US

In this chapter of our Annual Insurance Review 2019, we look at the main developments in 2018 and expected issues in 2019 for the US.

Key developments in 2018

The 2018 Camp Fire in Northern California and the Woolsey Fire in suburban Los Angeles – which resulted in dozens of deaths and destroyed thousands of structures – are expected to result in losses exceeding the billions in insurance claims reported for the California wildfires of 2017.

The opioid epidemic has resulted in numerous suits brought by states, political subdivisions, third-party payors, hospitals and individuals against pharmaceutical manufacturers, distributors and others, seeking a variety of damages allegedly resulting from the diversion and misuse of prescription opioids such as hydrocodone and OxyContin. Multiple million-dollar settlements have been reached, with hundreds of cases pending (most consolidated in federal court in Ohio). Government plaintiffs seek to recoup response costs for providing law enforcement, courts, corrections, and health and human services. The White House Council of Economic Advisers estimated total economic losses at $504bn for 2015 alone, and others have prognosticated overall losses of $1trn.

Most of the opioid insurance coverage determinations to date have been limited to duty to defend issues, with courts reaching divergent results. One significant issue is whether the complaints – most of which allege intentional, egregious conduct – allege an “accident” or “occurrence”. Another is whether governmental claims seeking restitution of response costs seek “damages” or “damages because of bodily injury”. 

Talc litigation continues, with thousands of cases pending against a much more limited universe of defendants. This litigation represents another instance of litigation outpacing the science in the US. The most interesting development concerned reports that a talc manufacturer knew its talc contained asbestos.

The public nuisance liability theory failed in lead paint litigation across the US for years until 10 California cities and counties scored a $1.15bn abatement award in California. After the state appellate court limited the abatement to pre-1951 homes, the trial court reduced the amount of the abatement fund to $409m.

The American Law Institute approved its Restatement of the Law – Liability Insurance this May. Although some sections accurately restate the law, other sections actually misstate the law and evince notable pro-policyholder bias.

Allocation of losses continues to be an issue driving long-tail coverage claims in the US. A majority of states have applied a pro-rata approach over the inferior “all sums” approach for allocation of continuing or progressive injuries or damages among multiple periods. In most pro-rata jurisdictions, policyholders are responsible for damages during periods of no insurance, regardless of whether or not insurance was available for purchase in the market. A couple of pro-rata states relieve the policyholder for responsibility where coverage cannot be purchased for some types of losses (notably asbestos or environmental) due to the presence of exclusions. In 2018, the New Jersey Supreme Court adhered to its so-called “unavailability of insurance” exception, while New York’s highest court flatly rejected any unavailability of insurance exception and required the policyholder to bear responsibility for uninsured periods regardless of any alleged inability to purchase insurance for the risk. The treatment of “non-cumulation/prior insurance” clauses has resurfaced and has been contested in numerous coverage actions.

On the first-party side, last year’s 10 hurricanes (including Irma and Harvey) continue to dominate the claims activity. Hurricanes Michael and Florence in 2018 produced substantial losses, but are expected to be earnings rather than capital events for the US and global insurance and reinsurance sectors.

Cyber security laws, regulations and best practices abound for insurers and their policyholders, and have evolved quickly. Numerous coverage claims are being asserted for data breaches under traditional general liability policies, with many decisions involving issues and analysis presented under coverage B (personal and advertising injury). Several coverage decisions have been rendered under business and crimes policies involving social engineering scams, in which fraudsters attempt to trick or induce employees to take actions that compromise corporate security or finances. In 2018, the United States Court of Appeals for the Second and Sixth Circuits held there was coverage with respect to the claims before them. Previously, the Fifth and Ninth Circuits held against coverage under business and crime policies.

In cases of first impression, one federal district court recently held that an “aircraft” exclusion barred coverage for a drone crash. Another ruled that a homeowner’s insurer must defend a wrongful death action brought by the parents of a teenage girl who committed suicide after receiving repeated vengeful texts from a fellow student.

What to look out for in 2019

Insurers writing in California will be forced to confront how to address the severity and frequency of fire-related losses against a regulatory framework that limits insurers’ ability to raise rates.

Opioid and talc litigation will likely continue apace in 2019. Many financially strapped governmental entities may find the potential for a large fund to abate lead paint to be too tempting to avoid pursuing recovery under a public nuisance theory. 

The American Law Institute’s Restatement of the Law – Liability Insurance is not binding or precedential in any court in the US. Yet it may have a greater impact than any single decision. Policyholder advocates have cited to the restatement even prior to its approval, and some court decisions have relied on it. Insurers must have a strategy to address this advocacy piece and be prepared to educate courts on the limitations of the document, the bias of the process and reporter who ultimately prepared the document, and rely on the applicable body of case law on the issues at hand.

Cyber and data breach claims will continue to flourish, and coverage litigation under cyber policies will proliferate. The lack of standardisation of cyber policies among companies and the numerous revisions companies made to their policies over a short period of time have prevented any clear trends from emerging. With more litigation under cyber policies in the future, trends and precedent will begin to emerge.

Authored by Hinshaw & Culbertson LLP.

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