Navigating Financial Lines Risk: Coverage Disputes, DOJ Antitrust Activity and AI Confidentiality Implications

Intro (00:00):
You are listening to the Alliant Specialty Podcast, dedicated to insurance and risk management solutions and trends shaping the market today.

Mike Radak (00:09):
Hi folks. Thanks for tuning in for today's episode of Alliant Specialty's Claims and Legal podcast, where we discuss some of the latest legal developments in the financial lines insurance world. I'm Mike Radak. I lead Alliant's Specialty Claims and Legal team, and my team spends quite a bit of time dissecting relevant decisions and developments for the financial lines insurance space. I'm going to talk to you about some of those developments that we recently wrote on. David Finz is here with me, as always. He's going to tell us about the latest developments affecting the cyber insurance world. First I'm going to talk a little bit about a recent case out of the ninth circuit that I consider a win for policy holders, which we always like to see from where I sit, and also wanted to touch briefly on some shifting Department of Justice priorities that we're seeing. As always, if you'd like to read more about these articles, please check out our monthly Executive Liability Insights newsletter.

The first case that I'm going to talk about involved an insured casino business that was sued by a former consultant for breach of contract, fraud and quantum meruit. The insurance carrier, D&O insurance carrier, I should say, denied coverage for the entire lawsuit based on an exclusion in the policy with regard to breach of contract. The carrier held that the exclusion applied, and the insured need not cover claims alleging, arising out of, based upon or attributable to any actual or alleged contractual liability. Ultimately, the underlying matters settled for several million dollars after some protracted litigation, which we commonly see in these scenarios. The insured then sued its insurer arguing that the denial was improper, and they were seeking coverage for defense and indemnity payments. The district court ruled in favor of the insurer, opining that the underlying lawsuit clearly arose out of contractual liabilities such that that breach of contract exclusion was applicable. On appeal, the appellate court rejected that decision finding that the underlying matter contained both covered and uncovered claims and that the insurer could not issue a blanket denial for potentially covered and excluded allegations. Worth noting that the court stated that the insurer provided no legal support for its position and actually provided case law that undermined its position and favored the insured. The court reason that the quantum meruit and fraud claims were wholly separate from the breach of contract claims and that under the applicable law, which in this case was in Las Vegas, a quantum meruit claim was not actionable if there was an express contract involved, which there was here. The appellate court remanded this back to the district court for further consideration and instructed them to analyze each cause of action against the policy when they were reviewing for coverage.

A couple takeaways from this ruling, which again I consider this a favorable result for policy holders. Our team of lawyers on Alliant's Claims and Legal team, we carefully review each coverage letter we get from the carriers and too often we see, like in the case I just discussed, that the carriers do not get their positions right. We routinely push back and advocate for carriers to reverse or reconsider positions if they aren't consistent with the policy and the applicable law. It's absolutely critical that brokers don't just accept these coverage positions at face value and look for angles to push back and find coverage if the carrier's not already doing so. It's critical to understand that the allegations in these complaints have to be analyzed individually and that it's improper for carriers to reject a claim outright in its entirety if there are other potentially covered allegations. We fight these battles daily on behalf of our clients, and a ruling like this gives us further ammo to prevail on similar coverage disputes. Again, nice to see the courts getting it right in this instance.

Next topic, just shifting gears a little bit, wanted to talk about an article we recently wrote involving the Department of Justice and some statements of interest that they filed in some pending litigation. A statement of interest, it's a formal legal filing by the U.S. Department of Justice in a pending federal case to which the U.S. is not a party, but it allows the government to inform the court of its position on specific legal principles or to protect federal interests that might be at issue in the underlying lawsuit. We've seen the Department of Justice in the last two and a half months file two statements of interest regarding antitrust matters in the trade association space. One involved a National Association of Realtors where the DOJ filed a statement arguing that association rules facilitating high broker commissions are anti-competitive and violate the Sherman Act. The other more recent statement of interest that they filed was in a lawsuit involving the American Veterinary Medical Association. DOJ argued that private accreditation standards, even if recognized by the government, must comply with antitrust law and are not exempt based on lobbying or state action doctrines. There's a couple takeaways for trade associations from what we've seen in these statements. Association rules, even if they're labeled as standards or ethics, they're not automatically protected from antitrust liability. We've seen accreditation bodies and associations setting technical standards, must ensure that they do not exclude competitors or fixed prices. Associations, I guess as a takeaway, should review their rules, provide antitrust training and ensure that any rules restricting competition are clearly designed for consumer benefits.

Based on these recent statements of interests, we can expect that the DOJ is going to transition from purely advisory filings to potentially aggressive enforcement and litigation against trade associations if they think there's any violation of antitrust law. This is something that we're going to continuously monitor and I find interesting because we're always trying to determine which direction this current administration's going to go with respect to enforcement obligations. This looks like one area where we're going to see some significant activity. With that said, I will turn it over to David to talk to us a little bit about some developments in the the cyberspace.

David Finz (06:37):
Thanks, Mike. Now this next topic, we want to get out in front of this and provide our listeners with an important update regarding a very interesting decision that came out of the U.S. District Court for the Southern District of New York, a very influential federal court. As reported by JD Supra, as well as a number of other media outlets covering the law, your AI conversations may not be considered legally privileged. This is a case involving a securities and wire fraud scheme. The defendant in this matter used a computer AI chat tool to prepare some reports, some documents, to outline his defense strategy, and then ultimately shared these along with some draft legal documents with his counsel, with his attorney. The government in their prosecution of the case sought production of those documents that were generated using this AI tool.

The judge found that the documents were not privileged, and his reasoning was based upon the fact that there was no reasonable expectation of privacy on the part of the defendant when he chose to utilize a consumer AI tool. Those tools make very clear that the information you share could be used to train the model, and as such, they are essentially out there in the public sphere, so there's no expectation of privacy. Taking those documents and that information that was already preexisting and sharing it with counsel after the fact, the court found does not retroactively create some attorney work product defense around the production of those documents. Now, this is obviously a concerning decision for jailhouse lawyers, in-house counsel and anybody else who might use generative AI to do some legal research or gather some information or draft legal documents. Here are the limitations of the court's decision and why I believe it's not time to panic just yet.

First off, the decision doesn't reach the issue of what happens when a party uses an enterprise AI tool rather than a consumer oriented tool. The difference being that an enterprise tool is essentially like using an intranet. It doesn't put information out there in the public sphere, and it's clear in the contracts of enterprise tools that the information may not be used to train the model and that it will be kept confidential. Some agreements even expressly prohibit disclosure, so bad facts make bad law. This was a situation where unfortunately the defendant used an open tool and that created some bad facts in this case. Different facts might have necessitated a different outcome. I'll even go as far as to say that the judge's decision even suggests that a different result would've been produced had the tool not been a consumer oriented tool with no expectation of privacy attached to it. Another issue that's not addressed by this decision is what happens if the attorney essentially deputizes their client and says, go do some research. As part of the legal representation in the case, there is a doctrine under another well-known defense case called Covell that holds that communications that are needed for the provision of legal advice do retain privilege. That may very well apply if the attorney is directing that this query or this prompt on the part of their client be undertaken, which was not the case here. Lastly, if an attorney themselves were to use an AI tool as part of their own research, it's not clear whether the court would have found that privilege didn't attach to it. That also might have produced a different result.

Now all that being said, this decision is still a cautionary tale. By the way, if you're interested in looking it up. The case is United States of America v. Heppner. Again, it's out of the Southern District of New York, and the decision was issued on February 10. So, what should organizations be doing in response to this ruling? Well, you need to review your current AI practices through the lens of confidentiality. To be able to take a look and say, would this be something that we could exclude from evidence in court? Based upon what we know from the judge's decision, which admittedly is one federal district court out of over 90, so it doesn't necessarily have precedent setting authority across the country. I do believe the judge's reasoning here is persuasive enough that it will certainly be cited by other prosecutors. Now, you also have to make a distinction between consumer oriented and enterprise tools. If your business is using enterprise AI, then you should look at the contract language to see how the issue of confidentiality is being treated. Again, the expectation should be that under an enterprise AI tool, any queries or information that you upload cannot be used to train the model, will not be shared with other parties and that disclosure ought to be prohibited. There's more of an expectation of privacy and the privilege argument might hold up if you are using an enterprise AI tool. Also, try not to play lawyer. If you have a legal question, consult with counsel. Don't go it alone and create your own legal research results, your own legal documents, because if you do that and then you retroactively share that information with counsel, based on the court's ruling here, it doesn't all of the sudden get the aura of privilege around what you have already created. These are important considerations as organizations roll out AI for their staff.

We need to keep in mind that wrongful acts and allegations of negligence are still going to be attributable to the organizations that utilize these tools because those organizations are populated by real life human beings. Blaming the AI tool for giving you bad information or for producing something that is not privileged, is not going to be much of a defense for you vis-a-vis a plaintiff or for that matter, a prosecutor. You may have recourse against the AI company, but that's not going to be much comfort to you when you're dealing with the case at hand. It's important to use these tools responsibly and to understand the privacy considerations around your searches depending on which type of AI you are using, whether it is a consumer oriented chat tool or whether it is an enterprise AI platform, which offers what we would hope to be a higher expectation of privacy. With that, I'm going to turn it back over to you, Mike, to wrap it up.

Mike Radak (13:33):
Thanks, David. Fascinating stuff. The implications of AI and the legal space is mind-boggling. I am fully certain that we've probably not heard the last of this issue, and we will likely be talking about the legal implications of AI for the foreseeable future on these podcasts because I think we're just on the cusp of how the courts are going to treat a lot of these things. With that being said, thanks, David. Thanks for our listeners for tuning in today. If you'd like more information on anything we talked about today or anything that you see in our newsletter, please don't hesitate to reach out. If you have any questions, you can certainly reach out to David and I individually, but feel free to let us know if you would like a subscription to our newsletter as well. If you'd like more info about Alliant and a more rewarding way to manage risk, please visit our website at www.Alliant.com. Thanks.