Insurance Issues in e-commerce Contracting

Insurance Issues in e-Commerce Contracting

Presentation to

ACC IT Privacy & eCommerce Committee February 4, 2010

Ann V. Kramer, Esq. Catherine Chaskin, Esq.

Outline

ƒ Indemnities v. Insurance

ƒ Which Coverage Responds First?

ƒ Warring Other Insurance Clauses

ƒ Targeted Tenders

ƒ Subrogation & Contribution

ƒ Indemnity Provisions

ƒ Insured Contract Terms

Indemnities v. Insurance

ƒ Indemnities may stand in front of or behind insurance.

ƒ Is the indemnity “net” of insurance?

ƒ If so, whose insurance? Yours, theirs, both?

ƒ Even if the obvious intention of contracting parties is that their insurance is primary, many courts ignore this, looking solely to “other insurance” clauses in the relevant insurance policies.

Other Insurance – Primary Pro Rata

Other Insurance

If other valid and collectible insurance is available to the insured . . . our obligations are limited as follows:

a. Primary Insurance

This insurance is primary except when b. below applies. If this insurance is primary, our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance by the method

described in c. below . . .

c. Method of Sharing

If all of the other insurance permits contribution by equal shares, we will follow this method also. . . .

If any of the other insurance does not permit contribution by equal shares, we will contribute by limits. . . .

Other Insurance – Excess

If other collectible insurance with any other insurer is available to the insured covering a loss also covered hereunder (except

insurance purchased in excess of the limit of liability hereunder), the insurance hereunder shall be in excess of, and not contribute with, such other insurance.

Other Insurance –

Excess (Additional Insured)

This insurance is excess over. . .

(2) Any other primary insurance available to you covering liability for damages arising out of the premises or operations for which you have been added as an additional

Other Insurance –

Excess (Vendors)

ƒ This [vendor’s coverage] will be excess over…any valid and collectible insurance available to the insured as an additional insured under a policy issued to a

manufacturer or distributor for products

Other Insurance –

Escape (Super Excess)

Other Insurance.

This insurance is excess over any other valid and collectible insurance whether such other insurance is stated to be

primary, contributing, excess, contingent or otherwise. This provision does not

apply to a policy bought specifically to apply in excess of this insurance.

Indemnity Clause Trumps

ƒ Courts may deny equitable contribution/

subrogation where it would contravene the intent of the parties as set forth in valid

indemnity provisions of their contracts.

ƒ American Indem. Llloyd’s v. Travelers, 335 F.3d 429 (5th Cir. 2003)

ƒ Federal Ins. v. Gulf Ins., 2005 Mo. App. LEXIS 364 (Mar. 8, 2005)

Indemnity Clause Trumps (CA)

ƒ “As we see it, the question is one of contract interpretation. … If the conduct… or

claim… falls within the [terms of the

indemnity agreement], and the intent was to make the [indemnitor’s] insurance …

primary, then the agreement should be

enforced and contribution denied. If either of these prongs is missing, the general policy supporting equitable contribution trumps.”

Edmondson Prop. Mgmt. v. Kwock, 67 Cal. Rptr. 3d 243, 250-51 (Cal. App. 2007)

Insurance Policy Governs (NY)

ƒ “The scope of the insurance coverage

actually obtained by the [indemnitor] must be determined by the terms of the policies, not by the terms of the [contract with the third party indemnitee].”

USF&G v. CNA, 618 NYS2d 465, 467 (3d Dept. 1994)

Targeted Tenders (IL)

ƒ

The additional insured (AI) tenders the

claim for defense and indemnification

to the other party’s insurance company

as an additional insured and

ƒ

Notifies its own insurance company but

does not tender the claim for defense

or indemnification.

Targeted Tenders (IL)

ƒ Inform the insurer that claim is tendered under additional insured coverage

ƒ Make clear that AI has made an intentional election between insurers and why the election is important to protect its interests

ƒ AI believes its own insurance is excess (hopefully endorsed properly)

ƒ Point out why additional insurance covers the claim ƒ State that AI is looking to insurer for all coverage

and does not want its own insurance tapped ƒ Tender immediately before incurring costs

ƒ Malecki & Ligeros, The Additional Insured Book, 5th _{ed. , p. 128 (2004)}

Fixing “Other Insurance”

ƒ Getting access to your indemnitor’s insurance policy is often very difficult.

ƒ Indemnitees can protect themselves by endorsement on their own policies:

“This insurance is excess over… any other primary insurance available to you

covering liability for damages arising out of the premises or operations for which you have been added as an additional insured by attachment of an endorsement.”

Fixing “Other Insurance”

ƒ Specific wording is designed for different business environments:

“This [vendor’s coverage] will be excess over… any valid and collectible insurance available to the insured as an additional insured under a policy issued to a

manufacturer or distributor for products manufactured, sold, handled or

Deductibles & Self-Insurance

ƒ

If one policy is a “fronting” policy,

outcome unclear

ƒ

In some states, “self insurance” has

been held not to be insurance and,

therefore, it is not “other insurance”

ƒ

Who pays deductibles? Shift the

responsibility by contract?

Sole Negligence

ƒ Issue arises in policies and contracts

ƒ Certain policies exclude additional insured coverage for the additional insured’s sole fault

ƒ Even if excluded under AI cover, indemnitor may still have coverage under contractual liability provision for “insured contracts”

ƒ Some states will not enforce an indemnity for the other party’s sole negligence

Subrogation

ƒ Disallowing Subrogation Among Insureds: Anti-Subrogation Rule

ƒ Many states forbid subrogation claims

where both parties have the same insurer

ƒ Pennsylvania General v. Austin Powder, 502 NE2d 982 (NY 1986)

ƒ Alternative is an explicit policy provision waiving subrogation rights

Reallocation Among Insureds According to Fault –The Impact of Anti-Subrogation

Doctrine

ƒ The anti-subrogation rule has been held inapplicable to a claim for contribution or indemnification from a coinsured for

amounts in excess of applicable policy limits.

ƒ Impact of anti-subrogation rule where additional insured loses its status based upon a finding of fault or otherwise in

Policies Potentially Responsive to

e-Risks

ƒ Comprehensive General Liability

ƒ Bodily Injury and Property Damage

ƒ Personal Injury and Advertising Injury

ƒ Errors & Omissions/Directors & Officers

ƒ Covered Wrongful Acts

ƒ Crime/Property

ƒ Require loss or destruction of property

“We Read Policies

When You Ask a Business Partner to

Insure You, What Risks Really Transfer to That Partner’s Insurer?

ƒ Copyright Infringement?

ƒ Trademark Infringement?

ƒ Trade Dress Infringement?

ƒ Antitrust Violations?

ƒ Unfair Competition?

ƒ Patent Infringement?

Typical General Liability Coverage for

“Advertising Injury”

“Advertising injury” means injury arising out of one or more of the following offenses:

a. Oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services;

b. Oral or written publication of material that violates a person’s right of privacy;

c. Misappropriation of advertising ideas or style of doing business; or

Typical General Liability Coverage for

“Personal Injury” May Be Broader

ƒ “Personal injury” means injury, other than “bodily injury”, arising out of one or more of the following offenses:

* * *

d. Oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services; or

e. Oral or written publication of material that violates a person’s right of privacy.

Uh Oh…. New Exclusions Target Data Breach Issues This is an example of an endorsement to a GL policy which excludes

liability arising from FCPA, DPPA and related statutes & regulations

Other Sources of Coverage:

The Wave of the Future?

ƒ Specialty Policies are Entering this Arena, Providing (very narrow) Coverage for

(example):

ƒ Media Liability (Copyright, trademark, privacy) and Media E&O

ƒ Security and Privacy Liability (“failure of security” or “privacy peril” “Phishing

Endorsement”)

Downsides to this New Coverage

ƒ Another Policy? More premium?

ƒ Slim Claim Track Record

ƒ Policies are Baroque

Other Options?

ƒ Risk Mitigation through Technology.

ƒ Downside: costly to do it right.

ƒ Consider: going through privacy policy application process in order to educate

yourself (and your board, CEO, etc.) on best practices that your company is not

Thank you!

Catherine Chaskin, Esq. ReedSmith LLP [email protected] 10 S. Wacker Chicago, IL 60606 O: 312-207-6478 C: 269-362-3914

Ann V. Kramer, Esq. ReedSmith LLP [email protected] 599 Lexington Avenue New York, NY 10022 O: 212-205-6057 C: 917-442-0622