Previously published in Risk Management, June 2010.
In an era where so much third party data is entrusted to policyholders (financial information, customer data, personal information and health records), insurance coverage against data theft is vital. But many insurance companies will contest loss claims from policyholders after property in their possession but belonging to another party is stolen. Regardless of whether claims fall under commercial crime insurance, financial institution bonds or fidelity insurance, insurers often argue that these are "third party" or "indirect" losses and refuse to pay.
This leaves the policyholder in a difficult position. In addition to potential liability claims from the actual owners of this information, the theft of this information often causes a loss to the policyholder.
But there is good news. Many authorities have established that crime and fidelity policies do cover such theft and that insurers must live up to their coverage obligations.
In one recent case, for example, a policyholder was the victim of a computer hacker. The insurance company refused to pay the claim, but the court rejected the insurers attempts to evade payment and ruled that the policyholder was entitled to crime coverage for the theft of customer data.
Such a ruling is not only supported by the language of many crime policies (which often contain a provision indicating that they provide coverage for the theft of property not owned but in the possession of the policyholder), but also by numerous crime insurance coverage cases over the decades.
Another court case from nearly 60 years ago held that a crime insurance policy held by a hotel owner offered indemnity and liability protection for a guest's property that was stolen from the hotel safe. In fact, whether "direct" is argued to mean "proximate cause," "efficient cause," "but for" causation or "substantial cause," many courts have concluded that crime and fidelity insurance policies cover third party claims as "direct loss."
These days, however, most crime insurance is purchased to cover a lot more than just employee theft. The majority of crime insurance policies cover not only criminal or dishonest conduct of the policyholder's employees, but dishonest and criminal conduct of third parties as well.
One appellate court, for example, upheld a trial court decision that had rejected the insurance company's "indirect loss" defense related to a crime coverage claim. The court held that there was coverage for the policyholder's loss, which included liability to third party broadcasters when a third party media placement service executive absconded with money that was to pay broadcasters for advertising services.
Even a New York case that is widely relied upon by insurance companies to deny coverage under the "indirect loss" defense has ruled that a crime policy's third party coverage would be applicable where the theft involved "third party property held by the insureds." Indeed, jurisdictions around the United States in both state and federal cases have rejected strained and narrow interpretations of the so-called "direct loss" requirement.
Given all this, it appears that the recent trend is toward rejection of overly narrow insurance policy interpretations on this front – good news for policyholders given the amount of property that they routinely possess but do not own
Joshua Gold is a shareholder in the New York office of the law firm of Anderson Kill & Olick, P.C. where he regularly represents policyholders in insurance coverage matters and disputes concerning arbitration, time element insurance, electronic data and other property insurance coverage issues.
About Anderson Kill & Olick, P.C.
Anderson Kill practices law in the areas of Insurance Recovery, Anti-Counterfeiting, Antitrust, Bankruptcy, Commercial Litigation, Corporate & Securities, Employment & Labor Law, Real Estate & Construction, Tax, and Trusts & Estates. Best-known for its work in insurance recovery, the firm represents policyholders only in insurance coverage disputes, with no ties to insurance companies and no conflicts of interest. Clients include Fortune 1000 companies, small and medium-sized businesses, governmental entities, and nonprofits as well as personal estates. Based in New York City, the firm also has offices in Greenwich, CT, Newark, NJ, Philadelphia, PA, Ventura, CA and Washington, DC. For companies seeking to do business internationally, Anderson Kill, through its membership in Interleges, a consortium of similar law firms in some 20 countries, assures the same high quality of service throughout the world that it provides itself here in the United States.
Anderson Kill represents policyholders only in insurance coverage disputes, with no ties to insurance companies, no conflicts of interest, and no compromises in it's devotion to policyholder interests alone.
The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations