USA Law and Practice Contributed by: Christina Culver, Rhonda Thompson and L. Michael Brooks, Thompson, Coe, Cousins & Irons, LLP
4.5 Sanctions and Illegality Issues Sanctions compliance, illegality doctrines, and public- policy considerations operate across three overlap- ping dimensions in US insurance litigation. First, fed- eral sanctions administered by the Office of Foreign Assets Control (OFAC) can legally prohibit insurers from paying claims regardless of policy terms, chang- ing what would otherwise be a contractual obligation into a potential federal violation, with potential crimi- nal implications. Second, the common-law illegal- ity defence and public-policy doctrine permit courts (and insurers) to deny coverage when the underlying conduct is criminal or intentionally harmful, though courts vary in how broadly they apply this principle. Third, the courts continue to struggle with the ques- tion of whether coverage for specific categories of losses such as fines, penalties and punitive damages are against public policy. Recent decisions from 2026 indicate a potential growing judicial resistance to the expansive use of public policy to override unambigu- ous policy terms. Public-policy grounds may invalidate or limit enforce- ment of certain policy provisions, especially where clauses conflict with statutory mandates or fundamen- tal principles, such as exclusions for illegal conduct or policies void by statute. The courts are cautious in applying public policy limitations due to their evolv- ing nature and jurisdictional variation, particularly in determining whether a contract term is void as against public policy. 4.6 Late Payment and Claims Handling Practices US insurance litigation concerning claims handling (including delays in investigation, valuation and pay- ment) has continued to grow in both federal and state courts. Recent decisions from 2022 through to 2025 reinforce that unreasonable delay or denial of cov- ered claims exposes insurers to extra-contractual liability under both common law bad-faith principles and state statutory frameworks. Regulatory agencies have also heightened enforcement attention, issu- ing guidance warnings that delays attributable to systemic insurer practices, not just individual errors, may constitute unfair claims settlement practices. The practical impact on coverage disputes is that insur- ers face dual exposure from breach-of-contract and
also had to address whether ransomware encryption causing no physical hardware damage constitutes “direct physical loss or damage” to electronic equip- ment. AI-related insurance coverage disputes are increas- ing but have not developed a cohesive body of case law yet. Insureds frequently rely on existing policy frameworks such as general-liability policy advertis- ing-injury provisions for AI-generated IP infringement claims; professional-liability or errors-and-omissions policies for AI-generated professional advice failures; cyber-policies for AI-related data breaches; and D&O policies for alleged misrepresentations about AI capa- bilities in securities filings. Insurers are developing AI exclusions in E&O and cyber-policies. It is foreseeable that generative AI copyright claims will be the subject of intense litigation under traditional general-liability coverage for advertising injury, and exclusions for many types of IP-rights violations. 4.4 Aggregation and Limits of Liability The US courts have developed standards for deter- mining the number of “occurrences”, applying per- occurrence versus aggregate limits, and allocating coverage across policy periods in a variety of cases, including mass tort, environmental, opioid, PFAS, wildfire, cyber, and product-liability litigation. The majority approach is the cause test, under which the number of occurrences is determined by the num- ber of underlying causes rather than the number of injured claimants. New York applies an “unfortunate event” test. The courts are split on whether to apply a cause-based approach or a manifestation or injury-in- fact approach. Allocation methodologies include pro rata (time-on-the-risk) allocation, spreading losses among insurers based on years of coverage, or all sums (joint and several) allocation, which assign full loss amounts to each triggered insurer. Continuous trigger and all-sums versus pro-rata allocation dis- putes are a recurring feature of long-tail systemic loss coverage disputes. The courts tend to emphasise the policy language, type of injury, insured’s conduct, and continuity of harm in determining the number of occurrences and allocation of coverage, reflecting the complexity and fact-specific nature of these disputes.
297 I NSURANCE L I T IGATI O N 2026
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