I’m sitting in a dusty room in my house. Kids are screaming. A dog is barking. And I am wondering how I got here. It’s January 1, 2020 and tomorrow everyone goes back to work. I should be enjoying myself, playing my family’s new Nintendo Switch. Instead, I am on the internet trying to solve a mystery that is plaguing me:
Can an exclusion really be “absolute”?
We’ve already published our Silent Cyber Strength of Wording Guide, which aids in the review of insurance policies for inadvertent cyber coverage. If you are reading this, you should probably review the Guide first. Step one in the Guide is looking for an “absolute” cyber exclusion.
The RiskGenius policy analysis team was instrumental in creating the Strength of Wording Guide. As I grilled them in December 2019, I kept coming back to the idea of an absolute cyber exclusion. And a thought started itching in my brain:
Declaring something to be “absolute” is subjective.
Wrongly declaring something to be “absolute” can be dangerous for the insurance industry.
So I set out to see if my ideas were correct.
As I researched the topic of the absolute cyber exclusion, I landed on an interesting webinar recorded by the fine attorneys at Bradley Arant. In the webinar, attorney Katherine Henry makes the case that the absolute cyber exclusion is the “next” absolute pollution exclusion because both exclusions bar insureds from recovering during potentially catastrophic losses. What I found most interesting was the history of the absolute pollution exclusion that Henry briefly reviewed.
The short summary:
- The absolute cyber exclusion was published in 1973
- It was published in response to Federal and State laws that created pollution liability (CERCLA being one example)
- Courts interpreting the exclusion found it was not “absolute” in many scenarios
I’m going to get all nerdy on you now and look at insurance policy language. One paragraph — that’s it! You can handle it; I will make this painless, I promise!
Here’s the “absolute” cyber exclusion as it was originally written:
The emphasized language is important. According to Henry, courts in 16 states held that insurance policies that included this exclusion still covered “gradual pollution occurring over many years or decades as long as [the] insured did not expect or intend to pollute [the] environment.”
If you think about how pollution occurs, you should immediately understand the importance of this distinction. Here are two pollution loss scenarios and how insurance might cover them:
Scenario A: An oil rig blows up and pollutes the water. The exclusion would apply as the pollution was not gradual (although it was unexpected). The insurance company would not be responsible for the oil company’s pollution liability.
Scenario B: An oil rig leaks oil into the ground for years, undetected. The exclusion would not apply as the pollution was gradual (and unexpected). The insurance company would be responsible for the oil company’s pollution liability.
Not surprisingly, the pollution exclusion language was changed based on these court decisions. But even today, there are many exceptions to the pollution exclusion where courts will recognize and allow recovery. At the end of my research I came across another appropriately-titled webinar from Boggs: Is the Absolute Pollution Exclusion Really Absolute? Hint: No!)
It’s fair to say the absolute pollution exclusion is not absolute.
In our next post, we will look at the history of the absolute cyber exclusion with an eye towards evaluating if the many examples are, in fact, absolute.