In this episode focusing on data centers, real estate partner John Simonis and insurance recovery partner Chris Mosley join Paul Sovik-Siemens, senior VP and managing director for project risk at Lockton, to explore critical insurance considerations, challenges, and best practices for data center development and construction projects. The panel discusses the nuances of builder’s risk and liability insurance, the importance of wrap-up policies, and strategies for structuring insurance programs to protect large-scale data center investments.

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Transcript:

Intro: Hello and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at [email protected]. We'll be happy to assist. 

John: Hello, everyone, and welcome to Insured Success, a segment of our Reed Smith Data Center series. Today, we will be discussing insurance-related considerations and best practices for data center construction projects. My name is John Simonis. I'm a real estate attorney and co-chair of Reed Smith's Global Data Center subgroup. I specialized in data center transactions development for many years, including a negotiation of numerous design and construction contracts. Today, I'm joined by my partner, Chris Mosley, and by Paul Sovic-Siemens, who is a senior vice president and manager of project risk at Lockton Companies. Lockton is one of the top insurance brokerage firms for substantial construction projects in the U.S. Both Chris and Paul have extensive experience structuring and negotiating insurance programs for data center and other substantial construction projects. Chris, can you share a bit more overview on your background? 

Chris: Thanks, John. So I'm Chris Mosley. I'm a partner in Reed Smith Insurance Recovery Group. I have been representing businesses in insurance-related matters for more than 30 years. I have a particular specialty in representing owners and contractors in construction-related matters, and that work includes the assistance in negotiating insurance policies and the appropriate insurance provisions in general contracts and subcontracts on the front end, as well as handling claims that may arise after the fact, which most people see when we sue insurance companies. But the bottom line is that for the entirety of my career as well as my team, we've been helping businesses that are involved in the construction of large-scale projects from the beginning through the end of the project and then through claims that may occur thereafter as well. 

Paul: My name is Paul Sovik-Siemens. I run our project risk department in the west for Lockton. My career has spanned over 20 years in construction-related insurance. I spent the first several years on the carrier side, most recently joined Lockton, and in the last five years, I've worked in our group that focuses primarily on setting up construction-related insurance for projects. A lot of our projects recently have been focused on data center clients, and so we've had a lot of experience lately structuring deals and negotiating with the contractors and figuring out the best way to cover these data center assets. 

John: Thanks for the background, gentlemen. So data center construction projects are large, complex, expensive projects, often costing hundreds of millions of dollars or even billions of dollars. And the insurance costs can be several million dollars as well. So from an insurance coverage standpoint, they're obviously very complex. But maybe we can start with a little bit of an overview on the coverages that would typically be negotiated in an insurance program from a data center project. Chris, maybe you can start by giving a little overview on the differences between the builder's risk aspects of the project versus the liability insurance. 

Chris: Sure. So when insuring a project like a data center, there's really, as a general overview, two basic types of coverage. What we call in the insurance trade first-party coverage or third-party coverage, first-party coverage being things like builder's risk, third-party coverage being things like liability insurance. But what are those policies and what do they do? Well, the simplest way to understand it is to think about having two data centers next to one another. Say, John, you own one data center and Paul owns the other. And there's a tower on John's property, call it a cell tower or whatever the case may be, and it falls. If that tower falls on your own data center, say John's data center, then John's going to call his first-party property carrier and say, this tower fell upon my building. There was a significant amount of damage to my building. I need you, the insurance company, under your first-party policy to pay for that. And first-party policies can look like builder's risk during the course of construction or a commercial property policy after construction is complete. Now let's take the other situation where the tower on John's property falls onto Paul's data center and damages that data center. Now, Paul has sustained a significant amount of loss because of the damage to the data center and perhaps some other damages that flow from that, and Paul sues John. One thing to understand about a liability policy, and this is true with any liability policy, it is a lawsuit policy. So anytime you hear liability policy, it's a lawsuit policy designed to protect you against lawsuits filed by third parties. So when Paul sues John, John contacts John's liability carrier and says, I've been sued because my tower fell on Paul's data center. Please protect me and provide me the two benefits under the liability policy is, which are paying for my defense, that is giving me a lawyer and paying for it, and then paying for any judgment or settlement that may occur thereafter. Those are the two basic types of policies that are intended to cover a project like a data center, both before and after the project completes. 

John: So with that background, Paul, maybe we can jump to the liability insurance and in particular, maybe one part of the liability insurance that I have often found to be misunderstood, the completed operations coverage. 

Paul: Happy to hit on that. So if we were talking about liability related to a construction project or construction operations, think of it in two different buckets. The first bucket are the premises or operations of that construction site. An example of a scenario where that would be triggered is if I'm walking by Chris's job site and Chris drops a hammer and it hits me, that's a liability during their premises and operations. So I would turn around and sue Chris and his job site. As Chris mentioned, it's a legal policy to where we're going to recover damage through the premises operations. The second bucket of a construction policy is called the Products Completed Operations and Construction Defect Coverage. Now, that coverage starts after the project has been put to its intended use, is finished, certificate of occupancy. Any of those triggers can set it into the post-construction completed operations phase. Now, what does that give you? That gives you construction defect claims for problems that arise sometime between post-completion and generally the statute of repose. So an example like that would be that you build your building, you've got no problems, it's operating no problem the first two years, and then all of a sudden, year three, you're figuring out that there seems to be some water penetrating and perhaps creating some damage. Water damage is a huge component and a driving loss in the construction defect phase. And this general liability policy is there to cover resulting damage from that construction defect water loss. 

Chris: And John, the only thing I would add, I think Paul described it perfectly. As an oversimplification, your premises and ongoing operations occurs until you get to the CO point, and thereafter, you're in the completed operations coverage, which hits the construction defect coverage Paul was talking about. 

John: And I guess similarly, your builder's risk policy, which would be your property coverage during construction. At some point transitions to your traditional property insurance on an operating facility, correct? 

Paul: That's correct. And that policy operates differently than the liability policy. As Chris mentioned, it's a first-party policy just during the course of construction. And when you're talking about building a construction project and when you want to get that coverage in place and the builder's risk, you really got to focus on the construction schedule. You want to start it when there's something there to insure, meaning if you've gone out and you've done some grading or you've brought materials on site. Anything that can sustain property damage, you'll want to have your builder's risk policy in place at that point. Fast forward towards the end of the project, builders risk carriers are not interested in covering your operations. So as you approach the completed phase of your construction project, you've got to make sure that you're coordinating with your permanent property carrier to transition that policy off so that there is no lapse in coverage on the builder’s risk. 

John: Paul, you touched on one thing I think is worth some emphasis, and that is that supplies, materials, equipment that's delivered on site and stored before it is incorporated into the improvement itself. I think that's becoming a bigger issue. Recently did a podcast on tariffs in data center construction. And one of the things that was emphasized during that discussion was that to avoid tariff uncertainty and tariff increases, a lot of developers are focusing on potentially doing early procurement. But if you do that early procurement, you really have to focus on making sure that whatever you, the delivered materials, delivered equipment is appropriately covered in the interim until it's incorporated into the improvement. 

Paul: That's correct. And that's a focus you'll need to have when you put together a builder's risk policy, because within that policy, there are a lot of different sublimits that will extend to different materials that are stored onsite, stored offsite. They're not always clear on where that coverage falls. So when you are. Setting up your builder's risk program, it's important to know that equipment purchase, when it's arriving, where it's being installed, and making sure you have adequate coverage for it. 

John: And who typically carries the builder's risk insurance? I've seen it both ways. Sometimes the contractor, sometimes the owner. What is most typical? 

Paul: In our experience, we see the owner bringing it a lot. But the reason for that is that there are sometimes coverages that are more important to the owner, such as loss of income coverage or loss of rents. Usually the owner has a better grasp on that, and they will want to customize the insurance to match their risk tolerance. 

Chris: John, I'd like to add one point to what Paul was saying in terms of the transition from the builder's risk to the standard property policy. that transition can't be under-emphasized. I've certainly been in multiple lawsuits which would involve my client, typically the owner, the builder's risk carrier, and the property carrier. And the big fight is when did the damage occur and is there a gap between the builder's risk and the commercial property? One of the biggest things that I've seen, some of the biggest problems I've seen for owners who have builder's risk coverage is they like to set it and forget it and just let it go until things get to the end. But if it becomes pretty apparent that the project is going to be delayed and needs to be extended, it's something that someone like Paul can go and talk to the insurance companies about, but you really need to get way ahead of that, like several months, five, six months in advance to give the builder's risk carrier a time to get comfortable with the reasons for the delay and the extension. But you really don't want to get caught with some sort of lapse between your builder's risk carrier coverage and your commercial property coverage. 

John: And one other thing that might be worth noting on the builder's risk coverage, I think, is who is actually insured by that. And I know I see a lot of that get heavily negotiated in the construction documents because the builder has an interest in the builder's risk coverage as it relates to the having to reconstruct improvements that have been damaged. And the owner obviously has an interest as well because it's its facility. So usually both insured, but I guess where I see more debate is who gets to negotiate and settle the client, right? 

Paul: That's a fair statement, John. The contractors that will go on to a project and perform construction operations will have access to that builder's risk policy just as the owner has named insured status. But the difference is first named insured status, they're the ones that will be able to drive the claim outcome and the ones that will receive the funds from the carriers in the event of a claim. 

John: Great. Now, let's jump to professional liability. Those doing the transactional side of these deals have typically seen requirements for professional liability insurance in their contracts. The professional liability, the underlying professional liability insurance that is maintained by the architects, the engineers, by contractors when they are doing professional services, engineering work, build-a-suit work, and subcontractors that do that. We always put requirements in for those parties to carry your builders' risk insurance, but one misunderstanding, I think, from people who are not in the risk management side of things is that that insurance does not run to the owner. That insurance, the typical insurance that's carried by those parties, it runs on a claims-made basis. So it's not when it occurs, it's when the claim is made. So you need to negotiate a tail period where that coverage will remain in effect. And it also goes to the party. So it goes to the architect, to the engineer, to the contractor, not to the owner. The reason the owner cares is that there's somebody standing behind the indemnity obligations and the potential liability under the construction contract. Those policies are typically umbrella policies. So they run across the contractors, the architects, many projects. So, you know, we want to have covenants in that they renew that. But the coverages that are provided, at least in my experience, and I'd ask you both if you see similarly is $2 to $5 million, occasionally $10 million for a very big player. But the smaller players don't like to carry large amounts because they think it invites litigation. And they usually marry up the coverage under the professional liability to the limitations of liability to negotiate the contract. So with that said, I know a lot of owners on these substantial data center projects looked at a separate owner's policy covering potential professional liability that runs in favor of the owner called an Owner's Protective Professional Indemnity Policy, OPP. Paul, you want to give a little more background on that? 

Paul: Absolutely. The OPPI, is a policy in the name of the owner. And what that policy does is it adds a layer of protection exclusively for the owner in the event that those underlying architects, engineers, subconsultants don't have enough insurance. Those policies that you mentioned earlier, John, that they bring $2 to $5 million in coverage, those policies are in the name of the subconsultant or the architect or the engineer. When they get a claim, those limits go away quickly. And when you're talking about a scale of a data center, there's a chance that you're going to run out of limits from all of those designers fairly quickly. So what this OPPI policy does is it sits above all of them and provides excess coverage only for the owner for design-related claims. 

John: And I guess the last type of coverage to touch on, which is workers' compensation and employers' liability, which we all see as a requirement of these contracts. I'm not sure that there's a lot of nuance to that, but anything that you guys see that is subject to significant negotiation in that space? 

Paul: When we're looking at data center projects, we generally see the contractors controlling the workers' comp. And so we haven't had a ton of experience, at least from the owner's side, on the workers' comp employer liability. 

John: So let's jump to how the program is structured. I think in a traditional setting, in a traditional construction setting, you'd see a contractor carry its own insurance, subcontractors carry their own, the architect and consultants carry their own. But on this scale of a project, we often see what's called wrap policies or wrap-up policies. Paul, can you give a little overview on that and the differences between a wrap policy and traditional insurance? 

Paul: Traditional insurance, let's start with that. Traditional insurance is a method where Chris is the owner. He goes out and he hires a general contractor, John, who then goes out and hires subcontractors, myself. In that scenario, John says, okay, I'm going to go get all these subs to actually do the work. All of those subs are going to bring their own insurance, and I'm going to bring my insurance too. And Chris says, okay, as the owner, I understand that. Something goes wrong. Look, John, I'm going to look to you. You're the general contractor. It's your item to deal with. If there's a loss, you've got to chase down the subs. If you get into litigation with your subs, it doesn't matter to me. I'm expecting you to do that. You told me that everybody would bring insurance. That's a typical way of typical setup within the traditional method. One thing to note on that approach is that all of those insurance policies, the general contractors, the subcontractors, all of those policies include projects outside of Chris's. So they're doing work for different owners, different general contractors, and they're bringing those same limits to each of those construction projects. How does that compare, contrast to what an OCIP is or a CCIP is? For this part of the conversation, I'll just call it a CIP, which is a controlled insurance program. The CIP is the liability that covers that specific project with dedicated limits and covers every contractor that enrolls into that project. So what does that mean? That means John is a named insured as the general contractor. That means I'm a named insured as an enrolled subcontractor. And we all have access to that one insurance policy with dedicated limits for that specific data center project. 

Chris: And John, I would add, colloquially, we call it a wrap because the policy essentially wraps in everybody on the project into the policy. And so frequently you'll hear an owner-controlled insurance program or contractor-controlled insurance program referred to as a wrap, and that's the reason for it. 

John: And on large-scale complex projects like this with many participants, I see wraps almost invariably on them. And so, Chris, maybe you can touch on the benefits of using a wrap on a large complex project like this. 

Chris: Sure, happy to do so. In my experience, and Paul can chime in on this. The wrap market or the CIP market is really a mature market. It's something that has developed over the last 20-odd years or so and is commonly used by the insurance industry to insure these types of projects and commonly used by owners and contractors on these types of projects. There are a number of what I would consider to be pros for OCIPs and CCIPs. Paul touched on one of them, and that is the dedicated limits to the project. And something that we'll touch on briefly later, the purpose of the wrap program, the purpose of the insurance program is to protect the bottom line profits for the owner developer and for the contractor and everybody else involved in the project. And so the best way to make that happen from a limits perspective is to make sure you know how much of insurance is available on this project. As Paul mentioned, in a traditional program, the general contractor may have myriad projects all covered under the program, and there's no way to tell which projects may run into problems in the future, which may suck off some of the limits on the contractor's policy. You're fighting with 50 other projects for those policy limits. So that's one of the major advantages to an OCIP. The other is to understand that the OCIP really comes into play when there's a claim, when, as Paul indicated, water starts getting into the building and causing all sorts of problems. Under the traditional program, I, as the project donor, would go to John and say, John, we have a problem. Notify your insurer. And so John would notify his insurer as the general contractor to get involved. And then John would contact Paul and the 19 other subcontractors that were involved in this. And each of those parties would contact their own insurers. And this is truly what used to happen on a regular basis. Every insurer that was involved would point to every other insurer and point to every other party involved as the party at fault. And, Each one would hire its own lawyers to represent the subcontractor, the general contractor, and sometimes you'd get two or three lawyers representing the same party, and the thing becomes a big web and a big mess, and then you need to hire the, each side has to hire a coverage lawyer to try to figure out how all the pieces fit together. It's a huge, complex mess. Under the OCIP and the CCIP, all of that goes away because you have a single policy under which all of the parties that are part of the construction are insured. Every wrap policy I've ever seen has what we call an insured versus insured exclusion, which precludes parties from suing one another with limited exceptions for the whole purpose of having a single unified defense. Frankly, one of the reasons why the insurance industry wanted to have the wraps was to save the cost on all these defense lawyers. So it significantly simplifies the claim process. And so those are some of the reasons why I think that they're very important. The third one that's particularly important for the owner slash developer is the fact that the owner doesn't have to worry about being an insured or an additional insured under someone else's policy. Every general contract under a traditional program is going to say, general contractor, you're going to make me the owner and additional insured under your policy, and you're going to require all the subcontractors to do the same. And then that's what's going to show up in the subcontracts. All of that is fine and dandy until you actually get to the claim. And I think what's really important to understand is the general contract and the subcontract do not define the terms of the policy. All they do is define what the general contractor and subcontractors are supposed to get. If the general contractor or subcontractor gets the right AI coverage, great, the owner is covered. If the general contractor or subcontractor does not get the right AI endorsement, additional insured endorsement, then the owner is not an insured under that party's policy. You may have rights against the general, you may have rights against the sub, but you don't have any rights under the policy. And the additional insured issue is one that is being hotly contested across the country and construction projects. All of that goes away in an OCIP. And that's another one of the major advantages of having a wrap program, be it an OCIP or a CCIP.

Chris: And let me add one last point, because this is one of the objections, the most common objection I get from owners with respect to wrap policies. I am a huge wrap proponent, and for a variety of reasons, but the objection I hear is it's expensive. Maybe. What's expensive to one person is not expensive to another. But I do think the wrap market is sufficiently mature these days that at a macro level, it accurately prices out the risk, the liability risk, construction defect liability risk for these types of projects. So folks need to kind of understand, again, the purpose of the policy and the like, but that's another advantage to me of the wrap policy covering everything and the price is market-driven. 

John: Chris, you beat me a little bit to the punch because as the deal guy, I was going to make the comment I was surprised that the cost element wasn't brought up. But under a traditional model, the owner ends up paying for the subcontractor's insurance. The owner ends up paying for the contractor's insurance and its own insurance. It's an additional insured on all those policies, but it all does get paid. And if you use just a very broad rule of thumb of somewhere in the range of 1% that the subcontractors are throwing on their contract and somewhere in the range of 1%, bigger projects, maybe a little less. But there's a multiplier that's going on for the contractor's insurance. When you start taking the cost of a wrap policy that covers all of that into account, I think there's a good argument that when you compare apples to apples, you might be saving money. Paul, I imagine you have some thoughts on that. 

Paul: We do run into this quite a bit. And John, I think you're right that all contractors pad in a little bit when they're submitting their insurance line item. And in your scenario, the owner at the end of the day is going to be paying for that one way or another. The contractor will put that within their GMP, pass it on to the owner. And so the owner is paying that premium and likely a markup on top of that. 

John: Let's shift to one other item. You both have referenced OCIP and CCIP in this discussion, and I don't think we've really given a background on that, but OCIP being the owner's controlled insurance program and the CCIP being a contractor controlled insurance program where the contractor manages the program for the benefit of the owner and the contractor. So, Chris, maybe you can talk a little bit about the pros and cons of those two approaches. 

Chris: Sure. So the question I get asked frequently by my clients is, what's better, an OCIP that's run by the owner or a CCIP that's run by the contractor? Now, recognize when I'm representing my clients, I'm out to look specifically and exclusively for my client's best interests. So I will say it depends on who my client is. If my client is an owner, I want an OCIP. If my client is a contractor, I generally want a CCIP, but if we're going to go with an OCIP, I want to be heavily involved in the negotiation preparation of that policy. Now, if I take that, if I telescope out just a little bit and give a broader picture of what I think is the better approach, as a general proposition, I think OCIPs are better than CCIPs, and here's why. A contractor is generally expected and generally does complete a project, but from time to time, a contractor cannot complete the project. The contractor chooses to leave, the owner forces the contractor to leave, and the like. When an OCIP is in place, it's the owner's policy easy enough to bring in a new contractor and slide that contractor into the OCIP. But with a CCIP, a contractor-controlled insurance program, that policy goes with the contractor. So if the contractor goes, the policy goes, and the owner has to find a new coverage program midstream, which is difficult to do. And it's one of the things that Paul and his crew and folks like him can go and do, but it's a very hard thing to do. So if I were looking at this from a straight objective perspective, I think an OCIP is always the better way to do it. And if I were a contractor, I would just tell my owner, I want to be involved in it because I want to know what I'm getting. and if I think there's something I need and that I want to have the ability to participate in the negotiation of that policy. 

John: And I think often the arguments made by the contractors for using a CCIP is they take the management burden away from the owner. But I think the market is very well developed with folks like Lockton where the large brokerage firms will act as administrator of the program for the owner. So it's not the owner's risk management department that has to manage the profit. Right, Paul? 

Paul: In our experience, administering an OCIP does not require any client to hire somebody to actually work on it and implement an OCIP. A good broker will be able to have the resources to support that client to make sure that that OCIP is done correctly and executed and negotiated with the contractor, any sort of lenders that are involved, partnering with Chris, anyone that comes to the table, the broker really should be able to advocate on behalf of the owner. 

John: So you touched on timing, Paul. And in my experience, getting out ahead of this early in a project is super important, not only to make sure that we get the requirements and commitments of the contractor and all of the subcontractors and enrolled parties into the construction documents, but also to get the terms of the coverage, the amounts of the coverage out in front of everyone at the bid stage while they're still leveraging the negotiations. I think one of the benefits of an owner-controlled insurance program is the control portion for the owner. And if there's going to be any debates about coverage amounts, if there's going to be any debates about how claims are settled, I think you want to be out ahead of that. And from the standpoint of being a person who often is drafting the construction contracts, I think getting the commitments and requirements of not only the contract, but all the other project participants into the construction documents is critical. So what do you usually see in terms of how that's managed in terms of getting the teams together? I think probably on data center projects, because of the sophistication of the parties building them, I think it's better coordinated. And they all usually have risk management departments and all of the participants on the insurance side become their own work group. Is that what you usually see as a best practice? 

Paul: From our perspective, the projects that go the smoothest are the ones that start this conversation early and often. And I'll let Chris chime in as he related to the contract details and how critical those are. But from just a partnership perspective, partnership perspective between the owner and the general contractor, the earlier, the better that you set out the roles and responsibilities and who's going to be procuring the insurance, the smoother the process. Because you can work through coverage changes, deficiencies, requirements. All those things are better sorted out at the beginning because they all spill into the actual contract. And Chris, maybe you can talk a little bit about how important that contract language is. 

Chris: Yeah, I think it becomes critically important. And I agree with Paul that the team, and we'll talk a little bit later about what that team looks like, should start the process as soon as possible. I have certainly been involved in projects where I get a call where someone says, can you take a look at the insurance program that were proposed for this? And I said, sure. When are you guys expecting to go into the ground? And they said, like, Monday. And that becomes very difficult to try to negotiate things that we may want to improve the policy on if you don't have such a short time. I think it's also critically important to get the policy before finalizing the terms of the general contract and any subcontract, and in particular, the insurance terms. Because I have seen situations where the insurance terms in a contract have been agreed to and a contract finalized before the owner or whoever's going to get the policy gets the policy, and suddenly the market doesn't provide the coverage that is promised in the contract. And at that point, whoever was supposed to get in contract is in breach of the agreement. Usually when there's a dispute between an owner and general contractor, the insurance isn't going to be the central piece, but lawyers are going to get involved and they're going to find everything that's out there. And that's a problem. And I have certainly seen the failure to get the right insurance to be a significant problem. All that, and it becomes a six-figure lawyer fee to try to figure that out. All of that gets wiped out. If you go and get the policy first, get the best policy that you can, and then you draft the insurance provisions in the contract, the general and the subcontract, consistent with the policy, and then you're in very good shape. 

John: Well, I think there's a big advantage to laying out the program when you're getting bids. So you're comparing apples to apples, so you eliminate hidden profit centers with your contractors. But sometimes it does come after, particularly it sometimes comes after you have subcontractor bids. Paul, in that instance, how do you manage negotiating the appropriate deducts if you're providing a wrap policy that provides the insurance for the subcontractor? 

Paul: It's a good question and one that comes up a lot because it ties into the cost. And if we're looking at this from an ownership perspective, and we've got an OCIP quote that has X amount of premium attached to it, what the common question is, is how much am I going to get back in deducts? And before we answer that, we always like to say, look, there are two different ways you can have the contractors bid this. One is called gross, which is tell your general contractor to include insurance in there, have them line item it, and have us tell them, have that contractor explain what's included in their insurance so that we can create an apples to apples comparison. The other way of the bid method is called a net bid, which is essentially, I trust my general contractor, I trust my subcontractors, I'm going to tell them we're doing an OCIP, leave out your insurance costs in your bid. And so that bid comes in net of insurance, meaning there's nothing included in that bid package for insurance. How does this get managed? How do you how do we figure out what the if it offsets? The only way to do that is to do a gross bid to where you tell all the contractors include your insurance in there, tell me how much it's gonna you're gonna charge me for the insurance, and then what at least Lockton does, is our administration team will go in and verify that that amount through a review of the contractor's insurance pages. We'll go in and calculate what they should have charged for insurance. And then we'll turn around and hand that back to the owner and say, hey, this is what they need to deduct from their bid. Go ahead and change order this reduction because they're removing their insurance from their bid. And then when you add all of those, that's how you truly measure the deducts and if they've offset the premium that you paid separately for your OCIP. 

John: So obviously cleaner to do a net bid and have the bid be excluding the insurance being provided by the wrap policy. But if you have to go do that process, is there usually much pushback or is it you able to negotiate changes? 

Paul: If it's a gross bid, it's fairly straightforward and scientific to where the sub submits their rate pages and says, here's how much I'm paying for insurance we go in and do a calculation to show what they would have paid had they used their program and we say this is what your deduct is and we don't get a ton of pushback at that point because the numbers are the numbers. Where we do run into some interferences from subs is if. They say they can't net it out because they're running into minimum premiums on their program or they've, They've already maxed out their bid, and they can't take away the insurance costs from it because it's covering all the other coverages that wouldn't be included. Those are some of the pushbacks that we get from the subs. 

John: But generally, a better rule to maintain all parties, all project participants should be enrolled parties unless approved by the owner? 

Paul: I strongly encourage anyone that's working on that construction project to be enrolled. I think Chris would agree with me in that sense, because if you don't enroll some folks, then you're setting up a claim problem somewhere down the road. 

Chris: Big claim problems because your sub's not, the OCIP carrier is then going to want to drag the sub and the sub's carrier, and you start down the road of the old spiderweb problem of the traditional program, and it just makes life way more complicated to resolve the claim. 

John: Well, gentlemen, it's been a pleasure hosting the conversation with you. I realized this with a 10,000-foot overview of these very complicated and complex insurance programs. Before we sign off, any final thoughts or key takeaways for our listeners? 

Paul: From the insurance side, I'd encourage everybody to communicate often with your broker and with your attorney because these assets are large in value and the insurance programs that become available to protect your data centers are critical. You're investing a lot. There's a high dollar amount associated with these data centers, and you can eliminate a lot of your future exposures if you set up your program correctly at the beginning. 

Chris: And I would echo that. The purpose of an OCIP is to protect the project profits in the event of a catastrophic event. So it's very, very important to get the right protection for your profits, just as you would set up protection for any other measure on your project. And the best way to do that is to get the right team together. That's going to be the appropriate risk management people with the client. It's going to be the construction attorney, real estate attorney like John. It's going to be the broker like Paul. It's going to be the coverage lawyer like me, because we all bring something specific to the table to help put that policy together. The OCIPs aren't perfect off the shelf. You want to make them as good as they can. But if you get ahead of it up front and you put in the requisite work, then you've got the best chance to protect your project and its corresponding profits from any sort of catastrophic event that may occur down the road. So it's like anything else, put in the work up front and you're going to get a much better protective project on the back end. 

John: Great insight, gentlemen. I want to thank you both for joining me today. This has been our Bytes and Rights Data Center Series podcast on key insurance related considerations, issues, and best practices for data center development and construction projects. Please visit the Reed Smith website at reedsmith.com for additional information regarding our speakers and to access a broad range of podcasts and articles in our Global Data Center series that provide thought leadership from around the world on topics and issues impacting the data center industry. Thank you all for listening, and goodbye. 

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's Insurance Recovery Group, please contact [email protected]. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

All rights reserved. 

Transcript is auto-generated.

Reed Smith insurance attorneys Amy Koss, Stephen Raptis and Anthony Crawford survey the unique risk landscape facing data center owners and operators. Because no off-the-shelf “data center policy” yet exists, the trio explores how traditional coverages – property, cyber, technology E&O, and general liability – can be layered to safeguard both the bricks-and-mortar infrastructure and the critical information coursing through it. If you build, host, or rely on data centers, this episode is your blueprint for intelligent risk transfer. This is latest episode in our Data Center series.

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Hello: Hello and welcome to Insured Success, a podcast brought to you by Reed Smith's Insurance Recovery Lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at [email protected]. We'll be happy to assist. 

Amy: Welcome to Insured Success and our Data Center series. My name is Amy Koss. I'm an Insurance Recovery associate attorney in Reed Smith's Philadelphia office, and I'm joined today by Steve Raptis, an Insurance Recovery partner in our D.C. Office, and Anthony Crawford, an Insurance Recovery partner in our New York office. As part of the Insurance Recovery Group, we represent policyholders in complex insurance disputes and counsel corporate policyholders on coverage issues. In today's episode, we're going to discuss the unique risks that data center owners and operators should consider when purchasing their insurance coverage. Data centers have been popping up all over the place, and they're really being integrated into our way of life. For example, very recently, OpenAI launched its Stargate project, and as part of that project, OpenAI intends to invest over $500 billion in building and supporting AI infrastructure over the next four years. And these infrastructure efforts are only going to continue to increase as technological advancements like AI and the Internet of Things become enmeshed with the way that we live our lives and the way that we do business. And much like anything else, with big investment comes big risk. So we're going to talk today about what owners and operators of data centers should consider as they look to ensure their risks, especially those risks that are unique to data centers. Stephen, Anthony, how are we doing today? 

Stephen: Hi, Amy. Doing well. Thank you. 

Amy: Great. So as I mentioned, data centers carry a unique set of risks. What should data center owners look for when shopping for insurance and reviewing different policy options? 

Stephen: It's a great question, Amy, and I know from personal experience where I live in northern Virginia, data centers are everywhere, and every large piece of unused property seems to be in the process of being transformed into a data center. So it is just including what we hear in newspaper reports and trade press about this being an expanding industry. There's no doubt about it. Everywhere you look, there are more and more data centers coming up and AI is only going to increase that demand over time. And we know that the insurance industry is usually pretty good about coming up with specialized products once an industry hits a certain critical mass, they will start to produce specialized insurance products for that industry. And one might think that the data center industry is large enough now that it would have its own specialized insurance products. But in fact, we have not seen that. And we've talked to a number of insurance brokers to see if they might be aware of specialized products that are out in the marketplace. And they told us that they're not, at least not yet. So where that leaves data center owners and operators is that they need to take traditional off-the-shelf, for the most part, insurance policies and make those fit into their risk management portfolio in terms of how do we protect our assets, how do we protect our business. There aren't data center-specific policies. So they need to go out the marketplace and buy their traditional policies, but try to get those crafted as well as they can to their particular situation. And the good thing is that a lot of these policies that have traditionally been out there, including cyber policies, errors and omissions policies, those kind of policies are not written on a standard form, and so they tend to be more negotiable, whereas your property, general liability policies, those are written on standard industry forms and may be a little bit harder to negotiate, but even those can be changed in the endorsements. 

Amy: Thanks, Steve. So, in terms of some of the risks that these data centers are facing that are particular to data centers, what do some of those include? 

Stephen: The first kind of risk that may be the most prevalent risk is with respect to property, and that's the data center's physical operations. How does it protect its actual physical workings at a particular data center? And then there is sort of the more technical insurance, which would include errors and omissions coverage and cyber coverage, which is intended to protect largely against liability. But there is some first party coverage in the cyber as well that we'll talk about. And then finally, there's general liability coverage that covers property damage and bodily injury that might occur as a result of the data center's operations. 

Amy: So in terms of protecting the actual physical assets of the data center, what kinds of coverage are we talking about? What can data center owners and operators look for? 

Anthony: That's an excellent question. And, you know, the simple answer is starting out, the data center owners are going to look at their property policies. So, you know, these property insurance policies generally cover both the physical structure of the building as well as the assets inside of the building, which, you know, this is going to be something that is going to be significant and important to policyholders. Now, these policies traditionally cover loss due to physical damage from events such as, you know, it can be either sort of natural events such as earthquakes, some type of flooding, or it could be other man-made events such as fires. You know, also thinking about things such as water in truth. These property policies, as I said before, also look at sort of the assets inside, which is going to play into it hugely when we're talking about data centers, because you're talking about a lot of computer and electronic components that are going to be there. Data centers and the physical structure of the data center itself. We also, there is a component of property insurance that includes coverage for business interruption losses. And basically, this is where some type of physical loss has occurred at a business property, and there is an associated loss of business income because of that damage. So traditionally, you see where a fire burns down a factory or damages a factory, they're not able to produce the widgets that they do. They're able to get coverage for the lost income because they're not able to sell their widgets. They'll be looking at something similar here with data centers. Now, there are some unique components in terms of looking at property coverage for data centers because traditionally, these things, these policies cover sort of tangible assets. Well, one of the biggest components of a data center is that they have a lot of soft data that they're storing on the physical computer components within the structure. That data in and of itself, it may or may not be covered under the traditional policy. So policyholders may need to look to other policies or looking to look to get some type of endorsements added to their property policies in order to make sure that there are no gaps in the coverage because, you know, arguably one of the most important aspects of the data center is the data itself. There are some other considerations that we should look at, policyholders should look at when looking to insure their data centers. And that's concerns about a traditional extra coverage that's usually not sort of thought about or discussed heavily and negotiated in the underwriting process, and that's service interruption coverage. By their very nature, it's pretty clear that having uninterrupted access to electricity is pretty important to data centers. So policyholders need to look specifically at this coverage that's traditionally found in property policies and sort of work with the insurance company and the brokers to tailor that coverage so that it provides meaningful coverage for service interruption losses at the data center. And, you know, there can be different components of that. So, for example, some may provide coverage when there is a damage to the power supply or it may provide only coverage if there's sort of a power surge. But, you know, at the end of the day. This is something that policyholders will have to heavily scrutinize to make sure that they are not going to lose out on coverage if, for instance, there is some type of interruption with the service provided by the utility companies. Another thing that property holders need to take in consideration are sort of risk mitigation requirements that may be found in policies, specifically when talking about making sure that there's fire suppression systems and how that language is worded in the policies. Because traditionally, these policies require or may specify that there need to be sprinkler systems in place. But if you think about the nature of this risk with data centers. Having traditional water sprinkler systems in place may not necessarily be the best solution for data centers in that these fire suppression efforts may cause further damage using water. So policyholders should look to negotiate with their insurance carriers to make sure that they can use alternative means of fire suppression and have sort of that coverage or that understanding written into the policy. So something that would be more inert that would look to suppress any fires, but at the same time, not damage the computer equipment inside, which would occur if you were using traditional water sprinklers. 

Stephen: Anthony, those were terrific thoughts. One other type of coverage that we've seen with respect to property policies is, It's not unique to data centers because, again, there's not really unique data center coverage, but there is a specific coverage that is often available for coverage that attaches to property policies or can be purchased as a separate policy called specialized electronic data processing. Sometimes it's referred to as EDP coverage that will specifically apply to lost data. But regardless of whether or not you buy that EDP coverage, one thing that you really need to make sure that you're careful about is reviewing your property policy next to your cyber policy. And we haven't talked about cyber policies yet. We will. But it's important to do that because traditionally the property policy has covered the hard assets, the computer hardware, and it's carved out coverage for data. That's not always the case, but sometimes it is. And the cyber policy will pick up to replace the lost data. But again, cyber coverage may not, it may only respond where there's been a third party act or an exfiltration, that kind of thing. it may not respond to a natural disaster. So it's very important that you look at those two policies together as a data center operator to coordinate them and make sure that both your hard assets and your soft assets are being covered to the fullest extent possible. 

Amy:Really great points. So, and you guys previewed this a little bit just now, but how about the equally important non-physical side of running a data center? For example, technology errors and omissions coverage. What should data center owners look for there? 

Stephen: Just for a little bit of background, errors and omissions coverage, it's sometimes referred to as professional liability coverage. And what that does is it covers the policy holder for providing for any errors and omissions that may occur in the course of providing professional services. So if you own or operate a data set and you're doing data processing, data maintenance. Data storage, whatever that may be, for third parties, then it's important that you have errors and omissions coverage in case something goes wrong in the course of providing that service. And long before data centers became as prevalent as they are now, there is a specialized product that's developed in the insurance marketplace. It's often referred to as technology E&O or technology errors and emissions coverage. And it's really focused largely on technology companies and trying to write coverage that fits the type of services that they provide a little more cleanly than perhaps traditional E&O coverage did. And so, for instance, technology, you know, coverage is often. Well, it's certainly cognizant of the fact that in the technology industry, that the actors, the service providers in that industry are often dependent on services provided by others, particularly utility services. And as Anthony alluded to earlier, power services in the data industry, that's the lifeline. And so we've seen these technology errors and emissions policies. Generally speaking, they're intended to cover service outages from the insured to its customers. But there are often exclusions where the cause of the problem was the failure of third-party services provided to the policyholder, the data center owner. Now, if those... If those failures are within the data center's own control, they're often covered. For instance, if the cooling system breaks down, that's likely not to be excluded in terms of any liabilities that the data center owner may have to its customers. That's likely to be included within the coverage. But if it's a failure, a blackout or a failure by the power company to supply adequate power, and as a result, the data center can't do its job and therefore customer servers don't run and that kind of thing, and customer service customers are seeking some kind of liability against data center owner, that's likely to be excluded. And so when data center owners and operators buy this coverage, they need to be very cognizant. They need to very carefully read those exclusions to figure out, okay, what kind of outages are going to take me outside coverage in terms of liability to my customers and what's going to leave me inside the scope of coverage? And again, these are the kind of policies that tend to be more negotiable. And so to the extent that the language is not good, there may be an opportunity there for the data center owner operator to try to negotiate either the exclusion out of the policy or narrow the exclusion in a way that shifts more liability back to the insurer. 

Amy: Great. So it sounds like there's some room for these owners to get the coverage they need, even if it's not built right into the product off the shelf. So cyber insurance has been a hot topic in the insurance industry recently. Is there anything specific that data center owners should consider when purchasing their cyber coverage? 

Anthony: That's an excellent question. Yes. You know, first and foremost, there are some extra considerations that data centers are going to have to look at. First and foremost, they need to look at, you know, what kind of data are they dealing with and storing and, you know, what's the potential liabilities they face there. And that will depend on kind of what they're doing and what the nature of that data is. So, for example, you know, if it's hosting, you know, if it's a situation where the data center is only hosting the company, you know, the policyholder's data itself, its own data. So there's no third authorities involved. You know, there could be some type of liability that they may face for, you know, breaching their customer or their employees data, for example. When you look at other things, such as, you know, if this is, for example, something that's hosting sort of Bitcoin data or, you know, some type of blockchain operations and stuff. The liabilities change and the value of the data becomes very, very, very important. And, you know, there is no real sort of off the shelf answer to this because it's, you know, as we've been reiterating throughout this podcast, you know, this is new kind of new territory, sort of older, you know, in some traditional ways, but also new territory in terms of, you know, the data that we're looking at. So how do policyholders and insurance companies price out this type of insurance when looking to protect the data? Those are going to be questions that, you know, ultimately the industry and policyholders are going to have to work out together. What policyholders should be cognizant of is looking carefully at any exclusions or limitations to coverage such that, you know, they are they're not basically buying a policy that doesn't cover the risks that are associated, particularly the unique risks associated with their specific operations. And avoiding those coverage gaps. And I think that time ultimately will tell how that shakes out and whether or not the insurance industry can get to some sort of standardized policy or policy language. But for now, it is likely going to continue to be sort of bespoke manuscript policy endorsements at a minimum. 

Amy: So policyholders should really keep an eagle eye out to make sure that the coverage they're buying covers exactly what they need. Great. 

Anthony: Absolutely. And, you know, as with the property coverage, the other coverages that are discussed here, this is, you know, it's going to require a little bit more effort on the part of policyholders and their brokers to ensure that, you know, the proper coverage is being put in place specifically to those, you know, areas that would traditionally not necessarily be captured in the more standard form policies. 

Amy: So, what is often thought of as the catch-all of insurance, the general liability coverage, how can data center operators leverage their general liability coverage to maximize their risk protection? 

Stephen: Maybe just for a little bit of background, general liability coverage is the oldest coverage, insurance coverage, that's around for companies. And what it's intended to do is protect against property damage and bodily injury. And so, primarily anyway. And so companies always bought this for anything from slip and falls to some sort of accident that was caused by their operations where people were injured or property was damaged. That's the background of that coverage. You look at data centers, they're big, clean, neat-looking operations, and you wonder, well, how is general liability coverage implicated there? And I think the answer that we're seeing, at least where I live in Northern Virginia, is that a lot of the neighbors are expressing displeasure in being neighbors of data centers for various reasons, including that they sometimes say that they're noisy and that they emit fumes that may be toxic from time to time, including diesel fumes and other things from the operation of generators and so forth. And they're concerned that there may be other emissions that they're not aware of that may be causing long-term health problems or may make their property harder to sell, ultimately diminish its value. And I think it's probably only a matter of time until those generalized complaints become lawsuits and legal action and. And traditionally, those were the kinds of things that general liability policies protected against. With one big caveat, that after the mid-1980s, those policies started containing specific exclusions for pollution, and pollution was broadly defined. And so the challenge for data center operators is what can they do to protect against that risk from an insurance perspective if their general liability policy is going to cut out most of the coverage for certainly substances that are coming out of the facility, but possibly arguably also noise and other things we may not generally think of as pollution, and pollution is very broadly defined. So one thing that they can do is they can try to negotiate back the scope of those exclusions when they're buying the coverage. The other thing they can do is buy specialized pollution liability policies that have been around for a long time that are specifically designed to protect against liability if there is some sort of pollution event that ends up causing damage or allegedly causing damage to a neighbor's property or causes some kind of bodily injury or disease, that's the kind of thing that's intended to protect against that risk. Again, it's not unique to data center risks because we don't have unique data center policies yet, but it's a policy that's been around for quite a while that can be adapted well for that purpose. 

Amy: So it sounds like the big takeaway from this is that these data center owners and operators should really be on the lookout to make sure that the policies they're buying match the coverage that they need for their unique situation. Anthony and Steve, do you guys have any final thoughts you want to share before we wrap up? 

Anthony: Yeah, sure. I mean, one of the biggest takeaways from this discussion that we've had is that policyholders need to be vigilant in working with their brokers and the insurance companies to make sure that they actually are getting the coverage in place that they need to protect themselves and their assets, given the unique nature of data centers. So it's important that policyholders work with insurance professionals to make sure that they are getting that coverage. And when I say insurance professionals, I also include sort of ourselves and those attorneys that specialize in insurance coverage issues to sort of act as an extra set of eyes, extra set of an advisor to make sure that not only are they getting the best prices for the coverage that they're looking for, but they're also getting coverage that's going to actually respond if something should happen that they need the insurance coverage to respond to. 

Amy: As we wrap up here, a big thank you to Anthony and Steve for the wealth of information they shared, and a thank you to the folks who tuned in to listen. Be sure to look out for our next episodes in our series, and if anyone out there would like to discuss anything you heard today, all of our attorneys are on our website, and we'd be glad to hear from you. Take care. 

Stephen: Thank you, Amy, as well. 

Amy: Thanks, Steve.

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's insurance recovery group, please contact [email protected]. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

All rights reserved.

Transcript is auto-generated.

While the devastating Los Angeles wildfires earlier this year were extinguished, the risks associated with those fires – and wildfires more broadly – continue to affect policyholders. In this episode, Nick Insua, Matt Weaver and Kya Coletta discuss important topics related to wildfires, including recent insurance updates, smoke damage remediation, the threat of mudslides, the California FAIR Plan and the process of rebuilding after a loss.

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Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's Insurance Recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at [email protected]. We'll be happy to assist. 

Nick: Welcome everyone to the Reed Smith podcast Insured Success. My name is Nick Insua. I’m a partner in the New York and New Jersey offices of Reed Smith and I’m in our insurance recovery group. I primarily work on first party property and business interruption insurance claims although my practice is varied on liability coverage disputes as well. I'm joined for today's podcast by my partner, Matt Weaver. Matt is a partner in our Miami and Dallas offices, and a significant part of his practice involves dealing with the aftermath of natural disasters. And finally, we are joined by Kya Coletta. Kya is an associate in our Los Angeles office, and she primarily focuses her practice on representing corporate policyholders in insurance coverage disputes and does have a particular focus currently on losses relating to aviation clubs. And today we're going to be talking about some of the current legal and different coverage developments related to the terrible wildfires that struck the Los Angeles and greater Los Angeles area early in this year of 2025. We did want to acknowledge the devastating losses that many families and the communities there are facing due to these recent wildfires. Our hearts continue to go out to everyone affected. And we hope to provide some useful insights today and resources to assist those affected in recovering. Our firm, along with many, not only in the West Coast, but around the country, work very closely with an organization called United Policyholders. They're a nonprofit organization that provides invaluable information and support for policyholders navigating insurance claims and recovery efforts. Homeowners should visit their website for guidance on filing claims, negotiating with insurers, and accessing disaster recovery resources. United Policyholders is based in California and has a lot of experience dealing with natural disasters and their aftermath from an insurance perspective, and in particular on wildfire claims. Our podcast today is going to hit on a few key topics. The key areas of focus will be smoke damage remediation, mudslides, the fair plan, rebuilding after a loss, and some recent insurance policy updates. The reason why these topics matter is because there is and we've seen an increased risk of wildfires. Not only these in California, but others in California. We've now seen some subsequently in southwest of the United States. This is a risk that's growing in frequency and severity. Insurance policies, terms and conditions are evolving, and there's a lot of change in policy terms and how those might apply to losses. And we've also seen some recent court rulings from California, and there will be others, undoubtedly, that all policyholders and lawyers working with them should be aware of. So with that, we're going to step into some substantive segments of our podcast. Our first segment is going to be key initiatives by Insurance Commissioner Ricardo Lara since our last podcast. And the first topic in that segment is going to be provisional approval of State Farm's rate increase request. And I'm going to ask Kya if you would chime in on what's behind the 22% emergency rate increase approval? 

Kya: Thanks, Nick. As of last week, the Insurance Journal reported that insurance companies have so far paid out more than $12 billion for losses from the Los Angeles area wildfires. This figure nearly doubles the $6.9 billion in claims reportedly paid out last month. State Farm General, the company's California-only subsidiary, has cited increasing payouts and rising reinsurance expenses as justification for the rate hike to pay out future policyholder claims. This request by State Farm would raise rates by 22% for homeowners and 15% for renters. The commissioner's approval is provisional, meaning State Farm must not only pause policy cancellations in the interim, but also present supporting data during an April 8th public hearing before full approval is granted. If State Farm is unable to substantiate the validity of these rates at the hearing next month, the commissioner has stated that State Farm will have to issue full refunds with interest to the impacted policyholders. This emergency rate increase approval reflects broader concerns about the financial stability of insurance companies in California's high-risk wildfire zones and seems to be an attempt to keep State Farm from withdrawing from the state. We should know more after the April 8th hearing, which is held before an administrative law judge and Commissioner Lara, so stay tuned. 

Nick: Great, thank you. And there's also a directive for comprehensive investigations of smoke damage claims. Can you tell us a little bit about that new directive? 

Kya: Sure. Many policyholders were fortunate that their homes remained standing during the L.A. wildfires. However, many of these homes are uninhabitable due to unclean air, unsafe drinking water, and lingering harmful substances. Despite this, insurers have pushed back on smoke damage claims, arguing that smoke damage does not constitute, quote, physical loss or damage to, unquote, property. Earlier this month in response, on March 7, 2025, Commissioner Lara issued Bulletin 2025-7, which provides guidance on the handling of smoke damage claims for properties affected by the LA wildfires. It clarified the Department's position on insurance coverage for smoke damage and outlined the expectations for insurance companies in processing these claims in three major ways. First, the Bulletin advised that it expects insurers to handle smoke damage claims in compliance with applicable laws, regulations, and best practices. This includes adherence to California Insurance Code Section 790.03(h), which requires insurers to adopt and implement reasonable standards for the prompt investigation of processing claims, as well as adherence to Section 2695.7(d) of the Fair Claims Settlement Practices Regulations, which essentially mandates insurers to conduct and diligently pursue a thorough, fair, and objective investigation of claims. It is also unreasonable under this section for insurers to require policyholders to incur substantial costs to investigate their own claims. If professional testing is warranted, insurers are expected to contract and pay for these services. Second, the department encourages insurers to consider the distribution of low-cost, commercially available at-home test kits for things like asbestos and other smoke-damaged contaminants as a reasonable first step in responding to and investigating certain smoke-damaged claims. Then, depending on the results of these at-home test kits, further investigation and processing may be warranted. And third, the bulletin addresses the implications of recent court cases on smoke damage claims to stress that whether a particular claim is covered depends on the specific policy language and unique facts of each claim. My colleague Matt will go into these wildfire cases more in depth later, but to close the loop on the commissioner's directive, the cases noted are the California Supreme Court's decision in Another Planet, a COVID-19 case that sets the standard for direct physical loss, and the California Court of Appeals decision in Gharibian v. Wawanesa General Insurance Company, which notably involved ash and soot damage rather than smoke damage. Importantly, the Bulletin 2025-7 emphasized that the Gharibian decision should not be interpreted and applied as a blanket rejection for coverage of smoke damage. Rather, where a particular claim is covered depends on the specific policy language and the unique facts of each claim. This directive can be seen to ensure that claims are not dismissed based on superficial inspections, and insurers must now provide detailed documentation and consider the full extent of smoke damage before denying coverage. Any policyholders with questions or concerns about their smoke damage claims are encouraged to contact their insurance company or the department directly. 

Nick: Thank you. And our fourth point is approval of the $1 billion assessment to support the fair plan. And my question is, how is California supporting high-risk policyholders? 

Kya: Sure. So the California fair plan was established to meet the needs of California homeowners who were unable to find insurance in the traditional marketplace. It is a syndicated fire insurance pool comprised of insurers licensed to conduct property and casualty business in California. Last month, the Fair Plan Association reported that it had paid more than $914 million to policyholders to cover claims related to the Palisades and Eaton fires. The Fair Plan's accounting subcommittee and governing committee each recommended an assessment of $1 billion to enable the Fair Plan to access additional available layers of reinsurance and maintain operators. To address this, the Commissioner approved the $1 billion assessment on member insurance companies to stabilize the program. This step by the Commissioner is meant to ensure that homeowners in fire-prone areas can still access insurance, even as private insurers scale back their offerings or leave the market entirely. But for a more extensive list on what the Insurance Commissioner has ordered or recommended, please review Reed Smith's 2025 California Wildfires Relief Resource Guide, which is available on our website. 

Nick: We're now going to move into our second segment, which is areas that are ripe for focus. And I want to start with mudslides and post-fire risks. And Matt, would you be able to tell us why mudslides often follow wildfires and what homeowners should know about that possibility? 

Matt: We've seen, and people in California have experienced this before, anyone who is living around the Montecito area after the Thomas fire knows all too well the risk of mudslides and why fires can lead to that extremely dangerous, extremely life-threatening problem. You know, you have a situation where, you know, all the vegetation on the side of a hill or in a particular area may be burned away. And what you're left with is a lot of loose material. And then once you get large rains, as happened after the Thomas fire, you can have devastating problems. Most homeowners policies and a lot of business policies as well, will speak to the issue of whether mudslides are covered, usually in the context of earth movement. And you're either going to find that peril excluded or you might find coverage for it depending on the particular policy. So from the perspective of policyholder, always understand what your coverage is. And if you have questions about it, speak to someone who can explain it to you. 

Nick: And is there anything policyholders can do to try to ensure that they are covered for this mudslide risk? 

Matt: Right. I mean, make sure that you're documenting all your damage. I mean, if you have wildfire damage documented early, make sure that you have all the evidence gathered that you can, whether it be pictures, videos, if it's possible to have, if you have smoke or soot or ash damage, have a hygienist come out if that's possible. Your insurance carrier often will send someone like that out if you're reporting that type of damage and make sure that that's done as quickly as you possibly can. And we're going to talk about, when we go into some of these cases that Kya mentioned, we're going to talk about why that's important. Also think about flood insurance. I mean, if you may be in a situation now as we're sitting a couple months out from the fires where it may be problematic to add that risk on, but in the future it's something you should consider because oftentimes flood insurance will have provisions that cover mud flows. So understanding the type of coverage you have is important and then documenting your damage as soon as possible is always a good idea. 

Nick: Yeah, I would just say I always tell policyholders that we're cursed and blessed to have mobile video units in our pockets where we can, if you're unfortunately have one of these horrible losses, you can, you know, as Matt was just saying, document, take video, whatever you can to show what the loss was. 

Matt: And don't be shy with your insurance carrier either. The sooner you're telling them about whatever issues you're having, the better. 

Nick: Absolutely. All right, great. Now I want to ask Kya about smoke damage remediation. And in particular, you were just talking about some of the cases that discussed COVID-19 losses, smoke losses, ash and soots. I want to ask you, how does smoke damage differ from some other types of property damage? 

Kya: So often when we think about what covers a house, we can think about dust and debris, and those are things that simply can just be wiped away. Smoke damage, on the other hand, involves microscopic particles, and they penetrate porous materials such as drywall, insulation, fabrics, other materials. Smoke damage can leave behind corrosive residues, leave persistent odors, and chemical changes to the property itself. So this makes remediating a property a bit more complex when it involves smoke damage and often requires specialized cleaning techniques and oftentimes material replacements. As Matt will get into later, smoke damage is physical damage. Judge Corley of the Northern District of California in Bottega v. National Surety concluded that smoke causes physical contamination that can alter property. 

Nick: All right, great. And Matt, I wanted to ask you if you could explain to us what the distinction is between an accessible property and a habitable one and why that's important. 

Matt: Right. So this deals with not necessarily the structural integrity of the property, but whether it's safe to be inside of, or if you're a business, whether it's safe to operate your business. The case law, even after a lot of developments during and following the pandemic, still generally says that if your property is structurally sound yet uninhabitable for reasons that have to do with contamination, that is still considered physical loss or damage. The issue then becomes, what is contamination? Does COVID-19 contaminate the property? Does smoke contaminate the property? Does soot and ash contaminate the property? That's where the battle lines really have been drawn in these cases. And again, you're going to have carriers arguing that a structure can still be accessible to avoid paying for further remediation. And we've seen that play out even in cases before these current fires. So that's going to continue to be an issue as we go forward. 

Nick: All right. What about cleaning versus taking it down to the studs? Kya, can you tell us when is simple cleaning sufficient versus requiring a full teardown? 

Kya: Yeah, that's a good question. Surface level soot and some minor smoke damage can sometimes be addressed through deep cleaning, air filtration, and repainting. But when smoke damaged particles seep into the walls and the insulation and the HVAC systems, this kind of simple cleaning is just insufficient. So taking it down to the studs just simply means removing all impacted materials down to the framework to ensure that no lingering toxins remain. This is particularly important in cases where prolonged exposure to smoke has led to irreversible chemical changes in the property materials and the soil. 

Nick: What about rebuilding after a loss? What should homeowners do after their claim has been submitted? 

Kya: So immediately after the incident, and Matt and Nick, you both touched on this, the policyholder should take detailed images and photos of the damage caused by the smoke, ash, and soot and submit these forward to the insurer with the claim. Likewise, after submitting the claim, policyholders should keep detailed records of all communications with the insurer. They are recommended to get a contractor estimate, if not multiple, for rebuilding their home to ensure they receive fair compensation under their claim. And this also can include maintaining comprehensive records of all cleaning and repair activities, including dates, costs, and the extent of the work done. Any reports from third-party experts might also be helpful to substantiate the claim. If possible, the policyholder should avoid taking remediation actions without at least notifying their insurer and giving them an opportunity to inspect the premises and consent to the plan work before moving forward. And of course, if the policyholder experiences delays with their company, their insurance company, they may need to escalate their claim with the state insurance department or seek legal advice. 

Nick: Okay, and are there any steps homeowners can take to ensure they receive full insurance benefits for rebuilding? 

Kya: Well, policyholders should definitely review their policy to understand their coverage limits, and this includes any additional living expenses or ALE for temporary housing, and they should also ask for policy extensions if any reconstruction is going to take longer than expected, and this is particularly important to ensure that they are compensated for any sort of code-compliant upgrades required by their local building laws. 

Nick: Great. We're now going to go to our third segment, and this will be a discussion of some of the recent case law that we've already mentioned a couple times so far, but right now I want to turn it over to Matt and if you would talk about how some of the recent legal cases impact insurance claims on smoke damage. 

Matt: So Kya's already mentioned these cases. They are the Bottega case from the Northern District Californian Federal Court and the Gharibian case from the Second Appellate District, which is California State Appellate Court. One of the things that lawyers always talk about is bad facts make bad law and good facts make good law. And these cases are prime examples. You heard Kya talk about the commissioner's bulletin in relation to Gharibian. When I talk about that case, it really is going to ring true why the commissioner is now telling all these carriers that you can't use that case as grounds to deny smoke claims. Bottega is interesting because it's a business interruption claim. Bottega is a restaurant in Yountville in Napa Valley. They suffered smoke and soot damage from the 2017 North Bay fires, and they had to close for about 10 days. Now, their business closed. In other words, they couldn't serve customers, but they actually were able to clean all the smoke and soot off their restaurant really in about a day. And then they started serving first responders. This is all noted, by the way, in the opinion. It gives you a sense of where the case might be going. So they immediately submitted a claim for business interruption of about $108,000. And then a year later, they had an industrial hygienist who came to the property and identified smoke damage. So from a policyholder's perspective, this is exactly what you want to do. I mean, these are good facts, right? This is how you would want to see a claim handled. Maybe you could have the hygienist out there a little bit sooner, but you still want a professional doing that work. So there were two real issues that I think are worth discussing that Judge Corley focused on in finding that, yes, this is a covered loss. The first, and it's important, I think, as we talk about these wildfire cases, California law, at least under a business interruption policy requires that the operations of the business be completely closed or a complete cessation of operations. Yes, the court found there was a complete cessation of operations here, even though the smoke was able to be clean and even though the restaurant was still serving first responders within 24 hours. The key here was they couldn't operate a business. There were restrictions on access to the property in addition to the fact that fires were still burning nearby. But the key issue and why the case is important is that it looked at some cases from the COVID-19 context. It didn't really mention Another Planet, even though that's probably the most important case in California on the issue. And really it said, listen, in light of these cases, there's got to be some physicality to the loss, right? Whether it be physical alteration, physical contamination, or physical destruction, right? It can't just be something that doesn't cause a physical problem for the property itself. And the other thing that's very important in this case is what actually happened in the litigation was extremely important. The carrier national casualty admitted in discovery responses that the smoke damage caused physical loss or damage. Then when it came time to actually decide on motions for summary judgment, whether Bottega could win the case, it argued the opposite. And any lawyer can tell you that most federal judges are not going to like that. And Judge Corley was no exception. So what I find interesting as a lawyer who practices in Florida is Judge Corley cited one of my least favorite cases from Florida, which is a case called Mama Joe's, also involving a restaurant about five miles south of where I'm sitting right now in Coconut Grove in Miami, that filed a business interruption claim because of the presence of road construction dust on its restaurant. The federal judge down here in Florida, Judge Moore, and then the 11th Circuit said, you can just wipe away construction dust. This doesn't actually cause any physical alteration to the property. And here, Judge Corley in Bottega said, you know, COVID is more like construction dust. But smoke is more like asbestos or some type of gas that would physically alter or contaminate the property. And from my perspective, I'm interested to hear if Nick or Kya have anything to add. That analysis is exactly right, but it's important. What was very important here was the industrial hygienist opinion backing that up. I mean, lawyers are not scientists. I can't sit here and tell you with any type of certainty how smoke and soot and ash physically affect the property, but there are people who can. Nick, Kya, anything you want to add to that? 

Nick: Yeah, I would just add that it's always helpful to have scientific evidence or experts to support your opinion on the facts. Obviously, not all homeowners are going to have access to that, but to the extent you can, to the extent you can find resources that would bolster the science that can make these distinctions that, as Matt just described, can be dispositive to whether you get coverage or are denied. 

Kya: I agree with what Nick said, and I think where possible, getting various expert opinions, not only in different areas, but on the same type of smoke damage, I think that that could really benefit bolstering the claim to say that this smoke damage did cause physical loss. 

Matt: Right, and that's a perfect segue to what happened in Caribbean, which was very different. So, Gharibian was a homeowner's claim from the 2019 Saddle Ridge Fire in LA County. Again, like the property in Bottega, the fire did not burn the house, but there was some debris and soot and ash and smoke damage, or at least the smell of smoke. The insurer testified that two months later, the smell of smoke was gone, and they did all the cleaning of the property themselves. They also hired an attorney within weeks of the fire who wound up handling the whole process, the whole claims process for them. The carrier, Wawanesa, came out, prepared a cleaning estimate, was willing to pay several thousand dollars for that. The insured never took the carrier up on that work. Then there was an industrial hygienist who was hired by the insured, found the presence of soot and ash, but opined that the presence itself of those materials did not physically damage the structure. So again, the carrier said, all right, well, you have soot and ash, we'll offer you some money. In this case, they revised their estimate for cleaning upward to $20,000 and the insured never used that money. So again, from the perspective of the court, these are not great facts, right? You have an expert who's not giving the opinion that can support a finding of physical loss or damage, and you have an insured who's not really taking the opportunity to back up what they're saying by putting their money where their mouth fits, for lack of a better term. So the court, in deciding whether or not this was physical loss or damage, cited another planet for the standard under California law, which is there's got to be some injury or impairment to property. And also found that that standard is not limited to COVID-19 cases, but then said, listen, there's no evidence of this on these facts. You have an insured who said there was no noticeable smoke within two months. You have an expert who did not find the presence of actual damage. And you have a situation where everything was cleaned without the need for any, from the insurance perspective, without the need for any experts or specialists. So, you know, the insured tried to argue that prior payments. Prior offers or payment were somehow relevant. The court said, no, that's not enough. Those payments were made under reservation of rights. So, you know, takeaways for me, policy language always matters in these cases and facts always matter. You're not going to be able to get away from the type of facts that are unique. And that's why, you know, Commissioner Lara has said you can't rely upon Caribbean because it's a unique circumstance to just summarily deny these claims. But in a situation where you have facts like Caribbean, you have to be careful. Nick, Kya, anything to add to that? 

Kya: Yeah, I mean, we're sitting here now three months into 2025, and you have gone through two cases that have the opinions been issued in 2025. So we have these two opposite ends of the spectrum that policyholders now have these guns in their holsters to differentiate their facts between these two sides of the spectrum. And I think it's a really important time for policyholders to be aware of these cases and how they can use them to help argue for coverage under their own claims. Nick, anything to add? 

Nick: No, I just think that everything that you guys have said is spot on. The facts matter, and you have to pay extremely close attention and get expert assistance if it's available. All right, so our fourth segment, I'm going to ask Kya. You were just talking about this a bit, you know, arming policyholders to pursue their claims. But what should policyholders do if an insurance company denies their claim, citing a lack of physical damage? 

Kya: Right. So if the insurer denies the claim and says that the smoke or other contaminants do not constitute physical damage, I recommend that any policyholder should first request a written denial letter explaining why the claim was rejected. Receive that from the insurer. Second, as Matt mentioned, gather any sort of expert assessments from industrial hygienists, contractors, environmental specialists to help demonstrate the extent of the physical damage. Third, cite any sort of legal precedents that we discussed today in any claim denial appeal and emphasize how the court ruled in favor of recognizing smoke damage and also differentiate the facts to help your own claim. Fourth, demand a proper investigation from the insurer. This will make sure that the insurer does not dismiss the claim based on any sort of superficial inspection. And finally, file a complaint with the state insurance department if this policyholder believes that their claim and or appeal was unfairly denied. If any policyholder continues to experience roadblocks, my advice is to consult with an experienced coverage counsel to address these issues and determine how they should be repackaged to the insurer. 

Nick: So we are now just going to have a few concluding remarks. I would say some of the important takeaways are to make sure that as a policyholder, you are trying as best as you can to stay updated on legal developments. We saw or was heard earlier today about developments and directives from the insurance commissioner. Kya talked about resources on our website where you can follow along for some of these updates. I wanted to mention again United Policyholders as a resource to not only stay updated on developments, but also to provide support and other resources where possible. And, you know, as Matt said too, facts matter, policy language matter. So make sure you take account of the facts related to your claim, document damages, and the amount of damages. Look over your insurance policy documents as closely as you can. Policy language might change from year to year. Make sure you understand that you have the full policy. You don't just have a declaration page or evidence of coverage. You have the actual policy to look at. You want to advocate for your claim. Make sure you communicate in writing and you get responses from your insurance company in writing. And if you do run into, as Kya just said, roadblocks that become difficult or insurmountable, seek assistance. United Policy holders, other organizations, or counsel to help advocate for your claim. Matt, Kya, anything to add? 

Matt: Agree with everything Nick said. Thank you, everybody. 

Kya: Thank you for joining us. 

Nick: Yeah, thanks very much, and good luck. 

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith’s Insurance Recovery Group, please contact [email protected]. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

All rights reserved.

Transcript is auto-generated.

In this podcast, Peter Hardy, Eleanor Ruiz and Claudia Gwinn provide an introduction to cryptocurrency insurance, including key issues such as crypto-related risk coverage (i.e., theft, hacking, fraud and operational mistakes), considerations in respect of valuation wording and notification requirements to the insurer in the event of loss.

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Transcript:

Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at [email protected]. We'll be happy to assist. 

Claudia: Welcome back to Insured Success. My name is Claudia Gwinn and I'm a junior lawyer in Reed Smith's insurance recovery group and I'll be in conversation today with my colleagues in the London team, partner Peter Hardy and counsel Ellie Ruiz. Today we're going to be discussing the cryptocurrency insurance market and in particular the types of crypto policies available and the risks they seek to cover, insured considerations as to the policy wording and them respective disclosures. And finally, making a claim under a crypto policy. So to start off, what does the cryptocurrency insurance market look like currently? What kind of policies are available? And what are the risks currently attaching to cryptocurrency and digital assets?

Ellie: Hi, Claudia. So when we're talking about cryptocurrency insurance, there's probably two broad categories. There's coverage for assets that's available to consumers, For example, your individual, your corporate investor, and then there's insurance for the key stakeholders within the crypto industry, and that would include crypto custodians or exchanges. There's then various types of assets that crypto insurance might cover. There's a type of custodial insurance that might protect against sort of general loss as a result of hacking, theft, loss of funds. There's also the option to look under crime insurance policies. That's more directly relating to theft, potentially crime-related events, individual insider involvement. And then you can also look for some types of specific policies targeting risks that are directly related to being in this cryptocurrency environment. For example, a specific type of policy that addresses theft of an element of the software or hacking in particular based on the, relevant industry rather than a broader concept of crime or of general custodial insurance. The risks that we're looking at, those risks that are inherent when you're holding crypto assets, some of them are very new. It's a relatively new area and they're quite specific risks to this area that have to be considered. Those might include that this is an area where there's a lack of regulatory oversight. There's definitely market volatility that everyone is aware of that really affects the value of the cryptocurrency that might be being held. And there are also a whole different host of security concerns around encryption, how assets are held, and particularly on cryptocurrency platforms, that makes these systems vulnerable to a different type of attack than you might think about assets held in a bank account, particularly the collapse of FTX in November 2022. That made, I think, crypto asset holders and the public generally more aware of those risks and that there's a real need to protect these digital assets in as many ways as possible. And one of those ways is to look at taking out insurance. And it'll come as little surprise, I think, that one area that we've seen particular activity is that these crypto exchanges are a tempting target for hackers. There's the high value nature of the assets that are involved. And as I mentioned before, new potentially untested security. There might be new vulnerabilities that haven't yet been provided against. And that's all in the balance between an insured and their insurer trying to get ahead of any of those risks and make sure that an insured in this space is protected. Peter, is there anything else you thought you wanted to add there?

Peter: Thank you, Ellie. Just a couple of additional comments for me, perhaps. I think, as you've indicated, this is very much a new and still developing sector of the market. We've seen a lot of new wordings coming into the market. We've even seen new insurance capacity provided by insurers dedicated to this particular market sector. So we're all learning about how the market is developing and we're learning about how these policies might respond. I mean, the cryptocurrency cover that one might buy, I think, is increasingly likely to be found in bespoke, standalone, dedicated crypto policies. But it might also be found in more general business and liability covers, often perhaps by way of endorsing. So I think that the fact that the insurance options are continuing to evolve and the range of new wordings that are potentially available present both opportunity and challenge for insurers. It's very important for an insurer to fully understand what cover it's actually bought. I think often there is a temptation to think that because there is cover in the market it's cover you must have but what you really need to understand is what you have for and whether that is what you think you are looking for now that this loss has arisen because it might be the case that you bought perfectly appropriate cover but the loss that's arisen is excluded for one or other reason by the particular policy you brought It's taking time to understand, I think in particular in discussions with your brokers. What isn't available and what you bought is essential if you're going to be able to assess the nature of your insurance protection in the event that the loss arises. And it's also important to note, I think, that because this is a new market sector, these wordings, these policies are largely untested in terms of their claim systems. As Ellie mentioned, cryptocurrencies are particularly susceptible to fraudulent activity and market manipulation, in particular to schemes such as pump and dump schemes where the value of an asset is artificially inflated through misleading and false statements, only to find that the asset is then dumped at the inflated price. So I think the wildly fluctuating value of cryptocurrencies can create problems for the policyholder going forward. There's no doubt about that.

Claudia: So given this crypto asset price volatility, are there any particular considerations that the insured should keep in mind as to valuation provisions under the policy?

Peter: It's a good observation, Claudia. I think the fact that the value of the crypto asset, the value of crypto assets frequently fluctuating makes it important for there to be an accurate valuation methodology in the policy. And it might be provided in one or other ways. But it will hopefully be a valuation methodology that recognises the balance sheet value of the lost asset to the policyholder. There are several options. The market value option, which will base the coverage on the value of the asset at the time of the loss. There's the historic cost approach, where coverage will be based on the price of the assets when they were acquired, which might be some time prior. And there's the average value which will base coverage on the overall average value in the market over a specified period of, say, three or so years. But it is important to recognise that even when evaluation is fixed by reference to the date of loss, it may significantly be different to the value attributed to the lost asset on the balance sheet in current time. And this could have a real impact on insurers' rights and subrogation and recovery and on their perception of the value in those rights.

Claudia: Thank you, Peter. And speaking more generally, what kind of information or disclosures is a crypto asset business likely to have to provide to their insurers?

Ellie: I think I can take this one. This is something we're always talking to insured clients about because it's a way of getting ahead of any future problems down the line before you've got any claims. When the policy is being placed under the Insurance Act 2015, we always start with there's a very important duty of fair presentation that requires that the insured provides the insurer with a full and accurate disclosure of all material information to the risk which it knows or ought to know before entering into an insurance contract. In the context of cryptocurrency, that can be an extensive burden particularly when you're talking about an area. In which perhaps insurers are less au fait. You as the insured client might have a much better detailed understanding of the information you're handing across. The information can vary, the nature of the duty can vary, but some of the minimum areas that we've experienced and things we'd expect that an insurer of a crypto asset policy might be requiring include an explanation of the type of crypto assets that are being held. So that's whether it's the different type of coin, Ethereum, Bitcoin, Litecoin, what's being held, what's being traded, because different assets in this area have got different risk profiles. There's a question of the value of holdings, as Peter's just covered, that fluctuates, but the value at the time, the profile of that value as it's changed over time. And then from a security perspective, there's an issue around storage methods. Some elements of holding cryptocurrency involve some physical storage. Then there's also some online storage. There's offline storage. There are various different types of wallets in which information is kept. And all of that is information that your insurers will want to be right across because it directly impacts their assessment of the security measures. All the details of security measures are something that insurers are going to want to understand and there's usually an obligation that no significant changes would be made to those security measures that are in place over the life of the policy. That's all about preventing theft, preventing hacking, preventing unauthorized access. There might be specific types of measure that an insurer will want to see in place or request that are put in place. It's all about. Ideally, ensuring that these risks are minimized before any policy is actually put in place so that your insurer's got a better opportunity of calculating the risk that's being faced. And then there's a question of a claims or a loss history. As with any insurance policy, insurers in this space are going to find it relevant if there have been previous breaches of security, previous claims made on these types of policy. And interestingly previous claims made in this sphere but under other policies as Peter's pointed out this kind of coverage is evolving and it's not necessarily that you'll have held this specific type of cover for multiple years you may have held different types of cover under which you've already claimed for similar types of losses so it's worth looking across the picture there. I think it's I think it's fair to say that crypto custodians are likely going to be subject to more in-risk disclosure requirements than some types of investors, partly because of, people building up a knowledge about this area. Crypto asset holders in particular are holding large amounts of assets of particularly high value, so there's a lot of responsibility for safeguarding and significant total that might be at stake. Due to the scale of those operations, custodians might be required to evidence things like strong risk management. They'll want details of security protocols at inception and at renewal. And one other key point to keep in mind as any type of crypto policyholder is that you will need to communicate that information, be that verbally over meetings or be that in documents, in a particularly clear way. As I pointed out, there just might not be parity of understanding of crypto asset terminology in particular between insured and insurer. And we want insureds to feel comfortable and confident that they've been making accurate and clear disclosures should the issue arise down the line.

Claudia: Thank you, Ellie. So moving from the insured's disclosure obligations at inception to the insured's notification obligations when making a claim, what kind of information will the insurer expect to be provided with when an insured event takes place? When is the obligation to notify triggered?

Ellie: Thank you. That's obviously, it's one of those first questions people come to us with. Do I need to notify? That's almost always what Peter and I will get asked first. what constitutes a claim or a potential claim and those obligations about notification you should be able to find those clearly in the policy it's one worth checking when it's placed so that there's somebody in the business particularly in these crypto businesses that might be relatively new it's not necessarily the case there'll be somebody in that business who's got a direct responsibility for insurance as their whole job so allocating somebody the task of identifying when the insurance should be called upon and to understand those notification provisions is really important. Under a crypto insurance policy, the right to make a claim that might be triggered by the hacking event itself, theft or fraud of an asset or negligence identified by the custodian that proves a risk. For example, a security breach, even if there's not a potential loss identified right at the outset, it's one of those things that is likely to have to be notified to insurers. Following an event, if there's an insured event, it's important that those notification provisions are complied with really specifically. There's often a very specific time period in these kinds of policies when we're talking about crypto assets. That's partly because of the nature of the asset, as you'll be aware, they can move very rapidly. And the more time that has passed since the event, the more difficult it can be to get information, the more difficult it can be to trace. So, in most scenarios, the sooner the better to notify insurers and that way there's no delay which might have undermined insurers' ability to mitigate or investigate the incident. When you make a notification, as with most policies, you'll follow up with a proof of loss and the information provided to an insurer in the proof of loss document presentation that should be as detailed as it can possibly be and substantiated with as much documentation or forensic evidence if necessary at that stage it's a good point to bring in investigators or forensic accountants people who can produce a report that collates all of that information so that nothing gets lost given as i've said how quickly things can move on So things like date, time of incident, type of incident, assets compromised, and then all of the investigation carried out to date and the ongoing investigation that might proceed after that point. Is there anything else you had on that one, Peter?

Peter: Yeah, thank you, Ellie. Just again, a couple of comments. I think like all assets, the value of an insurance asset can go up or down depending on how well you look after it. And I think understanding the notification obligations under your policy and your requirements in that respect are key to preserving the value of your insurance asset. I would assume one of the most key features of doing that. I think it's very important as well to understand the importance of the broker's role in this regard and how much support you can get, will get from your brokers. If you report to them that you believe you've got a matter that needs reporting to insurers under the policy, they will understand the notification reporting requirements very clearly. They will work with you to make sure you comply with your obligations. I think the nature of a cryptocurrency loss means that there is quite often going to be other activity around the circumstances of the loss. Other investigations may well be ongoing, in particular criminal investigations may have resulted from the nature of the loss that you suffer, particularly if, as Ellie was describing earlier, we put a crime or a theft-related loss. So a policyholder should be aware that that parallel investigation might perfectly legitimately compromise your ability or one's ability as an insurer to investigate the nature of the circumstances behind the loss and report it to insurers. So I think a policyholder will need to explain to insurers very clearly what constraints they may be working under in order for insurers to retain confidence that the insurer is giving them a full explanation of what it knows about the circumstances of the loss. I think that's very important to protecting the relationship with insurers during the progress of pursuing this loss to a client. It's also, one may often have heard that the expression of a policyholder being required to act as a proven uninsured, which means effectively taking steps to protect insurers' position in the event that insurers ultimately pay a claim and taking steps to act as if it was uninsured in the way it investigates its claim and manages the options available to it at this point in time. So how does that manifest itself? Protecting assets to the extent that it's possible to do so, avoiding further losses and making clear that the circumstances of the loss have been recognised by the insurer in terms of removing assets from hot-cold storage and transferring to cold storage, freezing accounts, making sure that any apparent investigations can be continued, any quote-unquote bad actors can be identified and pursued and not released from liability because that's something that the insurers will be very keen to see is protected. The insurers will want to know that the insured is protecting the rights that they may have by way of subrogation or other recoveries to recover any amount that it in fact pays out under the policy. And very often acting as a prudent uninsured is doing just that. That is protecting the rights of the insured in the event that your claim that you submit to the policy is successful and is paid. And as Ellie has already mentioned, we're seeing increasingly now specialist forensic. Investigators and crypto investigators who are dedicated at types of very niche investigations that are likely to provide for the most success in both making the claim on the policy and recovering the value from the lost asset. Ellie, any further comments from you on those?

Ellie: No, I agree with all of that. It's definitely not an obligation that ceases when you make that notification, bearing in mind the idea of acting as a prudent, uninsured, and protecting the value in your insurance policy is something we really want to emphasize and make sure that people appreciate the value in an insurance policy in this sphere.

Peter: And although very often we are required to take issue with insurers, that should very much be the point of last resort. And you should be looking to work with your brokers, looking to protect the interests of insurers, making sure insurers know that you're looking after their interests because you believe you've got to pay to pay them policy. So I think, you know, until the point where it is absolutely clear that there has been are falling out there isn't one and you work together to recover the best for you as the insured under the policy protecting insurers interest going forward which will provide you with the quickest way of recovery.

Claudia: Well thank you Peter and Ellie you've identified some really excellent tips for policyholders of cryptocurrency insurance you know in particular ensuring that you understand the language and terminology attached to the crypto asset so you're able to make clear disclosures or claim notifications. And of course, as Peter pointed out, with the assistance of your broker, and also that you have as much detail or information as possible relating to the crypto asset at your disposal, keeping in mind that there may be investigation limitations in the event of criminal or regulatory investigations running in parallel. Well, thank you for listening today and Peter and Ellie for being in conversation with me. If you have any questions about the topics discussed in the podcast, please contact our speakers, Peter Hardy and Ellie Ruiz. Thank you.

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's insurance recovery group, please contact [email protected]. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

All rights reserved.

Transcript is auto-generated.

The 2025 Los Angeles wildfires have left many businesses and individuals in Southern California facing significant challenges. In part 2 of a podcast focused on insurance claims following a natural disaster, we hope to assist victims as they navigate the insurance claims process. In this podcast, John Ellison, Chris Kuleba, Max Louik and Esther Kim discuss claim submissions, the post-loss insurance policy conditions that policyholders need to comply with and the coverages that are available for losses resulting from a natural disaster under a first-party property policy.

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Transcript:

Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at [email protected]. We'll be happy to assist. 

John: Greetings and welcome back to the latest episode of Insured Success. Today's topic is part two of our podcast on dealing with natural disaster claims. We're focusing on three topics related to natural disaster claims for business owners and also individuals. Part one, we'll talk about claim submission. Part two will be the post-loss insurance policy conditions that policyholders need to comply with. And part three is the various coverages that are available for losses resulting from a natural disaster under a first-party property policy. My name is John Ellison. I'm a senior partner in Reed Smith's Insurance Recovery Group in both our Philadelphia and New York offices. And I am joined by my colleagues, Max Louik, a partner in our Pittsburgh office, Chris Kuleba, a partner in our Miami office, and Esther Kim, a senior associate in our Philadelphia office. Natural disasters are covered by first-party property policies, including wildfires, hurricanes, and windstorms. And this topic is particularly timely given the tragic events that have been ongoing in LA for the last several weeks. Moody's, among other estimators, have proposed that the insured losses from the 2025 LA wildfire claims will likely be in excess of $20 to $30 billion dollars. Other prognosticators have estimates that are even higher. An LA Times article earlier this week stated that the wildfires have damaged or destroyed about $350 million in public infrastructure. And as of another estimate earlier this week, over 16,000 structures have been destroyed in both the Palisades and Eaton fires. For individuals and businesses affected by these events, United Policyholders, a nonprofit organization based in San Francisco, has a page dedicated to the wildfires with information and resources on submitting insurance claims and disaster recovery that has a whole lot of useful information. And in addition to that, the California Department of Insurance, which has been particularly active in the post-wildfire time, has the latest announcements and updates regarding what the insurance department is doing on behalf of policyholders with respect to their insurance policies and claims resulting from the wildfires. So with that introduction, let's talk about what you take as your first steps in dealing with a natural disaster loss. And I'm going to pass it over to Esther to pick it up from here. 

Esther: Thanks, John. So when your property has been damaged by a natural disaster, you should first review all of your insurance policies to determine which policy provides coverage for that specific property and cause of loss. Most individuals and businesses will generally have one policy that responds. For a business, the commercial property and business interruption policy will likely cover losses caused by natural disasters and lot fires. In California, after a property loss, an insurance company must provide free of charge a complete and current copy of an insurance policy within 30 days of a policyholder requesting it. So that's helpful if you need a copy of your policy. Also make sure to request an electronic copy of the policy if you're experiencing a complete property loss and would prefer the policy to be sent to your email. Once you have reviewed your policy, then you will need to submit a notice of claim to the insurance company. So I will now turn it over to Max to discuss best practices for submitting a claim. 

Max: Thanks, Esther. I think, you know, when it comes to submitting a claim, the bottom line is one of the most critical things you can do is submit a claim in writing to the insurance company and to do so as soon as possible, especially when you're facing a natural disaster like the kind we have seen unfold in Los Angeles, where there'll be lots of claimants making those claims, it's important to get your claim in writing and get it in early. Now, typically your policy will specify how to submit a claim. It may say who to send it to, their email addresses, their mailing addresses, that type of information. For best practice, if there's both a mailing address and an email address, we suggest that you notify the carrier through both means, if you can. You should also consider involving your broker. They should be familiar with how to submit claims to the particular carrier that issued your policy. And if you're a business submitting a notice of claim as opposed to an individual. Strongly consider providing notice on behalf of not only the insured company, but also all of its affiliates and subsidiaries to make clear that you're providing notice on behalf of every entity that might be insured and has suffered a loss under that policy. You want to include all losses known or losses that are suspected in your notice. And consider using a descriptor like, you know, providing notice of this and all related losses when describing your known loss. I think I mentioned as the timing, it's important to do provide notice as soon as you can. Typically, a policy will include some language to that effect. It'll say you need to provide notice as soon as practicable. It might purport to require prompt notice of the loss or damage, including a description of the items of property damaged, the cause of the damage, and the time it occurred. But don't let perfect be the enemy of the good. Since you could submit updates to the insurance company and supplement your notice of claim, it's important to submit the notice as early as possible. Prevent the insurance company from raising any late notice offenses to potentially exclude coverage down the line. Now, if you're listening to this a long time after you have suffered a loss due to a natural disaster, don't worry. You still want to provide notice as soon as you can, but California and other states generally follow a notice prejudice rule, although some jurisdictions do vary. But under the notice prejudice rule, even if your notice is technically late or wasn't as soon as practicable as the policy might require, in order for the insurance company to deny coverage on the basis of late notice, it's going to need to show that it was substantially prejudiced by the timing of your notice. Now that could be another podcast topic entirely, but I did just want to allay any fears. Yes, get it in as soon as you can, but it's never too late under many circumstances. So after you provide notice, the next step really is that the insurance company will require you to submit a proof of loss. And we're going to address that next. I'm going to pass it to Chris. Can you tell us about submitting a proof of loss to the carrier? 

Chris: Yeah, sure. And just a practical tip. To Max's point, notice the insurance company needs to be timely. If you are in a situation where you don't have a copy of your policy because, for example, it was in your property when it burned, you haven't received a copy either by physical mail or more likely electronic mail from your insurance company, in order to avoid a situation where an insurance company may try to assert a late notice defense, it may be a good idea to check the insurance company's website, which will often have email addresses or even physical addresses to send your notice of claim before you even receive your policy. So just a sort of best practices tip there. In terms of proofs of loss, typically those are going to be due. This is going to be policy dependent. So again, always look at your policy, but typically these are going to be due within 60 days of your loss or within 60 to 90 days of the insurance company's request for a proof of loss. So some of our listeners may find themselves in a situation where they've given notice to their insurance company, there's some back and forth with the insurance company, you are providing documents, you're providing evidence of your loss, but there's been no formal request for proof of loss. Unless the policy requires the proof of loss automatically without a request from the insurance company, you're under no obligation to provide a formal proof of loss, which, by the way, is a sworn statement setting forth typically what the cause of loss is in your view and what your damages are. There's no requirement to submit that unless there's a request by the insurance company absent, again, express language in the policy saying you have to do it no matter what within a certain time after the loss. Again, if you are in a situation where you know within the 60 days of some of your damages, but your investigation is still continuing or your damages are continuing, a good best practice is to mention to your insurance company just that, that you're still investigating, your damages are continuing, your proof of loss is based on what you currently know and have currently been able to quantify, but you reserve the right to amend it and supplement it as additional information comes to light later on in the process. So that's really some of the high-level tips on proof of loss. I'm going to turn it back over to Esther to talk about whether you should start repairing or cleaning up the property, whether and when following your notice of claim. 

Esther: So after a loss has occurred, some tips to keep in mind. Make sure to preserve evidence and documents relating to the damage and obtain approval from your insurance company before replacing or removing damaged property. Try to mitigate further losses where possible and send out document preservation notices to anyone that may have relevant information relating to the loss so all materials are preserved. Also, be sure to provide all necessary and relevant documentation to the insurance company as they become available and provide these updates in writing. And it is helpful to have a point person, for instance, within your company for communications with the insurance company to ensure consistency and control over the information provided. Now that we've discussed submitting a claim and a proof of loss to the insurance company, we wanted to highlight some conditions that policyholders should be aware of for most property policies. And Max and Chris will discuss some of these conditions. 

Chris: Yeah, if I could just jump in quickly, because I think the document requests from the insurance company are going to be one of these. Most property policies are going to give the insured the option to either produce documents to the insurance company or, particularly with respect to businesses, allow the insurance company to actually come to the business and search the business's books and records themselves. Generally speaking, exercising the option to have the insurance company come out and take a look at the documents themselves is a good option. Obviously, if there's sensitive documents in the files, you're going to want to account for that by entering into a confidentiality agreement or entering into some sort of protocol with the insurance company where they allow you to sort of screen or segregate those documents from the larger set so they're not skimming through unnecessary and irrelevant private information. An example of this is a homeowners association. If you have damage to your condominium, for example, and the insurance company comes in to inspect, you may want to exclude from the set that they review the personal records and financial information of your residence. The reason I think that that's a good option as opposed to producing documents is because invariably when an insurer decides to produce documents, the insurance company is going to follow up their receipt with additional requests and that process can significantly drag on the claim resolution process because inevitably there will be more documentation that the insurance company thinks may exist and will continue to ask you to produce it. But if they come out to the site to actually review the documents themselves, that can really cut through some of that back and forth. So Max, I'll kick it to you to discuss some of the other post-loss conditions and I'll jump in as we continue. 

Max: Yeah, thanks, Chris. I mean, I do think that's a really important point, but sometimes, you know, that might not be an option that's available to you as an insured. And, you know, whether it is or it isn't, Most insurance policies of the type that we're talking about are going to include what's called a cooperation clause, and that essentially obligates the policyholder to cooperate with the insurance company during the investigation of the loss. And to the extent the insurance company is submitting requests for information to you and you're unable to bring them onto the site to review the records themselves and you have to provide information or documents to them, it's really important. It seems basic, but it's really important to document what the requests are, especially if they're made over the phone. And it's important to document the information and responses that you're providing to the insurance carrier. So if you have telephone conversations with the insurance company or your broker does, make sure those communications are noted and follow up with a confirmation email clarifying that you've understood what it is the insurance company is asking and the insurance company understands what it is you're providing. And that's going to go a long way just in case down the road something needs to get litigated. You want to document a record as best you can. So that's generally the best process for cooperating. But Chris, can you speak a little bit about when an insurance company asks for an appraisal, what should our policyholders do then? 

Chris: Sure. So appraisal in general is an alternative dispute resolution mechanism. And what I mean by that is it's a way to resolve certain disputes without actually going to court and litigating these issues. Now, in almost all circumstances, an appraisal provision in a property insurance policy is going to apply to disputes over the amount of laws. That means, for example, you say your damage is $5 million and the insurance company comes in and says it's $500,000. If there are no coverage issues and really no dispute over causation as really should be the case where you have a total loss from a wildfire, then typically, either the insured or the insurance company can demand the appraisal process. And in that instance, the insured will appoint an appraiser, the insurance company will appoint an appraiser, and the two appraisers will decide hopefully on a third umpire who will kind of be the sort of final decision in the appraisal proceeding. Now, in California, though, where there's a state-declared disaster, neither side can actually compel the appraisal process. So even if the insurance company or the insured demands appraisal of the loss, in this wildfire scenario, the insurance company or the insured, in that case, cannot be compelled to participate in that process. Generally, though, for natural disasters or any kind of loss, an appraisal for both the insurance companies and the insured is a valuable process to consider because it can result in some significant cost savings, again, as long as the issues are limited to the amount of loss. Typically, and this is the case in California, the appraisal panel cannot decide things like causation. They can't come look at the loss and say, okay, this was definitely caused by a fire. This was definitely caused by a hurricane. This was definitely caused by a pipe leak. They're strictly going to be limited to a determination over the amount of loss. Similarly, if there are disputes over coverage, for example. We agree the loss is this. There's differences in how much it's going to cost to fix it. But there's also issues with respect to whether or not the loss is covered under the terms of the insurance policy. That is not an appraisable issue. And that is likely one that will have to be litigated in court. And almost every state, as far as I'm aware, that that is the case in terms of coverage issues. So that's the appraisal process. I'm going to kick it over back to you now, Max, to talk about some deadlines that the insurance company may be under to provide information and respond to claims. 

Max: Yeah, that's right. And actually, this is one area that can be pretty heavily regulated by the various states and their insurance departments and their insurance codes. So for example, in California, an insurance company has 15 days to acknowledge receipt of a claim. An insurance company has 15 days to respond to a written communication from the policyholder regarding a claim and to which, you know, a reply is expected to be made. And in fact, in California, the insurance companies typically have 40 days after a proof of loss is provided to accept or deny the claim or to notify the policyholder that more time is needed and to explain the basis for that additional time. Now, what happens in the unfortunate circumstance where the insurance company denies your claim and you believe it's covered or they're ignoring your claim, unfortunately, you may need to sue the carrier. And the timing of when you sue can be an important issue. Many property insurance policies contain contractual suit limitation clauses that purport to limit the time that you can file a lawsuit. And, you know, usually one or two years. after the date of the loss. However, some of those contractual periods are also governed by insurance regulations. So for example, in California, I think you cannot have shorter than a one-year statute of limitations period. And also, there's a question as to when that statute of limitations period is running and when it's told. So even though it runs from the date of the loss, I can tell you in California, that suit limitation period is automatically told while the insurer is processing the claim. So it may begin on the date of the loss, but once you provide notice, and in that period where the insurance carrier is investigating and deciding whether to provide coverage or not, there's a pause placed on that statute of limitations. So really, it picks up again, after the carrier denies coverage, or they, you know, issue a coverage determination that is less than what you had hoped to receive. So that's important to keep in mind as well, the clock is ticking. But generally, you know, it's not going to be as important to get done as soon as possible, like the timing of the notice itself would be. But okay, so those are some conditions and those are some timing issues. But Esther, can you speak to how you can try and figure out how much coverage you have under your policy, generally speaking, once a loss occurs? 

Esther: Sure. When you're first reviewing your policy, you're going to want to look at your declarations, which are at the front of the policy, and it serves as a summary document. It shows, for instance, who the policyholder is, what the policy limits are, the policy period, and whether there are any deductibles, among other things. Endorsements to the policy may modify any of the coverage provisions, so it is important to read those as well. And those are usually at the back of the policy or sometimes in the front of the policy. Insurance companies often attempt to exclude or sublimit coverage for common natural disasters or apply higher deductibles, so you should check your policy carefully. Max, in going through a policy, can you please discuss the types of property evaluation provisions that a policyholder might come across? 

Max: Sure. And it's getting into the weeds a little bit, but it can have a profound impact on the amount of recovery an insured is able to procure after a loss. And of course, the policy language is going to govern, but typically we see either two different approaches to evaluating damages. There's an actual cash value approach and a replacement cost value approach. If you have actual cash value coverage, your policy is going to pay the depreciated cost to repair or replace your damaged property. On the other hand, if you have replacement cost coverage, your policy is going to pay the cost to repair or replace your damaged property without deducting for depreciation. So typically, obviously, the replacement cost value coverage tends to be more valuable. And replacement cost coverage may require actual repair or replacement of the property and that it be made as soon as possible after the damage occurs. But regardless of how those damages are calculated, please remember to request undisputed amounts from your insurance company. In California in particular, if the insurance company accepts your claim, they have to pay the undisputed portion of that claim immediately, but no later than 30 days after they've made that determination. 

Chris: Max, if I could, before we jump ahead, there's a couple of points I just wanted to mention about valuation. Sure. So for our listeners, Max mentioned the difference between actual cash value and replacement cost value. Be careful because there are a lot of insurance policies that require, in order for you to take advantage of the replacement cost coverage, like Max said, you need to repair or replace the property as opposed to just getting estimates to do it. But also there are limitations in the policy that required you to commence the rebuild to repair process within a certain amount of time. For example, a policy may say you're only getting replacement cost coverage if you start to rebuild the property within one year of the date of loss. Now, where an insured is dependent on their insurance company paying out under the policy in order to be able to afford to repair or rebuild the property, that can be an issue. So be sure to look at your policy, see what the language says, and in all cases, if you don't think that's going to be possible to repair or rebuild within the time required by the insurance policy, request in writing an extension of that period from your insurance company. I've seen many instances where that provision sort of goes unnoticed. The insurance company doesn't mention it to the insured, policyholder doesn't pick up on it, and it can create real issues and cost real dollars if it's not addressed ahead of time. Another sort of valuation and policy limit issue that we didn't talk about. And this applies, there's two different sort of categories. One applies to homeowners typically. And then there's another one that applies mostly to businesses, although it could be present in a commercial property policy as well. Co-insurance. If you've had your insurance for several years and there hasn't been an increase in the dwelling limits, you may want to revisit that issue with your insurance broker because under most property policies, you're going to see what's called a coinsurance penalty, which will penalize the policyholder for not having enough insurance on the property. For example, you bought your insurance policy 10 years ago and you insured it for $600,000 and the insurance company comes in and says, well, the actual cost to replace the dwelling is $800,000. Let's say then you suffer a $100,000 loss on your policy. Because you only had $600,000 in coverage and the replacement cost is actually $800,000 for the property. Which is 75% of $800,000, the insurance company is going to try to penalize you $25,000 or 25% for that $100,000 loss. So be sure to look to make sure that you're insured with enough coverage to avoid co-insurance penalties. And that is a residential and commercial property issue, depending on the policy. The other issue, which is specific to commercial property policies are, and particularly those that insure multiple properties, be careful to make sure that your policy is either a blanket limit policy or a scheduled limit policy. And the difference between those two things is this. Under a blanket limit policy, if you have five properties, a single blanket limit that covers all five properties is available in the event of a loss of any single property. In a scheduled limit policy, each property is going to have its own scheduled limits, not only in most cases for the dwelling coverage, but also for business interruption, for extra expense. All those sort of sub-coverages of the policy may be scheduled as well. And in those cases, you may find yourself in a situation where your property or the subcomponents of the loss are not adequately covered because you do not have that full blanket limit available in the event of an underinsurance issue. So keep those things in mind, too, when you're determining how much coverage you actually have. And I co-authored with a few other people from Reed Smith an article back in October of last year called, in the Daily Business Review, called How Much Coverage Do You Really Have? Valuation and Loss Settlement Provisions and Commercial Property Polities. That goes into detail about some of those issues. And if you have any questions about that, it's worth taking a look at that article. 

Max: I think those are really helpful and important tips. I think I'm going to address next some other coverages that might be available to respond beyond those that we've already mentioned, your typical damage to the property policy. Or I think we might've mentioned, or if we haven't, I'll mention now business income losses for when you not only lose your property or lose your factory, but you have lost profits due to the damage that has been caused by the event. And there's various ways that those are going to be calculated and you'll have to check your policy for that or work with your broker or Insurance Coverage Council. But it's important to remember that there are several other coverages that could be available to respond in the event of a loss that you might not currently be thinking about. The first is extra expense coverage. We see that often in commercial property policies. And extra expense coverage is for additional expenses that are incurred in addition to the. That you would incur to continue normal operations or to mitigate your losses while the property is unusable, it's damaged, or it's in the process of being repaired or replaced. So make sure to keep track of your receipts regarding any repairs or replacement of your property and any additional costs and expenses that are needed to continue business operations and keeping things running as normal as possible after the loss. That's where extra expense comes in. There's also contingent time element coverage for business income losses that are caused not directly to you, but that losses that are suffered by a supplier or a customer or parties in your supply chain. Any of those individuals or entities suffering losses may result in you suffering a loss, even if you haven't suffered the natural disaster directly. So those are contingent time element or contingent business income loss coverages. There's also coverages for ingress and egress, really when losses occur that prevent you from accessing your insured property. There's coverage available for that as well. There's civil or military authority coverage for when losses are resulting from governmental or military authority orders that interrupt or reduce your business operations. And finally, there are service interruption coverages for those losses that are sustained due to the interruption of utility services to the insured premises. I think in the case of the California wildfires, all of these coverages are likely to be impacted by many of the businesses and individuals who are in the path of the fire and those who are nearby or in the greater area. So it's important to keep in mind that you may have other coverages available, even if you believe you have not been directly impacted by the loss to date. Chris, let me flip it back to you to talk about a specific issue that we've seen sort of prop up in the context of the LA fires, and that is a matter of causation and what caused the loss. 

Chris: Sure. Just for those listeners, to the extent, you know, you're just looking for some information about natural disasters or losses in general, there are two main causation doctrines that the majority of states will follow. One is the concurrent cost doctrine. The concurrent cost auction says that there were two or more perils combined to cause a loss, and at least one of them is covered. The entirety of the loss is going to be covered. An example of that is if you have a home that's suffering from some construction defects, and a hurricane comes along and damages the home, makes those defects worse, causes property damage to the home. All of a sudden, you had some defective windows, for example, and a hurricane came in, and now the windows are leaking like sieves. Your whole house is saturated. it, under that scenario, under the concurrent cause doctrine, your loss should be covered, even though construction defects may be excluded and the hurricane being a covered cause of loss. In California, however, courts follow what's called the efficient proximate cause doctrine. And that doctrine says that where two or more perils combined, only the efficient proximate cause is covered. Typically, that's defined to mean the predominant cause of loss, the one that sets the others in motion. So if you have a causal sequence where there are multiple causes in a chain of causation that ultimately resulted in the loss, if there is one that was the main precipitator of the other causes that set the others in motion almost, but for that initial most important cause, these other ones wouldn't have occurred, that is going to be the relevant cause for determining whether or not your loss is covered. So if that predominant or efficient proximate cause is covered, your loss is covered. If the predominant or efficient proximate cause is excluded, then your loss is likely going to be excluded. We've heard some rumors, despite how obvious it may seem to some, that the cause of the losses that we're seeing in Altadena and Palisades was caused by a fire. We've heard some rumors that some insurance companies are taking the position that this is a wind loss. The efficient approximate cause of the loss is wind. Now, you're going to have to look at your policies, and some courts are undoubtedly going to have to determine that issue. But historically, where you have these fire-related losses. Even though the fire itself is spread by wind, the efficient proximity cause has, in case it's been found to be the fire, in which cases are going to be a covered cause of loss under most property policies in California. One issue that we haven't quite seen yet, but we undoubtedly will, unfortunately, are mudslides. Whenever you have these wildfires that burn and destabilize hillsides and are followed by rains, often in February of the year, you're going to see some mudslides. And there are a fair number of cases in California interpreting whether under most standard California property insurance language, whether the efficient proximate cause of these mudslides is weathered or fire or something else entirely. And there are several cases that hold in the instance of mudslides, the efficient proximate cause of the loss is fire. And some of those cases, for those interested, include Howell, include Garvey, Vardanian, and several others. Happy to talk about those. But one thing to keep in mind is always check your policy. While many policies will cover fire, many will exclude earth movement. Even though earth movement in the event of a mudslide is one of the causes of loss in that chain of causation. If the court or if it's determined that the fire a covered cause of loss is the efficient proximate cause of that loss your loss should be covered despite the existence of a earth movement exclusion and policy now. There is a sort of, there's a bit of a wrinkle to that. So some earth movement exclusions, and we're seeing more and more of this, I think, are stated as sort of a compound exclusion. So not only do they exclude earth movement, which again, if standing alone, should not prevent coverage if the fire was the efficient approximate cause and fire's covered cause of loss, but they're combining the exclusion with earth movement and another cause of loss. So for example, they'll say, we exclude earth movement to the extent earth movement combines with fire, or to the extent earth movement combines with rain to cause the loss. And there's a California Supreme Court case on that issue. It's called Julian. And what Julian says is, well, okay, those types of exclusions are enforceable. They're not an unauthorized end around California's efficient approximate cause doctrine. They're allowed, though only in limited circumstances. And that is where the causal sequence is obvious and known and common. And in that case, it was a exclusion that excluded earth movement to the extent it combined with weather conditions. There was a mudslide and the insurance company took the position that the mudslide damage was excluded. The case went all the way up to the California Supreme Court and the court agreed with the insurance company because of the commonality and the easily understood sequence of events being fire, destabilization of land, rain. Mudslides, damage to the home. Now, Julian has been narrowed pretty significantly since it was decided in 2005. And there are cases out there which have less common fact patterns, but involving rain, involving fires, where Julian has found to be inapplicable. So again, read your policy. These are not cut and dry issues, but that's kind of a high level overview of some of the causation issues you might see as these claims progress in California. 

Esther: I wanted to add a quick note about SBA business loans. So if you have a small business or a nonprofit and your losses are not fully covered by insurance, you may consider applying for an SBA loan. The SBA provides low-interest business fiscal disaster loans up to $2 million that can be used to repair or replace fiscal assets, such as property, machinery, and equipment. The SBA also provides low-interest economic injury disaster loans, also up to $2 million, that can be used for working capital and expenses like rent and utilities until normal operations resume. And the qualifications are on the SBA website, so that may be something you want to consider. 

John: So I think that brings us to the conclusion of today's podcast, and we thank you all for listening and joining us. Feel free to email any of us with questions or comments. All of us appear on the firm website. In addition, on the firm's website, there is a dedicated page to wildfire and other natural disasters that we've created that is being updated constantly with new information on what is going on in the Los Angeles area and what the insurance department is doing, et cetera. So we encourage you to look at that. We also have an active Reed Smith Insurance Recovery Group LinkedIn page that has a lot of the same information. So please feel free to check those resources or again, reach out to any of us with any questions you may have. And once again, thanks for joining us. And we hope you listen to our next episode of Insured Success. 

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's insurance recovery group, please contact [email protected]. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

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Cyberattacks, including hacks, ransomware and malware attacks, are on the rise. Nearly every industry has been or could be affected, including professional and financial services, manufacturing, distribution, health care, education, tech, retail, energy, government and non-profit. Experts believe this trend will only continue. But insurance may be able to help manage the growing risks, as Lisa Szymanski and Adrienne Kitchen discuss in this episode.

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Transcript:

Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at [email protected]. We'll be happy to assist. 

Adrienne: Welcome back to Insured Success. I'm Adrienne Kitchen, and I'm joined by Lisa Szymanski. Cyberattacks, including ransomware, business email compromise attacks, third-party breaches, network intrusions, inadvertent disclosures, and malware attacks are on the rise. Nearly every industry has been or could be affected, from professional and financial services to manufacturing and distribution, healthcare to education, tech to government, and non-profits and retail to energy. And experts believe this trend will only continue. 

Lisa: The cyber threat landscape is quickly evolving, creating new and unique risks. Data and privacy breaches are disruptive, expensive, and embarrassing, and many lead to litigation. Malicious attacks are on the rise. So it's a question of when, not if, a business will suffer a data breach. 

Adrienne: That's right, Lisa. And most states, including D.C. And the U.S. minor outlying islands, have data breach notification statutes. A handful of states have statutes mandating methods by which businesses must secure data. The federal government also has enacted several statutes and regulations addressing data privacy and security in different realms, from health to finances and government to family. 

Lisa: With respect to insurance, traditional insurance like commercial general liability policies typically exclude losses arising from a data breach. However, other policies like employment practices liability policies, directors and officers policies, errors and omissions, and even property policies may provide some cover. This is because security breaches may give rise to claims against management, commercial crime policies may cover certain direct losses, and computer fraud and property policies may provide cover for damage to types of electronic data. 

Adrienne: An often overlooked, unpurchased, optional feature of some cyber policies is system failure insurance, which is usually triggered by an unplanned outage of a computer system resulting from operator error, erroneous updates of software, or a similar unintentionally damaging maintenance of computer systems. Another often overlooked aspect of cyber policy is customer attrition, which provides cover for lost profits due to a residual loss of customers following a service interruption. 

Lisa: Data security and privacy liability policies may be placed as standalone policies, or coverage sections in package policies, or endorsements to traditional liability policies. All of this cover is relatively new, so the forms vary significantly and are always evolving. Data security and privacy liability insurance is negotiable, and policyholders should compare the policies and try to obtain bespoke coverage whenever possible. Generally speaking, data security and privacy liability policies may cover several risks, including, for example, misappropriation of private information, unintentional disclosure of private information leading to a risk of or actual identity theft, failure to protect confidential information from misappropriation or disclosure, failure to disclose or notify victims of a breach incident, violations of federal, state, local, or foreign laws governing data protection and privacy, including certain regulatory actions, as well as business interruption.

Adrienne: Data security and privacy liability policies may also cover certain costs incurred when a business responds to, investigates, or remedies a breach. This includes things like breach notification costs, attorney's fees for legal assistance from privacy counsel following the breach. Sometimes these are called breach coaches, the costs of a forensic examiner. Various other response costs like maintenance of a system for those affected to communicate with the company. Remedial measures like credit monitoring and expense reimbursement may also cover defense and claims administration costs, damages, and consumer redress fund payments. It also may cover business interruption costs to hire communications professionals to address the effects of negative publicity so the company can maintain goodwill, and other costs like replacing or restoring electronic information, extortion payments, and criminal rewards. 

Lisa: Data security and privacy liability policies typically contain a number of exclusions, and I'd like to highlight a few of those for you. These include intellectual property violations, products liability, violations of anti-spam, blast facts, and similar laws, misconduct committed by senior management, infrastructure failures, inability to use, the performance of, development of, expiration of, or withdrawal of support of certain tech products and software, and content created by third parties. 

Adrienne: Right. And as mentioned, cyber insurance is vital. It's also vital to check your kidnap, ransom, and extortion policies. They may cover things like ransomware attacks, although you want to take a look at your policy language because that is becoming less the norm, but the older policies do, and some may still. Cyber and KRE policies may cover the costs of independent forensic analysts, independent consultants, lawyers, and others, either expressly or as part of the loss mitigation coverage. Importantly, many policies have pre-approved vendors and counsel that must be used or require that the insurer give consent before the policyholder retains any vendors or counsel. 

Lisa: Publicity costs may also be covered, and this is particularly important because reputational harm may be one of the largest damages to a corporation following a cyber attack. Adrienne, maybe you could talk about steps that policyholders can take before and after the breach to help protect their business. 

Adrienne: Before the breach, selecting the right policy and the application process are crucial. You have to consider all possible areas of exposure and ensure your business has enough coverage for its risks. Cyberattacks are costly and can shut down a business completely if networks and computers are unusable, if the business cannot afford recovery costs, faces third-party liability, or cannot survive any temporary loss in income. Costs can vary and rise very quickly following a cyber attack. So it's vital to fully assess all potential exposures that your business might face and ensure you have adequate coverage, including for things like business interruption, ransomware payments, third-party liability, data recovery costs, legal fees, PR, and payment to customers. In determining what losses are likely, businesses should consider things like potential damages, including loss of a computer system or the data within. A business shutdown, potential fines and penalties, reputational damage, and things like theft and extortion. It's also really important to keep your IT security officers and the stewards of the IT systems in the loop when completing cyber insurance applications. Cyber insurance applications increasingly focus on cybersecurity infrastructure and controls, and an inadvertent error in an application may be used as a basis to deny coverage. So it is crucial to consult the people with the most information about your business's IT systems and keep them closely involved with the application process. 

Lisa: It's also crucial to understand your company's specific risks and exposures. For first-party costs, where the company is hacked or is subject to a ransomware attack, look for coverage for notification and credit monitoring expenses if your customer's personal information could be stolen in a data breach. These expenses add up quickly. Some policies cover credit monitoring and identity theft protection services for customers as well. With respect to third-party costs, look for liability costs associated with a breach of personally identifiable information. Also look for coverage for lost business income and extra expense due to a cyber attack, including express coverage for mitigation costs, particularly if you use your own IT and cybersecurity salaried employees to respond to an attack, to the extent they are working to respond to and recover from a cyber attack. It is also important to look for defense costs in the event your business is sued following a breach. 

Adrienne: Exactly. It's also important to consider obtaining coverage for employee or vendor acts. Insurers may decline claims if an employee or vendor with access to your data was at fault. Look for policies that include coverage for these kinds of incidents. Some policies bar coverage for rogue active employees but will cover the negligent active employees. This issue is increasingly important given the rise of social engineering fraud. Also be aware of sublimits that may leave your business without sufficient coverage following a social engineering fraud loss. 

Lisa: Another thing you should do is consider obtaining retroactive coverage. The reason for this is because breaches can occur months before they are discovered. Consider whether your business would benefit from retroactive coverage of breaches that occur before the date of policy inception. This is particularly important if your company is a first-time buyer of cyber coverage. Another important step is to implement best practices and industry-recognized security measures. Cyber insurers frequently require policyholders to minimize security threats through a variety of security updates, multi-factor authentication methods, and other means. If a bad actor was able to infiltrate or circumvent, and it's later discovered that the business's security policies and procedures were something other than what the policyholder stated in the application, or if the business was not using industry-standard security measures, the insurer may outright deny or severely limit coverage. To prove their compliance with policy terms, businesses should consider whether they need to retain professional IT security staff or an outside vendor to assess and maintain network and data security, to generate a comprehensive compliance assessment, and to document ongoing assessments and remediation steps taken in response to newly arising threats. Generally, businesses need the most recent security measures to mitigate vulnerabilities, including a firewall, intrusion detection and prevention systems, multi-factor authentication. Restricting access to specific information, data backups, and encryption of data. 

Adrienne: After a loss, it's important to notify all insurers that might provide coverage, review all of your policies, make sure that there's not coverage that you might be missing in a policy that you would not expect to cover. You should also notify your excess and umbrella insurers, not just the primary insurers, because cyberattacks can wind up being very costly. Most cyber policies require immediate or nearly immediate reporting and frequently require that the loss be suffered during the policy period. So you should promptly report all claims, even ones without a loss, to avoid a denial based on late notice. Ensure you include all information required by each policy and comply with the notice requirements in the policies. It is crucial to report the event before engaging any vendors or incurring any costs. Many policies have pre-approved panel vendors and lawyers that must be used. This will minimize the insurer's ability to deny non-approved pretender expenses. 

Lisa: Non-cyber policies that include general liability, first-party property, directors and officers' coverage, kidnap, ransom, and extortion policies, and crime policies may potentially cover cyber-related losses. You should work with your broker to review these policies and provide notice. If there is even a possibility, the cyber event may be covered under those policies. Make sure you include all the required information and comply with other notice requirements for each type of policy, which can vary from policy to policy. 

Adrienne: Excellent point, Lisa. It's also important to incorporate claim considerations into your response and recovery plan. Once a claim is reported, you have to submit a proof of loss, which includes a detailed description of the loss, time, place, and cause, and a calculation of losses along with underlying supporting documentation. The submission date for proofs of loss varies from policy to policy, and because expenses are frequently ongoing, the policyholder may need to request an extension of time or file more than one proof of loss or both. Coverage positions and theories should be well thought out and considered prior to the claim and proof of loss process in order to reduce disputes afterward. 

Lisa: Thanks, Adrienne. I'd like to spend a minute now speaking about a narrative of events. This is something that insurers frequently want from policyholders. Documenting recovery efforts in real time is critical. It includes listing impacted systems, dates of partial and full restoration, details about interruptions to operations and revenue and manual workarounds, or incremental hours to continue operations or minimize slowdowns. A narrative should discuss the impact of the breach on the business's production or its ability to provide services. The response to make-up lost production or services, lost or canceled orders, including permanent customer or contract losses, and the ability of customers to purchase products and services from competitors. As part of this tracking process, ensure that all incurred costs are reasonable and necessary. 

Adrienne: And just a note about KRE policies, kidnap, ransom, and extortion malware in the event that you get a demand to pay money to get your data back. You need to be aware of OFAC prohibitions against payments to the threat actors. The U.S. Department of the Treasury's Office of Foreign Assets Control List, OFAC, has an advisory discussing this. There's frequently a list of businesses, states that you cannot pay for ransom extortion demands. So you want to keep track of that and make sure you're not violating any of those. 

Lisa: With respect to hiring third-party vendors, depending on the type and scope of the breach, third-party IT vendors may be critical to the response and recovery following a cyber event, including assisting with public relations, crisis management, breach management, forensic investigations, and data or system restoration. Some policies will pay only for vendors from a pre-approved panel. If a business retains vendors outside of the pre-approved panel, these costs may be denied or only partially reimbursed. In order to maximize coverage for vendor work, ensure your vendors provide detailed information to your cyber insurer, including detailed statements of work and detailed records of work performed by each employee. Separating the statements of work for system enhancements and improvements is critical because cyber policies frequently will not cover upgrades to the existing system. Due to the nature of cyber events, these upgrades are inevitable as a breach exposes weaknesses in the existing security system. It is also important to separate expenses related to replacement of damaged or corrupted items that cannot be restored and hardware purchases made to minimize disruptions to operations. 

Adrienne: Great points. Another thing that's very important to do is to hire a forensic accountant. For extensive business interruption losses, which are common with cyberattacks, a company may need a forensic accountant to assist with the preparation of a proof of loss for business income, extra expense, and other losses. The forensic accountant can help identify, quantify, and maximize the losses based on the terms of the cyber policy. They will advocate for your business in discussions with any forensic accountants hired by the insurer. The same warnings that Lisa just discussed apply here regarding retaining a vendor from the insurer's pre-approved panel. Lisa, what about interacting with the insurer post-loss? 

Lisa: Thanks, Adrienne. I'd love to discuss that. If the insurer's reservation of rights or denial letter includes any inaccurate information, be sure to correct those misstatements immediately. Most cyber policies require the policyholder to keep the insurer apprised of major developments as they arise. It is important to include in your response plan a way to track and inform all the insurers of these developments. Provide all bills to the insurer promptly and ensure they audit the bills in a timely manner. One thing that is very important to do is to always secure written consent from the insurer before paying or promising to pay any demanded ransom or a settlement with any claimants. 

Adrienne: Yes, that is vital. There are some pitfalls that we have not discussed. Be aware of your coverage for notification costs. The cost of notifying those impacted by a data breach may or may not be covered by your policy, even if those disclosures are required by law. 

Lisa: Right. And there are severe and various penalties related to the disclosure of personally identifiable information. If you are responsible for housing or have access to third parties' personally identifiable information, you may need coverage in the event that data is compromised. 

Adrienne: Exactly. And if one exists, it's important to follow your insurance company's mitigation protocol to avoid the inadvertent destruction or alteration of evidence the carrier may need to investigate the claim. Consider running tabletop exercises so key personnel know the plan on how to respond to a cyber attack even before an attack occurs. 

Lisa: Another exclusion that may bar coverage is a contractual liability exclusion. Policyholders should be sure to review policy language and ensure that their company is adequately protected, particularly with respect to risks that may arise via contractual obligations and relationships. It is also important to ensure that you have the proper protections from third parties with which your company does business. 

Adrienne: Exactly. Another exclusion or other exclusions are war, terrorism, or act of foreign enemy exclusions. They may bar coverage. It is important to negotiate carve-outs to these exclusions to ensure your policy covers cyberattacks that originate outside your country during the placement of those policies. 

Lisa: Carriers are also rewording policies to limit coverage to theft of data, which could exclude coverage for data exposures caused by an employee's negligence. Negligence is the cause of nearly one-third of cyberattacks, and it is important to work with your broker or coverage counsel to ensure that negligent disclosure of data will be covered. 

Adrienne: Yes, and there's training that you can do in advance, you know, various, here's how to recognize a cyber attack that your business may want to also consider doing. And as always, hire experienced coverage counsel. You can hire them when you're placing your cyber policies so they can review. And of course, in the event of a loss to review all of your policies and help you recover as much as you can. 

Lisa: Thanks so much, Adrienne, and thanks to everyone for listening today. If you have any questions, please do not hesitate to reach out to either Adrienne or I. We'd be glad to assist.

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's insurance recovery group, please contact [email protected].

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.

All rights reserved. 

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Continuing our two-part series on Bermuda Form policies, John Ellison, Richard Lewis and Catherine Lewis return to discuss how policyholders can perfect their coverage and handle the dispute resolution process.

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Transcript:

Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's Insurance Recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at [email protected]. We'll be happy to assist. 

John: Greetings, everyone. Thanks for joining us again for another session of Insured Success. This is part two of our podcast on the Bermuda Form, and today we are focusing on perfecting the coverage available under the Bermuda Form coverage and how to deal with the dispute resolution process. We've already covered the history of the form and key policy terms and coverage issues in our part one podcast, but now we're on to how the policy actually works and how you can put it to use. Joined today by two Lewises, Richard in New York and Catherine in London. And without further ado, I'll turn it over to you, Rich. 

Richard: Okay. We're going to talk a little bit about some of the issues that we've seen at the claim side from the manner in which the program is structured. As we covered, I think, in the first one, the limits of Bermuda Form policies are huge. A program can have hundreds of millions of dollars in limits. And so are the retentions. They can be, I think when the policies first came out, they were 25 to 50. And a lot of policy holders have up to a hundred million dollars in retentions. And what will often happen is a policy holder will buy different products, whether it be captive insurance or actual domestic GL insurance and put that in their retention. And this can lead to some issues. The first issue being, as we covered in the first podcast, that the trigger of the occurrence-first reported policies, the Bermuda Form policies, is notice of an occurrence or notice of an integrated occurrence during the annual period. The problem would be if the policyholder in the retention purchase GL insurance that's triggered on a different mechanism, either an occurrence policies or claims made policies. Occurrence policies are policies that are generally triggered by injury during the policy period. And the issue you can see that may occur, and we've seen it many, many times, is that, you know, the policyholder gives notice in say 2005 of an integrated occurrence or an occurrence under its Bermuda Form policies. And there have been problems with this, you know, say a product over a 10-year period with injuries triggering a 10-year period in the occurrence policies. And so what the Bermuda Form carrier will say is that I'm excess not only of the retention in my year 2005, but I'm also excess of all the other limits that were recoverable under the occurrence policies from years 1995 to 2005. So I'm excess of 10 retentions. There's language you can use in your occurrence first report or in your occurrence policies, either like a deeming clause or something that deems only one year to be triggered. Similar issues occur with claims made policies, although generally claims made policies have a batching mechanism where only one year is triggered. Unfortunately, if the first claim came in in say 2003 and you give notice of integrated occurrence in 2004, the same issue can occur. The Bermuda Form carrier will say that I'm excess of two retentions. The other big problem that we've seen a lot is where the underlying coverage has defense costs outside the limit. Obviously, in these mass tort cases that implicate Bermuda form coverage, the defense costs can be massive. And a lot of those defense costs are incurred before there's any settlements or judgments. And if for some reason, the coverage and the retention, whether in a captive policy, we've seen that, or an actual real insurance has defense costs outside of limits, it's very difficult to recover those defense costs under the Bermuda Form policy. They say the only thing that eats through my retention where defense costs are outside of limits are settlements and judgments. And then I think I'm handling it back to John for the underwriting process. 

John: So issues that can arise in these Bermuda Form claims often will implicate what happens during the underwriting process. And just like with any application process for any type of insurance, insurers will often look for misrepresentations as part of that. One of the things that's a little unique about Bermuda is that some of those forms, analogous to what some D&O insurers do, will be attached as exhibits to the policy when issued. So there has to be care taken to be candid and honest and open about your business and any issues you have with claims when applying for the product. But one of the things that we've seen that there's often a blurring between underwriting and claims that happens in the insurance world. And oftentimes policyholders are of the view that if they tell their underwriter something as part of the process of buying a policy, that will satisfy notice of claim requirements. That is generally not the case under the Bermuda policy. It really does need to be a separate line of communication with respect to claims and claim issues that is independent of and separate from any communications that are engaged with an underwriter at a Bermuda insurance company because the Bermuda carriers will take the position that information passed to the underwriter doesn't necessarily satisfy the obligation to provide information of claims to the claims department. So that's a point that is often overlooked and policyholders can be confused or taken advantage of if they don't recognize that distinction in how they're communicating with the Bermuda market. Now, another thing that needs to be kept in mind when you're potentially restructuring a program and maybe moving insurers around from their historic participation in the program, like changing layers or maybe actually switching from one Bermuda carrier to a new one, these policies have inception dates and retroactive dates. And typically, when the structure of the program is changed and a participation layer is different or a new carrier comes onto the program, the inception date that you will get for the new policy is often not back to the beginning of the time of the program when you were first buying Bermuda coverage so that there can be a gap in coverage. And the historic coverage that you thought you had because you've been buying in Bermuda for years or maybe decades can be disrupted substantially. And that is something you really need to keep in mind when you're renewing coverage in Bermuda and how the policies line up against the historic structure of the program. And you need to work on that closely with the broker to make sure you don't have gaps created by different inception dates or different retroactive dates that can leave huge holes of coverage based on the limits that Rich described earlier. One other thing I'll just talk about on the underwriting thing is there are oftentimes best terms provisions that are attempted to be put into policies, usually at the higher layers of a program that tries to, it's like a most favored nations type of clause. That can really be disastrous if there is some policy in the tower that is different or has more limited terms than potentially others in the program and just need to be aware of these things. They're often attempted to be slipped in, in my experience at least. Right near the renewal date, so there's not a lot of time to deal with them. You have to be vigilant about knowing what sorts of endorsements are being tacked on to the policies at the last minute. Again, that's something that should be a joint project with your broker, but it's definitely something you need to take into account. So we're now going to segue into actually perfecting your rights to coverage under the policy. And if you get into a claim dispute, how you may need to deal with the underlying defense issues and then perfecting rights under the Bermuda program. And I'm going to turn it over to Catherine to take this on. 

Catherine: Thanks, John. So as Rich touched on at the start, the notice provisions in a Bermuda form policy are really important. And first point to note is that the notice clause will operate to trigger cover. And its second purpose is that it fixes the limits and retentions that will apply. What I mean by this is that the timing of the notice and the policy year in which it is noticed will confirm the retention or policy limits and the terms and conditions that will apply to that claim. So that will include any retroactive dates, discovery provisions and endorsements. So the policy year to which it's noticed is really important. Failure to give proper notice may defeat a coverage claim and now that's not a hard and fast rule but the clause typically requires notice to be given as soon as practicable and during the policy period or the discovery period and I say may defeat cover i mean the strictness of that is a question of New York law and will depend to the extent to which an insurer can show that it was prejudiced by the timing of the notice but typically the obligation to give proper notice will afford some sort of protection to insurers and in our experience is a real risk area for policyholders. And this on terms of formalities, notices must be in writing and we'll have to include general information about the underlying claim. The Bermuda Form also allows a policyholder to give notice of an integrated occurrence and we discussed integrated occurrences in some detail in our first podcast but in short it enables a policyholder to give notice of all of the personal injury or property damage claims that fall within the policy definition. If a policyholder is giving a notice of integrated occurrence the notice must be explicitly designated as such and it's important that any of these notifications are really carefully drafted and it has a significant impact on the volume of claims that are to be aggregated. So an overly broad notice might inadvertently capture issues outside the liability problem and if it's drafted too narrowly the notice may not capture the full extent of the problem particularly the case if the case theory as to the underlying issue changes as is likely to do. So over the first hurdle of notices the Bermuda Form also deals with the life of the claim itself and the conditions of the Bermuda Form set out the relationship between policyholder and insurers once there is a claim that's been notified and the insurers are afforded a right to associate with the policyholder in the defense and the control of claims relating to the occurrence. And as well as the insurers having a right the policyholder has the obligation to cooperate with the insurers. And we typically are advising clients to keep insurers notified of all material developments in the underlying actions. And this brings us on to notice and consent settlement. Obviously, when dealing with significant must-talk claims and underlying issues, the priority of policyholders and our clients is to resolve the underlying liability. The loss payable conditions in the policy envisages that a policyholder will seek and obtain insurers approval of settlement in writing. Practical issues that arise in our experience in relation to complex towers of insurance, where it might be unclear which ultimate attachment point the liability is going to reach. And it might be unclear whether consent of all the insurers in the entire tower is required, or simply those whose layer is affected. So depending on the particular facts and circumstances, it might generally be sensible to notice all insurers of the proposed settlement to avoid issues down the line. And of course, we've all seen that specific issues can arise where an insurer who has been asked to consent decides to ignore the request. And usually, if they ignore a request of consent, they can't then turn around later and invoke a lack of consent as the defenses are not paying. But it just really reinforces the fact that these policies do require significant interaction with all insurers no matter where they sit on a tower. 

Richard: I just want to add a couple more things about this, just because one of the first things that happens in a Bermuda Form arbitration is there's a lot of hearings about disclosure. And so when you're cooperating or you're dealing with requests to associate or allegations that you have to cooperate, just keep in mind that at the level of the claim, what you need to do is you need to protect your privilege. And you have to have an eye on protecting the privilege information, the core privilege information. So in general, what we advise is you provide everything that crosses the line. What that means is all the underlying pleadings, everything that you're sending to the people who are making claims against you, everything they send to you. If you provide your defense counsel to give an update of the case, just like in any U.S. case, you do it by teleconference with an instruction to your defense counsel to not talk about privilege matters, but talk about things that cross the line. One thing that will often come up in these arbitrations is what they call the common interest or a waiver of privilege because the carrier is in a position, is in the same position as the policyholder. I think generally after reservation of rights, that shouldn't survive. But as a general matter, protect your core privilege material and also send correspondence to the carriers as if you are setting up a direct examination or a witness statement for your witness to show how much cooperation we were affording the carrier. And so there's a written record of everything that the policyholder was doing to comply with its duty to cooperate, although not to share privileged information. 

John: So I think we're now going to talk about some settlement coverage issues that almost always arise in these disputes, given the amount of money involved and how much effort needs to go into resolving claims that reach attachment points in the hundreds of millions of dollars. But fortunately, New York law on this topic is generally pretty favorable for policyholders. There's a leading Second Circuit case called Luria Brothers that talks about what a policyholder needs to do to receive coverage under New York law for settlements. And it's basically a reasonableness test that takes into account all the factors and issues that your company is dealing with and defending, you know, a series of what is typically a series of claims. And all that needs to be ultimately demonstrated is that under the circumstances that you were facing at the time, those claims are resolved. You know, was there a rational, reasonable approach taken to valuing the claims and the exposure the company was facing? And then, you know, a resolution that was negotiated that essentially matches up with what a normal, reasonable business would do to protect itself in resolving claims like those that are pending against you. A related issue that often gets litigated in these arbitrations is when there are claims that are asserted in the underlying cases that are both in the covered basket of coverage and some that may not be covered. The classic example is where someone is facing a series of tort claims and they're alleged to have been negligent and engaged in some type of intentional conduct that would arguably be excluded under the policy. Again, New York law is generally favorable on this point. There's a whole line of decisions. It's called the relative exposure test. And, essentially what the policyholder needs to demonstrate only is that they've entered into a reasonable settlement that would satisfy the Luria Brothers test. And then there's a presumption that arises that all of the settlement is covered and the burden of proof shifts to the insurance company to demonstrate if they can, that some of the claims were paid for were outside the scope of coverage that were provided by the Bermuda Form. You typically prove this to a certain extent with testimony from defense counsel about things that cross the line, back to Rich's point about the privilege, often expert testimony is used to say that any reasonable company faced with the avalanche of claims that they've settled would have acted in accordance with the way the settlement was handled and papered. And there's lots of ways to work through this, but it's something that defense counsel, in-house counsel, and coverage counsel should be working closely on together so that it is documented and papered as best it can be with the eye towards avoiding having this issue become a big problem in an arbitration down the line. So we've covered some of the major points on perfecting the claim. Now let's talk about how the dispute resolution process and arbitration works under the Bermuda Form. And for that, we'll have Catherine get started. 

Catherine: Taking it back to its sort of basic level, the policy is a contract between the insurer and the policyholder, and as such, the arbitration clause in the policy is private as between those contracting parties. And as a matter of English law, arbitration is a confidential process and awards aren't public. So it's not therefore usually open to either the policyholder or the insurer to use one award as a precedent in a case against another insurer or policyholder. All that said, the insurance market is pretty small and people talk. So insurers participating on a program will be well aware of other decisions made on that program if there are multiple arbitrations against multiple different insurers. And they will also be aware of claims involving other policyholders. So if the same liability issue is arising throughout the market, the chances are that insurer will be sitting on a program for multiple policyholders and they'll be aware of the coverage issues arising under those programs. So given the inherent confidentiality surrounding arbitrations, and that it's a private dispute resolution mechanism between policyholder and insurer, it's challenging in our experience to join arbitrations together without the consent of the insurers involved. And it's sometimes a frustrating position where there would be significant cost savings for a policyholder inviting only one arbitration against its insurers. In practice, it's pretty difficult to persuade insurers to combine their arbitrations. 

John: So now I think we're talking about how do we get the process started? I mean, it's typically a three-person arbitration panel. Each side gets to pick one, and the process is started by a notice of arbitration either from the policyholder or the insurance company to the other party designating their arbitrator, and then there's a 30-day period for the other side to pick theirs. And then there's usually a negotiation process that leads to the selection of the chairperson for the panel. The world of Bermuda Form insurance arbitrators is a pretty small one, and there are an enormous number of repeat panels and repeat players in this. So it is really important you're working with people who know that pool of candidates and also know kind of the general thinking that they have towards insurance issues because they will have likely seen some of these issues in other disputes previously. And it very much operates like a small club, so to speak, with the arbitrators typically having characteristics of either being a retired English judge, either still practicing or retired, now KC, who's had a substantial practice in the insurance space. And then there are often some U.S. lawyers who serve as arbitrators over there who have significant insurance background from their practices. 

Richard: The only thing I'd say about that is sometimes you'll have an issue in your case that's just not understood by KCs being like, how could American juries do this? And sometimes you'll want an American practitioner or American judge to be able to explain that, you know, say liabilities for which the policyholder really had no responsibility are still being heaped upon them. And that that's just something that happens in parts of the United States. 

John: Yeah, and it's hard to overstate the importance of this selection process because it often can be outcome determinative. So, you know, focusing on panel selection and doing your due diligence as best as you can on getting, you know, a panel that you're comfortable with is really critical to the process. It's really hard to overstate how important it is. But, Rich, go ahead on other characteristics of the panel. 

Richard: Well, they're very expensive. KCs are very expensive and there's a little bit of sticker shock on that. And the other thing that you can expect is that when they see what each individual is getting paid, they're all going to want to get paid the highest rate of any of the three. And there's not a whole heck of a lot you can do about that, especially at the beginning of an arbitration. 

John: Yeah. And one of the issues that's a little different about the way arbitrations work under this form is all of the arbitrators have to swear to neutrality. I mean, it's different in a lot of respects from a U.S. Arbitration under the AAA format or jams or something like that. You know, arbitrators are not party affiliated like they often are in the U.S. and so the conflict issue and things like that is not something that really has much weight in London like it might in the United States. And, you know, once the panel is in place, they're kind of off on their own as a three, three person group that operates entirely independently of the parties and is not to be dealt with, you know, other than administrative things. So it's, it's a very different system. And, and, you know, I think it works just as well as the U S system. You just have to be aware of how, how it operates in a slightly different fashion. But Catherine, why don't you tell us about the timing and process? 

Catherine: Yeah, sure, John. Thanks. I'm talking about a bit of logistics. So, yeah, as John mentioned, there's a pretty narrow pool of specialist arbitrators who hear these. They're also very busy. And combining that with the barristers that are usually appointed by each party, fixing the final hearings can be challenging. And for hearings over a week, I think you're looking 18 or more months ahead. So it's not a quick process once you're in the arbitration and I'd say 18 months is still pretty quick in some of our experience in terms of structure they follow a typical English civil litigation format so for any international listeners these are not memorial style pleadings you'd get in some other arbitrations it's rather an exchange of evidence at various stages and for those in the US there are no depositions and I'll just run through the steps very briefly. The first stage is always an exchange of pleadings so statements of claim defense and counter claims there's then a procedural hearing which sets the order of directions for the remainder of the arbitration and the first sort of evidential step is then disclosure or document production often by Redfern or Stern schedules which is a common feature of arbitration generally typically the discovery or disclosure burden is going to be on the policyholder as that's the party with the relevant documents regarding the underlying claims and liability fully appreciate it's going to be quite extensive and therefore quite expensive for when you're dealing with the mass talk claims and frustratingly for policyholders is quite often minimal disclosure by insurers. Once the document production stage is over, it's then on to witness statements. So these are written witness statements prepared by each party, sort of advancing its own factual position. And there were no depositions. What happens at the final hearing is that the witnesses attended for cross-examination and they're then cross-examined on the points made in their witness statement. After the exchange of written witness statements, there's then expert reports. Then it's preparation for the final hearing which will be involved preparing written opening submissions which in England and Wales is referred they're referred to as skeleton arguments then there's the main hearing followed by written closing submissions if the tribunals ask for them, and then the preparation of the award by the tribunal and I think Rich is going to talk to us a little bit more about some of the logistics. 

Richard: Yeah I just have a couple brief points you know one of the points is you will be very well served by hiring a barrister to present your case. John and I did this one time without a barrister. It went much better with the barrister. Another issue is whether you have English solicitors. If you are a US firm that has a policyholder as a client, there's just so much groundwork that needs to be done over there. If you don't have a London office in that law firm, you probably need to hire a solicitor as well as a barrister. Another issue that comes up is procedural or substantive law. UK law will cover the procedural issues. US, typically New York law will cover the substantive issues, but there are some things that fall between the cracks. For instance, we had a case where privilege attached to what we'll call peer reviews of doctors. And was that California privilege? Did that apply or would it be evaluated under English law? Other issue that comes up is interest. Is it substantive in New York law, or is it procedural in English? And that's still up for a little bit of debate. 

John: Yeah. And one of the things that is unique about this is that these rulings are all supposed to be confidential, but this goes back to what I was talking about earlier and the due diligence and importance of selecting a panel. Even though everything is supposed to be confidential, there is a small cadre of people who seem to know the result of just about every arbitration that happens. Maybe not all the details, but at least who won and who lost. So although there isn't precedent in the traditional sense of being able to cite to another case or another arbitration award. People do know what is going on in these cases, and it's important that you be aware of that. And even though there isn't some website or books that you can go look up the results of all of these prior arbitrations, you do need to have people on your team who do know what's going on over there and how these things are proceeding in other matters. So just a point there. 

Catherine: Thanks. Yeah, just the last point for me on this is a fairly unique aspect of the media form arbitrations, which is a feature of English procedure. And it's certainly a novel point for our US clients. So the usual rule in England is that the losing party pays the winning parties legal costs and expenses. In these types of arbitrations, there's usually a fairly clear a successful party with either the insurer being ordered to pay the claim or the policyholder being denied coverage. If there is an uncertainty then about who has won and who has lost the tribunal will typically be asked to determine it. The rule as to cost shifting and the losing party paying costs doesn't mean that there's an open-ended indemnity for all costs but a successful party in the arbitration might recover anywhere between 65% and 80% of its legal costs and expenses. 

John: Just to close this out, we want to highlight a couple of points that we hope you've already gotten, but just to emphasize the notification process and the communications process with the carrier is critical. It's a little different than dealing with kind of traditional US domestic insurers. So you need to work closely with your broker and with a knowledgeable coverage counsel on that. That's also, that same logic applies to the structuring of the right legal team for these because although there are similarities to arbitrations that occur domestically, there are unique aspects. And as Rich said, the happenings in London, if that's the form as opposed to Bermuda, are often substantial. So having a cross-ocean team in place is really critical. I already re-emphasized the picking the right panel and doing your due diligence there. All of these are our key points. And we hope that we've given you a little more understanding of the Bermuda Form process and happy to help with any questions that may arise. And we thank you again for listening to this latest podcast of Insured Success and hope you keep on listening. Thanks very much.

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's insurance recovery group, please contact [email protected].

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

All rights reserved. 

Transcript is auto-generated.

In 2024, the citizens of more than 60 countries have gone or will be going to the polls to exercise their electoral rights, leading some to dub this year the “super-cycle” election year. The political change that some of these elections will bring could also bring political risk, but political risk insurance can mitigate some of those risks. In this podcast, Laura-May Scott, Emily McMahan and Katherine Ellena discuss what this insurance is designed to cover, how it could be triggered during this year’s elections and some practical considerations for evaluating a company’s risk profile and insurance suites in respect of political risk.

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Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's Insurance Recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at [email protected]. We'll be happy to assist. 

Emily: Hello, listeners, and welcome to the Insurance Success Podcast. My name is Emily McMahan, and I am an associate in the Global Commercial Disputes Group at Reed Smith in London. 

Laura-May: And I'm Laura-May Scott, a partner in the Disputes Group at Reed Smith in London. 

Katherine: And lastly, I'm Kat Ellena, an associate in the Insurance Recovery Group in Los Angeles. Today, we're going to talk about a key insurance in a business's armory, political risk insurance. We will also be considering this type of insurance in the context of elections. Emily: So this year, over 60 country citizens have gone to or are going to the polls to exercise their electoral rights, dubbing 2024 the super cycle election year. As we know, political change brings about uncertainty and therefore increased risk for organizations operating from or doing business in those affected countries. This is where political risk insurance can step in to mitigate some of these risks experienced by organizations that are associated with political change. 

Laura-May: Exactly that. And for those experienced in insurance and risk management, political risk insurance isn't just a peripheral concern. It's a critical tool in strategic planning and operational continuity. This insurance serves as a crucial tool for mitigating uncertainties that arise from political shifts, which we often see are magnified during elections or political unrest. 

Katherine: So with that backdrop in mind, in the next 10 minutes or so, we will explore three things. First, what political risk insurance is designed to cover. Second, how this coverage could be triggered in light of this year's super cycle of elections throughout the world. And lastly, some practical considerations for risk managers and company executives alike when evaluating their company's risk profiles and insurance programs in respect of political risk coverage. 

Emily: Great. So let's start with setting out what exactly political risk insurance is. Political risk insurance is designed to cover a policyholder's financial losses and operational disruptions arising from political events, such as government changes, policy shifts, civil unrest, and geopolitical tensions. 

Katherine: That's right, Emily. and political risk insurance specifically provides coverage for risks like expropriation, political violence, currency and convertibility, and government contract breaches. During election periods in particular, these risks can become pronounced, which requires a proactive approach to risk management. 

Laura-May: Yes, and in an election context, the risk faced by companies is twofold. So we have immediate market reactions, where there's riots and civil unrest, which results in business interruption. And you also have long-term policy implications as a result of government policy changes, which can cause more permanent implications for businesses. So let's look at how coverage can be triggered by elections. So elections inherently introduce a level of volatility that can disrupt business operations and financial stability. For instance, the anticipation of regulatory changes or shifts in foreign policy can lead to market volatility, which can ultimately then impact investment decisions and corporate strategies. 

Katherine: Right. And as you can see, there are many types of political risks that can be addressed through political risk insurance. For many businesses, the most relevant types of coverage that could be called upon as a result of losses experienced due to election fallout would be business interruption, expropriation, or political violence coverage. However, organizations based in or with assets in traditionally less stable regions may also require political risk coverage for losses experienced due to, for example, forced abandonment of assets or forced divestiture from an affected location. 

Emily: So, turning to ex-appropriation, this type of cover caters to losses experienced due to government acts which interfere with fundamental ownership rights of the insurance investment in the relevant region, which include but are not limited to confiscation and nationalization. This can occur when the new government enacts policies or takes actions to confiscate assets of the insured or chooses to nationalize an industry previously run by privately owned businesses which the insured participates in. This cover can also address the ex-appropriation of an insured's funds by a new government which are held in a deposit account in the affected country. This type of cover can also be triggered if the new government imposes laws or restrictions that selectively and discriminately apply to a company or category of companies, which includes the insured. And political violence insurance provides cover for the insured's losses due to physical damage to investments and assets, usually located in a particular area, and where those losses have been caused by political violence, such as war, revolution, terrorism, insurrection, riots, strikes, sabotage. Such causes can emanate from an election or be in direct response to an election result. 

Katherine: So while ex-appropriation and political violence coverage may be triggered as a result of events following the election of a new government, the most likely type of political risk coverage that would become relevant in relation to an election cycle is business interruption insurance. Business interruption insurance provides coverage for financial losses experienced by the insured, which are caused by the insured's business operations having been interrupted by the covered political risk. So, for example, political tension surrounding an election could lead to rioting, looting, arson, and other violent acts that could force an insured's business to close or potentially lose revenue or suffer property damage. 

Emily: So, we will now discuss some examples to highlight why political risk insurance is an important consideration in light of this super-cycle election year. 

Katherine: That's right, Emily. So even in stable democracies, the election of new governments can produce losses for uninsured. Consider the 2016 United States presidential election and the election of Donald Trump. His tenure in office brought significant policy change, particularly in trade and foreign relations. Both U.S. and international businesses involved in global trade practices face new tariffs and regulatory hurdles. And these changes force companies to re-evaluate their risk management frameworks and in many cases increase their reliance on political risk insurance. In fact, there are legitimate concerns that should President Trump be re-elected this November, the U.S. could withdraw from international organizations like NATO, which would have widespread geopolitical consequences. There are also concerns regarding rioting and other public disturbances related to the U.S. Election this November. According to the U.S. Attorney's Office, the riots after the 2020 U.S. elections alone caused approximately $3 billion worth of damage. And the unpredictability of the upcoming U.S. Election this November emphasizes the necessity of robust risk management strategies. 

Laura-May: And political upheaval due to elections is not limited to the U.S. For example, according to the French government, the anti-government yellow vest movement in France in 2018 caused over 200 million US dollars worth of damages. Kenya also experienced significant rioting and violence following its general elections, most notably after the 2017 presidential election. That election, which took place in August 2017, resulted in widespread unrest due to allegations of vote rigging and irregularities. The results were in fact later annulled, which led to further tensions and violence. And the exact quantification of the total loss varies, but the financial impact of the 2017 post-election violence in Kenya was extensive, and it affected multiple sectors, and it slowed down the country's economic growth. 

Emily: So, as we have discussed, not only can elections result in short-term reactions, such as political violence or rioting, but can in turn result in longer-term shifts in government policy and regulation. Political risk insurance can help provide a buffer against the unpredictability of a new government's priorities following an election, which is why it is integral for companies to assess their exposure in this super cycle year and assess whether their current insurance suite is sufficient. 

Katherine: So now that we understand both what political risk insurance can cover and the potential impact elections can have on a business that could trigger losses which may need to be met by this type of insurance, let's discuss what companies can practically do to ensure they're catering to the risk posed by a super-cycle year. 

Laura-May: Companies should adopt a practical approach to managing political risk insurance during election cycles by undertaking comprehensive risk assessments. And this can be done internally at the business or through the engagement of external political analysts and risk consultancy firms who develop scenario-based evaluations, providing a spectrum of potential outcomes and their implications for the insured. 

Emily: And once a comprehensive view is established of your company's risk exposure to political risks, companies will also need to ensure that those risks are met, either through strategic business changes or mitigation measures such as insurance. Laura-May Scott: Yes, and tailoring a company's insurance policies to align with the specific risk exposure identified and the geopolitical landscape of a business is crucial. It's something that we always come back to when we're talking about insurance. Cover needs to be tailored to a business's risks. Insureds must adopt a multifaceted approach to risk management. And this involves not only securing appropriate political risk insurance, but also doing other things like diversifying investments, staying abreast of political developments, and continuously refining risk assessments based on emerging data and trends. 

Katherine: And given that one of the most common types of losses a business may face due to an election is business interruption, companies should specifically review their business interruption policies to ensure that it would respond to the risks identified by each individual business. 

Emily: So on that topic of business interruption, when you review your company's current business interruption insurance, we recommend that you consider the following questions. First, does access to the business's premises have to be entirely prevented, or is it sufficient that access is merely hindered to trigger cover? Second, are there any geographical limitations to cover that could limit the cover available? On that note, we recommend reviewing definitions such as vicinity or similar types of geographical terms. Third, are there any monetary thresholds, monetary deductibles, or time deductibles for accessing this cover? In other words, is there a period of time or an amount of loss that is for the insurer to account for before insurance kicks in? Fourth, what is the definition of damage and is it wide enough to cover possible losses? And lastly, consider definitions like the definition of civil unrest or other relevant terms that operate within the specific political risk cover. The political landscape is constantly changing, and with the increasing prevalence of disinformation and social media, there is a risk that losses experienced by a business due to an election may not fit neatly into some of the legacy language in a political risk policy. We recommend that businesses think creatively about what types of events emanating out of an election could give rise to losses to ensure they are appropriately covered. With that said, elections also present opportunities. A sophisticated risk management strategy encompassing diversification and comprehensive insurance coverage presents an opportunity for businesses to grow and prosper. 

Laura-May: Exactly that, Emily. Use the political landscape change to ensure that your business is appropriately covered from an insurance perspective. So in summary, political risk insurance is an integral component of strategic planning for businesses and investors, particularly during election periods. The volatility and uncertainty elections bring can significantly impact various sectors, and being equipped with robust risk management strategies is critical. 

Katherine: So what are some key takeaways for companies in this super cycle election year that can help ensure potential risks are identified and also mitigated? First, it's crucial to continue to stay informed on political developments, polling data, and potential policy changes in the regions affecting your business. Second, businesses should regularly evaluate the relevant political landscape and its potential impact on business operations. Thirdly, businesses should also ensure that they're diversified, and they can do that by spreading their investments and operations across different regions to mitigate localized potential risks. Finally, it's imperative that companies review their insurance programs, specifically their political risk coverages, to protect against significant uncertainties. We also recommend that companies speak to their insurance brokers who are well placed to ensure that any identified political risks are properly mitigated through the right insurance policies. But in addition to speaking to insurance brokers, businesses can also consider engaging other external experts, such as political analysts and risk assessment firms that can help develop an even more robust risk management strategy. 

Emily: Great. Thank you, Kat. And thank you, Laura-May. And thank you, listeners, for turning into this podcast. If you enjoyed this episode, please subscribe, rate, and review us on your favorite podcast platform and share your thoughts and feedback with us on our social media channels. 

Laura-May: Yes, indeed. That's all for now. Bye, everyone. 

Katherine: Thanks, everyone. 

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's insurance recovery group, please contact [email protected]. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

All rights reserved.

Transcript is auto-generated.

In this podcast, Bert Wells, Cristina Shea and Adrienne Kitchen of Reed Smith’s Insurance Recovery Group delve into the critical topic of insurance coverage for supply chains, highlighting the significant risks and disruptions that can impact global logistics. This episode explores how events like political instability, cyberattacks and natural disasters can disrupt supply chains, and highlights the essential role insurance plays in mitigating these risks. The team shares real-world examples of supply chain disruptions and the insurance lessons learned from these cases, emphasizing the importance of understanding risks and ensuring adequate coverage.

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Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's Insurance Recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at [email protected]. We'll be happy to assist. 

Adrienne: Welcome to Insured Success. My name is Adrienne Kitchen. I am a senior associate in Reed Smith's Insurance Recovery Group. Joining me are Bert Wells, a partner from our New York office, and Cristina Shea, a partner in San Francisco. Today, we're talking coverage for supply chains. Supply chains are relationships between a seller or manufacturer of goods and the supplier of those goods or things like the materials incorporated into products, raw materials, component parts, things like that. Supply chains can be disrupted by numerous things, whether price changes, transportation or storage failures, labor shortages, political instability, man-made physical losses to plants like fires, storage facilities, stores or cyber attacks, all of which pose a significant risk to businesses. A disruption in any part of the chain can cause losses in other parts of the chain. Insurance has become central to managing risk in global supply chains and logistics, particularly as they grow increasingly complex and vulnerable to disruption. Some types of insurance that may help cover losses to supply chains are contingent business interruption, supply chain, and trade disruption or cyber insurance. Other coverage types may cover some potential gaps in these insurance types. Global supply chain risks also is a focus of national policy and security. Cristina, would you like to discuss some of those? 

Cristina: Yeah, thank you, Adrienne. So focusing on the U.S. first, you know, going back about, I don't know, 12 years or so, the U.S. Department of Homeland Security really started to recognize and understand the importance of securing the global supply chain. And along with that was recognizing, you know, its vulnerabilities and how it was susceptible to external forces. So to ensure that the global supply chain continued to function smoothly, the Obama administration adopted a national strategy in 2012. And that was designed to bolster and support the efficiency, I guess, of the insecurity of the global supply chain and ensure that it was able to withstand evolving threats. And then, you know, during the pandemic, the strain on the global supply chain really, it was, you know, front and center. It was under a microscope. And following the pandemic, the Biden administration really greatly enhanced some of that implementation of that strategy. And they took that program and addressed some of the acute supply chain crisis that had arisen due to the pandemic. And in the context of that, the Biden administration created a council on supply chain resilience and it implemented the use of the Defense Production Act that allowed U.S. Manufacturers to start creating essential medicines in the U.S. in order to mitigate some of the drug shortages. And all along throughout both the Obama and the Biden administration, the real focus has been on implementing security measures to shore up the supply chain and to protect its infrastructure. And then similarly, the European Union has been developing its own regulatory initiatives that have gone, you know, hand in glove with a lot of the U.S. initiatives as well. 

Adrienne: Thank you, Cristina. Recent cyber attacks highlight the scale and vulnerabilities related to the supply chain concerns. So now let's discuss some recent examples that have hit the news. Bert, would you like to start off? 

Bert: Yes, thanks, Adrienne. In fact, it's not limited to cyberattacks. In fact, disasters of various physical sorts are also very much a reason for supply chain interruptions that cause loss. And I want to speak for a moment about the tragic collapse of the Francis Scott Key Bridge in the port of Baltimore in March of this year, 2024. And as our listeners will no doubt remember, that not only shut down the bridge itself, but prevented entry and departure from the port of Baltimore by shipping traffic. So it had an obvious and an immediate and extreme impact on parties that were shipping materials into or outside the port of Baltimore, which is not only a major port on the East Coast of the United States, but as I understand it, probably the largest port in terms of handling automobile deliveries to the East Coast. So it's a very significant interruption in supply chains for those that were expecting some material to pass through the port itself or that for some reason needed to rely specifically on the Francis Scott Key Bridge, although there were other routes around the missing bridge for vehicular traffic. And in this connection, I'd like to mention two types of coverage that are often found in property insurance policies that could well relate to the Key Bridge collapse and cover losses that arose from it. I think the most obvious example is the so-called ingress / egress coverage that is found in many property policies, which is intended to protect a policyholder that can no longer enter or depart its premises. And it's triggered if there's a physical loss or damage to a property that is used to access the premises of the policyholder, preventing that access. So in the Port of Baltimore case, although this is a very obvious kind of coverage to apply, and it very directly applies, it would be a relatively limited number of policyholders that lost ingress and egress, let's say, specifically through the bridge or specifically through the port. That is, businesses that had properties actually in the port that could not get access to shipping or departing. Thinking, though, about the broader impact of the loss of the bridge on parties that transship materials through the port and don't necessarily have properties adjacent to the bridge or the port, there's another type of coverage that is found in many property insurance policies called contingent business interruption insurance. The purpose of contingent business interruption coverage is to protect the policyholder from losses that arise when there's a physical loss, that is to say, loss of or damage to physical property at the premises of someone else in the supply chain that gives rise to a loss. And an example here might be a party that was trying to ship automobiles to a dealership, let's say, through the Port of Baltimore, which could no longer gain access that way or had to wait months for access to additional inventory of automobiles. The idea of contingent business interruption is that one of your suppliers has suffered a physical loss and therefore the type that's covered in the insurance policy and that there are ensuing losses to business income, for example. Well, an interesting facet of this is who exactly is the supplier of the services at the Port of Baltimore? And does that supplier constitute a supplier for purposes of insurance? This was a question that came up in a case by a caption, Archer-Daniels-Midland versus Phoenix Assurance several years ago, in which it was held that various authorities that managed the Mississippi River in that case were indeed suppliers for purposes of insurance. And here, we would expect that entities such as either the state of Maryland or the Port of Baltimore, which is one of its agencies, or the federal authority responsible also for keeping the port open, might be considered a service provider, therefore triggering contingent business interruption for this particular collapse of access through the port and across the bridge. Adrienne, did you want to talk about Colonial Pipeline? 

Adrienne: Yes. Thank you, Bert. That was an interesting discussion and interesting issues that you might not expect. So the Colonial Pipeline attack in May 2021 was one of the first high-profile corporate cyber attacks that originated with a breached employee password as opposed to a direct attack on the company's systems. The Colonial Pipeline originates in Houston, and it carries gas and jet fuel to the southeastern U.S. and delivers about 45% of all fuel to the East Coast. In May 2021, a threat actor called DarkSide penetrated Colonial Pipeline's network security using a compromised VPN password. The threat actors stole some 100 gigabytes of data and infected Colonial's network with ransomware. In response, to contain the attack and due to fears the DarkSide might have information that would allow them to carry out further attacks on vulnerable parts of the pipeline, Colonial shut down its operations. That's a flow of more than 100 million gallons of fuel every day across thousands of miles of pipeline. It caused fuel shortages along the eastern seaboard, led to fuel prices hitting a seven-year high. The attack also led to emergency declarations by several states and the federal government and some various agencies. On May 9th, the Federal Motor Carrier Safety Administration issued a regional emergency declaration for 17 states and D.C. President Biden declared a state of emergency temporarily suspending the amount of petroleum products that could be transported by road and rail domestically. Ultimately, with FBI oversight, Colonial Pipeline did pay the ransom. It was some $4.4 million. DarkSide then provided a tool to restore the system, but it took quite a while to get everything back in working work. Six days after the initial attack, Colonial Pipeline was able to restart operations, and three days after that, operations had returned to normal. Although the DOJ recovered $2.3 million of the Bitcoin used to pay the ransom, Colonial Pipeline also suffered significant losses - investigation costs, loss of income from the multi-day shutdown, reputational damage, class actions alleging negligence and violations of consumer protection laws. One lesson learned from these attacks is the importance of various kinds of insurance, including cyber. Cristina, what are some other lessons learned from the trenches? 

Cristina: So just using, you know, real world examples that we have handled here for our clients, we have a client that manages supply chains for restaurants around the world. And one of that that client's key business associates had a breach of their network systems and through that breach the threat actor was able to access our client's network system and caused a complete shutdown of its network and a shutdown of its supply chain throughout Europe and the U.S. So the client itself had a cyber policy and we filed a claim under that policy. The problem here was that the losses were in the $13 to $14 million range, but the policy had a deductible of $15 million, meaning the client had to cover the first $15 million of its losses before coverage under the policy would kick in. So then we looked at some of the agreements between our client and its business associate or vendor. And through those agreements, the vendor was supposed to have added our client as an additional insured under its own policies. So effectively, that would have allowed the business associates policies to cover our client. But it turned out that the business associates insurer had canceled its policies the year before the incident. And the business associate either didn't realize that or realized it and didn't tell our client. But either way, our client was not able to recoup the benefits under those policies either. Long story short, our client had an interest in maintaining its business relationship with that vendor. So we ended up reaching a settlement with them, but it was a long protracted process. It really put a strain on the business relationship and it was a real distraction to both businesses. So, you know, I think that's a really good example of some lessons that we all learned from that. Number one being it's really important to understand, for every enterprise to understand where your risks lie, understand financially how much it's going to cost you if your systems are down for two days, two weeks, two months, and then determine whether your deductibles are set at the right place and whether additional policy limits are needed. You know, some companies make an intentional decision to set high deductibles and cover the first, whatever, $15 million, $20 million in the event of this type of breach. But, you know, that's fine if there's a certain logic to that for some businesses. But other businesses often buy policies straight from a broker without understanding the, you know, what the implications are and how it would look in effect if they were to have some sort of breach and disruption of their supply chain. And I think the other important lesson here to be learned is that if you are a business that has entered into these business associate agreements with vendors that require the vendor to insure you, those should be reviewed annually just to make sure that everybody still understands what is supposed to be provided under those agreements and that everything that was intended to be provided, like in this case, being an additional insured, is still intact and still effective. 

Bert: That's a great point. And I would add that just, I'm sure you've seen this too, that in many business associate or counterparty relationships, you'll see requirement of notice if insurance is canceled, as well as a requirement that it be maintained. Although a breaching party in one respect might breach in another respect as well. So that's no guarantee that the insurance will remain in place. 

Cristina: Yeah, you know, my recollection is, Bert, that they did have an obligation under this agreement to notify, but it wasn't entirely clear that anybody at the vendor knew that the insurance that was supposed to be provided to our client had actually been canceled. So again, it was a massive distraction and they'd wanted to maintain this business relationship. So we tried to get past it as quickly as possible. 

Bert: Well, continuing with the theme of sort of lessons learned from client experiences, I'd like to briefly share the experience of a client that I won't name that is in the consumer products industry. It supplies retailers, its product is in constant demand, and it operates or leases warehouses across the country in order to be able to continually restock retailers with their requested orders. Well, this is a classic complex supply chain scenario in which retailers are connected to the manufacturer through a distribution network passing through warehouses. And among the facets of that distribution system is something that seems very prosaic, a piece of software that tells warehouses what products to pick and what pallets to pack them on and what trucks to load them into and in what order. And my client was in the unfortunate position of having adopted an update to its picking and packing software, well having i should say having written it having designed it and having tested it extensively in what they call in the trade a sandbox to ensure that there were no glitches or bugs in that software so that it would operate properly when rolled out to numerous warehouses across the country. And lo and behold, the sandbox, I guess, wasn't big enough, didn't have enough sand. And when the software was rolled out, it froze. It offered nothing to the warehouses, no guidance at all. So warehouses across the country found themselves inundated with orders from retailers, but no capacity to fill them efficiently at all. And in some cases, just completely unable to fulfill the orders. This is a classic story of for want of a nail, the shoe was lost. For want of a shoe, the horse was lost. For this client, the consumer products manufacturer, this was an eight-figure loss, even though it took less than a week to get most of the warehouses up and running again. But fortunately, in its cyber insurance, it had selected an option, which many policyholders don't pick, in my experience, an option for a type of coverage called system failure coverage. And this is exactly the moment that system failure coverage is called for. There's no cyberattack here. There was no malicious intent. Instead, an accidental operation of the system. Indeed, an accident with the software that occurred after extensive testing, which was believed to be sufficient for the purpose, resulted in the freezing of a wide swath of operations and a big loss for the client. Anyway, as I say, fortunately, they had good coverage. They had this system failure feature in their cyber coverage. The deductibles and the waiting period, the time waiting period that also acts as a kind of deductible before such a loss can be collected, were actually rather small. So we were able to prepare a proof of loss and with a very significant demand for that client that was squarely within the scope of coverage. So the lesson learned is simply think about the options. These things cost additional money, but consider, too, the risk that you as a policyholder may face for the failure of a critical piece of software. And that additional premium you may ultimately decide is very worthwhile. Well, Adrienne, we spent a lot of time talking about examples so far. Why don't we get into some of the coverage types that are available for the many different ways that supply chain disruptions can manifest themselves? Would you like to tackle that? 

Adrienne: Sure. Thank you, Bert. And thank you both. Those are great examples and demonstrate how complicated supply chain disruptions can be, the various ways insurance can be implicated, and the importance of managing risk sort of beforehand as well as after. So thank you both for those. Several policy types may provide coverage. Bert, you talked about contingent business interruption, CBI, a little bit before. You specifically mentioned that it covers suppliers, and I just wanted to add that it can also cover purchasers and properties that attract customers to the policyholder's business. There's also something called specialized broad supply chain insurance. And it is broader coverage than CBI for supply chain disruptions. Supply chain insurance is sometimes called trade disruption insurance. These are specialized named peril policies that generally cover the loss of net profits and costs caused by physical or political perils. They may also cover losses from risks such as natural disasters, industrial accidents, a bridge collapse, production issues, employment and labor issues, infrastructure, riots, public health emergencies, a wide range of events. And cyber insurance is also a key insurance that may cover supply chains, particularly as the businesses in the supply chain rely on the internet, rely on software to make their supply chain work. Cyberattacks like denial of service attacks, extortion, and the resulting data loss can all affect the supply chain, more so because supply chains are increasingly reliant on computer systems for continuity of operations. Cyberattacks and other cyber disruptions, like the one you mentioned, Bert, can interfere with communication among those in the supply chain. So your manufacturers and your suppliers and your shippers and your warehouses, no one can talk to one another, so the supply chain shuts down in that way. Cyber insurance may cover a supply chain disruption caused by a computer virus, a malicious attack, or the resulting data loss. Third-party cyber insurance may provide some cover to businesses further down the supply chain if a cyber attack or system malfunction affects the supply chain and the policyholder is sued or has to indemnify a third party. Other coverages may help to fill some of the gaps in the more common ones that we've been discussing. Things like political risk and special contingency coverage. Political risk insurance is a specialized first party insurance that covers risks in politically risky parts of the world and may expressly insure against specified perils like nationalization of property, confiscation of assets, war, things like that. Cargo Marine covers the transportation of goods over the ocean or land, as well as any damage to the conveyance. Marine insurance may provide some indirect coverage for supply chain disruptions, things like coverage for equipment, merchandise, or goods that are in transit or being stored that may not reach their destinations on time or even at all. Port blockage, for policyholders whose supply chains depend on access to navigable waters, you may get time element coverage for a loss resulting from vessels being denied access to or egress from an insured facility or other property. They're the inability to deliver cargo from a vessel that does reach the facility if there's an issue with the cargo delivery. Civil authority and ingress / egress coverage. Bert, you mentioned ingress / egress a bit earlier. First-party property policies generally contain civil authority coverage, which covers business interruption losses and, in some cases, necessary extra expenses caused by the orders of local, state, or federal authorities, things like evacuation orders, curfews, and highway closures. There's also Directors and Officers coverage, which may protect board members, executives, directors, managers, and the companies they serve for claims and investigations of investors, third parties, and regulators. For instance, after a supply chain crisis, the officers and directors could be accused of failing to take proper measures to protect the business or third parties. Okay, so given how soon the U.S. election is now, we decided to play exit poll, in which our panelists will be asked a question that definitely has not been asked on any other poll, exit, or otherwise. Cristina and Bert, NASA launched Europa Clipper, its most expensive planetary probe ever, to explore an icy moon of Jupiter named Europa. Clipper's five-year journey will include gravitational ricochets around both Mars and Earth to slingshot it into the outer solar system, where it will eventually orbit Jupiter and repeatedly fly by Europa, but not land. NASA hopes the probe will detect chemical signatures of the contents of the water ocean under the moon's 10-mile-deep icy surface, giving clues as to whether some form of alien life may be present in that ocean. My question for you is, what type of supply chain insurance does NASA need now that this package is on its way to this distant icy moon? 

Bert: Okay, well, I have some thoughts. I guess what occurs to me is that we have various suppliers here, and not just the suppliers NASA was counting on to get its probe ready in time, but I think Mars is a supplier here because Mars has to give a gravitational boost to the Clipper probe. And if Mars is a little late or a little early, that probe is not going to get exactly the gravitational boost it needs. That's the ultimate example of just-in-time supply chain strategy, if you ask me. Now, as to whether I would have insurance for that, I don't know. I think Mars' appearance is probably a pretty safe bet. If NASA's looking for insurance there, I think we should all be pretty worried. 

Cristina: So I took a different approach. The way I saw this hypothetical was that if NASA is going to be navigating this ocean on the icy moon of Jupiter, then it should be looking to its marine insurer to cover the transportation and risks that are there under its supply chain.

Bert: Well, thank you. And thanks, Adrienne, for moderating this. This was everything I could have expected and hoped for. 

Cristina: Yeah, thank you, Adrienne. 

Adrienne: You are very welcome. And hopefully the listeners, if they have any questions, will reach out to us and they can see that we in IRG love insurance and we also have a good time in coverage disputes. 

Cristina: Thanks, everyone. 

Bert: Thank you. 

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean and Reedsmith.com. To learn more about Reed Smith's Insurance Recovery Group, please contact [email protected]. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

All rights reserved.

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From “greenwashing” to “greenhushing,” from sustainability goals to boardroom debates, ESG exposures are fluid and formidable. Learn from Carolyn Rosenberg and Jennifer Smokelin how claims have morphed and how pro-active strategies, including insurance, can be implemented to lower the temperature.

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Transcript: 

Intro: Hello and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at [email protected]. We'll be happy to assist.

Carolyn: Hi, everybody, and welcome back to Insured Success, where today our topic is It's Not Easy Being Green, ESG Claims and Potential Protections. I'm Carolyn Rosenberg. I'm a partner in the Chicago office of Reed Smith in our insurance recovery group, where I work with policyholders in connection with insurance review, as well as handling insurance coverage disputes and all kinds of risk management and corporate governance. My partner, Jennifer Smokelin, who is a partner in Pittsburgh, is steeped in energy and ESG and related issues and is one of our leaders in our ESG initiative. We're delighted that she is here today to help inform us and discuss these important issues. We've certainly talked about all the acronyms, ESG, DEI. Most people are familiar with greenwashing claims and, of course, the newest claim of green hushing. So, Jennifer, to try to hallucinate this a little bit further, when companies are talking about ESG and green hushing, what is the landscape? What is green hushing?

Jennifer: Thanks, Carolyn. Companies are talking less these days about ESG in earning calls and marketing materials. But they are mentioning it nearly as frequently as ever in their financial reports and disclosures. The apparent disconnect here suggests that companies haven't fully shelved their sustainability-related goals. They're just talking about them less. There's a number of data points over the past year that indicate that investor interest in ESG has cooled down. Many companies in the last year have exited the Climate 100+, an initiative pushing companies to address environmental issues. However, many companies still recognize that investing in sustainability is important for long-term value creation. So they keep doing the initiatives related to sustainability, just not specifically labeling them as ESG. Companies have adjusted their terminology. As I said, they don't use ESG. They might refer to sustainability instead. We're even seeing some companies talking more in the language of clean air, clean water, and economic opportunity, effective and apparently palatable terms other than ESG. This trend, nicknamed green hushing, stems from a recent tide of ESG backlash and mounting legal considerations.

Carolyn: What are some of those mounting legal considerations?

Jennifer: In three words, Carolyn, litigation and regulation. From shareholder suits to regulatory actions to class action litigants that have lodged greenwashing claims against companies they accuse of releasing rose-tinted marketing materials. To those of you listening, we strongly recommend you talk to us or the lawyer you regularly deal with at Reed Smith regarding how to address these litigation and regulatory risks. Let me highlight some examples of legal risks and quick upshot regarding specifics to talk to Reed Smith about. First, there is a risk regarding NGO suits. These are suits brought against public companies for allegedly misleading climate change with regard to ESG. The up shot here is that it's important to regularly act on any given ESG commitment in meaningful ways that are grounded in science, regardless of how many years away a particular deadline for an ESG goal might be. We also recommend publicly sharing clear updates on progress towards any ESG goal. From a regulatory risk standpoint, we are still seeing a risk with regard to SEC regulatory action. This despite the fact that the public company climate disclosure rules are currently stayed due to a pending litigation in the Eighth Circuit. For example, the SEC has recently brought enforcement action for allegedly inaccurate representations of recyclability. The upshot here is that recyclability, as interpreted by the SEC, is not simply a matter of the materials used. There must be a process in place to facilitate the act of recycling the item. It is important to be aware of and consider recycling practices wherever a company operates and sells to ensure statements with regard to recyclability are accurate. Another takeaway here is that the SEC is willing to go after fines and civil penalties for such representations. On the DEI side, California may require employers to report voluntary social compliance audits. If adopted, this bill, called AB3234. Would essentially mean that if an employer voluntarily conducts a social compliance audit, that employer must then publish a clear and conspicuous link on their website to a report detailing the findings related to compliance with child labor laws. The upshot here is that this bill is likely to be adopted. AB3234 has received broad bipartisan support, easily passing in both the State Assembly and the Senate at the end of August in California. Governor Newsom is expected to sign the bill soon. The final risk we want to highlight is shareholder suits. We have seen these both offensively, that is, brought by shareholders, and defensively, brought by the company, to fend off shareholder proposals with regard to ESG issues from going to vote at a company's annual meeting. The upshot here is that, ideally, there is a shared desire to better a company between both the shareholders and the leaders of the publicly traded entity. However, these legal battles illustrate that there is a tug between activist groups and company leadership that is rife with legal risk.

Carolyn: What about from a global perspective? I know we've been speaking about principally the U.S. I know there's much going on in the world. Can you tell us a little about that?

Jennifer: Carolyn, we see even more potential liability across the pond. As an example, in France, there is a criminal complaint linked to contributions to climate change filed against an energy company and its directors and officers in France, from which the upshot suggests that there is a possibility of criminal liability for major decision makers at companies. Another takeaway point from this case is using timing of shareholder suits to influence shareholder meeting outcome. This complaint was filed a few days before the energy company's annual shareholder meeting, which included a climate-focused shareholder proposal. The criminal complaint would likely influence the voting shareholders regarding that climate action. So speaking of corporate and corporate officer liability, Carolyn, how can insurance help?

Carolyn: The important thing about insurance is I think we start with the premise of looking at a director's and officer's liability insurance policy because that is typically where you would see coverage for an individual director officer's liability. And if you're a public company, D&O policies typically cover securities claims. So it depends if one of these suits led to stock drops or derivative shareholder lawsuits or claims against directors and officers in the company could very well be a house for that claim in a D&O policy. Private company D&O policies have broader coverage for the entity. And a key question to look at, which is what we do a lot of in reviewing insurance policies and negotiating for the most enhanced terms and conditions working with your in-house legal risk management and outside brokers, is that you want to also look and see whether there is potential coverage for investigations. For subpoenas, for regulatory actions against both individuals or if they're requested to provide documents, books, and records, as well as look in your policy to make sure there's no pollution exclusion. Although the claims against directors and officers are not for pollution, and therefore even if there were a pollution exclusion, it should not apply, it's best to look at your policies for any potential exclusions that could apply. Another important takeaway is that. When you are applying for insurance, typically you may be filling out a renewal application if you're renewing the insurance, but you may also be filling out longer questions and questionnaires if you're looking at insurance for the first time, or you may be looking at a broad panoply of options. And in looking at applications, you should be thinking about and being very careful about how you're answering. If there are questions asked about ESG initiatives, about DEI, about all kinds of what we would call under the rubric of environmental, social, and governance issues. That's because potentially insurance applications could be discoverable if considered part of the insurance policy. And, of course, insurers may be screening applications not just for underwriting but for purposes if there is a claim to determine whether or not there was any sort of alleged misrepresentation or omission in how the risk was presented to the insurer for purposes of the insurer turning around and using any sorts of exclusions or other terms and conditions against the policyholder. The important takeaway here is to have the insurance applications as well as the policies reviewed by knowledgeable coverage counsel. But D&O insurance is really the starting point. It's not the ending point. You could potentially have coverage for ESG-related claims under other policies, depending on how the claims are alleged and the causes of actions they're in. You could have environmental coverage claims. You could have coverage under general liability and business interruption. You could have employment-related claims and look under your employment practices liability policy. You could also potentially have coverage under a cyber or data tech and privacy policy, depending on, again, the tentacles, the allegations, the causes of actions that are alleged. The important takeaway here is to review your coverage before a claim, demand, or investigation or regulatory action occurs, and then if there is an issue, to take a look very carefully, work with knowledgeable counsel to determine when and how to report that claim, and then how to maximize coverage, not just for the defense costs of defending the action, but of course for any potential judgments or settlements. Those are some thoughts on how to access insurance in addition to good risk management reporting, regarding making sure your representations are careful and considered, as Jennifer was discussing. Jennifer, any last take away from your perspective?

Jennifer: Carolyn, I think you did an excellent job giving an overview of insurance, and we discussed green hushing and the mounting legal considerations with regard to ESG claims. So, no, I have nothing further.

Carolyn: Thank you. Well, thanks everybody for listening. Please reach out to us if you have any questions and we look forward to having you listen in on our next podcast. Thanks again.

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's insurance recovery group, please contact [email protected]. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

All rights reserved.

Transcript is auto-generated.