– CyberTheft is in the News Again – Umbrella Liability Limits—How High is Up? – Deduct Depreciation to Calculate ACV?—Connecticut Provides an Answer – Exclusion Of Injuries To Employees Of Independent Contractors – To be Indemnified for Legal Costs, the Hold Harmless Agreement Must Spell it Out – Exclusion of Injuries To Employees Of Independent Contractors New York Labor Law sections 200, 240, and 241

You can always learn something new, so I thought I’d share some of the items that have opened my eyes in the past month or so.

CyberTheft is in the News Again No sooner did I write about hackers emptying business bank accounts1, than another story popped up in the news. On July 19th, 2012, The Wall Street Journal ran an article recounting how two firms lost almost $600,000 each to cyber thieves.2 The “good news” this time is that the businesses were able to recoup their losses from their banks. In one case, Patco Construction was able to convince the U.S. First Circuit Court of Appeals to overrule the District Court in Maine that had originally ruled in favor of the bank. The lower court had held that the People’s United Bank had met the standard of providing “commercially reasonable” protection for its commercial depositors.

In the other case that was decided in favor of the depositor, hackers had helped themselves to $1.9 million from the Comerica Bank accounts of Experi-Metal, a metal-working firm in Sterling Heights, Michigan. Experi-Metal’s loss was reduced to $560,000 when JP Morgan noticed something irregular about the transactions and called Comerica. JP Morgan’s action confirms what the NY Times article about cybertheft stated: “Larger banks…have more mature pattern-recognition and monitoring capabilities3.”

So, can you tell your insureds to forget about the computer and fund-transfer fraud coverage that I recommended? Well, no. First, going to court is no way to collect your loss. Even if you win, you lose—the only winners are the attorneys. Second, these cases turn on specific facts. For example, as in the People’s United case, did the bank’s systems provide “commercially reasonable” protection even though it failed? There’s no way to be certain the insured will win.

Your insured’s need this coverage. The Wall Street Journal quotes Brian Krebs, author of Krebs on Security, who puts it quite succinctly: “…The truth is there are millions of small businesses that have no clue of the sophistication of the threat that is out to get them. You’ve got one lady who’s in charge of payroll, she works nine to five and, God bless her, she’s up against the Russian mob4.”

In my last article, I suggested advising your clients to ask their banks how they protect bank accounts from cyberthieves. In his blog discussing this problem, Bill Murray, an information security consultant lists some specific protections that banks can easily implement5:

• One-time-password (OTP) Tokens
• Out-of-band Authentication
• User selected image for recognizing the bank
• Customer Device Recognition by IP address and cookie
• Transaction Risk Profiling
• Challenge-Response based upon shared secrets
• Dollar Amount threshold for invoking Challenge-Response
• Access to intelligence from the eFraud Network including IP addresses of known hostile systems
• Risk Scoring Reports Your clients can ask their banks if these protections are available to commercial depositors.

But remember, even the best systems don’t always succeed. Do the right thing. Tell your clients they need to protect their bank accounts and they need insurance to close the circle.

Umbrella Liability Limits— How High is Up?

Frank Miraglia was horribly injured when he fell from planking on a construction job. He was impaled on a reinforcing bar from his scrotum to his 2nd lumbar vertebra. The injury rendered him a paraplegic. He successfully sued the owner of the property, H & L Holding, based on New York State Labor Law §240(a). An arcane dispute ensued over apportionment of the available insurance proceeds. It’s not this argument that’s important to us. Rather it’s the fact that the fight involved a reduced liability award of $30,000,000.6 That’s right, I said “reduced.” It’s common for huge liability awards to be reduced on appeal and this one was reduced, if you can use that word to describe a $30,000,000 judgment. What limits do you recommend that your clients carry? Deduct Depreciation to Calculate ACV?—Connecticut Provides an Answer

A line of court decisions hold that insurers can’t deduct depreciation when calculating ACV for a partial loss. (I wrote about this a year ago.7) Insurers, of course, say that you can.

Connecticut has settled the dispute by enacting a law requiring that the definition of ACV include a provision for deducting depreciation. ISO has promulgated a new endorsement for use in Connecticut starting January 1, 2013. It will provide that: “The actual cash value, immediately prior to the time of such loss or damage caused directly by fire or lightning, to a covered building, shall be the amount which it would cost to repair or replace such building with material of like kind and quality, minus reasonable depreciation. (emphasis added) Depreciation…means a decrease in value over a period of time due to wear and tear8.” It only applies to fire and lightning losses because the basis of the court decisions barring a deduction for depreciation was that insurance companies must afford at least as much coverage as the state’s Standard Fire Policy (SFP). The SFP only covered fire and lightning, so those are the only perils affected by those decisions.

To be Indemnified for Legal Costs, the Hold Harmless Agreement Must Spell it Out

Post & Broadway, Inc. hired TNT K Construction Corp. to do exterior stucco repairs on a building it owned. TNT K employee, Benito Reyes, fell from scaffolding while working on the repairs and was badly injured. (New York Labor Law § 240 rears its head again. More about that later.) The construction contract between Post & Broadway and the contractor, TNT K, said that the “contractor assumes all liabilities.” The contractor argued this meant it was required to carry insurance, but the court didn’t buy that argument. It held TNT K responsible for the damages awarded to Reyes. But, because the contract did not specifically call for the contractor to pay Post & Broadway’s legal expenses, the court ruled that TNT K was not responsible for the legal fees Post & Broadway spent to defend itself.9

In commenting on this case, Steven E. Peiper, an attorney who specializes in insurance defense work, wrote: “Remember, if you wish to recover attorneys’ fees through a contractual indemnity agreement, the agreement must specifically reference attorneys’ fees as a recoverable item.10”

Here’s wording that one city11 uses: The Contractor shall indemnify, defend and save harmless The City and all of its employees, officials, officers and authorized representatives from and against any and all suits, actions, legal or administrative proceedings, claims, demands, damages, liabilities, interest, legal fees, costs and expenses whatsoever kind or nature (emphasis added) whether arising before or after completion of the Work and in any manner directly or indirectly caused, occasions or contributed to in whole or in part, by reason of any wrongful act, error, omission or fault whether active or passive of the Contractor, Sub-Contractor, or anyone acting under the Contractor’s direction or control or on its behalf in connection with or incidental to the Work. It’s something you want to tell clients about, but, unless you’re an attorney, it should be reviewed by the insured’s counsel before being incorporated into any agreement. I’m not an attorney so I can’t comment on its legal effect. Exclusion of Injuries to Employees of Independent Contractors A certificate of insurance shows the property owner as an additional insured on the contractor’s policy as required by the contract between the property owner and the contractor. One of the contractor’s employees is seriously injured when he falls off the roof of a house while installing metal trim and, unsurprisingly, he sues the property owner. The suit is based on Labor Law sections 200, 240, and 241.

The contractor’s insurance company says there’s no coverage because the contractor’s policy does not cover claims by employees. The policy excludes claims: “when an insured or additional insured was sued or contribution was requested for damages arising out of bodily injury to an employee sustained in the course of employment.12 ”

I see two problems with endorsement like this: (1) The property owner has no way to discover the coverage gap from the certificate of insurance, and (2) If the contract between the parties requires the contractor to indemnify the property owner for all claims made against the property owner arising out of the work, the contractor may be personally liable but have no coverage. In a perfect world, insurance departments would not permit such an exclusion. Until then producers have to alert insureds to the policy deficiency and risk managers have to struggle to find out what lies behind the certificates of insurance their clients receive.

New York Labor Law sections 200, 240, and 241 New York Labor Law sections 200, 240, and 241 were involved in three of these items. Insurance practitioners need a basic understanding of these sections, so let’s briefly look at what these laws involve. Section 200 requires that all construction industry employers provide a reasonably safe environment for all of their employees as well as anyone else legally on their work site. That’s not so onerous. It’s sections 240 and 241 that really create the problems.

Section 240, also known as the “scaffold law” because it covers accidents involving falls from scaffolding, ladders, elevated platforms, etc., provides: All contractors and owners and their agents…who contract for but do not direct or control the work, in the erection, demolition, repairing, altering, painting, cleaning or painting of a building or structure shall furnish or erect…for the performance of such labor, scaffolding, hoists, stays, ladders… and other devices which shall be so constructed…as to give proper protection to a person so employed.13

The duty imposed by this section is non-delegable. That doesn’t mean you can’t hire someone else to do the work. What is does mean is that delegating the duty to someone else doesn’t relieve you of liability. The job can be delegated, the duty cannot. Section 240 imposes “absolute liability” on owners and contractors who fail to provide proper safety devices for workers.

Owners face liability under the law even if they have no involvement with the work other than having hired the contractor. “Absolute liability” means that the plaintiff doesn’t have to show that the defendant was at fault. (The law does not apply to the owners of one or two-family homes who do not direct or control the work.)

Section 241 deals with hazards other than elevation affecting employees engaged in construction work. Owners, contractors, and their agents must provide safety equipment, and follow certain safety practices, The section is comprised of 10 subdivisions. Subdivisions 1 through 5 and subdivision 7 deal with specific construction hazards ranging from the use of planking to asbestos removal.

The first five subdivisions of section 241, like section 240, create a nondelegable duty and impose absolute liability Subdivision 6 of section 241 requires owners and contractors to provide “reasonable and adequate” protection to construction workers and to comply with the regulations promulgated by the New York State Department of Labor. However, because it does not impose absolute liability on owners or contractors; the usual liability defenses of comparative negligence and assumption of risk are available to defendants.

Because sections 200, 240, and 241 offer seriously injured workers the ability to make claims for damages, such as pain and suffering, that are not covered by workers compensation and to get access to liability insurance carried by owners and general contractors there can be huge sums involved. The result has been voluminous litigation to establish the exact import of these sections. I’ve only scratched the surface. The brief overview on which I based these notes runs 11 pages14. Hurwitz & Fine, the well-respected insurance defense attorneys in Buffalo, NY, publish a monthly newsletter setting out current decisions on 200, 240 and 241 cases15.

This is a topic you need to know about.

1 “Hackers Empty Firm’s Bank Account—Who Pays? Insurance Advocate CINN Group Inc., Mt. Vernon, July 23, 2012 pages 24, 25, 26, 28

2 Joe Palazzolo “Cyberthieves Hit Owners” Wall Street Journal July 19, 2012 p. B2

3 Pamela Rickman “Owners May Not Be Covered When Hackers Wipe Out A Business Bank Account” New York Times, Thursday, June 13, 2012

4 Joe Palazzolo “Cyberthieves Hit Owners” Wall Street Journal July 19, 2012 p. B2

5 Bill Murray “Decision on Appeal of Patco v. Ocean Bank” http://whmurray.blogspot.com/2012/07/decision-on-appeal-of-patco-v-ocean.html

6 Matter of Matter of Miraglia v Essex Ins. Co. 2012 NY Slip Op 05003 Decided on June 20, 2012 Appellate Division, Second Department

7 “Don’t Deduct Depreciation When Calculating Actual Cash Value (ACV) for a Partial Loss? Insurance Advocate CINN Group Inc., Mt. Vernon, NY July 4, 2011

9 Reyes v Post & Broadway, Inc. Supreme Court of the State of New York. Appellate Division: Second Judicial Department. D33658. W/prt).

10 “Coverage Pointers” Hurwitz & Fine August 3, 2012 http://www.hurwitzfine.com/shownews.php?type=coverage&id=467

11 The city’s risk manager emailed me permission to use this clause, but he asked that I not identify the city.

12 Luis Miguel Herrnsdorf, plaintiff, v Bernard Janowitz Construction Corporation, etal. Supreme Court of New York, Appellate Division, Second Department 2012 N.Y. App. Div. LEXIS 5057; 2012 NY Slip Op 5144 June 27, 2012, There are other cases that came to the same conclusion, for example: Bassuk Bros. v Utica First Ins. Co. 2003 NY Slip Op 18423 [1 AD3d 470] November 17, 2003 Appellate Division, Second Department. An example of a case in another jurisdiction that came to the same conclusion is James River Insurance Company v. Keyes2Safety, Inc. United States District Court, N.D. Illinois, Eastern Division. July 24, 2012.

13 “Liability Under The New York Labor Law” http://lsinjurylaw.com/library/Labor_Law1.pdf

14 “Liability Under The New York Labor Law” cited above. 15 http://www.hurwitzfine.com/listnews.php?type=labor

Perfecting Clients’ Protection is a Moving Target

Insurance Advocate