Kerman’s Korner – Top 3 Takeaways from 2018


01315661Kerman’s Korner continues its tradition of recapping the top 3 takeaways from client interactions in the previous year.  2018 was full of helpful tips, so I had trouble narrowing it down to just 3!  Listen here:

For those of you who are interested in the cyber world, be on the lookout for the next Kerman’s Korner podcast episode, where we’ll be discussing the basics of Bitcoin and blockchain, as well as some of the insurance implications.

Previous episodes of Kerman’s Korner can be found at: 

Illinois Supreme Court Upholds Biometric Information Privacy Act: Will Rosenbach Become the Majority Rule On “Minority Report” Issue?


By: Robert Arnold and Celeste King

Biometric data refers to a physical characteristic that allows the establishment and verification of a person’s identity.  The most common forms of biometric data are fingerprints, retinal and face recognition scans and voice recognition.  Unlike a password, biometric data is intrinsically unique to an individual.  Companies collect the data, extract it and store it, and from that point forward are able to compare it with any future scan to verify the individual’s identity.  But, the two fundamental weaknesses of all identity privacy techniques likewise apply to biometric data: (1) must the entity collecting the data explain the purpose and use of the biometric data, and (2) what if your biometric data is misappropriated?

To deal with these issues, three states have thus far passed biometric privacy statutes – Illinois, Texas and Washington – with more states in the process of enacting similar laws.  As the first law of its kind passed in the nation, the Illinois Biometric Information Privacy Act (“BIPA”) (740 ILCS 14/1 et seq. (West 2016)), restricts how private entities may collect, retain, disclose and destroy biometric identifiers.  Specifically, BIPA requires entities collecting biometric data to provide written notice and obtain consent from individuals providing the data.  BIPA is distinguished from other biometric laws because it allows a person “aggrieved by violation of the Act” to sue for statutory or actual damages, attorney fees and injunctive relief.

In January 2019, BIPA was the subject of a groundbreaking decision on whether violations of the Act were actionable in the absence of “actual harm.”  In Rosenbach v. Six Flags Entertainment Corporation, 2019 Il 123186 (Jan. 25, 2019), the Illinois Supreme Court said they were.  The Court reversed the appellate court and held that a plaintiff may seek statutory damages under BIPA even without alleging actual injury or any adverse effect beyond a technical violation of the Act.

The defendant Six Flags uses a fingerprinting process for repeat-entry pass holders.  The system scans biometric data, then records and stores it so Six Flags can quickly verify customers’ identities.  Rosenbach’s son obtained a season pass, which required him to have his thumbprint scanned.  Neither Rosenbach, a minor, nor his parent were notified in advance that biometric data was necessary to obtain a pass.  Six Flags also did not publish information about where and how the data were stored, for how long, whether it was used for other purposes, or how it was destroyed.  Finally, plaintiff had not consented to providing biometric data and did not sign any waivers.

The 3-count complaint alleged that Six Flags violated BIPA because it failed to follow the statutory protocols requiring informed consent and written waivers.  The complaint also sought injunctive relief and a common law claim for unjust enrichment.  In the trial court, Six Flags successfully moved to dismiss the complaint on grounds that plaintiffs suffered no actual or threatened injury and therefore lacked standing to sue.  The Illinois Appellate Court affirmed the dismissal and the Illinois Supreme Court granted leave to appeal.

In reversing the dismissal, the Court took an expansive view of BIPA based exclusively on principles of statutory construction.  The Court described Six Flags’ position that the statute requires proof of actual injury as “untenable” because no such requirement was expressly stated in the statute.  The Court also rejected the argument that “aggrieved” could only mean actual injury because in the Court’s view the term “aggrieved” can also include infringement of a legal right.  The Court also referred to legislative comments in which the General Assembly described the ramifications of biometrics as concerning and unknown.  The Court reasoned that the broad statutory language was a result of the General Assembly’s assessment of the broad risks of biometrics, the desire to remedy such risks, and the difficulty of providing meaningful recourse once data has been compromised.

Rosenbach is notable as the first decision of its kind in the biometrics arena, and its approval of the potential of statutory damages and attorney fees without proof of actual injury will inspire increased class action filings.  Its broader impact may be limited, however, by the fact that Rosenbach involves an Illinois court interpreting an Illinois statute.  As other states enact comparable statutes, whether the Rosenbach rationale will be adopted by courts interpreting such statues remains to be seen.  That said, Rosenbach is consistent with other decisions that have weakened the standing requirement in privacy cases, especially decisions applying Illinois and California law.  (See e.g., Remijas v. Neiman Marcus Group, LLC, 794 F. 3d 688 (7th Cir. 2015); Krottner v. Starbucks Corp., 628 F.3d 1139 (9th Cir. 2010).

Also, Rosenbach was decided on the pleadings, and the Court’s holding was merely that failure to allege actual harm did not warrant dismissal.  Whether class action plaintiffs will be able to establish class certification, liability and damages under BIPA are all issues for another day. 

Fifth Circuit Adds New Consideration in Deciding Whether Policy Proceeds Are Property of the Debtor’s Bankruptcy Estate: and How it Could Impact Insurers Unintended Ways


By: Tony Draper & Mike Prather

In re OGA Charters, L.L.C.— F.3d — (5th Cir. 2018), 2018 WL 4057525

Click here for PDF.

On August 24, 2018, the Fifth Circuit Court of Appeals issued a decision that will alter the analysis of whether proceeds of an insurance policy issued to an insured who files bankruptcy are property of the bankruptcy estate under 11 U.S.C. § 541.  The results-oriented decision produced a more equitable outcome for the debtor’s many creditors, but it may lead to unintended consequences that could wreak havoc on insurers.

The Facts:  OGA Charters, LLC (“OGA”) operated a charter bus service.  While on a route to a casino in Eagle Pass, Texas, one of its buses was involved in a single-vehicle rollover crash that killed nine passengers and injured more than 40 others.  OGA had a single relevant insurance policy that provided $5 million of liability coverage for “covered autos.”  A small group of claimants quickly entered a settlement with the insurer that would have exhausted limits, leaving the remaining claimants with possible recourse only against OGA’s very limited other assets.  The total claims asserted by the accident victims exceeded $400 million.

Faced with a prospect of no recovery on their claims, a group of the non-settled claimants filed an involuntary bankruptcy petition against OGA and initiated an adversary proceeding asking the bankruptcy court to enjoin the insurer from paying the pre-bankruptcy settlement.  The non-settled claimants argued the proceeds were property of the OGA bankruptcy estate that must be equitably distributed to all claimants.  The Bankruptcy Court held the proceeds were property of the estate, and a direct appeal was taken to the Fifth Circuit.

Historical Treatment of Policies and Proceeds:  It is well known that insurance policies issued to a debtor are considered property of the estate, but the treatment of proceeds is another matter.  In the Fifth Circuit the latter question has historically been resolved by asking who owns—or is entitled to receive—the proceeds when a claim is paid.  See, e.g., In re Louisiana World Exposition, Inc., 832 F.2d 1391 (5th Cir. 1987) (proceeds of policies purchased by the debtor but providing coverage for its directors and officers were not property of the estate.).  Where the debtor has no right to receive and retain the proceeds of the policy, the proceeds are not property of the estate.  In re Edgeworth, 993 F.2d 51 (5th Cir. 1991).  Proceeds of first party policies and coverages are generally considered property of the estate, while proceeds of liability policies generally are not.

From a bankruptcy perspective, the purpose of asking who is entitled to retain the proceeds is to determine whether those proceeds might enhance or deplete the debtor’s estate.   If paying the proceeds would neither enhance or deplete the estate—as would occur when proceeds of a liability policy are paid to a third-party claimant—the proceeds are not property of the estate under 11 U.S.C. § 541.

While the question of who is ultimately entitled to policy proceeds is sometimes complicated by the particular circumstances, for instance when a policy provides both first party and third party coverage, the answer has typically been predictable.  That may no longer be the case after In re OGA Charters.

The holding:  The Fifth Circuit acknowledged the policy at issue in OGA Charters was a liability policy whose proceeds could not be retained by the Debtor.  Historically, this would lead one to conclude the proceeds were not property of the estate, leaving the insurer free to perform under the settlement and exhaust its limits unimpeded by the Bankruptcy Code’s automatic stay provisions.[1]  Here, however, the Fifth Circuit held that because the amount of claims far exceeded OGA’s coverage limits, OGA had “an equitable interest” in having the proceeds applied to satisfy as many of the pending claims as possible.  The proceeds were property of the estate subject to the bankruptcy policy of equitable distribution among creditors, notwithstanding the fact that OGA would never be entitled to retain any of the proceeds.

How this holding could impact insurers:  We believe this holding could have a number of unintended consequences for insurers.  Some of those include the following:

  • Limitation on insurer’s right to enter reasonable settlements:  It has long been the law in Texas that an insurer faced with multiple claims and inadequate limits may enter into reasonable settlements with fewer than all claimants even though those settlements exhaust limits.  Texas Farmers Ins. Co. v. Soriano, 81 S.W.2d 312 (Texas 1994).  OGA Charters appears to limit the protections and rights afforded by Soriano to expand a debtor’s property interests beyond what applicable state law otherwise provides.[2]
  • Possible exposure to significant defense costs: Under Soriano, an insurer could exhaust limits through reasonable settlements and by doing so end its obligation to provide a defense of other covered claims.  Under OGA Charters, an insurer may be denied the right to exhaust its limits, remaining obligated to provide a defense of all pending claims.  This risk is exacerbated by the fact that bankruptcy courts lack jurisdiction to adjudicate personal injury and wrongful death claims.  Those claims must be tried in the district court where the bankruptcy case is pending or where the claims arose.  28 U.S.C. § 157(b)(5).  A debtor’s plan of reorganization or liquidation might provide that the policy proceeds will be paid into a trust for the benefit of the injured claimants, but those claimants retain their right to a jury trial if they do not consent to the plan’s claim-valuation procedures.  Whether the insurer remains obligated to provide a defense for those claims is unclear under OGA Charters.
  • Stowers implications?:  If an insurer accepted a prepetition Stowers demand, and a bankruptcy was filed before the payment was made, it would appear the intervening bankruptcy in circumstances similar to OGA Charters should protect the insurer where the bankruptcy court concludes the proceeds are property of the estate.  This outcome is, however, far from clear.  In 2001, the Fifth Circuit in In re Davis[3] held that a Stowers claim did not become part of the debtor’s bankruptcy estate where the bankruptcy occurred years before the final judgment in excess of limits was entered,[4] the debtor received his discharge prior to entry of the final judgment, and the debtor had no assets available to pay claims in the bankruptcy—meaning the debtor-insured was not harmed by the excess judgment so no Stowers claim arose.  However, the concurrence in Davis recognized the answer may be different where a portion of the debtor’s assets are used in the bankruptcy case to pay the excess judgment.
  • Avoidance action liability:  If a liability insurer pays policy limits to resolve one or more claims against an insured, leaving other pending claims without coverage, and the insured later files bankruptcy, the OGA Charters holding could give rise to avoidance actions by a creative debtor, committee or trustee.  A fundamental requirement of any bankruptcy avoidance action is that the debtor have an interest in the assets that were transferred.  When faced with multiple claims and insufficient limits, OGA Charters now creates in the insured-debtor a property interest in liability policy proceeds.  Such avoidance actions could ultimately expose the insurer to liability well in excess of its policy limits.

[1]              In these circumstances, it is nonetheless advisable to seek relief from the automatic stay, to the extent it applies, out of an abundance of caution.  OGA Charters makes this particularly true when there are multiple claims exceeding limits.

[2]           Bankruptcy Code § 541, which defines property of a debtor’s bankruptcy estate, does not create property interests that do not otherwise exist.   It merely recognizes and enforces whatever property interests the debtor may have as of commencement of the bankruptcy case.  OGA Charters appears to go beyond § 541 by recognizing an “equitable” interest in property that does not otherwise exist under Texas law.

[3]              In re Davis, 253 F.3d 807 (5th Cir. 2001).

[4]           A Stowers claim accrues upon entry of a final judgment in excess of limits.

When is an SEC Investigation a “Claim” Versus a “Claim for a Wrongful Act”

By: Cassandra L. Jones

Inconsistent primary policy language has led to a divergent body of case law regarding regulatory investigations.  Over the past several years, this has produced regular court battles over when a claim materialized and what coverage or exclusions apply.  Insureds will likely become more vigilant in deciding when to tender these matters to D&O carriers, in the hopes of preserving coverage.  An insured may provide a carrier with an early “notice of circumstance” as soon as the SEC issues a formal order of investigation.  However, insureds will have to balance such notices of circumstance with “prior notice” exclusions.  This will likely lead to even more insureds seeking clarity on exactly when they can and should notice government investigations to obtain coverage under their D&O policies.

I.                   The Patriarch Case

A recent decision out of the Southern District of New York found that an SEC Investigation was a claim for purposes of a pending and prior claim endorsement.[1]  The facts as to the AXIS policy were unique when compared to the rest of the tower, and are likely unique when compared to other legacy towers.  Patriarch Partners was renewing its Private Equity Liability tower in July 2011, and purchased the AXIS policy in August 2011, which added a $5 million layer to its $20 million tower.

In December 2009, the SEC sent requests for information to Patriarch, which the SEC characterized as an “informal inquiry.”  In May 2011, the SEC made additional requests, which targeted specific funds, and characterized its requests as an “informal investigation.”  On July 1, 2011, the SEC sent a subpoena to a former Patriarch executive, Meric Topbas, which stated that “federal law requires you to comply with this subpoena.”  The subpoena followed the formal order of investigation into Patriarch, dated June 3, 2011.  On February 27, 2012, the SEC sent Patriarch a subpoena, which it tendered to the carriers on March 5, 2012.  All the carriers, including AXIS, accepted the Patriarch subpoena as a covered claim.  AXIS later sent a reservation of rights, and Patriarch eventually brought a declaratory judgment action after exhausting the underlying limits.

The AXIS Policy included a “Pending and Prior Claims Exclusion Added,” which stated the policy did not apply to “any amounts incurred by the Insureds on account of any claim or other matter based upon, arising out of or attributable to any demand, suit or other proceeding pending or order, decree, judgment or adjudication entered against any Insured on or before July 31, 2011, or any fact, circumstance or situation underling or alleged therein.”  AXIS disputed this effective date, because the AXIS policy was bound after the rest of the tower, but the court gave Patriarch the benefit of the doubt in this regard.  Even with this timing dispute, the court still determined the endorsement applied to exclude coverage under the AXIS policy.

Patriarch argued the Topbas subpoena was not a demand for non-monetary relief, and attempted to downplay the significance of the formal order of investigation and the Topbas subpoena.  However, the court determined that both the Topbas subpoena and formal order of investigation, whether taken separately or together, were a “demand” for “non-monetary relief” under the primary CNA policy and Second Circuit precedent.  Both preceded the July 31, 2011 date found in the pending and prior claim endorsement.  The court went on to say that “an SEC subpoena is not a mere request for information, but a substantial demand for compliance by a federal agency with the ability to enforce its demand.”[2]  It seems likely that this ruling will apply in limited circumstances where the insured is subject to a new government investigation, and where the endorsements to the policy are not backdated, which may affect application of similar exclusions.

II.                The MusclePharm Case

Just weeks after the Patriarch case was decided, the Tenth Circuit ruled on a similar matter involving the tender of an SEC investigation as a notice of circumstance under a D&O policy.[3]  In an unpublished decision, the Tenth Circuit affirmed a district court decision that found costs related to an SEC investigation order were not covered if they were incurred before a Wells Notice was issued.[4]

Similar to Patriarch, MusclePharm received a voluntary request to produce documents from the SEC in May 2013.  MusclePharm tendered the request to its D&O carrier, Liberty, in June 2013, and stated that if the request did not constitute a “claim,” then it wanted Liberty to consider the tender a “notice of circumstance.”  On July 8, 2013, the SEC issued an “Order Directing Private Investigation and Designating Officers to Take Testimony.”  Liberty denied coverage, but accepted the SEC’s May and July communications as a notice of circumstance.   On February 13, 2015, the SEC issued Wells Notices to two MusclePharm executives.    Liberty agreed to cover defense costs that post-dated the Wells Notices, but refused to reimburse MusclePharm for costs incurred between the issuance of the July 8 order and the Wells Notices.  The District Court of Colorado granted summary judgment to Liberty, finding that the Wells Notices were the first “claim for a wrongful act,” and any costs incurred before there was a “claim for a wrongful act” were not covered under the policy.

The Tenth Circuit affirmed this logic, finding that the July 8 order was not a claim for non-monetary “relief.” Further, the Tenth Circuit found there was no claim for “wrongdoing” in the July 8 order, in light of the language that the SEC “has not determined whether [the insureds]… violated the law.”[5]  The court also determined that the July 8 order was not a “proceeding” under the definition of claim.  The Liberty policy specifically stated that a proceeding must have been commenced by a Wells Notice or target letter.[6]  The case is again limited, because MusclePharm was seeking coverage of its defense costs from the date of the July 8 order to the issuance of the Wells Notices.  The court did permit MusclePharm to relate the claim back to the policy period under which is gave its notice of circumstance, as Liberty accepted the notice of circumstance as part of its original denial letter.

III.             Background and Related Cases

In its motion for summary judgment, Patriarch relied on several cases to justify the position that the Claim was not made until the February 2012 subpoena was issued to the company.[7]  The MusclePharm court also went to lengths to discuss and distinguish many of the same cases in its decision.  However, the issue of investigatory costs for individuals, and related entity investigation costs, has been a hot button issue for years.  The Office Depot case was particularly instructive concerning notices of circumstances, and the nuances between entity and individual coverage for government investigations.[8]

The Southern District of Florida noted that a July 2007 informal “notice of inquiry” from the SEC and a January 2008 formal “order directing private investigation” were both captioned “In the Matter of Office Depot, Inc.”  These documents both named the business of Office Depot as the topic of inquiry.  Neither identified any particular officers or directors as respondents or potential targets of a civil, criminal, administrative or regulatory proceeding.  The policy did not provide entity coverage for such an investigation, but Office Depot provided a notice of circumstance to AIG, which was accepted during the policy period.[9]

Like the formal order of investigation in Patriarch, the formal order sent to Office Depot contained general statements referencing conduct of the officers and directors who committed “possible violations” of the securities laws.[10] In finding that the formal order was not an investigation of an insured person, the court observed that “Office Depot is essentially seeking to recover the costs of investigating a ‘potential claim’ ….”[11]

This is the gray area that the insureds will seek to avoid.  Specifically, if they provide a valid notice of circumstance, will they be footing the bill for the defense of insured individuals before they are subpoenaed or specifically identified by a regulatory agency, even though those individuals are identified later?  There are several public company forms that provide limited coverage in these circumstances, but where they do not, expect insureds to seek answers from courts.

An RSUI case concerned the issuance of grand jury subpoenas and search warrants as part of an ongoing government investigation, similar to the Diamond Glass case Patriarch relied on.[12] In the Desai case (Universal Healthcare), the individual insured argued that a search warrant and accompanying grand jury proceedings constituted a Claim for a Wrongful Act under the policy. Unlike the Patriarch court, which only needed to find that the SEC subpoena constituted a “Claim,” the Desai court specifically found that the search warrant and grand jury subpoena were not a “Claim for a Wrongful Act.”[13]  On this point, the language of the policy is critical, as to whether coverage depends on whether a “claim” is made against the insured, or a “claim for a wrongful act” is made against the insured.

IV.             Concerns Going Forward

As noted, the Patriarch court did not hold that the Topbas subpoena stated a claim for a wrongful act.  The court confined its logic to the fact that the subpoena stated a demand for non-monetary relief, and constituted a claim.  To that end, it is unclear that the Topbas subpoena would have been covered under the policy.  Instead, the subpoena may have served solely to exclude coverage under the AXIS policy.  The distinction between a “claim” and “claim for a wrongful act” may make a difference as to when an insured provides notice of a regulatory investigation, and may impact the applicability of exclusions, like the exclusion in the Patriarch case.

As a general rule, SEC subpoenas request documents or testimony related to a certain time period for specific entities, which gives the insureds clues about what the SEC is investigating.  However, the subpoenas often make very clear that the SEC (or other government entity) has evidence that “tends to show” a wrongful act, but the subpoena itself does not state a “claim for a wrongful act.”  Several carriers have successfully argued that subpoenas do not meet the conditions of an Insuring Agreement, under this notion that they do not state a “Claim for a Wrongful Act.”[14]  In the case of government subpoenas, the Patriarch court made it clear that if federal law compels a response, the subpoena itself is a demand for non-monetary relief.  It is unlikely that these subpoenas will overtly state a wrongful act, and we should expect that insureds will litigate for a clear answer on when coverage is triggered for such investigations.

It begs the question: should an insured provide a notice of circumstance where the claim does not state a wrongful act, potentially triggering a prior notice exclusion when a claim for a wrongful act is actually made?  In light of this case, it seems likely that carriers can expect more notices of circumstance as soon as the SEC issues a formal order or an individual subpoena.  An insured would then hope that the NOC would pin the claim to an earlier policy in the event the SEC issues company subpoenas or Wells Notices.

This tactic could present problems for an insured, if they lack sufficient detail to provide a NOC that complies with the policy’s requirements.  Even in the case of Office Depot, the insured provided an adequate notice of circumstance, which was accepted by AIG, but the court did not permit broad coverage, despite the insured’s compliance with the policy’s NOC requirements.  Specifically, the court did not permit Office Depot to sweep in investigation costs before a formal order of investigation was issued.  This will likely remain the norm, but will prompt insureds to seek more clarity on these issues.

The Patriarch case may be a one-off, given that the exclusion AXIS raised only applied to its policy.  It is doubtful that the same exclusion would have applied to the underlying limits, given that it was the first policy AXIS issued to Patriarch and the underlying limits pre-dated any SEC inquiries.  Still, it seems that individual subpoenas and formal orders of investigation may be the new impetus for insureds to provide notice, even if coverage is not yet available under the policy.  Courts have shown that they will stick to literal interpretations of the policy, as it did in Patriarch.  In Patriarch, the exclusion likely would not have applied if it required a “claim for a wrongful act.”  On the other hand, the exclusion in Desai may not have applied if the language only excluded a “claim.”  With that, whether the policy language excludes “claims” or excludes “claims for wrongful acts” is beneficial to carriers will depend on the facts of each individual case.


[1] Patriarch Partners, LLC v. AXIS Ins. Co., No. 16-cv-2277, 2017 WL 4233078 (S.D.N.Y. Sept. 22, 2017).

[2] Minuteman Int’l, Inc. v. Great Am. Ins. Co., No. 03 C 6067, 2004 WL 603482, at *7 (N.D. Ill. Mar. 22, 2004); see also Weaver v. Axis Surplus Ins. Co., 639 F. App’x 764, 766-67 (2d Cir. 2016) (concluding that a letter was a “demand” because it “set forth the division’s request under a claim of right, including its entitlement to the documents identified therein, and put [the recipient] on notice of the legal consequences”).

[3] MusclePharm Corp. v. Liberty Ins. Underwriters, Inc., No. 16-1462 (10th Cir. Oct 17, 2017).

[4] Id. at 17.

[5] Id. at 13.

[6] The MusclePharm case specifically distinguishes Patriarch, stating the following in a footnote: Patriarch Partners is further distinguishable on this point. In Patriarch Partners, the relevant policy’s “claim” definition expressly included the “Investigation of an Insured alleging a Wrongful Act,” where “Investigation” was defined to encompass “an order of investigation or other investigation by the” SEC.  In contrast, here an investigation was not covered under the policy until such time as the SEC issued a Wells Notice or a target letter—“at the point when the insured has been charged with wrongdoing.” See Patriarch, 2017 WL 4233078, at *6 (interpreting the policy in ProMedica) (internal citations omitted).

[7] Diamond Glass Cos. v. Twin City Fire Insurance. Co., 2008 WL 4613170 (S.D.N.Y. Aug. 18, 2008).

[8] Office Depot, Inc. v. National Union Fire Ins. Co of Pittsburgh, PA., 734 F.Supp.2d 1304 (S.D. Fla. 2010).

[9] 734 F. Supp. 2d at 1310.

[10] Id. at 1320.

[11] Id. at 1323.

[12] RSUI Indem. Co. v. Desai, et al., No. 13-cv-2629 (M.D. Fla. 2014).

[13] Id. at 8.

[14] Minuteman Int’l, Inc. v. Great Am. Ins. Co., No. 03 C 6067, 2004 WL 603482, at *7 (N.D. Ill. Mar. 22, 2004); see also Weaver v. Axis Surplus Ins. Co., 639 F. App’x 764, 766-67 (2d Cir. 2016); Syracuse University v. National Union Fire Insurance Co., 975 N.Y.S.2d 370, 40 Misc. 3d 1205(A) (N.Y. Sup. Ct. 2013) (finding a duty to defend a grand jury subpoena, where the court found that non-compliance with subpoena was punishable by contempt).

Kerman’s Korner: It’s All Greek to Me


A recent trip to Europe reminded Jeremy of some words of wisdom he once received about good communication and always considering your audience.

If you want to catch up on prior episodes of Kerman’s Korner, please visit

Walker Wilcox Matousek LLP is pleased to announce Kerman’s Korner, an audio-blog that will feature a series of story-driven, tips, thoughts, and lessons that Jeremy Kerman and the team at WWM have learned over the years.  The firm hopes that this will be a unique, informative, and entertaining way for us to facilitate discussion and debate on some of the recurring and emerging issues that we all face as we work on our various claims and cases together.

Equifax Breach: Summary, Status and Significance

By: Celeste King

What Happened: On September 17, 2017, Equifax, one of the “big three” credit bureaus, announced that a data breach exposed confidential information for about 143 million individuals in the U.S., Canada and the U.K.   Equifax discovered the breach weeks earlier on July 29, 2017.  The data disclosed includes names, addresses, dates of birth, social security numbers, credit card and driver license numbers.  Equifax claims the intruders exploited a vulnerability in its software program called Apache Struts starting in May 2017.

Within days of the announcement, Equifax was named in dozens of class actions and in investigations by the FTC, CFPB, Department of Justice, state and municipal governments.  Equifax’s stock dropped 35% within a week of the announcement.  Equifax fired its CEO, CISO and CSO. Two congressional hearings will seek testimony by Equifax executives.

Is the Equifax Breach Different? Many consumers and businesses are numb to massive data breaches.  It seems that “the largest breach ever” occurs regularly.  So is the Equifax different from other massive breaches?  In several respects, yes.  What pushes Equifax to a new level is the combination of the breach size and the type of data involved.  Almost every adult in the country with a credit history is affected.  A name, DOB and social security number are considered the “trinity” of personal identifiers.  In particular, a stolen social security number may have life-long consequences.  It cannot be changed like a credit card and can be used to open a bank account, take out loans, obtain health care and file fraudulent tax returns.

Unlike retailers, Equifax does not have “customers” whose loyalty is at risk.  The consumer cannot control which credit bureau a bank or landlord uses to check credit history. Equifax’s business is collecting consumer data, and anyone with a credit history eventually becomes the Equifax product.  Some critics say this explains Equifax’s indifference to the breach – reporting delays, requiring consent to arbitration before confirming a consumer’s involvement, charging for credit freezes and repeatedly posting a bad link for consumers on its social media account.

Another significant aspect of the Equifax breach is the aggregation of losses across cyber and non-cyber policies.  The publicity has focused on the risks to consumers.  But what has received less attention is the number of business products that Equifax provides.  Equifax offers data products to 12 industries, ranging from automotive to staffing.  For example, many employers use the Equifax wage and employment verification system.   Equifax provides a bankruptcy alert that informs a business client if a commercial business has filed for bankruptcy.  Equifax uses consumer data to marketing targets for insurers, retailers, restaurants, credit unions and small banks.  Governments rely on Equifax’s data for security clearances.  All these businesses may incur costs to verify the integrity of Equifax’s data.  Companies that provided consumer data to Equifax may be accused of negligently entrusting sensitive data to a company with deficient risk management practices.

Click here for PDF.


By: Kristine M. Sorenson & David E. Walker

House Bill 1774 was signed into law by Governor Greg Abbott on May 26, 2017 and becomes effective on September 1, 2017.  The new law has three sections.  The first section pertains to pre-suit notice requirements and settlement negotiations.  The second section pertains to the amount of interest owed on weather-related property claims that are not promptly paid. The third section creates a new subchapter of the Texas Insurance Code, § 542A, which applies to weather-related property claims.


This law does not apply to flood insurance policies administered by FEMA under the National Flood Insurance Program.  The Fifth Circuit has held that federal law preempts state claims arising from the handling of flood insurance claims, including claims brought under the Texas Insurance Code.  Wright v. Allstate Ins. Co., 415 F.3d 384, 390 (5th Cir. 2005).

Highlights of the new law can be found in our client alert.

Click here for client alert.

Kerman’s Korner: With Guest Speaker Cassie Jones!

01315661As promised, Kerman’s Korner returns with a guest speaker: Cassie Jones from Walker Wilcox Matousek!

In this episode, Cassie shares a story about her first mediation when she was a young lawyer and the importance of trusting in your own judgment, even when the going gets tough.  Hear Cassie’s story here:

If you want to catch up on prior episodes of Kerman’s Korner, please visit

Walker Wilcox Matousek LLP is pleased to announce Kerman’s Korner, an audio-blog that will feature a series of story-driven, tips, thoughts, and lessons that Jeremy Kerman and the team at WWM have learned over the years.  The firm hopes that this will be a unique, informative, and entertaining way for us to facilitate discussion and debate on some of the recurring and emerging issues that we all face as we work on our various claims and cases together.

Florida Courts Clarify When Insurers Will Be Liable For Insured’s Attorneys’ Fees in Coverage Litigation

Johnson v. Omega Ins. Co.

200 So.3d 1207 (Fla. 2016)

W&J Group Enterprises, Inc. v. Houston Specialty Ins. Co.

— Fed.Appx. — (2017), 2017 WL 1279045, 11th Cir., April 6, 2017


On September 29, 2016, the Florida Supreme Court issued a decision clarifying Fla. Stat. Ann. § 627.428, which provides that an insured may recover attorney’s fees incurred as a result of recovering on a valid claim for insurance benefits.  The decision clarified what an insured must demonstrate in order to recover its attorney’s fees in a coverage dispute with an insurer.

The case of Johnson v. Omega Insurance Company, 200 So.3d 1207 (Fla. 2016), involved damage to an insured residence that the insured claimed was caused by a sinkhole.  The insurer retained an expert who opined that the damage was caused by excluded factors, including volumetric changes of clay-based soil, concrete shrinkage, and defective construction processes.  Based on this expert report, the insurer denied coverage.

The insured retained her own expert who opined that the property damage was caused by a sinkhole, a covered peril under the policy.  The insurer rejected this expert report, maintained its denial, and the insured filed suit.  After suit was filed, the insurer eventually retained a different engineering firm.  This firm concurred with the insured’s expert that the loss was caused by a sinkhole.  After receipt of this report, the insurer accepted coverage and agreed to issue payments for repair of the covered property damage.  The insurer also acknowledged its coverage obligation when it filed its answer to the insured’s complaint.

The insured then filed a motion for confession of judgment and sought recovery of her attorney’s fees and expert costs.  The trial court granted the motion and awarded the insured her attorney’s fees and costs, pursuant to Fla. Stat. Ann. § 627.428.

The insurer appealed and the Fifth District Court of Appeals reversed the trial court reasoning that an award of attorney’s fees pursuant to Fla. Stat. Ann. § 627.428 requires a showing of bad faith by the insurer.  The Court of Appeals based its decision on the statute’s language that an insured may recover its attorney’s fees if an insurer “wrongfully” denies the claim.

The Florida Supreme Court disagreed with the Court of Appeals and reinstated the trial court’s award of attorney’s fees.  In reaching this decision, the Johnson Court rejected the determination that an award of fees pursuant to Fla. Stat. Ann. § 627.428 is only permissible upon a showing of bad faith conduct.  Instead, the Johnson Court reiterated that if an insurer loses a dispute with its insured, then the insured is always entitled to recover its attorney’s fees, relying upon the prior decision in Ivey v. Allstate Ins. Co., 774 So.2d 679 (Fla. 2000).

On April 6, 2017, the 11th Circuit Court of Appeals further clarified when an insurer will be held responsible for the attorney’s fees of its insured in W&J Group Enterprises, Inc. v. Houston Specialty Ins. Co., — Fed.Appx. —, 2017 WL 1279045.  In W&J, an insurer had brought a declaratory judgment action to determine its coverage obligations in a liability claim against its insured.  While the declaratory judgment action was pending, the insurer settled the underlying tort action with the claimant for $653,000.  The insurer paid $650,000 of this settlement, with the insured funding the remaining $3,000.

The insurer then voluntarily dismissed its declaratory judgment action and the insured moved for recovery of its attorney’s fees pursuant to Fla. Stat. Ann. § 627.428.  The district court denied the motion based on the insured’s contribution to the settlement.

The 11th Circuit reversed the district court’s decision and awarded the insured its attorney’s fees pursuant to Fla. Stat. Ann. § 627.428.  In reaching this decision, the 11th Circuit relied on Wollard v. Lloyd’s & Cos. Of Lloyd’s, 439 So.2d 217 (Fla. 1983), which determined that this statute applies to provide an insured attorney’s fees when the insured and the insurer settle an action before judgment is entered.  The Florida Supreme Court reasoned in Wollard that when an insurer settles a disputed claim, it has declined to defend its position in the pending suit, thus warranting an imposition of attorney’s fees under the statute.

The 11th Circuit rejected the insurer’s arguments that attorney’s fees were not recoverable because the insured contributed to the settlement.  The insurer argued that Florida courts had previously determined that attorney’s fees under Fla. Stat. Ann. § 627.428 are triggered by the insurer’s unilateral decision to enter a settlement and dismiss a declaratory judgment action.  Mercury Ins. Co. of Fla. v. Cooper, 919 So.2d 491 (Fla. Dist. Ct. App. 2005).  The 11th Circuit interpreted the term “unilateral” in Cooper to refer to a circumstance where the insurer settles a third-party claim without also reaching an agreement with its insured about the payment of attorney’s fees.

The W&J Court determined that the award of attorney’s fees to the insured was consistent with Florida’s jurisprudence interpreting Fla. Stat. Ann. § 627.428.  It further held that the Insured’s contribution of less than 2% of the total settlement amount did not distinguish this case from other Florida decisions holding that the insured was entitled to recover its attorney’s fees.

The Johnson and W&J cases demonstrate that an insurer involved in a coverage dispute with its insured in Florida will likely have to pay its insured’s attorney’s fees if it does not prevail in the action or resolve its insured’s attorney’s fees in any settlement agreement.  An insurer wishing to settle with a liability claimant while it has an ongoing coverage action with its insured should consider engaging in global settlement negotiations to resolve any issue with its insured’s attorney’s fees.  Failure to do so may result in unanticipated exposure.

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Kerman’s Korner: How Much Data is Too Much Data?

01315661For the first ever Kerman’s Korner Quick Hit, Jeremy focuses in on the world of data breaches and cyber liability. Highlighting a story about a data transfer gone awry, Jeremy suggests a helpful tip for companies big and small that collect customer and employee data.

Click here to listen to the audio on the PLUS Blog.

If you enjoy this episode of Kerman’s Korner, please visit for prior episodes.

Walker Wilcox Matousek LLP is pleased to announce Kerman’s Korner, an audio-blog that will feature a series of story-driven, tips, thoughts, and lessons that Jeremy Kerman and the team at WWM have learned over the years.  The firm hopes that this will be a unique, informative, and entertaining way for us to facilitate discussion and debate on some of the recurring and emerging issues that we all face as we work on our various claims and cases together.