor, agreeing Zurich breached Singh’s insurance policy and acted in bad faith.

The Court of Appeals upheld the jury’s verdict. The court observed the insurer’s duty to defend the insured “is one of the main benefits of the insurance contract.” Thus, the court determined Zurich could not permissibly exhaust the policy limits then use its exhaustion of the policy limits as an excuse to continue defending Singh. Doing so put Zurich’s interests over Singh’s in violation of the insurance policy and Washington law. Notably, Zurich ignored its own lawyer’s suggestion it keep some policy limits in reserve to protect Singh from future claims.

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Washington Updates “Mandatory” Arbitration Statute

Posted Wednesday, July 18, 2018 by Christopher L. Thayer

In Washington, civil cases involving claims less than $50,000, which are filed in Superior Court, are referred into the court-sponsored “mandatory” arbitration program. Under this process, an attorney with at least five years of experience is appointed as the arbitrator to decide the issues in the case. There are relaxed rules of evidence and the parties may submit sworn statements or reports in lieu of live testimony for witnesses. It is generally a much less expensive way to resolved modest claims, as the hearings typically only take one day. Either party has an automatic right of an appeal if they are not happy with the result.

The Washington legislature has adopted new provisions expanding the monetary jurisdictional limitation on claims and modifying the procedures. The changes go into effect on September 1, 2018. A summary of the changes to the laws are as follows:

• Removes all references to the word “mandatory” throughout the arbitration laws, replaced with “civil” in some instances.

• Increases the maximum arbitration limit from $50,000 to $100,000 - if approved by the superior court of a county by two thirds or greater of judges.

• Adopts procedural rules for the timing of an arbitration hearing and permissible discovery, including authorizing medical examinations of parties – where appropriate.

• Sets qualifications for a person serving as an arbitrator. Requires a notice of appeal from arbitration to be signed by the appealing party (and not just their attorney).

• Increases the arbitration filing fee from $220 to $250, and the appeal filing fee from $250 to $400.

The increase from $50,000 to $100,000 for the jurisdictional limits will open up a much larger range of cases to the arbitration program, and presumably take some of the burden off the overloaded court system. As court-sponsored arbitration is generally far less expensive (and quicker) than a trial, this change will, in general, benefit litigants.

The requirement that a party must actually sign the appeal notice will be interesting to watch. This was added in the context of personal injury cases, where attorneys for defendants are being paid for by defendants’ insurance company. Anecdotally, insurance companies were instructing their attorneys to file appeals of arbitrations without consulting with their insured. As most people are not interested in having their lives tied up in litigation, it is likely many people would not consent to an appeal – so long as their insurance company is paying for the claim. It also seems likely insurers will start adding provisions to Washington insurance policies – requiring their insured to consent to any appeals where recommended by the insurer to address this situation.

If you have any questions about Washington’s “Mandatory” Arbitration process, please feel free to contact managing member Chris Thayer at (206) 805-1494 or at CThayer@PivotalLawGroup.com.

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Health Insurer Fined For Violating Independent Review Rules

Posted Wednesday, July 11, 2018 by McKean J. Evans

Washington’s insurance commissioner recently announced a $100,000 fine in response to a consumer complaint that Kaiser Foundation Health Plan, an HMO, ignored consumers’ rights in the health claims appeal process. The commissioner found that Kaiser failed to follow several rules related to appeals of health insurance claims to an Independent Review Organization (“IRO”).

At issue are rules contained in Washington’s statutes and administrative codes protecting insurance policyholders. Among other things, Washington law required Kaiser to provide the IRO with any records, documents, or information relevant to the claim within three business days; ensure that expedited reviews are adjudicated within 72 hours of the policyholder’s request; and provide the policyholder the IRO’s name and contact information within one business day.

In Kaiser’s case, the insured had the right to provide evidence supporting the insured’s claims to the IRO within five days. However, Kaiser failed to notify most consumers they had the right to do this. The commissioner also found Kaiser dragged its feet in the IRO process. Kaiser was found to have failed to timely send claims files to the IRO; failed to process expedited claims on time; and failed to timely give consumers the IRO’s name and contact information.

The commissioner found these violations occurred during the period from January 2016 through March 2017.

Kaiser signed a Consent Order regarding the above violations, pursuant to which Kaiser acknowledged its duty to comply with the law and consented to imposition of the fine.

Pivotal Law Group attorney McKean J. Evans represents insurance policyholders and has obtained favorable outcomes in disputes with health insurance carriers. If you have questions regarding a health claim dispute, contact McKean for a free consultation.

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Case law update: The “self-service” exception for a Slip and Fall injury at a Grocery Store

Posted Friday, July 6, 2018 by Christopher L. Thayer

In a December 2017 decision, the Washington State Court of Appeals, Division III, addressed a slip and fall personal injury claim where claimant fell in the shampoo aisle of a Walmart in Sunnyside. In McPherson v. Wal-Mart Stores, Inc., No. 34696-0-III (12/14/17), in an unpublished decision, the Court of Appeals affirmed the trial court’s dismissal of Ms. McPherson’s claim.

McPherson was injured after she slipped and fell in the shampoo aisle of a Walmart store in Sunnyside, Washington. The fall took place just after 5:00 p.m. After the incident, a store manager noted a shampoo bottle that had been knocked over on one of the shelves, resulting in some clear shampoo spilling down onto the floor. The spilled shampoo was deemed to be the cause of McPherson’s fall. The store manager reviewed video surveillance of the aisle where McPherson fell. According to a declaration from the manager, the video showed a Walmart associate had checked the condition of the shampoo aisle between 4:04 p.m. to 4:06 p.m. Later, at 4:53 p.m., the manager observed two women handling bottles of shampoo in the area where McPherson’s fall occurred. One of these women placed a shampoo bottle on the shelf in the same spot where the manager later discovered the shampoo bottle that spilled onto the floor. The manager declared that no one had notified Walmart of any spills in the shampoo aisle prior to McPherson’s fall.

After the McPherson sued for negligence, Walmart moved for summary judgment. The trial court agreed with Walmart, ruling McPherson lacked evidence the store had actual or constructive notice of the shampoo spill and dismissed McPherson’s claim. McPherson appealed.

A patron of a retail establishment is considered a “business invitee” under Washington law. A property owner is only liable for a personal injury claim to a business invitee if the owner had “actual or constructive notice of an unsafe condition”. Ingersoll v. DeBartolo, Inc. ,123 Wn. 2d 649, 652 (1994). Courts have defined “constructive” notice:

Constructive notice arises where the condition ’has existed for such time as would have afforded [the proprietor] sufficient opportunity, in the exercise of ordinary care, to have made a proper inspection of the premises and to have removed the danger.’”

Ingersoll.

There is an exception, the so-called “self-service” exception which provides: a plaintiff need not prove actual or constructive notice “when the nature of the proprietor’s business and his methods of operation are such that the existence of unsafe conditions on the premises is reasonably foreseeable.” Pimental v. Roundup Co. 100 Wn. 2d 39, 49 (1983).

Pimentel’s self-service exception has not been applied to all self-service areas where customers retrieve items from store shelves. Ingersoll, at 653. Most stores operate under a self-service model. Yet not all store areas present the types of readily apparent hazards discussed in Pimentel. A plaintiff who has sustained injuries in a self-service section of a store is not automatically excused from proving actual or constructive notice. To avoid having to prove actual notice, plaintiff must establish the defendant’s particular self-service operation makes the existence of unsafe conditions reasonably foreseeable. Pimentel , at 49-50.

To meet Pimentel’s self-service exception, a plaintiff must show the unsafe condition giving rise to injury was “continuous or foreseeably inherent in the nature of the business or mode of operation.” Specific to the McPherson case, the Court held McPherson needed to provide evidence of: (1) the frequency of shampoo spills at the Sunnyside Walmart, (2) the number of store associates assigned to clean such spills, (3) the frequency of checks for spills by store associates, (4) the number of injuries caused by slip and fall incidents involving shampoo spills, and (5) whether Walmart encourages patrons to report spills, etc. The trial court found McPherson presented no evidence to support any of these elements, and the Court of Appeals agreed.

Although an unreported decision, meaning it has no precedential value, McPherson is nonetheless a good primer on this particular area of law: slip and fall injuries in retail stores. The body of law relating to actual or constructive notice has developed over the years and reflects the court systems efforts to balance the potential liability of a store owner vs. protecting the safety of its customers. Grocery stores in particular are susceptible to slippery liquids being spilled on the floor. Whether or not an establishment is liable for any injuries is going to be very fact-specific. Proving how long a particular spill was on the floor can be difficult if not impossible for a claimant.

If you have questions about premises liability for injuries, either as a property owner or potential claimant, please contact managing member Chris Thayer at (206) 805-1494 or CThayer@PivotalLawGroup.com.

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