CYBER INSURANCE POLICIES

LARGER CURRENTS AFFECTING COVERAGE LAWYERING[1]

Michael Sean Quinn, Ph.D., J.D., C.P.C.U.

There are now broad and deep shifts going on in the waters of insurance law practicing.  They are jolting. These heavy flood-like flows are principally generated by the computer age having bursting onto the scene and having changing it immensely, or by the dawning and blossoming of “cyber space” (to mix metaphors), by the creation of  the cyber world, or by the arrival of the “digital age”—call it whatever you like, with one exception.  (I would prefer it not be called the “virtual ______”  or "virtual [anything]," since that image is radically false. I have written on the vices of  the "virtual" in cyber-discourse elsewhere.)

Because of what has come to pass on a global scale,  most lawyers (and those who assist them) are required to engage in all sorts of new activities; the profession is becoming reorganized; and new requirements re leaping out of the bushes every week, or so.  Of course, some of those activities involve dealing with the cyber insurance problems of client. This is one of the large changes; it is not small potato’s. 

At the same time, at the same time and related to this one, some of those activities strikingly manifest the need of law firms themselves to have the appropriate cyber insurances.  So, the image if lawyers picking insurance for themselves. (There is nothing new about lawyer helping insurers and insureds determine what provisions would be in a contract of insurance. The larger the policy the more likely there will be lawyers helping draft policies. Lawyers functioning as buyers of insurance for their own professional activities is new and different.)

As one might expect from relatively recent history, many of the new cyber policies are “named peril” policies.  In fact, it is hard to see it being any other way, ever.  There are not yet widely spread (or nearly mandatory) virtually-identical coverage forms.  All of those in use, however, are claims-made policies, as I suspect it will always be. All of them involve many definitions; many of the definition are themselves complex and new to even the semi-novitiate lawyer; and some of the definitions are layered, i.e., the term being defined depends on a second term which is also defined, and the first one down the definitional chain depends on another one further down the chain, and so forth. Perhaps over time the definitional structures will become less challenging. 

Here are some sketches of  those named perils, starting with liability insurance. The key concept is “wrongful act or omissions,” (“WAO”) definitions vary some, but not much.[3] In any case the coverage is more or less for WAOs causing

·      Injury to the network of another by dispatching “malicious codes,” “viruses,” malware, worms, and/or similar “poisons,” 

·       Invasions of protected privacy, 

·       Release (or theft) of private information by another by taking (stealing), turning over, distributing, or setting up other to do this

·      Participation in injurious media use, or causing it,

·      Injury when the insured is a cyber professional and/or a vendor of cyber services, 

·      Injurious hackery.

·      Injury while assisting another (or others) who actually do the hacking,

These are only examples, of course.[4]  (This is a paper of sketches; it is not a handbook or a how-to manual.)

Now for first party policies; keep in mind that what all’s insured are mostly not tangible objects but electronic and financial assets. Of course, since it is the “very modern,” high tech world we live in—though certainly not a “postmodern” world--first and third policies are often packaged together, though not always.  In any case here are some of the usual named perils potentially injuring the insured, but not by liability:

·      Network security of the insured is breached, 

·      Privacy components of the insured are breached,

·      Regulatory proceeding is inflicted upon the insured,

·      The insured is subject to an adverse media event,

·      The insured’s digital assets are destroyed, damaged, or rendered unusable,

·      The business income of the insured is reduced by an insured perilous event,

·      The insured is subject to an extortion of some sort of
“X-napping,” analogous to kidnapping, and/or the like,

·      The insured’s system is subjected to negligent (defective) care of some sort, like 

o   Design

o   Construction

o   Maintenance,

o   Securitization,

o   And so forth.[5]

These kinds of injuries can result from the insured being unable to provide its unusual services to its customer non-negligently, the public, industrial, or private “publicity”cause expenses and/or a loss of business and revenue. This insured injury might arise this way: Insured somehow injures X, but sustains injury as a consequence of its injury causing acts.[6] This might include notification (or similar) expenses, even if there is no actual proceeding pending.  One can easily imagine a law firm need coverage for the injury it causes itself by mishandling the confidential information of a client. Law firm as hackee. (1) Of course, the law firm might be providing legal services to a client by having files of their material from cases the firm worked on. (2) Then again, it might just store information for a client resulting from cases it did not work on.  It is not clear to me that this constitutes the rendition of legal services. (3) Or a firm might simply act as a cyber-storage company holding on to the digital material of a non-client.  (1), (2) and (3) might have very different insurance dimensions. 

.

*Michael Sean Quinn, Ph.D., J.D.1300 

West Lynn Suite 208

Austin, TX 78703 

512-656-0503
Fax: 512-344-9466
Email: mquinn@msqlaw.com 

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[1] Or maybe this should be called, “one enormous concatenations of smaller-looking currents.”

[3] Of course, since some fortuity is required, the WAOs cannot be explicitly undertaken to cause injury of damages. 

[4] See Jes Alexander and Mariah Baker Quiroz, “Hacking Through Cyber Insurance,” State Bar of Texas, 12^th Annual Advanced Insurance Law Course, June 11-12, 2015. This essay covers both third party coverage and first party coverage. It has lots of footnotes and is a good place to start one’s cyber insurance education. 

[5] Subrogation sails to the new world. 

[6] Intuitively, this is vaguely like A running into B; A is at fault; but the car of A is also damaged. A’s auto insurance will pick up both the liability side (3^rd party) and the property side (1^st party) of the accident. Thus, two separate losses. 

INSURANCE LAWYERS--CURRENT HISTORY

     

  INSURANCE LAWYERING:

SOME MILD CURRENT CURRENTS

Michael Sean Quinn, Ph.D., J.D., C.P.C.U. Etc.*

Insurance law and practice hasn’t changed much in the last couple of decades. In part that is because insurance law itself is in the doldrums. Doctrinal stagnation has been inflicted upon the practice inflicted upon the community of coverage. Some have always regarded  the practice of insurance law as old fashioned and boring. To some extent, however, things are changing.

So what’s new? There are a number of currents affecting practice. There are several mild currents; some are subtle expressions of change. Not everyone sees these mild changes or fully grasps their significance.  I will discuss major changes in another essay. For this essay I will use events and trends in Texas a potentially suggestive paradigm of what’s going on all over the country. Major and revolutionary changes will be discussed in another essay. 

First current: Texas insurance lawyers, as well as other states, now have specialized professional firms representing policy-holders. Some of these are larger firms representing larger clients in lots of area; some are tiny, so-called boutique  firms represent clients both large and small in special areas; some are specialized departments in mega-firms, and so forth. The rise of the policyholder firm is one of the most significant developments of the last 30 years (plus a few more, maybe). Anderson Kill, perhaps the first of the bunch, was created in 1969. It has been without question the best at self-promotion. In fact, the surge of such firms is certainly one of the most interesting developments of our era so far.  For one thing, it has increased the quality of performance. Now its specialist against specialist; the learned against the learned. Complexities and subtleties  are known and appreciated across the board.  Of course, this development is not restricted to Texas.

Second source of change: another current in Texas  practice, I think, has been the UT-CLE on Insurance Law, already mentioned, which began to develop around 20+ years ago. In the last few years the Insurance Section and UT-Law-CLE have cooperated in putting together and producing the programs to great effect.  The same sort of thing is surely available for the ABA and perhaps other state bar associations.

Third change: auditorium CLEs are no longer the only educational sources dished out by insurance lawyers to themselves, other lawyers and to their clients. There are also original online CLEs; formerly live CLEs are re-offered on line; there are webinars; and law firms put on their own courses available to their customers and clients, but therefore also often made available also to lawyers. Online, there are all sorts of  short publications (blogs) regarding cases, statutes, rules, philosophy, techniques, and more.   Often they present how-to tips to other lawyers and/or “civilians.” The truth is, I learn much from them about the many things of which I know no or  little, and/or have rather thin and/or faulty knowledge.   An excellent example of this sort of publication are those on the Deep Water Horizon cases put out by Haynes and Boone and by several other law firms. A great many more law firms are now involved producing blogs, often called “Alerts,” on a variety of insurance law topics, often among others. 

Fourth, in Texas, we now have “The Insurance Section of the State Bar of Texas,” and other states are developing similar new specializations, thougth4e ABA has not. Participatory activity in it has spread rapidly across both sides, as it were, of the central aisle.  All of this might strike one as the natural evolution of the practice—simply a routine economic cycling of the organization of the lawyer-insurance joint industry. But that’s not how it happened, and it’s not how it continues to happen.  (Keep in mind that insurance companies are probably sued more than any other set of organized companies and that they are involved in law suits at a rate several times that size.)

The section has made “insurance law workers,” as a Marxist observer might put it, much more of a learned, interactive, friendly, politely argumentative, “discussion-ing” (or “dialogic”), somehow and to some extent, unified  bunch, and that has been, is and will continue to be exciting.  Judges love to come and talk at our CLEs, more than they do others, I’ve heard, and I even witnessed and illustrative event once. The Section has a quarterly journal with plenty to publish; delivery is now available on line; and—perhaps most interestingly--it has a digital archive of all sorts of interesting writings.  People active in the section love it, and righty so! This very CLE program illustrates my point nicely. These phenomena not true only in Texas, though, I’m sure Texas has done it best.

This CLE also illustrates a fifth point, and that is the extent to which the necessary use of insurance law (and therefore the practice of insurance law) has become a genuinely diverse and pervasive specialty for a whole variety of professionals. Over the last 15 years or so, the practice of insurance law now permeates virtually all other areas of the law. Where here is risk—where there are perils—there is insurance. Where lawyering is afoot, insurance is always nearby--sometimes clearly perceivable, sometimes in the bushes. Virtually all large business deals, for example, mergers or/and acquisitions, whether purely domestic or international, have complex insurance components, and they are more and more being turned over to what I’m calling specialists in insurance contracts and their provisions.  Virtually all large companies have insurance lawyers in their General Counsel Office, and it amazing how many lawyer are to be found in specialty departments of large insurance brokerage houses and accounting firms.

Seventh, one of the most interesting purely intellectual event of the last couple of decades are the developing drafts of the RESTATEMENT (THIRD) OF THE LAW OF LIABILITY INSURANCE. This has certainly been an important process, and its official publication will be a significant event. The American Law Institute, its organizer, sustainer and eventual publisher describes it as a “Restatement [that] covers the law of contracts in the liability insurance context, liability insurance coverage, and the management of insured liabilities.”[1] Interesting, but not much used yet, and no revolution to be found here, even upon publication. It will certainly not trigger the shock in the legal system that happened with the RESTATEMENT (SECOND) OF THE LAW OF TORTS.[2]  (There is no “FIRST.” Talk about bad ideas. “Here is the second of the first book. It is not a revision of anything, since there was no first edition.” Very strangely, the ALI brackets “First,” “Second” and “Third” by dates and not by edition number. )

On the surface, then, it appears that not much new that is striking and hugely transformative has happened or is happening. Or so it might seem. Of course, there are “old time” cases grinding along; this will go on forever, or so long as there a people in conflict.  The apparently increasing number of huge storms with origins at sea and hail damages starting in many places both seem to be increasing first party, tangible property insurance work. Most of these cases are relatively small; in contrast, controversies arising out of Sandy are keeping a some Eastern seaboard coverage lawyers working well over full time, plus a few from elsewhere.  Insurers are taking lots more legal work in-house and that seems to be having an impact on the business side of the profession. Serious insurer bad faith cases appear to be dropping. The number of new, large companies—some coming from mergers, takeovers, and the like--are impacting the work of some sophisticated coverage lawyers, mostly at large firms. And demands by insurers for appraisals is diminishing must coverage work.

I am not suggesting that there are not marvelous, older-type complex cases flowing down the pipeline and there are truly excellent opinions being written.[3] A number will be studied in the next generation of law school case books. A number  of the opinions are masterful and some are quite subtle.[4] And a few are now famous, such as In re Deepwater Horizon,[5] together with a string of related cases. Alas, fame seldom lasts.

A big difference is emerging in complex, big-to-huge old-time coverage, and that is the emergence of e-discovery where there are piles upon piles of electronically stored information.

The aging of some (a big sum) of the legal profession is noticeable. Experienced coverage advocates turn gray, though—one would like to believe—slower than most others.  I’m not sure what the effect of this generational change will be over the short run-a decade or so.  Over the long run, it will have no impact whatever, except that the names of some law firms might change a little.

*Michael Sean Quinn, Ph.D., J.D.1300 

West Lynn Suite 208

Austin, TX 78703 

512-656-0503
Fax: 512-344-9466
Email: mquinn@msqlaw.com 

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[1] Drafts of versions of parts of it can easily be found on the Internet. Use “Restatement of the Law: Liability Insurance.”

[2] Not even it shocked the legal world quickly. Part of the problems is that lawyer are largely uninterested in reading and studying restatements of the law in general.  This has been a professional mistake. The ALI has been publishing Restatements since the 1920s and they are marvelous learning tools, and in a few cases transformative tools.  I have never understood why lawyers don’t love them. Nothing provides better systematic orientation that a relevant restatement.

[3] U.S.Metal, Inc. v. Liberty Mutual Group, #14-0753 (Tex. December 4, 2015)(CGL coverage).

[4] AIG Speciality Ins. Co. v. Tesoro, #15-50953 (5^th Cir. October 17, 2016)(discovery rule).

[5] In re Deepwater Horizon, #13-0770 (Tex. 2015)(oil spill and additional insured)

AMERICAN HOME SHIELD TV AD

FALSE! FRAUDULENT?

Michael Sean Quinn*

American Home Shield advertises a home warranty by beginning with a satirical skit where a person goes to a claims adjuster seeking coverage for his malfunctioning air conditional and is told that there no coverage for his air conditioner. Of course, this is false. There is some coverage for air conditioners, just as their is for his house and virtually all of its legal tangible contents, except, for example, for those which are illegal, e.g., a box of marijuana (though the box itself may be covered if it sustains physical damage), or not covered for some other reason, e.g., being very rare art works that may need to be specially scheduled.  

The adjuster is then portrayed as saying that the house is covered for earthquake, volcanoes, and zombie apocalypse.  Of course, the insured is horrified, while the adjuster is pridefully amused.  Here is a second, though less serious error. It is not the case that a zombie apocalypse is not covered unless it does physical damages to the house (and therefore its air conditioner).   This would be true even if the residence in the dwelling were killed or injured. (It might even be true if the apocalypse were only a partial one, i.e., if the world as we know it were not totally destroyed. It might depend on whether the courts would count a zombie attack as an act of war.)

A third error, in some ways the most serious, is that the voice states that the warranty covers what will happen, as opposed to what might happen. Of course, it is false that every air conditioner will suffer malfunction (or physical injury) because of product defect, mistreatment by the residents, or wear and tear. 

Therefore, AHS is not selling a financial-service product for what is certain to happen to each of us.  Moreover, although I haven't actually seen the warranty, my bet is that it contains exclusions or exclusionary language. 

Someone could easily believe that there is some sort of racket going on here, and I am not talking about the lunatics of the world that see vile conspiracies almost everywhere. I doubt that this is true in this case and certainly would not say so out loud unless I am  nothing more than formulating a hypothesis. It is reasonably arguable, of course, that ones needs both insurance and a warrant.

However, one should expect disagreement, argument, adverse reasoning, and even  conflict with the warranty company about how much it will pay (assuming it does not deny the claim) in case of needed repair and/or replacement, just as the homeowner may have it with an insurance adjuster.  

(Warranty adjusters, even if only supervising designated repair diagnosticians from  distance, are not infrequently, ex-property insurance adjusters, which is not necessarily a bad thing.) 

Read the warranty in advance. Get a copy and read it several times.  If there is enough money at stake, call a coverage lawyer and pay for an hour or so of his/her time.

*Michael Sean Quinn, Ph.D., J.D.

1300 West Lynn Suite 208

Austin, TX 78703

Office Phone: 512-296-2594

Cell:512-656-0503

Fax: 512-344-9466

Email: mquinn@msqlaw.com 
www.michaelseanquinn.com 

TRUTH, PREVARICATION AND UNTRUTHFULNESS: THOUGHTS UPON A DEPOSITION

TRUTHS, LIES AND UNTRUTHFULNESS

Michael Sean Quinn*

            In a deposition not long ago, I was asked whether I though an insurance company defending an insured had a duty to be truthful with the insured.  I answered that I was sure that the insurer must not lie to its insured and should not makes statements to the insured which, if it were thinking reasonably, would at least probably believe were false, and/or should believe are false.  “All well good,” said the depositioner “but I asked you whether the insurer had a duty to be truthful. Isn’t it that case, that the insurer must not be untruthful with its insured?”

Without thinking, I simply blurted out, “Well, that depends on the meaning of the word ‘untruthful.’”  I felt like Bill Clinton. The depositioner then said, “OK, tell me about that, please."  By then it had already dawned on me that there was a kind of trap built her questions and my answers.  I came to realize that in a subtle way, ordinary language with respect to telling the truth, being truthful, lying, untruthfulness, and being untruthful is not a perfectly symmetrical set but a bit of a pile epistemological ideas.

To be sure, to tell lies is to be untruthful, and to assert a true proposition to another is to be truthful, or—at least—it sounds like it. But maybe not. What if I assert to someone a true proposition, which I know he will not understand, am I being truthful? I am inclined to think not, at least under many circumstances.  If I am right about this, then being truthful is different than simply asserting truths. On the other hand, if I am in the presence of a person, and I have a true proposition in mind but don’t assert it, am I being untruthful?  Obviously not.

But suppose the proposition pertains to a service I am rendering this person, so it is one he needs to hear about. Am I being untruthful? Surely not, if I simply forget to mention it, or I mistakenly believe that this is not something he needs to know, and it will just upset him, if he hears it. On the other hand, if I systematically and intentionally refrain from telling him truths relevant to serving him, then it might sound like I am being untruthful.  One might call this an "untruthful omission." It surely would be being untruthful if the person for whom I am a steward asked me questions but I intentionally manage to avoid giving him answers, though never out-and-out lying.  This point, in at least extreme cases, is nicely illustrated by idea of half truths.

In any case, these points illustrate the odd fact that one can be truthful in a literal sense (“He never speaks anything but the whole truth.”), but also be untruthful in a less literal but also important sense (“He doesn’t always tell the whole story, even to her.”)  Of course, not telling the whole story can be an accident, a blunder, a pattern resulting from habit, or systematically poor memory or something specifically intentional. These various grades are significant because an isolated accidental happenstance would not count as a person being untruthful, whereas cases resulting from deliberate intent would.

In dawned on me in that deposition that my interlocutor was trying by semantic distinctions to set up a rhetorical disaster zone for his target and that I was being enlisted as his foot-in-mouth soldier.  I learn new things about legal dialogue, legal discourse, arguments of law and fact, and about the subtleties of the use of language in and near courts all the time. 

*Michael Sean Quinn, Ph.D., J.D.

1300 West Lynn Suite 208

Austin, TX 78703

Office Phone: 512-296-2594

Cell:512-656-0503

Fax: 512-344-9466

Email: mquinn@msqlaw.com 
www.michaelseanquinn.com