Tuesday, October 14, 2014

Tennessee Legislature Passes Legislation Changing Requirements for Coverage of Sinkhole Losses

By John E. Anderson, Sr.

The Tennessee Legislature recently reformed the law of sinkhole coverage and sinkhole losses in the State of Tennessee with legislation which became effective July 1, 2014. Under the prior Tennessee law, every insurer offering homeowners’ property insurance in the State of Tennessee was required to make available coverage for insurable sinkhole losses on any dwelling, including contents of personal property contained in the dwelling, to the extent provided in the policy to which the sinkhole coverage attached. The interpretation of the term “make available” was subject to differing opinions. Some took the position that the insurers were required to offer sinkhole coverage to their insureds, while others took the position that the law required them to offer coverage if desired. The new legislation was intended to clarify any confusion.

The new legislation provides that every insurer offering homeowner property in the State of Tennessee shall make coverage available for insurable sinkhole losses, including contents of personal property contained in the dwelling. Julie Mix McPeak, Commissioner of the Tennessee Department of Commerce and Insurance, issued a June 12, 2014 Bulletin to clarify any concerns – “The purpose of this Bulletin is to clarify that the Department interprets the ‘make available’ provision in 56-7-130 to mean that companies may limit the availability of coverage for insurable sinkhole losses to the inception of a policy…The Department interprets the statute to apply that availability to the initial purchase of a policy AND upon the request of a consumer thereafter.” (Emphasis added). Clearly, sinkhole coverage is not a mandatory requirement of insurers.

One of the bill’s sponsors, Jim Tracy (R-Shelbyville) explained that the new legislation was designed to impose objective standards to verify the cause of the alleged loss due to the existence of fraudulent claims, the impact of this legislation on the ability of homeowners to find affordable insurance coverage, and the need for this new legislation.

The bill sets forth specific investigation requirements upon receipt of a sinkhole claim. The new law requires an inspection of the insured’s premises to determine if there has been structural damage to the covered structure. If the insurer concludes that the structural damage to a covered building is not consistent with sinkhole activity, prior to denying the claim, the insurer must obtain a written certification from a professional engineer, a professional geologist or other qualified individual stating that the sinkhole activity did not cause the alleged structural damage.

Also, the insurer may limit its total claims payout for damages to the covered building. Under the new law, the insurer may limit payment to the actual cash value of the sinkhole loss to the covered building, excluding costs associated with building stabilization or foundation repair, until the policyholder enters into a contract for the performance of building stabilization or foundation repairs in accordance with the recommendations of the engineer retained or approved for the insurer.

Additionally, to be eligible to receive payment for building stabilization or foundation repairs, or any other loss to the covered building in excess of the actual cash value of the sinkhole loss to the covered building, the insured must repair such damage or loss in accordance with the plan of repair approved by the insurer. The new statute provides a detailed procedure for payment of claims.

Finally, the new law provides that an insurer may cancel, decline to renew or decline to issue any homeowner policy insurance on a structure that has been subject to a sinkhole loss claim if the structure:

1. Has not been repaired in accordance with a plan of repair approved by the insurer and within their time constraints set forth therein; or

2. Is subject to the risk of future sinkhole damage because of unstable land.

The new legislation is designed to impose objective standards to assist in the reporting and processing of sinkhole claims. It is a positive step toward accomplishing these goals.

Thursday, September 11, 2014

European Antitrust “Block Exemption” For Insurance Under Review

By James M. Burns

In the United States, the McCarran Ferguson Act (15 USC 1011-1015), enacted by Congress in 1945, provides the insurance industry with a limited exemption from the federal antitrust laws. The Act applies to all conduct that constitutes “the business of insurance,” provided that the conduct is “regulated by state law” and is not an act of “boycott, coercion or intimidation.” While the Act has been the subject of controversy over the years, and calls for its repeal have been frequent, including most recently during the debate that ultimately led to the enactment of the Affordable Care Act, the Act remains in place and provides a significant defense to potential antitrust liability for a whole range of insurer activity.

In Europe, the insurance industry also enjoys a limited exemption from the E.U. competition laws (specifically Article 101), by virtue of the “Insurance Block Exemption.” This exemption currently shields insurers from liability when they engage in (1) an exchange of information considered reasonably necessary for calculating insurance risk, including the exchange of joint compilations, joint tables and studies; and (2) the creation of co-insurance and co-reinsurance pools, provided that the market share of the pool does not exceed a certain level.

However, unlike in the U.S., the Block Exemption must be renewed every seven years for it to remain in place. Last renewed in 2010, the European Commission is now beginning its review of the exemption to assess whether it should be renewed in 2017. And, as the process in 2010 confirms, renewal is not guaranteed, as the Commission, over insurer objections, chose at that time to eliminate a provision in an earlier version of the Block Exemption that permitted insurers to implement “standard policy conditions” in their policies, finding that an exemption for this activity was not necessary to the proper functioning of insurance markets.

In connection with its review of the Block Exemption, in early August the Commission issued a notice inviting insurers to offer their comments on the continuing need for the exemption. Submissions can be made until November 4, and the Commission will ultimately submit a report to the European Parliament with its recommendation concerning the exemption in early 2016. Stay tuned.

Thursday, July 10, 2014

Auto Repair Shop Antitrust Actions May Be Consolidated into Multidistrict Litigation

By James M. Burns

Over the course of the last several months, auto body repair shops in five states (Florida, Mississippi, Indiana, Utah and Tennessee) filed antitrust actions against a collection of auto insurers, alleging that the insurers’ direct repair programs violate the antitrust laws. In each case, the plaintiffs alleged that the manner in which the insurers set reimbursement rates for covered repairs artificially depressed the compensation plaintiffs received for their services, and that the insurers also “steered” insureds away from plaintiffs’ businesses to those shops that are participants in the insurers’ direct repair programs.

With all of the cases having been filed by the same Jackson, Mississippi attorney, it was not particularly surprising that, in late May, plaintiffs filed a motion with the Judicial Panel on Multidistrict Litigation seeking to have the cases consolidated and transferred to the Southern District of Mississippi. In support of the request, the plaintiffs noted that the first filed case (Capitol Body Shop v. State Farm Mutual Automobile Insurance) was filed in Mississippi, that the actions all involve “common questions of fact,” and that transfer would “serve the convenience of the parties and witnesses.” Plaintiffs also noted in their motion that “all of the actions are at the same early stage of litigation.”

In June, the insurers filed oppositions to plaintiffs’ request, contending that “while the general theory of liability alleged in each case is the same, the factual allegations underlying each plaintiff’s claims are highly individualized.” The insurers also noted that plaintiffs’ assertion that the cases are all at the same, early stage of litigation was no longer correct, because, subsequent to plaintiffs’ filing of their motion, the court in the Florida action (A&E Auto Body v. 21st Century Centennial Insurance Co.) dismissed plaintiffs’ claims, albeit with leave to amend, finding that plaintiffs’ complaint lacked the necessary factual detail required for plaintiffs’ claims. Perhaps not surprisingly, the insurers also maintained that if the Judicial Panel does consolidate the cases, they should be transferred to the Middle District of Florida, before the judge presiding in the A&E Auto Body case, because it is the “most procedurally advanced case.”

On June 16, the Judicial Panel set plaintiffs’ motion for oral argument on July 31. In the interim, however, the defendants have filed motions to dismiss the Mississippi case, arguing that the allegations in that complaint, like the allegations in the Florida case, are similarly insufficient as a matter of law. While that motion is unlikely to be decided prior to the Judicial Panel’s ruling on the motion for consolidation and transfer, it could have an impact on the Panel’s decision whether to consolidate the cases, and where. The matter is clearly one to watch going forward.

Friday, June 27, 2014

Heads Up: Canada’s Anti-Spam Legislation (CASL) Takes Effect on July 1st

By Wendy G. Hulton

Once CASL takes effect, you will need express or implied consent before you (or your franchisees) can send a commercial electronic message (CEM). While franchisors are well aware of the pending impact of CASL and have been diligently ensuring that their organizations are ready, the bigger question that looms on the horizon is what are they doing to help their franchisees understand and comply with CASL’s requirements. Franchisors will typically be able to rely on implied consent under the B2B CASL provisions to communicate electronically with their franchisees. The bigger concern will be the B2C communications between franchisees and consumers. There is a lot of information on CASL available and while seemingly straightforward, the actual implementation for both franchisors and franchisees may prove to be more difficult. Ask yourself:

1. Do your franchisees send CEMs?

2. Do you know whether they are aware that they need to have consent to send CEMs?

3. Do you know whether they understand the difference between implied or express consent to send CEMs?

4. Do their CEMs satisfy the CASL content requirements?

5. Do they know that the consents need to be recorded, in case they have to prove they had consent to send a CEM?

6. Do you know if they have an unsubscribe mechanism for their CEMs?

Enforcement of CASL will be undertaken jointly by three regulators: the Canadian Radio-Television Commission, the Competition Bureau and the Office of the Privacy Commissioner. These enforcing bodies will have authority to impose a wide variety of sanctions on individuals and businesses that contravene CASL. While the regulators will probably be lenient initially, individuals may be fined up to $1,000,000 per violation and corporations may be fined up to $10,000,000 per violation. CASL also creates a private right of action that takes effect in 2017 that permits an individual to take civil action against anyone who violates CASL. If your franchisees are not prepared for CASL, it is not the risk of significant fines that you should be worried about, but rather the potential backlash through social media.

Thursday, June 19, 2014

The U.S. Supreme Court Holds That Inherited IRAs are not Exempt in Bankruptcy

By Eric Gregory

On June 12, 2014, the United States Supreme Court unanimously held in Clark v. Rameker Trustee that funds in an individual retirement account (“IRA”) inherited from someone other than the bankrupt debtor’s spouse are not “retirement funds” within the meaning of the United States Bankruptcy Code and are, therefore, available to pay creditors of the debtor-heir.

Background

Under the Bankruptcy Code, certain retirement plans are designated as “excluded” from the bankruptcy estate, which means that individuals can keep them. These include “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under Section […] 408 of the Internal Revenue Code.” Internal Revenue Code section 408 relates to IRAs.

Clark Case

The issue in Clark was whether the debtor could protect her mother’s IRA that she had inherited upon her mother’s death. The Internal Revenue Code treats IRAs inherited from a non-spouse differently from IRAs inherited from a spouse.

Justice Sonia Sotomayor, writing for the Supreme Court, upheld a 7th Circuit Court of Appeals decision, holding that the change in status of the account to a non-spouse inherited IRA makes it less like a “retirement fund” and more like a pool of money that could be used for any purpose. In summary, there was nothing preventing an individual who has emerged from bankruptcy from using the IRA assets “on a vacation home or a sports car immediately after the bankruptcy proceedings are complete.”

Inherited IRAs lack many attributes common in retirement accounts. For example, the beneficiary of an inherited IRA is prohibited from rolling funds over to their own IRA and from adding their own funds to the IRA.

Takeaway

This holding creates the risk that IRA money left to heirs will not be protected from creditors if the beneficiaries have financial difficulty.

It is important to remember that inherited IRAs may be subject to claims in non-bankruptcy proceedings as well. Under laws in states like Arizona, Texas and Florida, inherited IRAs are specifically protected from creditors. Most states, however, are silent on this issue.

Thursday, May 22, 2014

Cyber-Coverage: Clarity or Confusion

By Autumn L. Gentry

As the number of data breaches and disclosure of personally identifiable information (“PII”) increases, courts are being asked to decide whether such claims for data breach and disclosure of PII are covered by traditional commercial general liability (CGL) policies. Most often, companies who have only traditional CGL policies, argue that such claims should fall under their policies’ coverage for “personal and advertising injury,” which is typically defined as injuries arising out of the oral or written publication of material that violates a person’s right of privacy.

Sony made this same argument in the recent case of Zurich American Insurance v. Sony Corporation of America. Sony argued that coverage for a consumer class action filed against Sony for a 2011 data breach of Sony’s Playstation network should fall under its CGL policy’s coverage for “personal and advertising injury” which included the typical definition. A New York trial judge disagreed, finding that the definition required “some kind of act or conduct by the policyholder in order for coverage to be present.” Because the data breach was committed by third-party hackers who broke into Sony’s security system, rather than by an “act or conduct perpetuated by Sony,” the trial court held that the policy did not provide coverage for the data breach claims against Sony.

Courts in other jurisdictions have held otherwise, finding that coverage under a CGL policy extended to claims for data breach and disclosure of PII based upon each policy’s definition of “personal injury.” See e.g. Netscape Communications Corp. v. Federal Ins. Co., 343 Fed.Appx. 271 (9th Cir. 2009); Tamm v. Hartford Fire Ins. Co., 16 Mass.L.Rptr. 535, 2003 Mass. Super. LEXIS 214 (Mass. Super. Ct. 2003).

In response to the rising number of claims for data breach and cyber coverage being filed, Insurance Services Offices, Inc. (ISO) filed in many jurisdictions a new set of exclusionary endorsements. These exclusionary endorsements, which effect provisions under a CGL’s policy for “Bodily Injury and Property Damage” (Coverage A) and “Personal and Advertising Injury Liability” (Coverage B), are scheduled to take effect this month.

Insurers who issue these exclusionary endorsements will likely argue that these provisions apply to and, therefore, exclude coverage for any cyber liability or data breach claims. However, insurers will have to prove that they do so. If insurers do not issue these exclusionary endorsements, policyholders will likely argue that their traditional CGL policies cover such claims; otherwise their insurers would have issued the exclusionary endorsements based upon the ISO’s guidance. Only time will tell how the varying jurisdictions will decide these issues.

 

Thursday, May 8, 2014

Indiana Auto Repair Shops Bring Antitrust Action Against Auto Insurers




An Indiana trade association of auto repair shops, together with a group of its members, have filed an antitrust action against over twenty five auto insurers in Indiana, alleging that the insurers’ direct repair programs violate the antitrust laws by artificially depressing repair rates for the services plaintiffs offer and by “steering” insureds away from plaintiffs’ businesses. The action, Indiana AutoBody Association v. State Farm Mutual Automobile Insurance, was commenced on April 2 in the United States District Court for the Southern District of Indiana. Notably, the case follows a similar action filed by a collection of Florida repair shops against many of the same insurers only two months ago, including State Farm, entitled A & E Auto Body v. 21st Century Centennial Insurance.

As in the Florida case, the Indiana plaintiffs allege that State Farm’s vendor agreement requires shops that desire to participate in its direct repair program to accept the “market rate” for such services, and that State Farm calculates the “market rate” in a manner that keeps them artificially low and not representative of the “true” market rate. Plaintiffs also allege that the other insurer defendants have all advised plaintiffs that they will pay no more than State Farm pays for their services. As in the Florida case, plaintiffs allege that the defendants’ conduct constitutes a conspiracy to restrain their repair rates, in violation of Section 1 of the Sherman Act, and that the alleged “steering” conduct constitutes an unlawful “group boycott” of plaintiffs’ services. The defendant insurers have not yet responded to plaintiffs’ complaint.

Meanwhile, in the Florida action, on March 26 the insurers filed a motion seeking to have plaintiffs’ antitrust claims dismissed for failure to state a claim. They maintain that the Florida shops have not adequately alleged any anticompetitive agreement, and have at most alleged “consciously parallel” conduct by the defendants, insufficient to plead conspiracy under the Supreme Court’s Twombly decision. Specifically, the insurers assert that “plaintiffs’ core allegation is simply the self-defeating generalization that after State Farm, the purported market leader, ‘unilaterally’ adopted a price structure for labor rates, the other defendants asked plaintiffs to give them the same prices given to State Farm. Following a price leader, however, does not suffice to prove the existence of agreement.” As to plaintiffs’ boycott claim, the insurers maintain that “not only have [plaintiffs] failed properly to allege concerted action, but do not allege that any defendant cut off business from any plaintiff or refused to reimburse insureds who patronized a plaintiff, much less that all defendants refused to deal with any particular body shop.”

Plaintiffs filed a response to the defendants’ motion on April 17, contending that defendants’ motions fail because they do not acknowledge other allegations in the plaintiffs’ complaint, and that in any event dismissal of their claims at this juncture, prior to discovery, would be premature. The Court has not yet ruled on the insurers’ motion.

Turning back to Indiana, given the similarity between the two cases, the defendants in Indiana are likely to file a motion similar to the motion filed in Florida, seeking to have that case dismissed as well. As we move into the summer, both matters are now “cases to watch” for the auto insurance industry. Stay tuned.