Insurance 101

1. Insurance 101 Understanding and InterpretingYour Policies Denver, Colorado April 29, 2014

2. Insurance 101 Lawrence A. Hobel Partner, Covington & Burling LLP Lorin KleinRisk Management, Senior Risk Engineer, Whirlpool CorporationLorin Klein manages the loss control engineering services for Whirlpool as well as manages day to day loss control activities for Whirlpool worldwide, including Business Continuity Planning and addressing critical exposures for the company. Lorin was previously employed by several large commercial property insurance carriers handling large commercial risk accounts as both an engineer and underwriter. He has experienced large property claim losses from both the insurer and insured sides of the business. Jaco SadieManaging Director, Insurance Claim Services, FTI Consulting Lawrence Hobel advises domestic and international clients on policyholder coverage and complex environmental matters and litigation. Mr. Hobel has served as lead counsel in numerous major coverage actions, and has secured in excess of $1.5 billion dollars in insurance recoveries for extraordinary losses. He has represented policyholders in litigation and negotiations on a broad range of insurance recovery claims and coverage, including first party property damage and business interruption loss, D&O and E&O disputes, privacy and data breach claims, third party toxic tort, asbestos, product liability, and environmental liability coverage. He is listed in various publications of leading lawyers, including being ranked both nationally and in California by Chambers USA. Jaco Sadie is a forensic accountant, based in San Francisco, and leads the west coast region of the Business Insurance Claims practice for FTI Consulting. Mr. Sadie has significant experience preparing complex property damage and business interruption claims. He has prepared claims for companies in the U.S., Asia, Latin America and Africa.

3. What to Expect • Expectations Upon Completion of the Session • Overview of Key Coverage Issues in First Party and Third Party Insurance • Better Understanding of Interplay between Language and Outcomes • Differences in First and Third Party Coverage • Winning prizes

4. Agenda Policy Formation First Party Property Insurance: The Basics Third Party Insurance: The Basics Managing the Loss Resolving Insurance Coverage Disputes Disclaimer: The presentation is not intended to set forth the views of the participants on particular issues and may not accurately reflect such views and is not intended to represent the views of FTI, Covington or Whirlpool

5. Policy Formation – The Application • Law generally imposes a duty to communicate in good faith to the insurer material facts within insured’s knowledge • Materiality may be determined by test (e.g., subjective test – materiality determined solely by the probable and reasonable influence of facts upon that insurer’s underwriting decision) • Watch out for provisions in application (or under law) to communicate material changes to answers before policy issued • Some answers to questions on insurance applications may be deemed material as a matter of law: • Answers to specific questions asked by the insurer (courts split) • Insurers seek to establish materiality by so stating in application or policy: (e.g., “Any statements in the Application and in any materials provided shall be deemed material . . .”)

6. Policy Formation – The Application • Insured may defend claims of misrepresentation/concealment, such as where: • The inquiry or question was vague or ambiguous • The insurer discovered contrary information through independent investigation before issuing the policy – triggering insurer “duty of further inquiry” • Insurer cannot play “gotcha” • Insured does not warrant accuracy of statements “on information and belief” (unless information comes from sources under the insured’s control)

7. Rescission of Policy by Insurer • Rescission: right, typically exercisable by the insurer, to extinguish the insured’s contract rights based on: • False representations or concealment of material facts in application • Burden of proof is on the insurer to establish a (i) false representation or concealment and (ii) materiality • May not have to be related to risk for which loss occurred • Should require Insurer to pay back premiums

8. Reformation of Policy • Reformation: equitable remedy that allows courts to rewrite policies that fail to conform to the parties’ prior agreement • Requirements: • Antecedent agreement as to which there was no mistake • Insurance policy with materially different terms, resulting from: • Fraud • Inequitable conduct • Mutual mistake • Unilateral mistake not sufficient

9. PolicyInterpretation • Plain language is applied where it is unambiguous. • If ambiguous, the court considers the “reasonable expectations of the insured” or sometimes, reasonable expectation of the parties. • Courts generally allow the use of extrinsic evidence to ascertain the insured’s reasonable expectations. Typically not uncommunicated intent. • If the meaning of the provision does not appear from the plain language and the insured’s reasonable expectations cannot be ascertained, the policy is construed against the insurer (Contra proferentem). • Insurers seek to impose more insurer favorable interpretative rules based upon (i) sophisticated insured; (ii) manuscript negotiations; and (iii) custom and practice and technical terms. • Exclusions are generally construed narrowly. • A matter of law for the Court, not an issue for the jury.

10. Key Principles of Insurance • Indemnity • The insurance company indemnifies the insured against certain risks for a consideration known as premium. • Insurable Interest • The loss of which will directly affect the insured. • 3.Good Faith • The concept that parties to a contract have an obligation of good faith and fair dealing. • 4.Mitigation • The insured will not behave irresponsibly and will take appropriate steps and actions so that the loss is minimized. • 5. Subrogation • The insurance company acquires legal rights to act on behalf of the insured as against third parties, i.e. the insurance company steps into the shoes of the insured. • 6. Proximate Cause • The cause of loss to ascertain whether the loss is covered under the policy.

11. TwoTypesofInsurance FirstParty ThirdParty

12. First Party Loss or Damage To Owned Property • “All Risk” Property Damage • Builder’ s Risk or Construction All Risk • Boilers & Machinery • Hull or Rig Physical Damage • Vehicles/Mobile Equipment • Aircraft • Cargo • Operator’s Extra Expense (Well Control) • Flood • Quake • Windstorm • Terrorism • Cyber • Political Risk • Fidelity and Crime/Theft

13. First Party Loss of Revenue or Profit Business Interruption (from damage to owned property) Loss of Production Income (manufacturing) Delay in Start Up (for construction project) Loss of Hire (for rigs or vessels)

14. Third Party Liability: Injury to Employees Worker’s Compensation Employer’s Liability U.S. Longshoremen & Harbor Workers Maritime Liability/Jones Act Non-Subscribers’ Liability State Funds, where applicable

15. Third Party Liability to Others General Liability for Personal Injury or Property Damage Automobile Liability Directors & Officers Employment Practices Fiduciary Liability (pension plans) Environmental/Pollution Umbrella/Excess Liability Aviation Protection & Indemnity/Vessel Owner’s Liability Charter’s Liability

16. “Old-Fashioned Way” (Fixed Amount, Subject to an Audit) Retrospective Premium Plans (Frequentlynot part of policy) Fronting Policies Captive Insurers and Reinsurers Deductibles or Self-Insured Retentions(SIRs) per Occurrence or Loss/Aggregate • Funding and Premium Mechanisms FirstParty ThirdParty ü ü ü ü ü ü ü ü

17. Controversy —How to Apply SIRs • Issue: Once a first-layer excess policy’s aggregate limit has been exhausted, are the second- and higher-layer excess policies subject to a self-insured retention per occurrence for subsequent claims? • Deere & Co. v. Allstate Ins. Co., San Francisco Super. Ct., No. CGC-03-420927 (Oct. 25, 2013) (Phase III) (yes; maintenance of underlying insurance provision in second-and-higher layers incorporate all but “the premium, the amount and limits of liability” from the first layer, and SIRs are not any of these) • Kaiser Alum. & Chem. Corp. v. Certain Underwriters at Lloyd’s London, San Francisco Super. Cot., No. 312415 ( Oct. 11 & 31, 2001) (no, according to plain language in second-and-higher layers’ Limit of Liability provision; maintenance provision in those layers does not incorporate SIR contained in the first layer’s Limit of Liability provision)

18. Retrospective Premium Obligation • What happens when the policy provides for payment of a retrospective premium and claims are made by entities other than the disappeared entity? • Transportation Ins. Co. v. Busy Beaver Building Centers, Inc., No. 11-907, 2013 U.S. Dist. LEXIS 121838 (S.D. Ohio Aug. 27, 2013) • Named insured had no duty to pay retros because parent company was only party who paid premiums and insurer did not negotiate right to seek from subsidiaries • Policy issued to Cyclops; BB a subsidiary which paid Cyclops for insurance coverage. BB later became stand-alone corporation and was sued for asbestos-related claims • Insurer provided coverage; BB knew at time it submitted claims that it was no longer owned by Cyclops • Court in SJ ruling: BB never bound by contract between insurer and Cyclops because BB not a successor • Cyclops responsible for retros

19. First Party PropertyInsurance: The Basics

20. Types of property typically insured: Buildings Equipment and contents Personal property Inventory Interest in property of others in the custody of insured (if there is an obligation) Types of property typically excluded: Land Water Accounts, bills, deed, notes and evidences of debt Animals, standing timber, growing crops Dams and dikes PropertyInsurance

21. "All risks of direct physical loss unless excluded" Loss of tangible property Loss of use of tangible property Note that forms often are NOT standard "Named Perils" – E.g., Fire Explosion Collapse Weather conditions Computer virus Riot Smoke Debris removal Property Insurance – Two BasicTypes of Coverage

22. Typical Property Insurance Exclusions • The insurance company will not pay for loss or damage caused directly or indirectly by any of the following: • Earth movement (i.e., earthquake) • Flood • Enforcement of a law or ordinance • Wear and tear, erosion, corrosion, inherent defect, inherent vice • Mold/fungus • Pollution • Mysterious disappearance or unexplained losses • Nuclear reaction or nuclear radiation • Hostile or warlike action • However, coverage may be added by endorsement or specific risk coverage

23. Exceptions to Typical PropertyInsurance Exclusions • “If physical damage not excluded by this policy results, then only that resulting damage is insured.” • Or "In the event that a 'specified cause of loss' results, the Company will pay for the loss or damage caused by that specified cause of loss.“ Typically referred to as Ensuing Losses

24. First Party CausationIssues • Where All Risk Policy with exclusions or named perils policy, often dispute over whether cause is covered or excluded • All Risk Policy – insurer bears burden of providing exclusion • Named Perils – insured bears burden of proving covered • What was Proximate Cause of Loss • New York: Not remote cause. An excluded cause does not bar coverage if it merely “set the stage for that later event.” Look to causes nearest the loss. • California: if two causes and one is covered and the other is not, then doctrine of efficient proximate cause. Efficient proximate cause is the predominant cause. • Policies often contain concurrent causation clauses intended to eliminate or allocate loss where concurrent causes • Flood vs. wind loss

25. First Party Property Valuation Issues • Can be very complex • Replacement vs. Actual Cash Value • Like Kind and Quality • Upgrades/Code Requirements • Co-insurance/Valuation

26. Property Insurance:Time Element Coverage • Business Interruption Coverage (Time Element Coverage) • Covers lost profits until some defined time after the loss occurs • Complicated by interdependencies • Be aware: The cost accounting or GAAP loss ≠ BI loss • Important to anticipate potential business interruption losses and insure accordingly

27. Typical BI Insuring Agreement The insurance company will pay for Actual Loss Sustained by the Insured resulting directly from the necessary interruption of the Insured's business caused by a peril covered hereunder. Loss of Gross Profit: The sum of the reduction in sales after a rate of gross profit was applied and the increase in cost of doing business – i.e.,the additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding lost sales Loss of Gross Earnings: Loss of Gross Earnings less all charges and expenses that do not necessarily continue during the interruption

28. Period of Interruption Typically: • Starts at the time of the physical damage • Ending when, with due diligence and dispatch, the property could be repaired or replaced and made ready for operations • Under the same or equivalent physical and operating conditions that existed prior to the damage

29. Period of Interruption • Also called “period of restoration”, “loss period” or “period of indemnity” • Theoretical vs. Actual • Strikes, delay caused by insured not part of loss period (such as idle period or planned maintenance) • Delay caused by insurer is part of loss period

30. Typical Exclusions From BI Coverage • Increase in loss due to suspension or cancellation of contracts • Indirect or remote losses • Service interruption • Law or ordinance • Loss of market • Planned or rescheduled shutdown • Loss caused by damage to or destruction of finished stock

31. Enhancements to BI Coverage • Some insureds may purchase coverage for losses resulting when events other than PD to insured's own property occur, e.g., • Contingent BI coverage • Service interruption • Orders of civil authority • Denied (or impaired) access (ingress/egress) • Interdependencies • Extended period of indemnity coverage • Attraction properties

32. Business Interruption Quantification Issues Period of Indemnity and Extended Period of Indemnity Likely Experience if the Incident Did Not Occur Ordinary Payroll Coverage Idle Periods Make-up Depreciation Extra Expense (costs above normal to continue operations) Expediting Expense (costs to reduce loss) • First Party – Business Coverage

33. Third Party Insurance: The Basics

34. Primary Lower limits of Liability Limits can be per occurrence or annual Typically provides defense obligation and may not exhaust policy limits Excess May or may not “follow form” May contain additional exclusions Typically defense costs within policy limits (“Ultimate Net Loss”) Umbrella Higher limits of Liability Often broader coverage than primary Policy language less standard • General Liability Structures

35. “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ [or ‘personal injury’ or ‘advertising injury’] to which this insurance applies. • Liability Coverage • Duty to Indemnify • Covers • Judgments and Settlements • Consent to Settlement • Settlement with Insurer for less than Policy Limits and Exhaustion

36. “We will have the right and duty to defend any ‘suit’ seeking [damages because of ‘bodily injury’ or ‘property damage’ [or ‘personal injury’ or ‘advertising injury’] to which this insurance applies], even if the allegations of the suit are groundless, false or fraudulent.” • General Liability Coverage • Duty to Defend and Duty to Pay Defense Costs • The insurer is excused from its duty to defend only if the complaint against the insured “can by no conceivable theory raise a single issue which could bring it within the policy coverage”. • If the insurer reserves its rights, it may have rights to seek reimbursement (after conclusion of the action) of defense expenses allocable solely to non-covered claims. • Excess Policies and Payment on DWOPs

37. Claims Made Coverage Claims Made Coverage focuses on Whether Claim is first made during the Policy period Claims Made and Reported also requires reporting during policy period Policies typically require notice of circumstances Can usually purchase “extended reporting period” May have a “retro” date • Liability Coverage Trigger

38. Occurrence Issues Trigger is Occurrence during the Policy Period “an accident, including continuous or repeated exposure to substantially the same general harmful conditions” Trigger and “long tail” injury Exposure Theory – when exposed to product Manifestation Theory – Bodily injury doesn’t occur (and insurance not triggered) until reasonably capable of medical diagnosis Injury in Fact – Coverage is triggered when the actual injury is shown, retroactively, to have occurred, which can involve multiple policy years Continuous Trigger – Injury is deemed a continuous process and all policies (from exposure to manifestation) are triggered Number of Occurrences cause vs. effect • Liability Coverage Trigger

39. All Sums Each triggered policy has an independent obligation to pay the full liability Pro-Rata Loss is spread over triggered period Typically, loss is spread even where no coverage (insolvent insurers, exclusions, SIRs) Horizontal vs. Vertical Exhaustion Policy Limitations Prior/Other Insurance/Other Company Insurance • Liability Coverage – Allocation

40. Key Exclusions in GL Coverage • Exclusions • Not Third-Party Property • Faulty Workmanship by the insured • Claims covered under Workers Compensation • Pollution Exclusions • Intend/ Expect

41. Claims Against a Disappeared Entity • The case law continues to develop as to the rights of claimants to pursue dissolved entities to the extent of insurance coverage • Issues respecting rights where corporation law of jurisdiction has a sunset provision • Issues respecting whether requires dissolved entity to come back to life in some way or simply allows suit be brought against insurer • Issue respecting whether liability of successor for dissolved corporation

42. Successorsand Coverage • Most policies contain an anti-assignment clause: no "assignment of interest under this policy" without the insurer's consent endorsed on the policy. Such clauses are generally valid and enforceable. • Two exceptions have been asserted by Policyholders: • Clause should not apply when liability is by operation of law • Where the transaction amounts to a consolidation or merger of the two entities • Where the purchasing corporation is a mere continuation of the seller • The transfer of assets to the purchase is for the fraudulent purpose of escaping liability for the seller’s debts • Clause should not apply because once the injury or damage insured against has taken place, a policyholder could freely assign its rights to defense and indemnity for claims arising out of that damage or injury

43. Successor Issues • Case Law Mixed on Assignability after loss • The Henkel Rule (California Supreme Court) • No assignable chose in action because the duty had not been reduced to a sum of money due or to become due under policy • Assignment without consent only where (i) the claim had been reduced to a monetary sum; or (ii) the insurer was in breach of the policy and the assignment transferred the right to recover damages • California Supreme Court in Fluor considering whether Insurance Code section 520 warrants a different result • “[a]n Agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss.” • Some Courts have followed Henkel • E.g., Indiana Supreme Court, relying on reasoning of Henkel • Other Courts have ignored or rejected Henkel • E.g., Trial Court in Ohio noting that Henkel was in “conflict with” precedent of Pennsylvania, New York, Delaware, Ohio and Connecticut, generally on the basis that the loss has occurred before the claim is reduced to judgment or the insurer is in breach

44. Directors and Officers and ProfessionalLiability Coverage • D&O Insurance • Suits against Directors and Officers • Securities actions against the Company • Professional Liability Insurance (E&O) • Suits alleging errors and omissions in professional work

45. D&O Coverage • Why is D&O Insurance Necessary? • Corporations typically have bylaws that obligate them to provide broad indemnity to their directors and officers • It may be financially impossible for an insolvent corporation to indemnify • It may be legally impossible for a corporation to indemnify derivative claims

46. Basics of D&O Coverage • Side A • Insure directors and officers when they are not indemnified • Side B • Insure corporations when they indemnify their directors and officers • Side C • Insure corporations for certain types of direct liability

47. Wrongful Profit Deliberate Criminal or Fraudulent Act In fact vs. final adjudication – settlements Insured v. Insured (e.g., Claims brought by a disgruntled former director or officer) Severability Clause - the conduct of one individual will not be imputed to other individuals or to the corporate entity Prior Claims Regulatory Exclusions • Typical D&O Exclusions

48. Coverage for Loss Resulting from a Claim made (and reported?) during policy period For a “Wrongful Act” In the rendering or failing to render “Professional Services” Covers claims of errors or omissions: negligence, misrepresentation, violation of good faith and fair dealing, wrong advice • E&O Basics

49. CyberCrimeInsurance • Coverage afforded under “traditional” policies and specialty ‘cyber’ policies • Specialty ‘cyber’ policies could offer both first party and third party and cover: • Losses resulting from data breach, such as defense and indemnity costs relating to third party action, notification costs, credit monitoring, public relations, forensic investigation and crises management • Regulatory investigations, fines and penalties • Losses resulting from a misappropriation of intellectual property • Losses resulting from transmission of malicious code or denial of third party to insured’s network • Cost to recover data • Business interruption • Extortion from cyber attackers

50. Notice of Loss Policy provisions on Proof of Loss and timing Partial payment and advance payment Limitations period Examination Under Oath Obligations of Insurer and Insured Document Retention Notice of circumstances Notice of claim “Tender” of claim Duty to Communicate Managing the Relationship Consent to Settle Document Retention • Managing The Loss FirstParty ThirdParty