Welcome to the second edition of IN, focused on keeping insurers IN the Know on Q2 events, developments, and legal decisions recently impacting the industry.
Q2 brought wildfires, floods and storms. Q2 gave way to what many consider a “head start” to hurricane season, as the first named storm developed in June, which was, by many calculations, two months early. Q2 also provided many introductions – the FAA introduced the first operational set of regulations for routine drone use, while the Brexit “leave” vote introduced countless regulatory, operational, trade and practical uncertainties to which the insurance sector is not immune.
IN Q2 includes an overview of some of the more significant economic impact of recent disasters and regulations, as well as the primary issues insurers could face as the Brexit effect continues to unfold. IN Q2 further highlights recent legal opinions issued throughout the quarter in an effort to keep insurers IN the Know on the substantive issues of fraud and policy rescission, as well as the overall benefits that can result from exercising procedural options, like removal of a case to federal court, particularly where the case may involve a frivolous or groundless claim.
As always, thank you for reading, and thank you for giving us the opportunity to keep you IN the Know.
Best regards,
Stacey Farrell
Editor
IN numbers
82 billion The expected amount, in U.S. dollars, generated for the U.S. economy by the first operational rules for routine use of small unmanned aircraft systems, or drones, known as Part 107. (Source: Insurance Journal, “U.S. Issues Final Commercial Drone Regulations," June 22, 2016).
100,000 The number of new jobs created over the next 10 years as a result of the Part 107 new U.S. drone regulations. (Source: Insurance Journal, “U.S. Issues Final Commercial Drone Regulations," June 22, 2016).
7 billion Claims, in U.S. dollars, caused by global disasters during May 2016, following wildfires, floods, and storms. (Source: Global Catastrophe Recap, May 2016, Aon Benefield, Analytics, Impact Forecasting).
1.43 million Acres of land charred by Canada’s Horse Creek Fire in the Canadian city of Fort McMurray. (Source: Global Catastrophe Recap, May 2016, Aon Benefield, Analytics, Impact Forecasting).
3.1 billion Insured losses, in U.S. dollars, due to the Horse Creek Fire at Fort McMurray, including both physical damage and business interruption losses. (Source: Global Catastrophe Recap, May 2016, Aon Benefield, Analytics, Impact Forecasting).
IN now and trending
U.S. drone regulations. It’s neither a bird, nor a plane. In a June 21, 2016 FAA News report, the Federal Aviation Administration summarized the first operational rules for the routine commercial use of drones, known as Part 107. Part 107 compiles safety regulations for unmanned aircraft or drones weighing less than 55 pounds for non-hobbyist operations. Pursuant to the regulations, pilots must keep drones within visual line of sight; and operate them during daylight hours, or, during twilight if the drone has anti-collision lights. The FAA states that the provisions are “designed to minimize risks to other aircraft and people and property on the ground.” Click here read the full article.
Brexit. The UK’s “it’s-not-you-it’s-me” breakup delivery to the EU. How and to what extent will the irreconcilable differences between the UK and EU impact the global and U.S. insurance markets. Primary concerns for the insurance sector include: whether UK insurers will still be governed by the EU’s insurance directive Solvency II; and whether the UK will broker a deal to remain in the internal market of the wider European Economic Area (EEA) to preserve UK firms’ “passporting” privileges throughout Europe.
Solvency II. The EU insurance regulatory regime that only recently became effective on January 1, 2016, to establish a framework for harmonized solvency and supervision for the insurance sector throughout the EU. As an EU legislative program, it codifies and syncs EU insurance regulations across member states, including governing standards for 1) valuation of assets/liabilities and capital requirements (to reduce the risk of insolvency); 2) governance and risk management; and 3) reporting and disclosure. Solvency II applies to all EU insurers and reinsurers, with some exceptions.
Until the UK formally leaves the EU, EU law continues to apply to the UK. As a result, for now, UK insurers continue to be bound by Solvency II, though uncertainty remains as to whether the UK will remain bound by Solvency II after the UK’s formal departure from the EU. According to the Association of British Insurers, which covers 90 percent of the UK insurance market, firms have invested £3bn in the Solvency II directive. As a result, many UK insurance leaders believe that Solvency II will remain applicable to the UK given the significant amount of resources and efforts invested in the regulation, which also is imbedded in UK law. There are other industry leaders who are of the opinion that British-based insurers may benefit from remaining outside of the EU as well as Solvency II, citing the high costs associated with Solvency II’s implementation and that its capital rules damage competitiveness, and further limit the industry’s ability to expand. (Sources: The Actuary and The Telegraph, see also The Association of British Insurers).
Passporting. When a foreign financial firm gains access to the internal market of the wider European Economic Area (EEA) by establishing a UK presence and using a UK license as a European passport. If the UK does not secure an agreement to stay within the internal market of the EEA, the UK stands to lose those passporting rights enjoyed by many insurers based, or with operations, in the UK.
Essentially, the internal market has an underlying network of Directives and Regulations (i.e., Solvency II, noted above) that permit access to other EEA member states if a firm has a license in one member state. Again, one of the most important directives for financial services is the Insurance and Reinsurance Directive, Solvency II, for insurance. An increasing number of companies in the insurance industry have relocated significant portions of their operations from the United States to the UK. In light of Brexit, one of the questions raised is whether these companies could lose the ability to “passport” services into Europe, as they have been able to do because the UK was an EU member. Without passporting capabilities, a concern is that operational costs could significantly increase, which then may lead to companies considering whether to relocate from the UK and into the EU.
Both Aon and AIG have recently commented on their respective considerations of establishing operations centers beyond the UK, as a result of the vote. Aon Plc Chief Executive Officer Greg Case, who relocated the insurance broker to London from Chicago four years ago, recently explained that “[t]he UK has been at the center of insurance and risk management since maritime trade and shipping was insured at Lloyd’s in the City of London more than 325 years ago, … Leaving the EU jeopardizes the UK’s leading position in the epicenter of our global service economy.” Australian and global insurance group QBE has also warned that it may have to revise its approach to its insurance and reinsurance premiums sourced from the EU member countries and underwritten by UK regulated entities under the EU passporting rules. To read the full article, click here.
(Sources: Bloomberg and The One Brief)
IN weather
The June 20, 2016 short-lived Tropical Storm Danielle placed the 2016 hurricane season two months ahead of schedule, raising the question of whether the early activity could signal a busy hurricane season. According to the experts, however, this early activity does not lend itself to a more active season. Specifically, out of 18 “head start hurricane seasons” (seasons that had tropical storms or hurricanes before June 1) since 1950, eight were below-average hurricane seasons; 10 were above-average hurricane seasons; and six of those seasons were near-average. Notably, none of those headstart hurricane seasons were “super seasons” like experienced in 2004 and 2005. Click here for the full article.
Total economic losses from severe weather in early May throughout the Plains, portions of the Midwest, and the Mississippi Valley are estimated at USD 575 million. (Source: Global Catastrophe Recap, May 2016, Aon Benefield, Analytics, Impact Forecasting)
IN catastrophes
Canada’s Horse Creek Fire in Fort McMurray is set to become the costliest disaster in Canada’s history. (Source: Global Catastrophe Recap, May 2016, Aon Benefield, Analytics, Impact Forecasting).
West Virginia’s worst flooding in over a century has killed 24 people and is the highest death toll from flooding among any U.S. state this year. West Virginia received one-quarter of its annual rainfall in a single day, causing rivers to rise to dangerous levels, resulting in widespread devastation. The state of emergency has expanded to 44 counties. (Sources Reuters and Weather.com).
IN court
If the Insurer is not duped into paying the Claim, is it still Insurance Fraud?According to the New Jersey Supreme Court, yes. In the recent case of State of New Jersey v. Robert Goodwin, 224 N.J. 102, 129 A.3d 316 (N.J. 2016), the Supreme Court of New Jersey held that a person violates the insurance fraud statute, N.J.S.A. 2C:21-4.6(a), even if he or she does not succeed in duping an insurance carrier into paying a fraudulent claim. In doing so, the Supreme Court reinstated Robert Goodwin’s conviction for insurance fraud. Click to read full article.
A Claimant’s False deposition testimony constitutes insurance fraud. A recent Pennsylvania Superior Court case, Commonwealth v. Edward Feierstein, 2016 WL 800615 (Pa. Superior Ct. 2016), serves as a textbook example that insurance fraud is not limited to the pre-litigation stages of a claim. In Feierstein, the court found that the third-party claimant’s false deposition testimony during the course of a claimant’s civil action against the insured tortfeasor was material and ultimately criminal insurance fraud. The court recognized – but determined irrelevant – the distinction between false information given in the initial submission of an insurance claim to an insurer versus false deposition testimony in a civil lawsuit. Click to read full article.
A novel idea: insureds must be truthful with its insurers.In a twist on the old adage, “bad facts make bad law”, the Second Circuit’s recent decision in Fireman’s Fund Insurance Company v. Great American Insurance Company of New York, Civil Action No. 14-1346-cv, 2016 WL 2943139 (2d Cir., May 20, 2016), clearly demonstrates that bad facts withheld by an insured from its insurers can make for a very bad result for insureds. Click to read full article.
The Advantages of Removal: Twombly and Iqbal Applied to Bad Faith Claims. This month, the Eastern District of Pennsylvania issued an opinion that reminds insurance carriers and their counsel that it is often beneficial to remove certain cases to federal court. While federal court offers many advantages in insurance litigation, the recent opinion in Camp v. N.J. Mfrs. Ins. Co., No. 16-1087, 2016 U.S. Dist. LEXIS 74496 (E.D. Pa. June 8, 2016) highlights one important benefit: the federal court’s role in protecting carriers from frivolous and groundless claims at an early point in the litigation. Click here to read the full article.
Hybrid Property Policies: The Burden of Proof to Establish Policy Coverage and Exclusions One coverage issue frequently arising under first-party property insurance policies entails a determination as to which party has the burden of proof to establish coverage, or to show the applicability and effect of a policy exclusion. Often times, this determination can largely depend on whether the policy is an “all-risks” or a “named perils” policy. In addition to these classifications, however, the same policy may contain coverages afforded both under all-risk language, as well as named-perils. These policies have been classified as a “hybrid” policy. Recently, the United States District Court for the Eastern District of New York, in Fabozzi v. Lexington Ins. Co., 23 F. Supp. 3d 120 (E.D.N.Y. 2014), and the United States Court of Appeals for the Second Circuit, in Fabozzi v. Lexington Ins. Co., No. 15-911-cv, 2016 WL 860280 (2d Cir., March 7, 2016), weighed in on the burden of proof issue within the framework of such a “hybrid” policy in these courts’ respective decisions arising out of a collapse case. Click here to read the full article.
INQ3 Looking ahead.
Please plan to join us for the upcoming Cozen O’Connor property insurance and bad faith webinars:
Complex Appraisals
Under First-Party Insurance Policies –
The California Experience
July 13, 2016, 11:30 a.m. – 12:30 p.m. EST
To register, and for more information:
Complex Appraisals Under First-Party Insurance Policies -- The California Experience
Bad Faith Basics and Notable Insurance Cases
in the Carolinas, Georgia, and Florida
August 4, 2016, 11:30 a.m. – 12:30 p.m. EST
To register, and for more information:
Bad Faith Basics and Notable First-Party Insurance Cases
IN Conclusion
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