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Understanding the Impact of OFAC Advisory Notices on Insurance Policies

One of the most unusual notices that exists in many policies is the OFAC Advisory Notice. This notice, which can function to freeze or block an insurance contract, is rarely considered by claims professionals or insureds. So, what is OFAC?

OFAC stands for the Office of Foreign Assets Control, which is a financial intelligence and enforcement agency operating under the U.S. Treasury Department. The Division of Foreign Assets Control (DFAC), the precursor to OFAC, was created in the 1950s, when China entered the Korean War. DFAC blocked Chinese and North Korean assets that were subject to US jurisdiction. Thereafter, following a 1962 Treasury Department Order, DFAC officially became OFAC. Yet, despite OFACs presence as a governmental entity for over 70 years, little is known about it. Even less is known about OFAC’s relationship to the insurance industry.

In 2018, OFAC mandated an advisory notice restricting claims activities and payments when any person or entity benefiting from the subject insurance policy has violated US sanctions law or is a Specially Designated National and Blocked Person under OFAC. Included in the Specially Designated National and Blocked Persons list are various foreign agents, front organizations, terrorists, terrorist organizations, and narcotics traffickers.

In essence, the advisory mandates that insurers are restricted from issuing payments on claims where a designated entity is involved. Per the terms of the advisory this could include entities that are subject to foreign trade embargoes or sanctions.

Based upon our research, the OFAC advisory has been construed only a few times in the insurance industry. However, there has been increased discussions regarding this notice due to heightened worldwide tensions and international sanctions placed on certain countries, such as Russia, as a result of military activity. Further, the advisory notice would apply to any business or entity that is in violation of human rights, is subject to trade embargoes or sanctions, or is engaged in narcotics trafficking.

Although the advisory notice provides that the insured’s policy can be frozen or blocked if they are found to be in violation of OFAC regulations, neither OFAC nor case law provides clear direction as to what those exact ramifications are. This issue, however, should be considered in regard to any claim where such a designated entity may be involved, either as an insured or as the beneficiary of insurance payment.

Insurers who issue cyber coverage likely face the largest impact from the OFAC advisory notice. In fact, in 2020 the OFAC issued an Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments and issued an updated Advisory regarding same on September 21, 2021. That advisory, a copy of which is also linked to this newsletter, provides that facilitating ransomware payments demanded as a result of malicious cyber attacks may violate the OFAC advisory with respect to payments to those who have violated U.S. sanctions law or are Specially Dedicated national and Blocked Persons. The 2021 Advisory further provides as follows:

OFAC may impose civil penalties for sanctions violations based on strict liability, meaning that a person subject to U.S. jurisdiction may be held civilly liable even if such person did not know or have reason to know that it was engaging in a transaction that was prohibited under sanctions laws and regulations administered by OFAC.

In other words, an insurer who issues cyber coverage runs the very real risk of running afoul of OFAC regulations by issuing payment for any cyber ransom attack without first getting permission from the OFAC. As a result of these risks, insurers offering this type of coverage would benefit significantly by putting into place policies and protocols to ensure compliance with OFAC regulations and to ensure that proper reporting and communication with OFAC take place prior to issuing payment for any cyber ransom attack.

The attorneys at Lether Law Group have been providing insurers with coverage advice and recommendations for more than 30 years. Our experience includes addressing cyber claims and coverage issues under cyber policies.  If you’d like to discuss this particular coverage issue or other insurance related issues arising in the ever-changing world of insurance, please feel free to contact our office.

Washington State Supreme Court Clarifies Law on “Reasonable Investigation” and Determination of “Reasonable” Charges for Personal Injury Protection Claims

On February 15, 2024, the Washington State Supreme Court issued its decision in Schiff v. Liberty Mutual Fire Insurance Company, et al., Case No. 101576-3, which examined “… what an insurer must do to meet the ‘reasonable investigation’ requirement and the requirement to pay ‘all reasonable and necessary’ medical expenses” under Washington’s Personal Injury Protection (“PIP”) statutes and Washington law.

The decision arose out of a suit filed by Dr. Stann Schiff alleging that the insurers’ practice of reducing provider bills based on computer-generated calculations violated Washington law.  It was undisputed that Liberty Mutual Fire Insurance Company and Liberty Mutual Insurance Company (collectively “Liberty”), used a third-party database called FAIR Health to determine reasonableness of a medical provides charges when Liberty received medical bills from an insured under either a PIP or a MedPay (supplemental medical payment coverage) claim. [1]

The trial court denied both parties’ attempts at summary judgment and the Court of Appeals accepted discretionary review. The Court of Appeal, relying on its prior holding in Folweiler Chiropractic, P.S. v. American Family Insurance Co, 5 Wn. App. 2d 829, 429 P.3d 813 (2018) reversed the trial court’s denial of Dr. Schiff’s motion. The Court of Appeals reasoned, based on the Folweiler decision, that: 1) it was an unfair practice under the Washington Consumer Protection Act (“CPA”) to not conduct an individualized assessment of a medical bill; and that 2) RCW 48.22.095(1)(a) and RCW 4.22.005(7) required an individualized assessment.

The database provided information for an insurer to compare charges for specific medical treatments in a geographical area and to determine the percentiles of those charges.  Liberty apparently had an established practice of paying 100% of a medical provider’s bill if it was below the 80th percentile for the procedure/treatment in the geographical area. However, if the bill exceeded the 80th percentile, Liberty would reduce the charges to the 80th percentile charge and pay that amount. It was undisputed that Liberty did not conduct individualized investigations with respect to the bills at issue, but instead relied upon 80th percentile information from the database.

The trial court denied both parties’ attempts at summary judgment and the Court of Appeals accepted discretionary review. The Court of Appeal, relying on its prior holding in Folweiler Chiropractic, P.S. v. American Family Insurance Co, 5 Wn. App. 2d 829, 429 P.3d 813 (2018) reversed the trial court’s denial of Dr. Schiff’s motion. The Court of Appeals reasoned, based on the Folweiler decision, that: 1) it was an unfair practice under the Washington Consumer Protection Act (“CPA”) to not conduct an individualized assessment of a medical bill; and that 2) RCW 48.22.095(1)(a) and RCW 4.22.005(7) required an individualized assessment.

The Supreme Court rejected the Court of Appeals’ analysis and overturned the Court of Appeals. In doing so, the Supreme Court effectively also overturned the Folweiler decision’s individualized assessment requirement. In discussing the Folweiler decision, the Supreme Court stated and held as follows:

Though the Court of Appeals cited to the relevant statutes and regulations, it failed to explain how they mandate an inquiry into the qualifications of the medical provider and did not cite any case to bolster its interpretation. The PIP statutes and the insurance code do not have any express requirement that the insurers look specifically at the qualifications of a medical provider to determine the reasonableness of the charge.

Schiff Opinion at 12 (emphasis added).

Instead, the Supreme Court held that the insurance code: 1) places the responsibility on an insurer to determine whether to deny, limit, or terminate medical benefits if the insurer determines the claim is not reasonable or necessary; 2) that the code tasks insurers to conduct their own reasonable investigation; 2) that the code requires insurers to create their own reasonable standards for promptly investigating a claim.

After reviewing the Washington Administrative Code (“WAC”) and the properties of the FAIR Health database, the Supreme Court held that “Comparing charges for the same treatment in the same geographic area is relevant to the determination of reasonableness.” Schiff Opinion at 14.

As a result of this conclusion, and in light of out-of-state authority addressing the same issues, the Supreme Court ultimately held in favor of Liberty as follows:

We hold that the 80th percentile practice and the use of the FAIR Health database is not unfair or unreasonable and does not violate the CPA or the PIP requirements to establish standards under which reasonable charges for medical procedures are determined.

Schiff Opinion at 16.

The Schiff decision effectively overturns the Folweiler decision and provides insurers with further clarity on their investigatory obligations and reasonableness determinations in PIP matters.  Insurers remain responsible for determining whether to deny, limit or terminate medical benefits where the insurer determines treatment was not reasonable or necessary. Insurers are also still required to conduct a reasonable investigation and develop reasonable standards to promptly investigate claims.

As the Schiff decision makes clear, insurers can safely continue to rely on databases such as the FAIR Health database to determine whether a provider’s charges are reasonable and are not required to individually investigate and vet each provider when making that determination as part of that process.

The attorneys at Lether Law Group have in excess of thirty-one years’ experience in defending and advising insurers on the handling of PIP claims. This experience includes handling claims and litigating insurance disputes in the state of Washington. Please do not hesitate to contact our office if you have any questions regarding the Schiff decision or any other insurance matter.

[1] The FAIR Health database was identified as an “independent, nonprofit, medical claim database.”

Oregon Supreme Court Unilaterally Creates “Negligence” Cause of Action Against Insurers

On December 29, 2023, the Oregon Supreme Court effectively created new bad faith liability exposure for insurers doing business in Oregon when it issued its opinion in Moody v. Or. Cmty. Credit Union, 371 Ore. 772, 2023 Ore. LEXIS 692 (2023). In Moody, an insured sued a life insurance company for breach of contract and negligence based on a denial of a claim for life insurance proceeds.

The Plaintiff’s husband was the named insured under a life insurance policy and was accidently shot and killed. At the time of his death, the decedent had marijuana in his system. The Plaintiff filed a claim, and the defendant insurer initially denied the claim because the decedent’s death purportedly fell within an exclusion for deaths caused by or resulting from being under the influence of a narcotic or other drug.

The Plaintiff brought suit alleging that the death was not caused by or resulting from the use of any drug. She alleged claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and negligence. Plaintiff sought both economic and non-economic damages including emotional distress damages. The extra-contractual claims were dismissed by the trial court and proceeded to an appeal. The Court of Appeals reversed the trial court’s dismissal of the negligence claim and the Supreme Court accepted direct review.

On review, the Supreme Court framed the primary question as whether the Plaintiff could pursue a negligence per se claim. The Court clarified that, in Oregon, a negligence per se claim is shorthand for a negligence claim that otherwise exists where the standard of care is set forth in a statute or rule and violation of the statute or rules raises a presumption of negligence.

Under that framework, the Court first examined whether the Plaintiff had a legally protected interest sufficient to subject the Defendant to liability for emotional distress damages. In determining that she did, the Court examined ORS 746.230 (Oregon’s Unfair Claim Settlement Practices statute). While acknowledging that the statute did not create an independent cause of action, the Supreme Court nevertheless found as follows:

We find that the statue provides explicit notice to insurers of the conduct that is required and, in requiring insurers to conduct reasonable investigations and to settle claims when liability becomes reasonably clear, does so in terms that are consistent with the standard of care applicable in common claw negligence cases.

Moody, 2023 Ore. LEXIS 692 at *41.

The Court went on to hold that permitting a common law negligence claim could further the statute’s purpose by deterring insurers from engaging in prohibited conduct. The Court went on to find that allowing emotional distress damages would not place an undue burden on the Defendant because insurers are in a relationship of mutual expectations with insureds and that the insurer could reasonably foresee that failing to exercise reasonable care in the handling of the relationship could result in emotional harm. Finally, the Court held that the claimed harm was of sufficient importance under public policy to justify allowing the claim to proceed. The Court’s ultimate conclusion was stated as follows:

Considering all of those factors, and not relying on any one of them alone, we conclude that the insurance claim practices that ORS 476.230 requires and the emotional harm that may foreseeably occur if that statute is violated are sufficiently weighty to merit imposition of common-law negligence and recovery of emotional distress damages.

Moody, 2023 Ore. LEXIS 692 at *51.

While the Court cautioned that its conclusion would not make every contracting party liable for negligence that causes emotional harm, the holding is extremely concerning and problematic for insurers. In fact, the holding may effectively overturn long-standing Oregon case law holding that insurers are not liable in tort for the handling of an insurance claim. See, e.g., Farris v. U.S. Fid. and Guar. Co., 284 Ore. 453, 587 P.2d 1015 (1978) (Farris II). This issue was recognized in the Moody dissent as follows:

The majority’s analysis creates uncertainty about the remaining precedential effect of Farris II. If the majority means to distinguish Farris II on its facts, then courts may still rely on Farris II as rejecting tort liability for third-party insurers that have denied coverage in bad faith, which were the facts presented in that case. On the Other hand, if the majority is distinguishing Farris II based on the pleadings or based on the legal theory that the plaintiffs asserted in that case, then Farris II might have no precedential effect in any case styled as a negligence claim.

Moody, 2023 Ore. LEXIS 692 at *78 n.7.

The full nature and impact of the Moody decision will likely remain unknown until the Oregon Supreme Court has had the opportunity to further clarify or refine its holding in subsequent cases. As it stands, insurers in Oregon now potentially face liability for general damages (and potentially other alleged consequential damages) in tort as long as those claims are styled as negligence claims. Effectively, the Oregon Supreme Court has created bad faith liability for insurers based on a negligence standard of proof. This reflects a substantial increase in exposure for insurers doing business in Oregon especially when one considers that the majority of jurisdictions require a higher burden of proof for bad faith claims (i.e. unreasonable, frivolous, or unfounded denial of benefits).

The attorneys at Lether Law Group have in excess of thirty-one years’ experience in advising insurers on the handling of extra-contractual claims. This experience includes handling claims and litigating insurance disputes in the state of Oregon. We have several attorneys licensed in Oregon and actively litigating coverage and extra-contractual claims in that jurisdiction. Please do not hesitate to contact our office if you have any questions regarding the Moody decision or any other insurance matter.

 

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Season of Giving

Lether Law Group’s Heartfelt Charitable Endeavors

This Holiday Season, Lether Law Group is proud to highlight our participation in several impactful charitable initiatives, underscoring our commitment to giving back to the community and making a positive difference.

Queen Anne Helpline: Lending a Helping Hand

Community Support: In a concerted effort to aid those in need, our team at Lether Law Group gathered essential items for the Queen Anne Helpline. We donated blankets, sleeping bags, and toiletries, providing much-needed relief and comfort to those facing tough times during the Holiday Season.

The Maui Strong Fund: A Continuous Effort for Recovery

Ongoing Support: The devastating wildfires in Maui have deeply affected Tom Lether, a native of Maui and resident of Lahaina. Motivated by his connection to the island, Lether Law Group launched a fundraising campaign for the Maui Strong Fund. This fund is vital for the immediate and long-term recovery efforts in Maui. With Tom’s commitment to match each donation, we have raised $6,840.00 so far. This campaign is ongoing, and we continue to support the Maui community in their time of need.

Follow this link to donate to the Maui Strong Fund

Toys for Tots: Bringing Joy to Children

Heartfelt Collaboration: Lether Law Group participated in the Kiro 7 Cares Toy Drive, aiding Toys for Tots. This initiative ensures that children whose families cannot afford Christmas gifts receive the joy of the season. The combined efforts of our firm, along with the gentlemen over at Holiday Men Night Group and the Seattle Seafair Pirates led to an impressive collection of 3,000 toys.

Founder of Lether Law Group, Tom Lether, is a member of the Seattle Seafair Pirates.

Lether Law Group remains dedicated to making a significant impact through these charitable activities, embodying the spirit of giving that defines the holiday season.

Wishing all a season filled with warmth, compassion, and generosity.

Happy Holidays!

Wintertime Property Claims

It is the Season. Not just for the Holidays but also for winter storm property damage claims.

The volume of commercial and homeowner property claims typically increase during the winter months. This is due in large part to winter weather conditions. The typical types of winter claims include:

Frozen Pipe Claims: Exposed pipes will freeze. These types of claims trigger language in almost all property policies, including coverage and exclusions involving claims arising from the sudden accidental failure of plumbing systems due to freeze conditions. Typically, the policy language requires the building owner to take precautions to drain water lines or prevent against such freezing in order to have coverage.

Storm Drain Backup Claims: Heavy rains or snow melt can lead to storm drain back ups and flooding. These claims are typically covered but may be subject to a specific and lower policy limit.

Wind Driven Rain Claims: Particularly for those who live in the Northwest, we are used to heavy periods of rainfall often accompanied by strong wind conditions. A typical wind-driven rain claim may involve sudden and accidental leakage into a building as well as long-term water and decay damage. In Washington, wind-driven rain claims may be covered in the absence of weather exclusionary language.

Wind Claims: Winter storms usually bring high wind conditions. This can result in the failure of power utilities, downed trees, roof damage, etc. Depending on the policy language, these types of claims are typically covered.

Landslides: Heavy rainfall and wind conditions can contribute to saturated soils. This often results in landslides, particularly in the Northwest. Landslide events are typically excluded from coverage unless landslide coverage is expressly provided for.

Flood Claims: Heavy rainfall and snowmelt can lead to both river and tidal flooding. In addition to river overflow, strong King tides can result in oceanic saltwater flooding from tidal bodies of water. In the absence of express flood coverage, most surface water and floodwater claims are excluded from coverage. If a building owner has flood insurance, that insurance is typically paid by an insurer through the Federal Emergency Management Agency (FEMA) under the National Flood Act. There are severe restrictions on what is allowed to be recovered under the National Flood Insurance Act. For example, in a FEMA flood claim, there is no right to policy appraisal, no right to trial by jury, and no recovery of extra contractual or bad faith claims.

 

Once again, every policy is different. However, those building owners who are confronted with severe winter weather should review their policies and understand what is and what is not covered.

Lether Law Group has handled winter storm-related claims throughout the Northwest. This includes major catastrophes such as the Oso landslide, the Skagit River valley flooding, the Kingston and Perkins Lane landslide losses, and thousands of water intrusion and wind-driven rain type claims. Tom Lether has been directly involved as counsel retained through FEMA to litigate claims involving flood losses under the National Flood Insurance Act.

If you have questions in regard to winter storm damage claims, please feel free to info@letherlaw.com or (206) 467-5444.

 

Happy Thanksgiving from Lether Law Group

We are thankful for all of our clients, friends, and family! We hope everyone has a safe and wonderful holiday weekend.

In honor of the Thanksgiving spirit, a time of unity and gratitude, it’s crucial to support those in need. Since November 1st, Lether Law Group has been actively involved in a charity drive, focusing on essential items like blankets, sleeping bags, and toiletries. These vital supplies, collected from the generous contributions of our community and our employees, are set to benefit the Queen Anne Helpline. This organization is dedicated to assisting individuals facing hardships. We are committed to making a significant impact by providing these necessary items to those who need them most. To join us in this cause and make a difference, please visit the Queen Anne Helpline’s website at www.queenannehelpline.org for more information on how you can contribute.

In observance of the Thanksgiving holiday, our office will close at 12:00 PM on Wednesday, November 22nd, and will reopen for normal business hours on Monday, November 27th.