News Out of the UK Last Week:
The headlines last week were encouraging…”UK Policyholders Win FCA Test Case For Lockdown Payouts”. And while it is true that quite a few insureds scored a victory last Monday when the UK’s Financial Conduct Authority (FCA) held that hundreds of thousands of small businesses were entitled to insurance coverage for losses sustained as a result of the COVID lockdown, it is also true that the win was limited in its scope. Remember, the FCA was only considering UK policies and whether or not coverage existed under the “non-damage ‘extensions’ to the business interruption coverage provided under property policies. Unlike in the US where policies are written differently and the question still remains open (although most courts to date have sided with insurers), the FCA concluded quite early after the COVID lockdowns began that the standard BI coverage is contingent on the occurrence of material damage to the insured premises which had not occured during COVID.
For those small business insureds who purchased the non-damage extensions such as the disease clauses and the denial of access clauses, the FCA decision was welcome news. The FCA held that “most but not all of the disease clauses (in the policies) offer coverage, (while only)…some denial of access clauses provide coverage….(depending) on several factors, like whether the business was forced to close completely or was still allowed to operate in a limited way.”
Insurers are being urged by the FCA to either begin to pay out under these non-damage extensions or appeal quickly. It will be interesting to see if and how this decision impacts cases in the US.
A Non-Covid-Related Insurance Coverage Decision:
The US Court of Appeals for the Ninth Circuit issued an important insurance coverage decision last week in the AXIS Reinsurance Company v. Northrop Grumman Corporation case.
Northrop-related entities and individuals were under fire for charging excessive fees to employee benefit plan participants. The Department of Labor and plan participants brought separate, yet related, legal actions. Northrop and the DOL settled at the end of 2016. The parties entered into a confidential settlement under which the company paid undisclosed amounts to both the DOL and the impacted Northrop benefit plan. The excessive fee case filed by plan participants settled in mid-2017 for over $15M.
Northrop carried fiduciary liability insurance that paid out both defense and settlement amounts in connection with the two related matters. Three layers of insurance, each written in chunks of $15M, were in play. The primary insurer (AIG) and the first excess insurer (CNA) believed that the DOL settlement was insurable loss, and, after payment of such loss, AIG exhausted its limit of liability, and CNA eroded a substantial portion of its limit. When the excessive fee case settled, CNA's remaining limit was exhausted, and the second excess insurer, AXIS, paid a portion of its limit of liability.
Although AXIS did not dispute coverage for the plan participants’ excessive fee settlement, the insurer filed suit against Northrop claiming that the DOL settlement that eroded a large portion of the underlying insurance was not covered loss and, as a result, Northrop had been unjustly enriched. “Specifically, AXIS argued that DOL (s)ettlement payment constituted disgorgement, rendering it ‘uninsurable under [California] law, and, therefore, an ‘uncovered loss’ under the terms of the primary and excess policies.“ The lower court agreed with AXIS, but the Appeals Court reversed.
Under the improper erosion theory put forth by AXIS, the insured takes the risk of its underlying insurers making coverage decisions with which the excess insurers may ultimately disagree. Northrop argued that AXIS, the excess insurer itself, “assumed the risk that Northrop’s primary and first level excess insurers might adjust claims in a manner that would trigger AXIS’s secondary excess coverage.”
The Appeals Court ultimately found for Northrop holding that… “an excess insurer may not challenge (underlying insurers’) decisions in order to argue that the underlying liability limits were not (or should not have been) exhausted absent a showing of fraud or bad faith, or the specific reservation of such a right in its contract with the insured.” There were no allegations of fraud or bad faith in this case; and, although there was erosion language in the AXIS policy, the court found that the policy “did not clearly and unambiguously reserve for AXIS a right to challenge” the underlying insurers’ payment of the DOL settlement.
As policyholders and practitioners, we should be prepared for excess insurers to amend their policies to specifically provide for the right to challenge the underlying insurers’ payment of what they (the excess insurer) deems uncovered loss.
When asked how she would like to be remembered, the late Justice Ruth Bader Ginsberg replied, “[I would like to be remembered as] someone who used whatever talent she had to do her work to the very best of her ability. And to help repair tears in her society, to make things a little better through the use of whatever ability she has.”
May we all strive for the same.
Martin Croucher, UK Policyholders Win FCA Test Case for Lockdown Payouts, Law360, September 15, 2020.
Martin Croucher, FCA Urges Insurers to Advance Claims After Test Case, Law360, September 21, 2020.
Axis Reinsurance Co. v. Northrop Grumman Corp., case number 19-55135, in the U.S. Court of Appeals for the Ninth Circuit, September 14, 2020.
Ruth Bader Ginsburg in pictures and her own words, BBC.com, September 19, 2020.
Senior Vice President, Legal & Claims firstname.lastname@example.org