SteveK April 29th, 2010

In the recent unreported decision, Proformance Insurance Co. v. Riggins, the New Jersey Appellate Division addressed a dispute between two insurers as to the responsibility to pay for the demolition of a home necessary for implementation of cost effective environmental remediation, holding that the cost of demolition was not excluded by the owned property exclusion.  In the case, Proformance insured the property owned by Don Kolbe from 2002 until 2004, and MetLife insured it from 2004 until 2006.  A leak was discovered from the underground eating oil tank in 2006.  It was undisputed that the tank had been leaking for four to eight years prior to the discovery.

Proformance acknowledge its obligation to provide coverage, and engaged two consultants to evaluate the options to remediate the property. Each consultant provided two options, one that required demolition of the house, the other allowed the house to remain with structural supports during the process of remediation.  The cost of the demolition option cost approximately $145,000 less than the support option. Proformance elected the more cost effective option.  MetLife agreed to contribute to the remediation, but not for the costs related to demolition, arguing that it constituted damage to owned property. The Court disagreed finding that the house was not damaged by the contamination and that the destruction to the house was not due to “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The Court held that the decision to destroy the house was “simply a function of the decision to employ the most cost-effective means of addressing covered claims, rather than the product of any ‘occurrence’ as defined in the MetLife policy.”  Accordingly, the Court concluded that the exclusion did not apply. The Court further stated that it saw no rational basis to extend coverage for the costs of the structural option but excluding coverage for the less expensive option of reimbursing the homeowner for the demolition of the residence.

DiFrancesco, Bateman, Coley, Yospin, Kunzman, Davis & Lehrer, PC ( www.dbnjlaw.com ) is a full service law firm in New Jersey which provides a broad range of legal services, including the representation of clients in environmental and insurance matters. For additional information about the matters in this bulletin or in the firm’s environmental  or insurance practice, please contact Steven A. Kunzman, Esq. who heads the Environmental and Insurance Coverage Practice Groups.

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SteveK January 19th, 2010

Steven Kunzman and Todd Ruback of the firm recently participated in a podcast with A.M Best regarding developments in privacy law and related insurance issues. To hear the podcast go to: http://www3.ambest.com/bestfeed/insurancelaw/Insurance_Law_Podcast_40.mp3

DiFrancesco, Bateman, Coley, Yospin, Kunzman, Davis & Lehrer, PC ( www.dbnjlaw.com ) is a full service law firm in New Jersey which provides a broad range of legal services, including the representation of clients in insurance coverage matters as well as technology and privacy matters. For additional information about the matters in this bulletin or in the firm’s insurance practice, please contact Steven A. Kunzman, Esq. who heads our Insurance Coverage Department; for additional information about the firm’s technology and privacy practice, please contact Todd. R. Ruback, Esq. who heads our Technology and Privacy Law Department

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SteveK November 16th, 2009

By

Steven A. Kunzman, Esq.

And

Todd B. Ruback, Esq., CIPP

Privacy Overview

 The pervasive use of the Internet as a business platform and for the collection, use and transmission of personal information presents fertile ground for the growth in claims arising from data breaches and improper privacy practices. As these claims arise, they will undoubtedly be tendered to insurers for defense and indemnification under various commercial policy forms, including those recently developed to provide coverage for privacy claims.[1] Insurance companies must be cognizant of the changing winds on the privacy landscape.  Due to increasing regulatory compliance requirements and a spike in privacy related litigation flowing from record setting data breaches, organizations and insurance carriers will undoubtedly be faced with privacy as a significant risk component to business.  According to Verizon Business’s 2009 Data Breach Investigation Report, 2008 saw more reported data breaches than the previous four years combined, with 285 million records breached. [2]  The Poneman Institute estimated in its 2009 Annual Study that the average cost for a data breach exceeded $200 per record for organizations that were first time victims of a data breach.[3]  Numerous class action suits for privacy violations have been filed, the most famous of which is against Heartland Payment Systems, for a massive breach caused by external hackers.[4]  Additionally, the FTC and Attorneys General of states across the country appear to be stepping up enforcement actions against companies for improper privacy practices.

 The likelihood of an organization facing a privacy-related claim for liability or a regulatory enforcement action for improper privacy practices has increased significantly.  Concordantly, claims for coverage under insurance polices will increase significantly over the coming years. Although the present anticipated harm to any individual does not appear to be significant, these claims will have an impact on an insurer by increasing costs for claims processing, investigation, incident response management, complying with statutorily required breach notification processes, litigation defense and payment of claims, particularly the costs for any class action claims.

Privacy Litigation and its Impact Upon the Insurance Carrier

 Some background in privacy issues is helpful to put these potential claims into an understandable context. There are two components to privacy:  data protection and privacy practices.  Both components are governed in large part by either regulation or statute, and in some cases by common law. 

 Data Protection:            Data Protection encompasses the security of data that contains personal information.  There are generally three elements to security: technical, physical and administrative.  Industries such as financial services and healthcare have security standards as respectively enumerated in the Gramm-Leach-Bliley Act (GLBA) and Health Insurance Portability and Accountability Act (HIPAA).  Further, the payment card industry has created its own technically objective security standard, PCI-DSS, which applies to many organizations that accept payment cards.

 A security breach may take many forms, some of which include the unauthorized access to personal information by   an external source such as a hacker or an outsourced service provider, the unauthorized access to personal information by an internal source such as an employee or contractor, or something as simple as the theft of a company laptop that contains personal information 

Private party lawsuits against companies for failing to protect data due to deviation from certain standards are based upon a negligence theory.  To date plaintiffs have had difficulty prevailing on negligence claims, although there have been numerous and significant settlements.[5]  The challenge plaintiffs have faced is in proving actual damages that were proximately caused by the defendant’s failure to protect personal information.6  Some courts, however, are beginning to view data breach litigation in a similar light to toxic tort medical monitoring claims in that the threat of future harm may be sufficient to sustain a claim.7  If this “future risks” approach to data protection litigation gains traction, then insurance companies can look forward to more protracted and costly litigation, with the potential for significant jury awards under the class action umbrella.

 Privacy Practices:            Privacy practices that may be subject to claims include: improper collection, use, or transfer of personal information; the improper collection of information using unauthorized cookies, spiders, spy ware, or other technological means; failure to protect personal information according to a company’s posted online privacy statement; having a privacy statement that does not meet regulatory requirements8 spamming, improper faxing or telemarketing, and the commission of privacy torts such as the invasion of privacy.  For companies that transact online business in not only the United States, but also the European Union (EU) where the laws on privacy practices are greatly different, compliance become complex and risk of an improper privacy practice rises greatly.

 Companies committing improper privacy practices are often subject to multiple layers of penalties or fines not only in the EU but also in the United States.  For example, if a company fails to protect personal information according to its posted online privacy statement, it may be subject to an investigation and penalties from both the Federal Trade Commission (FTC) and state authorities for unfair/deceptive online trade practices,9 in addition to the potential private claims for violations of state consumer protection laws.  In essence, a company may pay three times for the same transgression in the US.  Although insurance policies generally exclude coverage for regulatory or enforcement actions by governmental bodies, the exposure is presented in private litigation, which may require aggressive defense of the regulatory claim.  It appears, however, that some of the new privacy insurance policies may offer coverage for regulatory matters. 

 Insurance Coverage:  Coverage Part B of a typical Comprehensive General Liability  (CGL) insurance policy generally includes coverage for damages cause by “personal injury” and “advertising injury.” Although those representing the insured often consider this section of the insurance policy to provide an expansive grant of coverage, this coverage is usually considered by the insurer to be limited to a number of specified claims such as personal injury, which is often defined in a CGL policy as “an injury arising out of…violation of an individual’s right of privacy.”  Part B of the policy states that the insurance applies to personal injury if “caused by an offense…[a]rising out of the conduct of your business, excluding advertising, publishing, broadcasting or telecasting done by or for you.” These policy forms were surely designed without any contemplation of the current risks since they have only come into existence with the pervasive use of computers and the Internet to transact business. In addition, there may be issues as to when the “injury” has taken place; at the time of the breach or the time when the personal injury is actually sustained.  In order to be able to properly evaluate and assume the risks some insurers have, therefore, developed policies to specifically address the risks presented. Undoubtedly if claims continue to rise and develop as anticipated, insurers may dispute coverage and/or respond to the claims being asserted based upon polices that, at the time of issuance, did not envision the present risk of injury caused by data breach.  Management of the risk therefore requires a thorough understanding of the nuances of the laws and requirements of   best of breed privacy practices

 Conclusion

The changing privacy landscape will have a tangible impact on an insurance carrier’s costs of responding to claims under the personal injury and advertising portions of the CGL policies and under specifically designed policies.  Foresight in addressing these

risks and an understanding of the landscape of privacy laws and issues will be an

essential component to underwriting the risks and defending the claims.

 End Notes

[1] Zurich North America Commercial Expands Security, Privacy Insurance Coverage, http://www.darkreading.com/security/vulnerabilities/showArticle.jhtml?articleID=218400572

2 Verizon Business 2009 Data Breach Investigations Report, By Wade Baker, April 15, 2009

3 Poneman Institute’s Fourth Annual US Cost of Data Breach Study, By Dr. Larry Poneman, January 2009

4 In Re: Heartland Payment Systems, Inc. (626 F. Supp 2d 1336; 2009 U.S. Dist. LEXIS 81493) (Order 

  granting consolidation of class action lawsuits.)

5 See, In re TJX Cos. Retail Sec. Breach Litig., 246 F.R.D. 389; 2007 U.S. Dist. LEXIS 87920 (over $40M settlement) and Department of Veterans Affairs Data Theft Litigation, No. 06-0506 (D.D.C. January 27, 2009) ($20M settlement)

6 See, Forbes v. Wells Fargo Bank, N.A., 420 F. Supp2d 1018, 1021 (D.Minn.2006); Giordano v. Wachovia Sec., LLC., 2006 2177036 (D.N.J. July 31, 2006) (unpublished); Guin v. Brazos Higher Educ. Serv. Corp., Inc. 2006 WL 288483 (D. Minn.) Feb 7, 2006 (unpublished); Hendricks v. DSW Shoe Warehouse, 444 F. Supp. 2d 775, 783 (W.D. Mich. 2006)

7 See, Pisciotta v. Old Nat. Bancorp, 499 F.3^rd 629 (7^th Cir. Aug. 21, 2007)

8 See, GLBA

9 See, Pinero v. Jackson Hewitt Tax Services, No. 08-3535 (E.D. La. Jan 7, 2009)

 Todd B. Ruback, Esq. is chair of the Privacy and Technology Practice at the law firm of DiFrancesco, Bateman, Coley, Yospin, Kunzman, Davis & Lehrer, P.C.  He is also a Certified Information Privacy Professional (CIPP) and thought leader in the area of privacy law.  He has authored or co-authored numerous publications on privacy and is also a lecturer at various privacy seminars and conferences.  He is a present nominee to be on the Board of Directors of the International Association of Privacy Professionals (IAPP) for the upcoming term of 2010-2015 and will be a speaker at the IAPP International Privacy Convention to be held in Washington, D.C. in April 2010, where he will lecture on trends and risk in privacy litigation. 

 Steven Kunzman, Esq. is the chair of the Insurance Coverage Practice of the law firm of DiFrancesco, Bateman, Coley, Yospin, Kunzman, Davis & Lehrer, P.C.  He has been providing counsel and representation to insurance companies on insurance coverage matters and defense to insurance company clients for over 25 years.  

Tags: insurance law new jersey, Privacy Law, Technology Law

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SteveK October 19th, 2009

On October 7, 2009, in the case of American Home Assurance Company v. United States Magistrate Judge Falk ,in the District Court of New Jersey, ruled that a report of an accident prepared by an investigator was not protected by the work product doctrine even though attorneys for the insurer were also present. The issue arose in a subrogation claim asserted by American Home against the U.S. arising from a collision between an aircraft that American Home insured and a paving roller on the runway at the Teterboro Airport. American Home dispatched an investigator immediately after the accident. At the same time counsel for the insurer also went to the site of the accident. While at the scene, counsel requested the investigator to send them the report.  During the course of the subrogation claim, the U.S. sought disclosure of the report. After an in camera review, Magistrate Judge Falk ruled that the document was to be disclosed. Te Judge reasoned that the report was not prepared in anticipation of litigation, but in the course of the usual routine of the business of insurance claims.  Even though a subrogation claim was always a possibility, the Court determined that the investigation was the ordinary course of business and, therefore, did not create a basis to protect the document from disclosure. Further, since the investigator was not hired by counsel, but by the insurer in accordance with the usual process, the presence of the attorney, or the request that the report be sent to the attorney, did not alter the character of the report. Finally, the Court noted that the report could not be considered to be in anticipation of litigation where the report itself states that the subrogation claim was “to be determined.” The Court stated that work-product protection is not ordinarily afforded to a document prepared prior to the decision regarding whether a subrogation claim will exist. This further demonstrated to the Court that the report was done in the ordinary course of business. This decision provides some guidance in what can be done to attempt to protect such reports from disclosure, or the need of the investigator to consider the content of report since it is subject o disclosure in discovery.

DiFrancesco, Bateman, Coley, Yospin, Kunzman, Davis & Lehrer, PC ( http://www.dbnjlawblog.com) is a full service law firm in New Jersey which provides a broad range of legal services, including the representation of insurance companies in coverage matters. For additional information about the matters in this bulletin or in the firm’s Insurance Coverage Practice, please contact Steven A. Kunzman, Esq. 

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SteveK September 14th, 2009

The New Jersey Appellate Division, in Crum & Forster v. Mecca & Sons Trucking, (unreported), affirmed the denial of coverage for a fire loss based, primarily, upon the vacancy exclusion contained in the policy. The Court reviewed the evidence as the use and operations on the premises and considered those facts in light of the policy terms which a building is stated to be “vacant when it does not contain enough business personal property to conduct customary operations.” The building was found to have, at best, some documents of Mecca and purportedly subleased to a landscaper to store some equipment.  In addition, the customary use of the building was precluded due to the current zoning.  The Court held that the storage of trailers by Mecca, a lessee, was an unauthorized or unlawful use of the premises and could not be considered a “customary operation,” therefore the property must be considered to have been vacant.

The Court also addressed the exclusion for loss due to vandalism where the property is vacant for more than 90 days. The court considered vandalism as being undefined as a question of fact. The Court therefore considered the experts for the parties as to the cause of the fire. The insured’s expert considered the cause to be “undetermined” because the state of the building did not permit a determination. The insurer’s expert did, however, conduct building inspections both inside and outside and interviewed witnesses, which supported the opinion that the fire was set, a result of vandalism. Since the report of the insured’s expert did not advance a determination based upon facts, it did not create a genuine issue of material fact precluding summary judgment in favor of the insurer.

The Court addressed whether there was any value to the loss, since the building could not be used for any discernable purpose, thus the building was a liability (the cost of removal) and the value was solely based on vacant land. The insured focused on the policy as an Agreed Value Policy. The Court concluded, however, that the language of the policy made agreed value an upper limit rather than a liquidated damage. Since this was no longer a needed determination, the Court did not address the issue further.

Although the Court was able to dispose of the case based upon the vacancy and vandalism issues, it also reviewed a number of other issues. One issue was whether the failure to have a sprinkler system, contrary to representations in the policy application, constituted an increased of hazard. Since there was no such system in place, there was no change in the use.  The Court considered this to be a different from Dynasty v. Princeton Ins. Co. 165 N.J. 9 (2000) in which the sprinkler system existed, but had been disabled;  justifying a determination of an “increase-in-hazard.” The Court here noted that the issue was not one of increased hazard but a claim for rescission due to a misrepresentation in the policy. On this issue, the Court questioned whether the misrepresentation was made by the insured or the broker. The Court stated that there was a question of fact as to whether the statements could be attributed to the insured. Since, however, there were other grounds to find no coverage there was no need to remand the case for a further determination of facts. Of course this is an important issue to be kept in mind in a case dealing with alleged misrepresentations in the policy; who made the statements and are the statements of the broker attributable to the entity actually applying for the coverage.

DiFrancesco, Bateman, Coley, Yospin, Kunzman, Davis & Lehrer, PC ( www.dbnjlaw.com) is a full service law firm in New Jersey which provides a broad range of legal services, including the representation of insurance companies in coverage matters. For additional information about the matters in this bulletin or in the firm’s Insurance Coverage Practice, please contact Steven A. Kunzman, Esq. 

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SteveK September 10th, 2009

      In a recent unreported decision, Rodriguez v. New Jersey Underwriting Ass’n, the New Jersey Appellate Division affirmed a decision reforming a homeowner’s insurance policy on equitable grounds. In the case, Diomedes Gonzales deeded his home to his former non-marital partner, Rosa Rodriguez. Prior to the transfer, Gonzalez had purchased insurance from NJUIA.  Although neither the mortgage holder nor the insurer were informed of the transfer, all payments were made on both from February 2000 until the time of an accidental fire which destroyed the house on September 2004.  NJUIA denied coverage on the basis that Gonzalez did not have an insurable interest in the home. Plaintiffs, Gonzalez and Rodriguez, instituted a declaratory judgment action seeking reformation of the policy and payment of the loss. The trial judge held that reformation was appropriate on equitable grounds, finding that NJUIA’s collection of premiums coupled with its failure to refund the premiums after declining the claim made it an appropriate case for policy reformation. The Court also justified the decision by concluding that NJUIA’s actions constituted unjust enrichment, and that there was no “gamesmanship” or fraud by the plaintiffs.

       After the trial and award of coverage, plaintiffs filed a motion to be able to assert a claim against NJUIA for breach of the covenant of good faith and fair dealing. In affirming the denial of the motion, the Court restated the reasoning of  Picket v. Lloyds, 131 N.J. 457, 67 (1993) that a finding of bad faith requires there to be no “fairly debatable” reason for denial  of a claim or where there is an unreasonable delay in processing a claim. Since the decision of NJUIA to deny the claim was “fairly debatable” there was no basis for a claim of bad faith to be sustained; therefore the denial of the motion was affirmed.

DiFrancesco, Bateman, Coley, Yospin, Kunzman, Davis & Lehrer, PC ( www.dbnjlaw.com ) is a full service law firm in New Jersey which provides a broad range of legal services, including the representation of insurance companies in coverage matters. For additional information about the matters in this bulletin or in the firm’s Insurance Coverage Practice, please contact Steven A. Kunzman, Esq. 

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admin August 19th, 2009

In DEB Associates v. Greater New York Mutual Insurance Company, (NJ App. Div.- approved for publication) the court held there is insurance coverage for the costs to update and correct construction code deficiencies on floors of a building arising from wind damage to another floor. The seventh floor of the building had been damaged from a windstorm. When the code officials inspected the damaged floor, they discovered that the walls had been secured to the concrete flooring with mortar, but not steel angle irons, as is presently required under the building code.  There was no evidence that the failure to use angle irons violated the code when the building was constructed.

The trial court found that the evidence was undisputed that the “repairs to the other floors would not have been required if the seventh floor wall had not collapsed and also that the angle irons were required [to be installed on all floors] as a consequence of the December 2003 partial collapse.” Although the parties agreed that the repair of the seventh floor required GNY to pay to reconstruct that floor in accordance with the current code, they disagreed as to coverage for repairs to the separate, undamaged portions of the building.

After reviewing case law from other jurisdictions, and restating that coverage sections of an insurance policy are to be liberally construed in favor of coverage; that exclusions are to be narrowly construed, and that ambiguities are to be construed against the insurer, the court concluded that since there was a causal connection between the collapse of the seventh floor wall and the requirement to bring the other floors in compliance with the existing building code, there is coverage for the corrective work. The court specifically stated that the decision was limited to the facts of the case, and that it may be different if the code problems were unrelated to the collapse of the wall. Since, however, the work to install angle irons to the remainder of the building was directly related to the cause of the initial collapse, involving the same structural part of the building and the same building code provisions. The court also stated that while the policy specifically excluded pre-existing code violations, the policy did not specifically exclude situations where a covered structure is grandfathered under the code but lost that status due to the occurrence. The court concluded that if the insurer had intended to exclude coverage in these situations, it could have written the policy to specifically exclude the coverage.

DiFrancesco, Bateman, Coley, Yospin, Kunzman, Davis & Lehrer, PC ( www.dbnjlaw.com ) is a full service law firm in New Jersey which provides a broad range of legal services, including the representation of insurance companies in coverage matters. For additional information about the matters in this bulletin or in the firm’s Insurance Coverage Practice, please contact Steven A. Kunzman, Esq. 

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admin August 19th, 2009

On June 5, 2009, the New Jersey Appellate Court ruled that an insurer is obligated to pay counsel fees incurred by the insured for a declaratory judgment action that the insurer had filed in Federal Court in Illinois, but was deferred in favor of a New Jersey action in which the insured was ultimately successful.

The case of Myron v. Atlantic Mutual (approved for publication) involved a New Jersey based company’s claim for insurance coverage for claims under the Telephone Consumer Protection Act (TCPA). Myron, a New Jersey based company, had been sued in numerous jurisdictions for allegedly sending “junk faxes” in violation of the TCPA, including one filed in Illinois as a class action.  Atlantic Mutual initially agreed to defend under a reservation of rights. After more than a year, Atlantic filed a declaratory judgment action in the United States District Court for the Northern District of Illinois seeking a determination that the Atlantic Mutual policy did not cover the claims. The declaratory action was filed shortly after the Seventh Circuit Court of Appeals (which includes Illinois) issued a decision in another action denying coverage for TCPA claims. The Court, however, dismissed Atlantic Mutual’s action due to lack of jurisdiction since the amount in controversy was less than the required $75,000.

Finding additional invoices, Atlantic Mutual re-filed.  Five days later, Myron filed a declaratory judgment action in Bergen County, New Jersey. Although the Bergen County action was dismissed due to the earlier filed Illinois federal court action, the Illinois federal court granted Myron’s motion for abstention, reasoning that New Jersey had the most substantial interest in the insurance coverage dispute. Myron then re-filed in New Jersey and was ultimately successful on the merits of Atlantic Mutual’s duty to defend, leaving the indemnity determination pending the outcome of the underlying TCPA litigation.  The court also granted Myron’s claims for counsel fees in the New Jersey declaratory action in accordance with New Jersey Court Rule 4:42-9(a)(6), which permits an award of counsel fees to a successful claimant “[i]n and action upon a liability or indemnity policy of insurance.” The trial court, however, denied Myron’s application for reimbursement of approximately $160,000 in fess incurred in the Illinois declaratory action reasoning, in part, that the rule should not apply “extraterritorially.”

On appeal, the Appellate Division reversed, holding that granting an award of the fees furthers the intent and purpose of the rule, “to discourage groundless disclaimers and to provide more equitably to an insured the benefits of the insurance contract without the necessity of obtaining a judicial determination that the insured, in fact, is entitled to such protection.” The Court also noted that this would prevent an insurer from using forum shopping to wear down an insured financially. The Court found that the two federal complaints were “battles in the war that Myron ultimately won,” and therefore can be characterized as part of the same action in the context of the applicability of Rule 4:42-9(a)(6).

This is a significant decision in that it imposes what is, in essence, a rule of procedure to a largely substantive issue. As the Court noted, it has applied the rule in suits in New Jersey where the substantive law of other jurisdictions has been applied.  In this case, however, the Court largely disregarded the distinction between the substantive laws as contained in legislation or common law, and elevated the rule based upon it’s espoused purpose, which is to provide an insured “the full benefits of the insurance contract” without the transactional costs necessitated by engaging in declaratory litigation.

DiFrancesco, Bateman, Coley, Yospin, Kunzman, Davis & Lehrer, PC ( www.dbnjlaw.com ) is a full service law firm in New Jersey which provides a broad range of legal services, including the representation of insurance companies in coverage matters. For additional information about the matters in this bulletin or in the firm’s Insurance Coverage Practice, please contact Steven A. Kunzman, Esq. 

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