BLOGS: All Risks Covered

3.15.2017, 11:22:00 AM

All Risks Covered team publishes North Carolina Insurance Desk Reference

The team of Womble Carlyle attorneys who contribute to this blog have curated a number of the blog posts, in addition to other content, into an e-book titled The North Carolina Insurance Desk Reference.  You can access it here.

12.30.2016, 11:30:00 AM

Lawsuit filed to set aside IRS Notice 2016-66

Two months ago, without any prior warning or public notice, the IRS issued Notice2016-66 which defined a number of common captive insurance transactions as “transactions of interest.” The Notice is limited to captive insurers organized under 831(b). The IRS states that these “transactions of interest” have the “potential for tax avoidance or evasion.” It places reporting responsibilities on the captive insurers and the owners of captive insurance companies, as well as a number of other professions (including lawyers, accountants, actuaries, and captive managers), with stiff monetary penalties for non-compliance.

The Notice has generated a substantial amount of reporting and commentary in the captive insurance community. By imposing reporting requirements on any 831(b) which has used risk pools to achieve risk distribution, had loss rates of less than 70%, or been involved in related-party lending, the Notice applies to the vast majority of 831(b)s which have had operations for the last 10 years. Further, captives (and professional advisors) were given only until January 30, 2017 to comply with filing the new reporting requirements, which include retrospective reporting of transactions for the last 10 years. However, since the time that this lawsuit was filed, the IRS has issued 2017-08 which extends the reporting deadline until May 1, 2017.

Two days ago, on December 28, 2016, CIC Services, LLC filed a lawsuit against the Treasury Department and IRS. It seeks an injunction from the federal district court, which would prohibit the IRS from enforcing the Notice.

More specifically, CIC Services, LLC is a captive manager located in Tennessee.It claims it is entitled to an injunction because (1) the Notice is a “legislative-type rule” which was unlawfully issued without proper compliance with the Administrative Procedures Act (which includes a public notice and comment period) and (2) because the Notice is “arbitrary and capricious and ultra vires in nature” and lacks the proper analytic foundation required under the Administrative Procedures Act.

The thrust of this injunctive lawsuit is that the APA contains a four step process before an administrative rule can be put into place, and the Treasury Department and IRS did not give public notice and seek public comment before publishing the Notice.

It will be interested to see how this lawsuit proceeds in the federal court system. If CIC Services, LLC prevails on a temporary restraining order or early motion for a permanent injunction, the IRS will not be able to enforce the Notice.


11.30.2016, 9:28:00 AM

Is the Owner-Manager of your Vendor your “Employee?”

Expansion of Coverage: North Carolina Crime Coverage Part:  Embezzlement

Is the Owner-Manager of your Vendor your “Employee?”

            On November 14, 2014, the Eastern District of North Carolina entered summary judgment in favor of an insured seeking coverage for embezzlement for actions by owners of a vendor. Colony Tire Corp. v. Fed. Ins. Co., No. 2:15 CV 27, 2016 WL 6683590 (Nov. 14, 2016 E.D.N.C.)

            The insured was seeking coverage under a claims-made policy for theft that occurred between 2002 to 2014.  The embezzlement losses were approximately $492,350.00.  The insurer denied coverage claiming that Colony, the insured, could not establish that the loss was caused by an “Employee” under the Policy.

            The money was stolen from Colony through its payroll and tax vendor, Employee-Services.Net (“ESN”).  Through the contract between ESN and Colony, ESN was allowed to withdraw funds from a designated bank account to pay Colony’s payroll and taxes.  Owners/Managers/Principals of ESN, James Staz and William Staz (collectively “the Stazes”) pled guilty to embezzling over $14 million from ESN’s many clients, including Colony.

            Essentially, the Stazes would withdraw money from Colony’s account, claiming that the money would be used to pay payroll taxes.  In reality, the taxes would go unpaid, and the money would fund the Stazes’ extravagant lifestyle, which included alcohol, strip clubs, jewelry, a luxury car, and a luxury home “with a lavish three-tiered pool, a cascading waterfall, wet bar, and dining area.”

            The critical issue for the court was whether the Stazes were “Employees” under the policy.  In the policy, the definition of Employees included “contractual independent contractor.”  In the definition, “contractual independent contractor” had to be a natural person.  Thus, from the outset, ESN, as a business entity, could not be a “contractual independent contractor.”  Further, to qualify as a contractual independent contractor, there had to be a written contract between Colony on one hand, and on the other hand either (a) the natural person or (b) an entity “acting on behalf of” the natural person.

            The written contract was between Colony and ESN.  The Stazes were not a part of the contract.  Thus, to qualify as “contractual independent contractors,” the court had to determine whether ESN was an entity “acting on behalf of” the Stazes pursuant to part (b) of the definition.

            The court interpreted the phrase “acting on behalf of” broadly due to its ambiguity.  Thus, not only did the phrase mean to act within the scope of a formal agency relationship, the Court also construed the phrase to mean actions in the general interest of or in the general benefit of the natural person.  Given this broad definition of “acting on behalf of,” the Court determined that ESN acted on behalf of the Stazes when it contracted with Colony.  Thus, the Stazes were Employees as defined by the policy.  Because they were Employees, there was coverage for the loss and directed the insurer to pay the loss.  The Court then directed the insured to prepare additional briefings on potential costs, attorney’s fees, and interest that it sought through its prayer for relief.    

            An important portion of the analysis, in our opinion, was the Court’s use of the Federal indictment for the Stazes.  Using the facts of the indictment, the Court concluded that ESN’s purpose was to facilitate the Stazes’ embezzlement scheme.  No one, other than the Stazes, benefited from ESN’s existence.  Further, the Court emphasized that ESN was a tool used by the Stazes for their criminal actions:  “the Stazes “through [ESN] defrauded ESN clients.” Id. at *5 (emphasis in original).  While not explicitly done in this case, such findings could support a veil piercing theory under North Carolina law, which would yield similar results through equitable means. 

            Given the results of this case, it would not be surprising to see a re-write of the “contractual independent contractor” provision in the future.  However, litigators could also distinguish this case on the basis of the facts.  The facts in the indictment supported showing that the Stazes used ESN for their exclusive, personal benefit.  One could potentially argue that similar facts, establishing this high-bar, close to a veil-piercing standard, would need to be found in order to meet the burden of “acting on behalf of” language.  This would be distinguished from actions by a "lone wolf" employee at a vendor who steals funds without benefiting the owners. 

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11.18.2016, 4:32:00 PM

Opioid Use and NC Workers’ Compensation

As we have previously reported, the North Carolina Industrial Commission was tasked to investigate a prescription formulary for North Carolina State workers.  The results of the investigation were published earlier this year.  The Commission considered the potential savings, benefits, and implementation procedures of a drug formulary, not just for State workers, but for the workers' compensation system as a whole.  Also requested specifically by the General Assembly, the Commission also investigated the use of narcotic drugs and the growing health problem of opioid use.


The results of the investigation included a general statement that given the complexity of drug formulary implementation, the Commission recommended additional time and resources be spent evaluating the costs and benefits associated with a formulary.  The Commission recognized that, in the meantime, a generic mandate could have potential savings.  Specifically for this post, the Commission stated that strong consideration should also be given as to how opioids are treated in the North Carolina workers’ compensation system. 


A new Wall Street Journal article published recently offers a new option in which the Commission may have interest.  The article discusses that insurers, such as Liberty Mutual and Broadspire, are using algorithms to suggest other treatment options after a certain number of opioid refills. 


Given that the North Carolina Industrial Commission has utilized new technology to help identify non-insureds, the use of a computer program to aid management of this potential epidemic is very interesting.  It would not be surprising if the Commission’s further work on this subject included new technology in this area.


10.18.2016, 11:07:00 AM

Hurricane Matthew flood claims may not be entirely preempted by federal law

In the wake of Hurricane Matthew and its associated flooding (particularly in North Carolina and South Carolina), a recent case of first impression in the Sixth Circuit may be cited by both damaged businesses and insurers and insurance brokers in the Carolinas. Harris v. Nationwide Mutual Fire Insurance Company, __ F.3d __, 2016 WL 4174381 (6th Cir. Aug. 8, 2016).

Writing for a unanimous panel, Judge Ralph B. Guy, Jr. held that the National Flood Insurance Act (established in the wake of flooding in Florida and Louisiana after Hurricane Betsy in 1965) did not preempt claims based on state law for negligence in the procurement of an insurance policy for a home situated in a flood-prone area. Although this case was decided on principles of federal abstention, it has major ramifications for those practicing insurance law. While it is not binding on any courts in the area affected by Hurricane Matthew, policyholder counsel will likely cite to it as persuasive authority in support of negligence claims against insurance brokers and other professionals involved in the purchase of homes or insurance.  

The case arose when a married couple suffered a flood loss during a 2010 flood of the Cumberland River. They brought a claim against their mortgage bank (Regions), a flood-zone certifier, their insurance company (Nationwide) and their insurance broker (David Vandenbergh). On appeal, the issue was whether the homeowers’ state law claims for negligence during the procurement of their Standard Flood Insurance Policy were preempted by Congress when it passed the National Flood Insurance Act (NFIA) The panel unanimouslyheld that while the NFIA preempted coverage claims against the insurer, it did not preempt negligence claims regarding procurement of the policy.
The case was remanded to the district court for further proceedings and, presumably, for trial.

The Court explained that:
“The NFIA indisputably preempts state-law causes of action based on “the handling and disposition of SFIP claims.” Gibson [v. American Bankers Ins. Co.], 289 F.3d at 949. . . . . The Fifth Circuit has distinguished claims-handling causes of action from policy-procurement causes of action, and held that the NFIA does not preempt state-law claims “to the extent that they implicate [insurers'] acts or omissions regarding issuance of the policy because those claims are procurement-based, not claims-handling-based.” Spong v. Fid. Nat'l Prop. and Cas. Ins. Co., 787 F.3d 296, 306 (5th Cir. 2015). In determining whether a plaintiff's cause of action arises from claim handling or policy procurement, the Fifth Circuit looks to whether the plaintiff was “already covered” by a SFIP, or instead was a “potential future policyholder.” Id.  We agree with the Fifth Circuit's approach and hold that the NFIA does not preempt policy-procurement claims such as plaintiffs'.”

In adopting the same distinction as the Fifth Circuit, the Court noted that:
“Damages stemming from policy-procurement claims, unlike those arising from policy-coverage claims, are not “flood policy claim payments.” 44 C.F.R. § 62 App. A, Art. I. . . . . Policy-procurement damages, therefore, pose no danger to the federal interests prompting preemption in the claims-handling context, i.e., “reduc[ing] fiscal pressure on federal flood relief efforts.” C.E.R. 1988, Inc., 386 F.3d at 270.”
Addressing questions of federal abstention:
“[G]eneral conflict-preemption principles do not compel barring state-law policy-procurement claims. It is possible to comply with both state tort laws and FEMA regulations, and state laws regarding misrepresentation and breach of fiduciary duty in the policy-procurement process do not “stand[ ] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” in enacting the NFIA. Id. at 269Id. at 269 (quoting Green v. Fund Asset Mgmt., L.P., 245 F.3d 214, 222 (3d Cir. 2001)).”

As Hurricane Matthew's floodwaters recede from the Carolinas, Harris and Spong are likely to be cited as the parties duel over whether claims for negligent procurement in the purchase of insurance can proceed to trial. 

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10.10.2016, 8:25:00 AM

Hurricane Matthew insurance tips for businesses

With Hurricane Matthew downgraded to a tropical cyclone, it is time for affected businesses, property owners, and insurers to focus on quantifying the amount of damage caused by the storm.  By some estimates, Hurricane Matthew will generation over 100,000 insurance claims and between $4 billion and $7.5 billion in property losses.  Although the focus is typically on pre-storm preparation, the immediate steps taken this week will be important to any business owner seeking to present an adequate claim to its insurer for property damage.

Safety is always the first priority.  Do not put yourself, your employees, of first responders in danger.  Currently in North Carolina, the predictions are for worsening flooding in many low lying parts of the eastern part of the state, with peak flooding not reaching some areas until Wednesday (four days after the storm passed). 

Once the threat of imminent danger has receded, the next step should be to document your loss.  Thorough documentation of the damage to your property will be invaluable.  Hopefully you will also have photographs or video from before the storm, so that any claim presented to an insurer can show both the before and after photographs of the condition of the property.  Because cell phones and digital cameras are not limited by physical film, do not hesitate to shoot dozens or hundreds of photographs.  Videos may be helpful as well. 

At the same time you are documenting the damage, you should immediately put your insurer on notice of the loss.  You should call your insurer to begin putting them on notice as soon as you arrive at the property if you assess any physical loss.  After you give initial notice, you can follow up with complete details, provide the photographs you have taken, etc.  The insurer will likely eventually send an adjuster to physical inspect the damage to the property. 

It is important to quickly give notice for several reasons.  As a legal matter, giving prompt notice prevents having a claim denied by an insurer on the basis of a late notice defense.  As a practical matter, because of the large number of claims that will be filed within a short period of time, some insurers will likely handle the claims on a first-come, first-serve basis.  Getting your claim in quickly gets you closer to the front of the line.   

If immediate repairs are needed, take plenty of additional photos of the damage, the repairs in progress, and the final repairs.  Maintain copies of documentation regarding the repairs, and provide those to your insurer.  If your business had to buy or rent additional equipment as a result of the damage, or you suffered inventory loss, you will want to maintain detailed documentation of these costs as well. 

Finally, whichever employee you assign to provide information to the insurer should maintain a journal or notebook.  This should include copies of all documents submitted to the insurance company, along with a log of all conversations with the insurer or its representatives.  The log should include the contact information of anyone from the insurer that you have contacted with, the date and time, the topics you discussed, and any additional information which you believe may be useful in the future or in the event of a dispute. 

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9.22.2016, 10:37:00 AM

Charlotte-area riots and looting could be covered by insurance

Businesses in Charlotte, North Carolina will most likely be covered by property insurance for damage caused by protesters. Additionally, some may be able to recover lost business income.

Over the last two evenings, Charlotte has been the site of protests as a result of the police shooting of Keith Lamont Scott, a 43 year old man. On Tuesday night, protestors blocked Interstate 85 near the UNC-Charlotte area, and looted a nearby Wal-Mart. On Wednesday night, the Uptown area near the Epicenter was the site of most of the demonstrations. The protests, and resulting police response, have caused business disruptions in various parts of Charlotte.

 Today, it is reported that many of the largest employers in the urban center of the city, including Bank of America, Duke Energy, and Wells Fargo have asked or permitted employees to work from home. Governor Pat McCrory has declared a state of emergency and requested the assistance of the National Guard.

Local news reported that a number of Uptown Charlotte businesses were damaged or looted during the violent overnight protests. These included the NASCAR Hall of Fame, the Charlotte Hornet’s team store, the Charlotte Convention Center, the United Way of Central Carolinas, the Bank of America headquarters, and several restaurants.

Property Insurance
Generally, businesses have a commercial property or business-owners property policy (sometimes called a BOP). The standard ISO commercial property and business-owners property policies have provisions that cover riot, civil insurrection property damage, and looting. This would include physical damage to a building, as well as merchandise that may have been stolen. Damage from fire will also be covered as a named peril.

On the other hand, photographs from social media and news reports show many shattered windows in Charlotte. Plate glass window insurance is usually offered as an add-on or additional insurance, and is not covered by many standard policies.

Businesses which are routinely in possession of someone else’s property – such as a shoe repair or auto repair shop – would likely need to have specific bailee insurance to cover the cost of replacement of a customer’s property which was damaged.

Business Interruption
If any curfew is imposed in Charlotte, or other restrictions on access to a business by either its customers or employees, the company may have a claim for business interruption or lost business income, depending on what coverages were selected. These policies typically provide require the insurer to pay for necessary extra expenses and lost business income as a result of a civil authority prohibiting access to the business.

The usual business interruption policy will only be triggered if there is sufficient physical damage to the business’s property such that the business must suspend its operations. Business owners should carefully read their policies however, as the trigger for business interruption may not begin for 24, 48, or 72 hours after the first civil authority prohibits access to their premises. Although the policy may not require an additional deductible prior to business income coverage being available, the 24 to 72 hour waiting period serves as a “time deductible.” Even once the business interruption coverage is triggered, it will not be retroactive to the date of the event. In other words, for damage caused on Wednesday night, business interruption coverage will not begin until Saturday night. As a result, some losses will not be recoverable under the standard policy. The business interruption during the first 72 hours could be covered by a captive insurer, however.

Often, this is a critical period of time for business owners immediately after a civil insurrection. During this waiting period, policyholders should take prompt repair measures to mitigate their damages even though lost profits will not be recoverable. Extra expense coverage, on the other hand, typically is triggered as soon as the first civil authority action.

Businesses with claims should immediately take photographs and put their insurance companies on notice. If claims are denied, there are typically internal appeals processes available to policyholders. If claims continued to be denied, business owners should consult with a knowledgeable insurance attorney about their options.

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