July 26 2017

Corporate Counsel: Stay Involved and Know When to Get Help with Your Company’s Insurance Program

Two recent federal court decisions illustrate the importance of corporate counsel’s continued involvement in the drafting and management of a company’s insurance program.

Corporate counsel often has an intimate knowledge of the company’s operations and corporate history to help spot potential gaps in what the company’s insurance, as written, covers. Corporate counsel also typically is one step removed from the day-to-day strategies of a pending litigation or regulatory proceeding to ensure that what insurance is available is, in fact, triggered when needed.

However, many issues surrounding insurance do not present themselves at first blush; they often are embedded within larger, legal and/or corporate matters.

The following decisions exemplify how issues surrounding insurance can present themselves in all aspects of a company’s operations, and corporate counsel is advised to consult with coverage counsel if there is any question as to the existence, scope or application of an insurance policy.


1) Are You Comfortable with How Your Company’s Business Interruption Insurance Applies to its Operational Risks?

A recent, Ninth Circuit decision involving DirectTV and its business interruption insurance illustrates how important it is to understand and scrutinize the terms of your company’s insurance where its operations depend heavily on certain supply chain(s).

In DIRECTTV v. Factory Mutual Insurance Company, 2017 U.S. App. LEXIS (9th Cir. June 19, 2017), DirectTV and its property insurer are in lengthy and costly litigation over the meaning and application of the term “direct supplier” as that term is used in the business interruption coverage part of DirectTV’s property insurance policy. DirectTV suffered significant losses when monsoonal flooding in northern Thailand in 2011 damaged two facilities of one of its “Tier 2” component suppliers, reducing the supply of hard drives available for incorporation into DirectTV’s set-up boxes.

DirectTV’s “Tier 2” suppliers supply components to DirectTV’s “Tier 1” suppliers/manufacturers, which themselves are in contract with DirectTV. DirectTV neither receives components directly from nor is in contract with its “Tier 2” suppliers.

The insurer argued that the ordinary and common meaning of the term “direct supplier” governs, in which case the term would not include a second tier supplier of the type at issue and no coverage is available. DirectTV, on the other hand, argued that the term should be applied according to its ‘usage in the “electronics supply chain industry,’” in which case a second tier supplier of this type would be considered a direct supplier and the losses would be covered.

The district court agreed with the insurer, applied what it saw to be the “ordinary and popular” meaning of the term, and granted summary judgment in the insurer’s favor. On appeal, the Ninth Circuit disagreed, reversed the judgment for the insurer, and granted DirectTV the opportunity to prove at trial that it and the insurer, when drafting the policy at issue, intended for the term “direct supplier” to be applied according to its industry or trade usage meaning and include DirectTV’s “Tier 2” suppliers.

Of importance is the absence of a definition of “direct supplier” in the property policy. Perhaps this entire dispute could have been avoided had the parties included a definition and clarified up front how far down the supply chain they intended the business interruption coverage to extend.


2) Do Not Assume a Prior Settlement Agreement with Your Company’s Insurer(s) Covers a Pending Claim for Insurance; If Your Insurers Rely on a Prior Settlement Agreement to Deny Coverage, Scrutinize the Scope of the Agreement (and Release Contained Therein) Carefully Before Agreeing.

A recent Sixth Circuit decision involving a company’s cleanup costs with respect to a former battery storage facility in New Jersey illustrates how important it is to carefully read and scrutinize the wording of any prior settlement agreement your company entered into with its insurance carrier(s) before conceding that the agreement precludes additional coverage.

In 2009, Cooper Industries received a notice from the federal Environmental Protection Agency (EPA) that a piece of property located in New Jersey might have polluted the Passaic River. The property at issue contains two facilities — a battery manufacturing plant and a battery storage plant — currently or formerly operated by Cooper and/or its predecessors.

The manufacturing plant had been the subject of a 1985 cleanup order issued by the New Jersey Department of Environmental Protection, and Cooper and its insurers had already resolved Cooper’s insurance claim for the costs to clean up the pollution emanating from the battery manufacturing plant (along with other unrelated sites) by way of a 1989 settlement agreement.

The battery storage plant, however, had been sold off to a third party long before in 1960, and the issue in this case — Employers Insurance of Wausau v. McGraw Edison Co., 2017 U.S. App. LEXIS 11773 (6th Cir. June 30, 2017) — was whether Cooper’s 1989 settlement agreement with its insurers covers the battery storage plant and the costs to clean up the pollution emanating from it (which the authorities had not ordered remediated until 2009).

The insurers argued that the agreement (and release contained therein) is expansive enough in scope to encompass the battery storage plant such that no additional coverage is available. Cooper argued in the contrary. The district court sided with the insurers and granted their motion for declaratory relief, effectively barring Cooper from any additional insurance for the site under the liability policies at issue in the settlement agreement.

However, on appeal, the Sixth Circuit agreed with Cooper and reversed the lower court’s judgment in favor of the insurers.

The Sixth Circuit carefully reviewed the wording and format of the settlement agreement and how such wording should be understood in light of Cooper’s operations and corporate history and held that the agreement unambiguously does not encompass the battery storage facility (and any pollution emanating from it).

Due to the apparently careful drafting of the 1989 settlement agreement on behalf of Cooper, Cooper may now pursue additional insurance for the costs to clean up the pollution emanating from the battery storage plant under the liability policies subject to the agreement.

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