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CALIFORNIA: An Introduction to Insurance: Insurer

Insurance professionals in California should follow 2024-25 with two things in mind – the past and the future.

First, the past: the recent legal landscape has stretched insurance reserves beyond comfort. Even with carriers largely winning hard-fought coverage battles on Opioids and COVID business Interruption, carriers have faced expensive headwinds: nuclear verdicts driving excessive settlements; increased labor and supply costs; and a multitude of class and mass tort actions.

The future: cyber insurance is to talk of the market in response to the innovation of threat actors, technology, and privacy laws. The COVID-19 pandemic accelerated the digitalization of businesses and remote work models, increasing the need for cyber cover, especially among SMEs, which often do not have dedicated IT professionals or departments. Responding to the growth, a plethora of new cyber MGAs have launched and the race to secure and retain talent is on. Experienced specialty line coverage lawyers have never been more in demand.

1. Explosion of Cyber Insurance 

Under any measure, cyber presents the most significant growing trend in insurance driven by the digitalization of the workplace and increased threat landscape:

• Global cyber insurance premiums are expected to double from 2023-2027 to USD29 billion.

• Ransom payments nearly doubled in 2023 to USD1.1 billion.

• In the last three years, business email compromises (BECs) have caused USD3 billion in losses.

• 2023 saw twice as many software supply chain attacks as the previous three years combined.

• The industry disrupted two major ransomware groups early this year, and yet ransomware leak site victims increased by 21% in Q1, the most active first quarter ever recorded.

AI adoption by threat actors will further accelerate the sophistication and frequency of attacks. Because threat actors' exploits are constantly evolving, so too do cyber policies. These new added coverages make interpretation challenging and unpredictable. At the same time the traditional claims made and reported coverage issues continue to be litigated. In Zoom v Certain Underwriters, Case No 22-cv-398878, Santa Clara Superior Court ruled in favor of Certain Underwriters at Lloyd’s, London, addressing what constitutes a “Claim,” a common issue in third-party cyber insurance claims.

Coming years will push coverage lawyers in California to be educated on technology, the digital ecosystems, and cyber coverage issues.

Privacy Litigation Tsunami 

California remains a focal point for privacy litigation as plaintiffs stretch CIPA and other California privacy laws to new technologies. Plaintiffs are targeting emerging website advertising and analytic features (pixels, cookies, session replay, chat, and SDKs) under evolving statutory privacy protections.

Motion to dismiss have seen mixed results, with plaintiffs trying to seize on every favorable decision. After the court’s decision last year in Greenley v Kochava, plaintiffs began asserting a new theory under CIPA’s trace/trap provisions. As one court has explained, plaintiffs seek to “disrupt a large swath of internet commerce without further refinement as the precise basis of liability.” A wide variety of plaintiff firms have joined the fray, each digging their own niche: eg, attacking imperfect privacy policies, privacy securities suits after a data breach, or suits tracking negative press targeting large technology companies.

Because of the significant liability profile, many companies look to insurance, but insurance does not typically cover intentional business practices, wrongful collection, and wiretapping.

Artificial Intelligence 

AI: everyone’s favorite buzzword these days. While AI bias and misidentification cases have been around for several years, the launch of ChatGPT in 2023 and the subsequent copyright actions ignited lawsuits involving AI tools and products. Multiple class actions against Google and OpenAI based on the data sets used to create and train AI products allege copyright infringement and privacy violations including federal (ECPA) and state (CIPA) wiretapping laws.

Plaintiffs face a common hurdle: avoiding old precedents. Many of these cases have been dismissed on the ground that AI learns from but does not copy and repeat intellectual property. Is that any different from what humans do? The coverage implications also remain to be seen, as these new technologies did not exist when the policies were drafted.

The civil rights cases are more fully developed with lawsuits alleging wrongful conduct in connection with employment, insurance underwriting and claims processing, access to finance and education, and claims based on the use of AI in law enforcement and private security. These claims cross all policy lines.

We expect legislative action at the state level. Colorado may have won the race to enact the first legislation, but California is determined to establish regulatory standards for AI and with its strong technology company base it will have an oversized influence. National leaders also have a significant interest in regulating AI with the Senate Roadmap for AI laying out a USD32 billion proposed investment and advocating for legislation across multiple fronts including deep fakes, children’s safety, social scoring, and bias. AI Regulation is widely seen as being built on the privacy framework and it may be the push that results in getting federal privacy legislation passed. Stay tuned!

2. Massive Pressures on the Cost of Insurance 

Climate Change 

Insurance costs are rising dramatically in California, with P&C carriers leaving the state in droves. Climate change is often blamed, but this oversimplifies the analysis—nuclear verdicts, inflation, stubborn supply chain issues, Prop 103, and slow regulatory approval of rate increases all burden the cost of insurance. But severe weather events certainly impact these costs as well.

Opioids and COVID Business Interruption: The Last Chapter?

Early 2024 decisions are expected to shut down coverage litigation over opioids and COVID-19 business interruption claims. On January 26, 2024, the Ninth Circuit Court of Appeals issued its decision in AIU Ins. Co. v McKesson finding that carriers have no duty to defend McKesson over claims it intentionally oversupplied opioids and inflamed the ongoing opioid epidemic. This decision is likely to end opioid coverage litigation in California as the path for coverage seems largely closed for suppliers and distributors of opioids.

On March 5, 2024, the California Supreme Court heard oral argument on a certified question from the Ninth Circuit Court of Appeals concerning COVID business interruption claims brought by event company Another Planet Entertainment. A decision is expected any day (and is required by June 5). This is expected to conclude the COVID business interruption saga in California once and for all.

Class Actions 

Class actions in California and nationwide are also imposing significant costs, with massive settlements and pending litigation in tort actions stress testing GL towers of insurance. While capacity was sufficient for one wave, reserves are tested by the combined impact of a train of massive class actions targeting manufacturers, distributors, and retailers for opioids, talc, and medical devices such as CPAP and Hernia Mesh. As insurance is impacted, plaintiffs push to invent new theories to find new defendants with untapped insurance.

And so, class actions are “ever ancient, ever new,” as theories evolve. Emerging class action theories include:

• Climate change theories targeting high contributors.

• “Greenwashing” claims challenging a company’s failure to conform with their own environmental representations, raising coverage issues with “failure to conform” exclusions.

 • Civil rights suits relating to hair relaxers and dyes.

Take Away 

2024 is a page-turning kind of year: from COVID-19 coverage disputes around business interruption and opioids to a surge of new technology, AI, cyber threats, and legal frameworks, especially around privacy. California, a leader in innovation, is at the forefront of these developments, and insurance professionals will need to follow with a keen eye.