Policyholder Informer

Policyholder Informer

Insurance Liability, Risks, and Options in Augmented Reality: Catch ‘Em All

The rising Pokémon Go sensation has dramatically increased the popularity of augmented reality games, but it has also brought with it increased risks and liabilities for both game users and developers alike. For those who don’t know, Pokémon Go is a mobile app that, although released just last month, has already been downloaded over 75 million times, generated more than $75 million in revenue, and boasts daily usage statistics that have exceeded Snapchat, Twitter, Instagram, and Facebook. It’s a location-based augmented reality game that allows users to partake in virtual scavenger hunts. Using the user’s GPS and mobile camera, players are encouraged to explore their surroundings, seek out animated characters in real world places, and “catch ‘em all.” The characters are overlaid on the player’s screen and displayed as if they exist in reality. Unfortunately, distracted players on the hunt can end up wandering (or driving) into places they shouldn’t be, and becoming injured or injuring others as a result.

The number of Pokémon Go calamities increases daily, with incidents ranging from the mundane to the absurd and dangerous. In the few short weeks since its debut, users have experienced or caused numerous personal injuries, property damage, and car accidents. Some users have become stuck in trees and locked in cemeteries, while more serious incidents involve users straying onto train tracks, falling off cliffs, or entering restricted nuclear power facilities—all while on the hunt for Pokémon characters. Still others in pursuit of Pokémon have trespassed on private property, and some users have even been robbed after being targeted and led to specific locations using the app.

The question that lies ahead is whether and to what extent insurance coverage may be available to respond to the unfortunate and escalating losses we see from this augmented reality product, and others that are sure to follow. For those who use the app, or have been injured by those using it, several types of policies generally provide personal liability coverage, including your standard homeowner’s insurance or renter’s insurance policy, your auto insurance policy, and your uninsured motorist coverage (which in many states is mandatory). But coverage isn’t just for the app user.

Aspiring app developers and companies that develop, manufacture, market, and distribute augmented reality apps or provide augmented reality services should not underestimate the value of appropriate insurance coverage. New companies focused on bringing their product to market in a competitive environment often overlook the value of insurance, in particular relatively new insurance products such as cybersecurity policies. Such coverages are particularly important when considering the fact that pop-up disclaimers and end-user license agreements that are common among mobile app developers don’t always provide adequate protection, and don’t necessarily apply to those injured by game players. In fact, a lawsuit has already been filed in Florida challenging the terms of Niantic’s license agreement (the company that developed Pokémon Go). And even if a licensing agreement is upheld in court, an augmented reality company may incur substantial costs defending itself.

It is therefore important for these types of game developers and companies to have sufficient liability coverage, which might be available through commercial general liability policies and errors and omissions policies; however, the unique nature of many of these claims and corresponding losses might not fit squarely into the types of insurance policies we would typically turn to in these situations. Such policies should contain broad language that clearly cover bodily injury and property damage related to, among other things, the risks associated with augmented reality.

Companies that introduce augmented reality apps would also be wise to obtain additional coverage for cybersecurity due to the potential of such apps to collect vast troves of personal data and the prevalence of data breaches today. See Blank Rome IP attorney Gabriella E. Ziccarelli’s article, The Price of Pokémon Go. As with most cases, whether coverage ultimately exists depends on the facts of the situation and the terms of your policy, so pay close attention and seek the assistance of qualified advisors when purchasing coverage to evaluate the risks, and help avoid potential gaps in coverage for augmented reality risks.

Whether Pokémon Go becomes a long-term success for Nintendo Co. remains to be seen. Nintendo stock soared earlier last month, only to plummet last week after realizations came to light that it didn’t actually develop or publish the game (Niantic, Inc. did; Nintendo only has a percentage interest in the company that markets and licenses the Pokémon franchise to outside developers). Nevertheless, the game’s status is at an all-time high and augmented reality games are likely to become more prevalent, thus increasing the need for sufficient coverage. As augmented reality continues to rise in popularity, it will becoming increasingly important for policyholders to know what insurance options are available to them, and developers of augmented reality products must be mindful of ensuring their business is adequately insured and protected.

Although it’s too soon to know whether carriers will start to offer new coverages and/or apply exclusions specific to augmented reality, at least some specialty insurance options have already popped up. One company claims to offer “Pokedex Insurance” (which is limited to the cost of one’s phone), while a Russian bank just announced that it will provide “free insurance” to its customers who play the game (up to $800). Whether or not these are mere marketing ploys looking to capitalize on the Pokémon frenzy remains to be seen. In any event, savvy policyholders, insurers, and brokers will no doubt have their eye on the augmented reality space as it continues to grow in popularity.

Ensure You Are Covered as Food Companies Face Recall Risks

A wide number of companies have been in the news in recent months as a result of food contamination or food recall events. However, such problems are not isolated to companies with poor safety records or lackadaisical quality controls. In fact, a report issued by Swiss Re, the international reinsurer, has found that the number of United States food recalls—and the costs associated with those recalls—have nearly doubled since 2002. And this is a trend that is likely to continue as the food industry becomes increasingly integrated, the regulatory requirements become increasingly complex, and infectious diseases become increasingly drug resistant. Accordingly, all companies involved in either the food or health supplement industry must plan not for “if,” but “when” a recall is necessary.

To this end, insurance should be a key component of every company’s risk management strategy, and there are a number of specific insurance products on the market to assist. For example, a number of insurers have started marketing policies to “food and beverage” companies that purport to provide coverage for “accidental contamination” and/or “recall.” Unfortunately, these products have only recently been tested in the courts, and policyholders have been generally disappointed to learn that these policies do not provide the breadth of coverage expected.

For example, in Fresh Express Inc. v. Beazley Syndicate 2623/623 at Llyod’s, 131 Cal. Rptr.3d 129 (Ct. App. 2011), a California court of appeals held that a policyholder was not covered for a government-requested recall of its fresh spinach, because it was ultimately established that Fresh Express’s products were safe and that the E. coli contamination was limited to its competitor’s products. Therefore, although Fresh Express had acted at the direction of government regulators and in the best interest of the public, it nevertheless was unable to access its insurance coverage.

Wornick Co. v. Houston Casualty Co., No. 1:11-cv-00391, 2013 U.S. Dist. LEXIS 62465 (S.D. Ohio May 1, 2013), is a second example of a policyholder not being able to access its coverage despite its loss arising from a government-requested recall. In Wornick, a producer of “Meals-Ready-to-Eat” (“MREs”) for the government was required to issue a recall because an ingredient in one of the MREs’ components had been recalled for salmonella. Nevertheless, the Wornick court ruled that the policyholder’s MREs were not “contaminated” nor “impaired” because it could not be established that the supplier’s product actually tested positive for salmonella.

In a third case, a policyholder was determined to have no coverage because although its product tested positive for listeria, the strain of listeria was ultimately determined not to be harmful to humans if consumed. Little Lady Foods, Inc. v. Houston Cas. Co., 819 F. Supp. 2d 759 (N.D. Ill. 2011). Therefore, once again a company that acted prudently by withdrawing a product from the market that had tested positive for potentially harmful bacteria was ultimately surprised to learn that its “accidental contamination” coverage did not insure its substantial losses.

However, the case law is not all bad. In a matter litigated by this author, a federal district court determined that a chicken producer was covered for both “accidental contamination” and “government recall” when the government refused to apply the mark of inspection to product within its facility because of poor pest control and sanitation conditions. Foster Poultry Farms Inc. v. Certain Underwriters at Lloyd’s, London, No. 1:14-cv-953 (E.D. Cal. Jan. 20, 2016). The court ruled that the language in Foster Farms’ policy did not actually require “contamination” but only an “error” in the manufacturing process, which itself was self-evident based on the government’s refusal to apply its mark of inspection. Furthermore, the Foster Farms court held although the affected product had not left Foster Farms’ possession, its destruction still constituted a “recall” because this term had not been defined by the insurer, and a policyholder should not be required to endanger public safety in order to secure its insurance coverage. The lesson of Foster Farms is two-fold:

  • First: Policyholders should not accept conventional wisdom, but instead consult with experienced coverage counsel.
  • Second: The language used in the policy is critically important, with subtle differences potentially being determinative of coverage.

This second point should be considered not only when a claim arises, but when the policy coverage is purchased and renewed. As the case law develops and insurers compete with each other for market share, the language of first-party food liability coverage is likely to change significantly in the next couple of years. Simply buying coverage “off the rack” may result in a policyholder not securing the coverage it intended.

Instead, a policyholder should:

  1. Carefully evaluate its risks:
    • Could potential loss emanate from suppliers’ conduct or the conduct of the supplier’s supplier?
    • What are the chances of unfounded adverse publicity?
    • Will government regulators “order” a recall or only suggest one?
    • Could loss result from an innocuous mistake in quality control testing and/or documentation?
  2. Consult with food liability insurance specialists who can identify potential gaps in coverage based on the policyholder’s particular risks.
  3. Push its insurers for more expansive coverage, while also remembering to identify any past losses, because misstatements in an application may serve as the basis for rescinding coverage.

An ounce of prevention at the time a policy is purchased is worth a pound of coverage when a contamination event occurs or a recall is required.

Wage-and-Hour Policies May Be a Useful Asset to Fill Potential Coverage Gaps

As a wise person once said, “It’s déjà vu all over again.” Anyone who thought wage-and-hour lawsuits would be a short-lived lawsuit du jour of the plaintiffs’ bar have been proven wrong. Claimants filed more than 8,900 FLSA cases in federal court last year, a 30 percent increase from 2011. In light of the continued trend and recent legislation that has the potential to expand liability to individuals acting on an employer’s behalf, employers should take a hard look at the insurance assets available to protect against these potential liabilities.

California’s new statute, the Fair Day’s Pay Act, has the potential to implicate a “person acting on behalf of an employer” to liability for the company’s allegedly improper wage-and-hour practices. Labor Code § 558.1 (eff. Jan. 1, 2016). New York amended its existing Business Corporation Law § 630, effective January 19, 2016, to extend potential liability for unpaid wages to the top 10 shareholders of privately held corporations incorporated in New York and foreign corporations. While employers and individuals are armed with a wide array of defenses, the potential risks warrant a close look at what insurance assets a company has available to offset any potential liabilities in this continuously growing area.

D&O and EPLI insurers frequently respond to wage-and-hour coverage claims with a panoply of defenses. Even if there is a question as to whether a wage-and-hour lawsuit gives rise to coverage, there may be a strong argument that coverage is implicated in most wage-and-hour suits because of the very nature of the lawsuits. Some of these lawsuits allege that employers misclassified or improperly designated the status of their employees as “exempt” from overtime laws, failed to enforce adequate wage-and-hour policies, or coerced employees into working excessive hours. In fact, many wage-and-hour lawsuits allege that employees were told that they were “exempt” from overtime requirements when they were, in fact, not exempt. Such allegations should constitute “misrepresentations” covered by an EPLI policy and, to the extent they implicate individuals, may be covered by D&O policies. Additionally, EPLI policies often expressly cover the types of allegations pled in wage-and-hour lawsuits under broad “Wrongful Employment Act” definitions that include coverage for “employment-related misrepresentations,” “employment-related discrimination,” “failure to implement and enforce appropriate corporate policies and procedures,” and “breach of implied contract.”

Notwithstanding arguments in favor of coverage, insurers frequently assert that FLSA exclusions and carve-outs from the policies’ “Loss” definition bar or substantially limit coverage for wage-and-hour lawsuits. Accordingly, companies should consider purchasing specialty wage-and-hour policies to fill potential gaps in coverage. Several Bermuda and London-based insurers, including Beazley, Markel, and AWAC, and at least one domestic insurer (AIG), are marketing wage-and-hour policies. Companies should be mindful, however, that these specialized policies include many of the less policyholder-friendly attributes frequently found in foreign-market policies. When deciding whether purchasing such a policy is a prudent business decision, companies should evaluate those attributes, which may include high self-insured retentions, mandatory London arbitration provisions, and New York choice of law provisions.

Coverage disputes involving wage-and-hour lawsuits are nothing new. But given the continued risk, companies may be well-served to revisit whether their present insurance portfolio adequately protects its business.

The Insured v. Insured Exclusion and Section 1123: the Primacy of Bankruptcy Law and the Importance of Planning Ahead

The Insured v. Insured (“IVI”) exclusion is a frequent and important issue for directors & officers (“D&O”) liability coverage, particularly where the bankruptcy of an insured entity may blur the lines of who is an insured and who is acting on behalf of an insured. Nevertheless, because the exclusion generally bars coverage for a claim made against an insured individual that is “brought or maintained by or on behalf of” the insured entity, whether the IVI exclusion applies is often the single most important coverage issue for the many claims often asserted against a debtor’s former directors and officers in bankruptcy.

Although the applicability of the IVI exclusion to bankruptcy-related claims has been litigated several times and often decided in favor of insurers, none of those cases has addressed the critical question of the primacy of Bankruptcy Code Section 1123, and how this provision may prevent application of the exclusion in such circumstances. Therefore, as insurers become more emboldened by their prior victories, debtors, their former directors and officers, as well as their bankruptcy and coverage counsel should be careful to consider Section 1123 both when drafting the debtor’s plan of reorganization and in any subsequent insurance coverage litigation.

Bankruptcy plans often now provide that certain claims will be prosecuted by a litigation trustee for the benefit of a creditor trust post-bankruptcy. A number of cases have applied the IVI exclusion to defeat coverage for such claims. Most recently, in Indian Harbor Insurance v. Zucker, a federal district court in Michigan held that the IVI exclusion applied to bar a claim brought by a trustee appointed to a post-bankruptcy litigation trust. In reaching this conclusion, the Indian Harbor court followed earlier similar decisions in a number of other federal courts, including the Ninth Circuit (Biltmore) and district courts in Virginia (R.J. Reynolds) and Missouri (Weis).[1]

Although each of these decisions was in large part driven by its particular facts, the basic premise of each is that a post-bankruptcy trustee is an ordinary assignee of the debtor company—an insured—and therefore purportedly stands in the shoes of such insured debtor for purposes of the IVI exclusion. This finding of an alleged “ordinary assignment,” however, ignores the fundamentally different nature of transfers pursuant to Bankruptcy Code Section 1123 when compared to ordinary assignments pursuant to state contract law and the fact that a post-bankruptcy trustee assumes special powers as an estate representative.

Section 1123 requires that a plan “provide adequate means for [its] implementation,” including the final disposition of all estate property.[2] Two expressly sanctioned means for doing so are “transfer of all or any part of the property of the estate to one or more entities, whether organized before or after the confirmation of such plan” and “the retention and enforcement . . . by a representative of the estate appointed for such purpose, of any such claim or interest.”[3] Importantly, Section 1123 expressly applies “[n]otwithstanding any otherwise applicable nonbankruptcy law.”[4] Case law outside the insurance context already establishes that the transfer of a claim combined with a grant of standing to a representative of the estate to pursue that claim post-confirmation is not necessarily an “assignment” and certainly is not an ordinary assignment under state law.[5]

For example, in Metropolitan Creditors’ Trust v. Pricewaterhousecoopers, LLP, 463 F. Supp. 2d 1193 (E.D. Wash. 2006), the issue was whether such an appointment and transfer pursuant to Section 1123 violated a “nonassignment” clause in the defendant’s engagement letters.[6] Citing Section 1123, the court held that the transfer of the claim pursuant to the debtor’s bankruptcy plan was not an “assignment,” suggesting that “courts should follow a case-by-case approach in determining whether an appointed party is serving as an assignee or as a representative of the estate.” Id. (citations omitted). In reaching this conclusion, the court set forth a two-prong test for making this determination: (1) “whether recovery by the appointed party would benefit the debtor’s estate and its unsecured creditors,” and (2) “whether the appointment in question was approved by the bankruptcy court.” Id. at 1199. If the answers to both of these questions is yes, the third party is treated as a representative of the estate and the transfer is not an assignment barred by contractual “nonassignment” clauses.

In Metropolitan, this test was easily satisfied: the bankruptcy court had “approved the Joint Reorganization Plan, which incorporate[d] the Trust Agreement,” the “aim of establishing the Trusts was to liquidate [the debtors’] assets for the benefit of their creditors,” and a “reference to Section 1123 in the trust agreement . . . manifest[ed] a clear intent to appoint the Trusts as representatives, rather than assignees, of the debtors’ claims.” 463 F. Supp. 2d at 1199-1200. Accordingly, estate claims that are transferred to a post-bankruptcy trust pursuant to the superseding bankruptcy powers of Section 1123 are done so free and clear of any restrictions that would undermine the transfer’s purpose.[7]

Insureds and their insurance coverage counsel generally have neglected the importance of these Bankruptcy Code mechanisms in arguing against the application of the IVI exclusion to claims brought or maintained by post-bankruptcy trustees.[8] Insureds should be more careful not to leave such arguments on the table. Likewise, debtors, creditors’ committees, other plan proponents, and their respective bankruptcy counsel should be aware of these important issues when drafting the debtor’s plan of reorganization and related documents, and should draft such documents to avoid any mention of an alleged “assignment” and specifically state that any transfer of a claim is being executed pursuant to the controlling provisions of Section 1123.

As Metropolitan makes clear, perhaps the best time to ensure that a Section 1123 transfer will not implicate an IVI exclusion is at the time plan documents are completed and submitted to the bankruptcy court for approval. Although often overlooked, even in insurance coverage disputes an ounce of prevention can be worth a pound (or policy limit) of cure.



[1] Indian Harbor Ins. v. Zucker, No. 1:14-CV-1017, 2016 WL 1253040 (W.D. Mich. Mar. 31, 2016); see also Biltmore Associates, LLC v. Twin City Fire Ins. Co., 572 F.3d 663 (9th Cir. 2009); In re R.J. Reynolds, 315 B.R. 674 (Bankr. W.D. Va. 2003); Reliance Ins. Co. of Illinois v. Weis, 148 B.R. 575 (E.D. Mo. 1992), aff’d in part, 5 F.3d 532 (8th Cir. 1993).

[2] 11 U.S.C. § 1123(a)(4).

[3] 11 U.S.C. § 1123(a)(5)(B) (emphasis added); 11 U.S.C. § 1123(b)(3)(B) (emphasis added). See also 11 U.S.C. § 1123(a)(3)(A) (emphasizing that the “debtor” and the “estate” are separate legal entities with separate claims and interests).

[4] 11 U.S.C. § 1123(a).

[5] See, e.g., Citicorp Acceptance Co. v. Robison (In re Sweetwater), 884 F.2d 1323, 1327-30 (10th Cir. 1989); Guttman v. Martin (In re Railworks Corp.), 325 B.R. 709, 719 (Bankr. D. Md. 2005).

[6] Anti-assignment clauses also have been addressed in the context of insurance policy transfers, with courts likewise concluding that Section 1123 and other provisions in the Bankruptcy Code permit such transfers notwithstanding any anti-assignment clauses in the policies or contrary state law. E.g., In re Fed.-Mogul Global Inc., 385 B.R. 560, 566, 571 (Bankr. D. Del. 2008), aff’d, 402 B.R. 625 (D. Del. 2009), aff’d, 684 F.3d 355 (3d Cir. 2012).

[7] See, e.g., Jewel Recovery, L.P. v. Skadden, Arps, Slate, Meagher & Flom (In re Zale Corp.), Adv. No. 395-3599, 1996 Bankr. LEXIS 1933 (Bankr. N.D. Tex. Sept. 5, 1996); Parrett v. Nat’l Century Fin. Enters., Inc., No. 2:04-CV-489, 2006 WL 783361, at *4-5 (S.D. Ohio Mar. 23, 2006); see also Cirka v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., No. 20250-NC, 2004 WL 1813283, at *8 (Del. Ch. Aug. 6, 2004).

[8] The only coverage litigation where the issue appears to have been raised is American Casualty Company of Reading, Pa. v. Gelb in the New York Supreme Court and Appellate Division, First Department. In that case, attorneys now at this firm raised the argument but ultimately prevailed on other grounds. Neither the trial nor appellate court addressed the Section 1123 arguments. The insureds’ briefing for this case is available here.

What’s All This I Hear About Captives?

In our experience, a lawyer specializing in insurance coverage—even a whole group of insurance coverage lawyers—can practice for decades hearing the word “captive” thrown about by brokers or risk managers in large companies without being asked to address legal issues relating to a captive and without understanding what the heck a captive is or how it works. The National Association of Insurance Commissioners (“NAIC”) and the Center for Insurance Policy Research define a captive as “an insurance company created and wholly owned by one or more non-insurance companies to insure the risks of its owner (or owners).”[1] So at its core, a “pure” captive is a quasi-insurance company set up and funded by a business to serve as a form of self-insurance.

Captive Facts and Figures

While captives have been in existence in some form for 100 years, the use of captives has exploded in the last thirty-five years. According to A.M. Best, there are approximately 6,000 captives globally, up from 1,000 in 1980. The businesses who take advantage of this form of risk retention range from huge multi-national corporations (most Fortune 500 companies use captive subsidiaries) to small businesses in highly regulated industries (e.g., trucking) to sophisticated non-profits (e.g., hospitals). The formality, complexity, and size of captives ranges similarly. For instance, of the 6,000 captives currently operating, A.M. Best rates 200 of them. A.M. Best explains why a captive would want its rating services:

Although a rating on a captive is comparable to any other rating issued by A.M. Best, we recognize that captives serve special purposes and typically have an operating style that differs from the conventional market. A rating can be of benefit to a captive by demonstrating its financial strength and its best practice performance to a variety of stakeholders, such as fronting insurers, reinsurers, and a parent not otherwise engaged in insurance.[2]

In a parallel regulatory regime to conventional insurance companies, the organizing entity of a captive insurer must “domicile” the captive in a particular jurisdiction. Few jurisdictions, however, provide for captive-domiciled insurers, although that number is growing. The most popular domiciles for captives are Bermuda, the Cayman Islands, Guernsey, Luxemburg, Ireland, and Vermont (who would have thought?). Each of these domiciles provides a statutory regulatory structure which imposes greater or lesser requirements of reporting, capital, and reserves. For example, Vermont’s insurance statutes contain a lengthy section devoted to the establishment and regulation of captives. See 8 VSA § 6001, et seq. Along with the regulatory regimes, an industry of lawyers, accountants, and actuaries has grown up to provide the services necessary to support captive insurers.

Why Form A Captive?

So why would a business with no experience in the insurance industry go to the time and expense to set up a captive insurance company in the Cayman Islands (sounds good for winter board meetings) or Vermont (sounds good for winter or summer board meetings) to cover its risks? The answer to this question differs depending on whether a company considers the use of a captive as an alternative to real self-insurance or as an alternative to purchasing a conventional insurance policy.

As an alternative to real self-insurance where a business simply absorbs and pays out of income all of its losses, a captive offers financial and administrative benefits. First, the premiums paid to a captive insurer that serve as the reserve fund for the payment of losses are tax deductible. This is not the case for losses paid directly by the business, even if the business has set up a separate reserve fund. Second, if a business faces a significant volume of claims, the establishment of a captive can reduce balance sheet uncertainty by providing historical claims and loss data, and can professionalize the approach to claims handling and reserve setting.

As an alternative to commercial insurance, a captive offers both significant advantages and some notable disadvantages. Based on the perceived riskiness of their industry, or a history of significant claims or other perceived blots on their record, some business are simply unable to purchase needed insurance at a reasonable price—or at all. Commercial insurance also sometimes includes exclusions or coverage language that does not match the risks of the business and is accordingly not worth the premium. Formation of a captive can take the place of commercial insurance, or can provide a primary layer of insurance that makes it more palatable for commercial insurers to sell excess above the captive layer. Running insurance through a captive using a reputable actuary to make projections for several years provides historical claims and loss payment information and reserving data that may eventually lead to commercial insurers taking on the risk. Depending on the type of business, a captive primary level, or a captive reinsuring a commercial fronting insurer, can save significant money. In an insurance tower, primary insurance is typically the most expensive. A well-run captive can reduce the primary layer cost by eliminating the commercial insurer profit margin and risk premium and layers of overhead. (Some estimate the savings at 15-30 percent).

All those advantages do not come without disadvantages. For instance, some business entities are simply not equipped to establish and run an insurance company, no matter whether it is minimally regulated or heavily regulated. To do the job properly, the business must hire experienced claims administrators to take in and evaluate claims, assign claims handlers or hire outside counsel, supervise outside counsel, work with actuaries to set appropriate claim reserves, work with accountants to properly administer the books and records of the captive, set up a formal governance structure with a board and annual meeting in the domicile, and interact with the regulators. In a huge corporation with many claims, the captive administration is a big business. Because large corporations have insurance towers in every segment of their risks (D&O, E&O, cyber/IT, EBL, fiduciary, etc.), the captive insurer is the primary claims administrator and its handling of claims may affect the interests of the excess insurers. Once a large claim hits that may call on excess insurance, excess insurers will undoubtedly flyspeck the work of the captive and even deny claims based on alleged negligence or intentional misconduct by the captive which typically might include faulty notice and under-reserving. Regulators may claim that a captive has over-reserved, a practice that shelters more income of the sponsoring entity from taxation.

Captives Come in Different Flavors

As stated above, the “pure” captive insures only the risks of the parent, sponsoring company or owner. There are also “group” or “association” captives that are formed by unrelated groups of entities for the purpose of insuring the group against similar risks. There are also “rent-a-captive” arrangements where a company may sponsor a captive and then “rent” out the capital of the captive to other businesses who then maintain an account within the captive, but do not have the burden of maintaining and administering the captive’s insurance functions. There are “protected cell” or “segregated cell” captives which provide for separate accounts within the captive for different business entities where the capital of each cell is not exposed to the liability risk of the other cells. Each of these captive types carries its own advantages and disadvantages, greater or lesser administrative burdens and higher or lower expenses.[3]

So what’s not to like about captives? They can cost less, cover more, and provide for much greater control by the sponsoring companies in the handling of claims. But the advantages come with complexity, statutory regulation, the need to engage professionals, and the imperative of scrupulous oversight.


[1] “Captive Insurance Companies,” http://.naic.org/cipr_topics/topic_captives.htm (Updated 3/28/2016).

[2] AM Best Captive Update, News of Alternative Risk Markets From A.M. Best Company, January, 2016.

[3] While the subject of captive insurance – like actuarial science – seldom appears on the top ten most exciting insurance topics, the most current “hot topic” in captives relates to the establishment of captives by insurance companies to finance a particular type of reserves in the universal life context. In some circumstances, understood only by those steeped in the topic, these reserves are considered excessive or redundant statutory reserves. Insurance companies set up captives to fund these redundant reserves and can use assets to capitalize the captive that would not permitted reserves on their own books (non-admitted assets).

“Private” Claims Resolution Programs – Some Keys to Success

In recent years, we have seen an increasing use of a claims resolution (non-litigation) program offered as an efficient way to resolve large numbers of claims by companies faced with potentially vast and costly lawsuits. Examples include the voluntary program set up by General Motors to resolve injury and death claims related to alleged ignition switch defects in over two million cars; the $4.85 billion program set up to resolve certain Vioxx claims against Merck & Co. in the federal multidistrict litigation (“MDL”); the multi-billion dollar fund set up by BP to address claims arising from the 2010 Gulf oil spill; and the current proposal by Volkswagen to set up a claims program to resolve claims arising out of misleading emissions measures in half a million cars sold in the United States.

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Do You Have Insurance for Drone Liabilities?

Unmanned aerial vehicles, popularly known as drones, present enormous commercial potential for companies seeking to use this new technology to collect data. Drones are currently used for data collection in a number of fields. For example, farmers use drones to collect crop data, oil companies use drones to explore for oil and gas, surveyors use drones to create maps, and sports teams use drones to analyze practices. Numerous other industries will find uses for drones as regulatory barriers are relaxed.

Drones also present certain risks. Drones obviously pose the risk of colliding with objects and living things. Fortunately, the insurance industry has started to introduce specialized insurance coverage for these types of risks. And technological developments, such as sense-and-avoidance technology, promise to enhance drone safety.

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Government Investigators at Your Door? Check Your Insurance Policies.

A governmental entity may initiate an investigation with something as seemingly innocuous as an “informal” request for information, or as ground shaking as armed government officials executing a full-blown search and seize warrant at your company’s headquarters. In either scenario, the ensuing investigation is likely to be expensive, time consuming, and a distraction from your business operations. Any governmental investigation can quickly escalate into an extensive and protracted inquiry that forces your company to spend significant time, resources, and legal fees responding to (and defending against) the government’s investigatory demands. These investigations may also result in subsequent legal or administrative enforcement actions, which expose the company and its directors and officers to potential liability for damages, fines, penalties, and other financial obligations. These actions pose a serious threat to the organization and its top brass, and must be met with a vigorous defense. The crucial question is: How will you pay for your response and defense? The answer may lie with your insurance portfolio.

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Top 5 Tips for Insureds Following Winter Storm Losses

This week, winter snowstorms swept through the East Coast of the United States and several surrounding areas, leaving snowfall of up to two to three feet in a 36-hour period. In the bustle to get the snow cleared and get back to work, companies and individuals should be sure to maximize all available insurance coverage.

Winter storm losses can be serious and expensive.  At least one source estimates that the cost of the recent East Coast storm could range from $585 to $850 million. While not all costs will be covered by insurance, insurance policies can protect against a variety of losses relating to winter storms. For example, damaged buildings and property may be covered under a first-party property policy, as can business interruption losses that are caused by property damage. Snow and ice can also potentially expose a company to third party claims for bodily injury or property damage relating to conditions on their property, which may be covered by liability insurance.

The following five tips will help insureds maximize their coverage for winter storm losses and get back on their feet quickly.  Continue Reading

Don’t Let Insurers Use Attorney-Client Privilege to Shield Claims Handling Documents

Upon receiving an insurance claim from its policyholder, an insurer is obligated to promptly and reasonably investigate, adjust, and determine whether to pay a claim. Those are fundamental aspects of an insurer’s business that arise with respect to every claim. Reports by insurance investigators or adjusters, prepared during the processing of a claim, are discoverable as made in the regular course of the insurer’s business.

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