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CALIFORNIA: An Introduction to Insurance: Insurer

California: An Introduction to Insurance: Insurer

What’s old is new. Insurance in American is older than the country itself, dating to Benjamin Franklin’s 1752 founding of the “Philadelphia Contributionship for the Insurance of Houses from Loss by Fire.” Yet, as the primary hedge against risk associated with innovation, insurance stays on the cutting edge of new industry, and this has been especially true during the current pandemic era. Lockdowns, remote work and distancing have driven a plethora of claims involving business interruption, cyber, food delivery, and opioid addiction. California has also been plagued in recent years by wildfires. These claims are complex and expensive already, but social inflation has heightened the risk as the post-pandemic economy emerges. The insurance industry must be vigilant to manage its risk in California. Needless to say, coverage lawyers are very busy here.

Business Interruption 

In the past two years, more than 2,000 cases have been filed in state and federal courts nationwide by insureds seeking business interruption coverage under commercial property policies for losses sustained as a result of government-issued restrictions aimed at slowing the spread of COVID-19. The overwhelming weight of authority at the trial court level has been in favor of insurers, with courts routinely holding that economic losses resulting from such restrictions do not constitute “direct physical loss of or damage to property” as required to trigger business interruption coverage under the ISO commercial property policy form. Trial courts have also nearly universally found such losses to fall within virus exclusions, even where no actual contamination of the insured premises was alleged. In the past year, eight of the Federal Circuit Courts of Appeals have joined the chorus of decisions and found no coverage for COVID-19 related economic losses.

Cyber and Privacy 

With cyber-attacks in the news daily, the cyber insurance market continues to expand as do claims. Ransomware, malware attacks, and data breaches continue to increase with no indication this trend will reverse. Ransomware payments for the first six months of 2021 totaled nearly $600 million, which is more than all of 2020 combined.

Privacy claims, which are typically covered in cyber policies, are also at all-time highs. California has been a leader in privacy for decades. The California Constitution includes a right to privacy and California enacted the first breach notification law in 2002. The recently enacted California Consumer Privacy Act (CCPA) and the California Privacy Rights Act of 2020 (CPRA) are some of the most stringent privacy laws in the United States. With many of the CPRA provisions becoming operative in January 2023, business and their insurers are bracing for an influx of litigation claims. As other states enact similar statutes, privacy litigation will continue to generate claims nationwide.

The Gig Economy 

In the United States, online food delivery has doubled in the last five years, and is expected to approach $35 million in 2022. Without ready-made ISO forms defining insurance for gig economy workers as they bounce from app to app, the insurance issues are novel and present high stakes. The issues associated with these policies are very quickly taking over the insurance legal market.

Regulators have responded to this growing industry by promulgating mandatory insurance regulations primarily in the rideshare context, but there has been little regulation of delivery platforms. In the absence of regulation of policy terms, insurers should tailor policy language to provide coverage only when the gig operator is actually transporting persons or property for a delivery accepted through a gig application. Insurers should also negotiate with insured gig platforms over deductibles and self-insured retentions to minimize some of the risks and ensure that adequate contractor screening controls are in place. Finally, policies should be crafted with sensitivity toward the distinction between the independent contractors who use gig applications and the company’s corporate employees.

Opioids 

2020 was the deadliest year to date from opioid overdoses in North America, totaling more than 76,000. The COVID-19 pandemic has simultaneously exacerbated and overshadowed the opioid epidemic by limiting access to treatment services, overwhelming the healthcare system, and creating stressors that lead to greater drug use, from social discord, unemployment, and the loss of life. Simultaneously, opioid litigation is in full swing, and insurers are making difficult decisions about settlement, trials, and coverage. In 2021, prescription opioid manufacturers prevailed in one of the first California trials. The Court found “there is simply no evidence to show that the rise in prescriptions was not the result of the medically appropriate provision of pain medications to patients in need.” In 2022, California opioid coverage litigation is expected to become active following the West Virginia Supreme Court of Appeals decision overturning an injunction preventing insurers from pursing coverage litigation in California.

Wildfires 

Eight of the ten most destructive wildfires in recorded California history (by acreage) have hit in the last five years. This has heavily impacted property insurers in California, with about 10,000 structures burned in those fires. The state has taken increasingly aggressive action to prevent non-renewals and maximize insurance payouts, through legislation, regulation, and enforcement by the California Department of Insurance (CDI). California has passed numerous laws in the last five years to address this:
• SB 11 addressed growing non-renewals by expanding the state’s “last resort” insurance.
• SB 894 requires insurers to extend coverage for Additional Living Expenses.
• AB 1800 required expanded replacement cost coverage even without a rebuild.
• AB 1797 required annual replacement cost estimates to every address under insurance.
• SB 824 bans non-renewals when ordered by the commissioner, who has issued three such moratoriums since the law’s passage in 2018.

With ever-changing laws, a rash of wildfires, and an increasingly aggressive CDI broadly interpreting old and new laws, adjusting wildfire claims in 2022 California is fraught with peril.

Social Inflation 

Social inflation continues to impact losses particularly under professional liability, product liability, D&O, and commercial automobile policies. Drivers of social inflation include legislative and judicial factors such as tort reform rollbacks, courts overturning limits on non-economic damages, and relaxation of prohibitions on litigation funding. Societal factors include jurors and plaintiffs adopting “jack pot” mentalities and becoming desensitized to large numbers through social media exposure, economic inequalities creating animosity toward corporations and large organizations, and plaintiffs’ counsel deploying emotional litigation strategies. The result is awards untethered to any economic rationale.

Legislative and political engagement can address legislative drivers, but insurers have fewer option to address societal drivers. Retaining experienced coverage counsel, preferably with underlying subject matter expertise, can be an effective hedge to combat social inflation. Coverage counsel are often involved in a wide number of claims and are in a position to identify emerging claim trends as they develop and before published decisions get widespread media attention. Counsel can also provide an independent assessment of the merits of claims and a check on defense counsel who may be too close to a matter to appreciate the danger of an oversized award or the merits of an early settlement opportunity. Early identification and assessment of problematic claims allow counsel to navigate the claim to a successful resolution.

Take away 

It is an exciting time to be a California insurance lawyer with opportunities to favorably impact outcomes for insurer clients on a wide range of cutting-edge issues.