Source: https://www.insurancerecoveryblog.com/
Timestamp: 2019-04-18 16:43:15+00:00

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In late February 2019, the Fourth Circuit issued an opinion detrimental to claimants seeking policy benefits under a judgment-debtor’s insurance policy. Gateway Residences at Exch., LLC v. Illinois Union Ins. Co., — F.3d —-, No. 18-1491, 2019 WL 963238 (4th Cir. Feb. 28, 2019). A property developer, Gateway, suffered property damage when two generators caught fire during a test. Mechanical Design Group (“MDG”) designed and installed the generators. Gateway made a claim against MDG, but MDG failed to report the claim under its claims-made and reported errors and omissions liability policy.
After Gateway obtained a judgment against MDG, it tried to collect the judgment from MDG’s insurer (Chubb) in Virginia state court. The insurer removed the case to federal court. Gateway argued that the court should remand the case because it lacked subject matter jurisdiction. Under the diversity jurisdiction statute, an insurer takes on the citizenship of its insured when a claimant files a direct action. The trial court ruled that Gateway’s suit was not a direct action and refused to remand the case. The Fourth Circuit affirmed.
Gateway also argued Chubb waived its right to decline coverage, because it failed to provide timely notice of its coverage defenses to Gateway. A Virginia statute mandates that insurers inform claimants of coverage defenses against the policyholder within 45 days of discovery, or waive those defenses. The trial court noted that Chubb’s policy covered only claims made and reported during the policy period. Because MDG never reported the claim, the trial court ruled the policy was not triggered, and Chubb’s reporting obligation to Gateway never arose. The Fourth Circuit affirmed.
As explained below, the Fourth Circuit’s decision is flawed. Among other reasons, it misconstrued a statute designed to protect claimants when a policyholder fails to provide notice as required under a policy.
Illinois Union Insurance Company (“Chubb”) insured MDG under a Contractors E&O (Professional) Liability policy (the “policy”). Gateway hired MDG to design and install two generators at a condominium complex in Alexandria, Virginia (the “Gateway”). When tested in August 2014, the generators caught fire and resulted in over $900,000 in damage to the property. Gateway demanded that MDG repair the damage shortly after the loss. MDG, however, went out of business in September 2014. MDG did not report the loss to Chubb, and the policy expired on February 1, 2015.
Gateway notified Chubb of its intent to sue MDG in September 2016 and sued MDG later the same month. Chubb sent a denial letter to MDG in October 2016, but did not inform Gateway of its coverage decision. Gateway obtained a default judgment against MDG and then sued Chubb in Virginia State Court to collect on the judgment against its insured.
Chubb removed the action to the Eastern District of Virginia. Gateway sought to remand the case on the theory that the court lacked subject matter jurisdiction, because the parties were not diverse. Gateway argued its suit against Chubb constituted a “direct action.” Under 28 U.S.C. § 1332(c)(1), in a direct action the insurer takes on the citizenship of the its insured. As MDG was a Virginia corporation, Gateway argued there was no diversity jurisdiction, and that the court should remand the suit. The trial court rejected Gateway’s argument and denied its motion.
The focus of the dispute was the application of Va. Code. Ann. § 38.2-2226. This statute requires a liability insurer to inform the claimant (or its counsel) of a breach by the insured of the policy’s terms or conditions. Id. The insurer must provide notice of the breach within 45 days of the breach or of the claim, whichever is later. Id. The failure to provide the required notice results in a waiver of the coverage defense against a suit brought by the claimant against the insurer.
The trial court granted Chubb’s motion for summary judgment. It reasoned that because the policy insured only those claims made and reported during the policy period, and MDG failed to report Gateway’s claim during the policy period, there was no longer a policy to breach at the time Gateway provided notice.
Gateway appealed both the denial of the remand and the grant of summary judgment to Chubb. With respect to the remand, Gateway argued that several courts applying Virginia law had referred to actions to collect a judgment against an insurer as a “direct action.” While conceding this point, the Fourth Circuit observed that none of these cases interpreted the meaning of “direct action” as used in 28 U.S.C. § 1332(c)(1). Following decisions from other federal circuits, the court found that the term had a narrow meaning, being, “a suit in which the plaintiff sues a wrongdoer’s liability insurer without joining or first obtaining a judgment against the insured.” Id. at *2. The court determined that the intent of 28 U.S.C. § 1332(c)(1) was to address jurisdictional issues in states that allowed claimants to sue a defendant’s insurer without first obtaining a judgment against the defendant. Id. The court ruled that Gateway’s suit was not a “direct action,” and Chubb did not assume the Virginia citizenship of its insured. The court affirmed the order denying Gateway’s motion to remand.
With respect to the grant of summary judgment to Chubb, the court emphasized that Va. Code. Ann. § 38.2-2226 required notice to the claimant when the insured breached the terms and conditions of the policy and therefore created a coverage defense. The court concluded that MDG did not breach a condition of coverage, so that there was no coverage defense. Instead, it reasoned that the policy had expired in February 2015, so “there was no ‘breach’ because, after February 2015, there was no policy to be breached. Gateway Residences, 2019 WL 963238, at *5. Although Gateway first made a claim during the policy period, the policy required notice to the carrier of that claim during the policy period. Because MDG never triggered coverage, the court concluded that Chubb had no obligation under § 38.2-2226. The court characterized Gateway’s claim as being outside the scope of the policy’s coverage. The court ruled that a denial based on the “scope of coverage” was not a “defense” under § 38.2-2226, so that Chubb was not obligated to provide notice of the denial to Gateway. Because Chubb had no obligation to provide notice, it did not waive any defenses to coverage. Id.
With respect to the court’s finding that a suit by a judgment creditor is not a “direct action” for purposes of diversity, it is unfortunate that the Fourth Circuit ignored prior precedent. The decision is consistent with other the law from other circuits, however. Accordingly, most insurers will be able to freely remove collection actions brought by claimants to federal court.
With respect to the court’s analysis of § 38.2-2226, there is much to criticize. First, the court entirely missed the purpose of the Virginia statute. The statute is intended to protect claimants in the event a policyholder fails to provide timely notice of a claim. See Liberty Mut. Ins. Co. v. Safeco Ins. Co. of America, 288 S.E.2d 469, 474 (Va. 1982). By its terms, the statute applies to “liability policies” and does not distinguish between occurrence-based policies and claims-made policies. Virginia enacted the statute in 1986, after claims-made policies had become prevalent, and the Commonwealth has revised the statute twice since its enactment. Presented with opportunities to limit the scope of the statute to occurrence-based policies, the legislature declined to do so. Clearly, the Virginia legislature intended the clause to apply to claims-made policies. This Fourth Circuit’s decision denies claimants protections afforded to them under Virginia law.
The court’s conclusion that Gateway’s claim fell outside the policy’s “scope of coverage,” and therefore was not a “defense” under § 38.2-2226, is a misunderstanding of Virginia law and the policy. The policy’s “scope of coverage” is professional loss that has resulted from wrongful acts in the performance of the insured’s professional services. The allegation that MDG committed errors in the design and installation of the generators appears to fall squarely into the scope of the policy’s coverage.
The timely reporting of a claim is a condition precedent to coverage, not the scope of coverage. Although notice during the policy period is part of the insuring agreement, MDG’s E&O policy also provided in its terms and conditions that timely notice was a “condition precedent.” Opening Brief of Appellant, Gateway Residences at Exchange, LLC, v. Ill. Union Ins. Co. 2018 WL 3440460, at *10 (4th Cir. 2019) (No. 18-1491). Virginia law has long treated timely notice as a condition of precedent to coverage. See State Farm Mut. Auto. Ins. Co. v. Porter, 272 S.E.2d 196, 200 (Va. 1980).
Further, the court misinterpreted when the breach occurred. The court stated, there was no ‘breach’ because, after February 2015, there was no policy to be breached. Gateway Residences, 2019 WL 963238, at *5. The breach occurred, however, during the policy period, when MDG failed to tender Gateway’s claim to Chubb. Accordingly, the court relied on flawed reasoning in concluding that there was no policy to breach. In sum, the Fourth Circuit ignored the purpose of the statute, confused the scope of coverage with conditions precedent for coverage and therefore failed to apply § 38.2–2226 as intended.
A few practical lessons may be drawn from the decision. First, if a contractor has committed an error, the property owner should consider tendering a notice of claim to the contractor’s insurer. Many insurance policies do not require the notice of claim come from the insured. If a contractor goes out of business, providing notice on behalf of the contractor is even more imperative.
Insurers, however, sometimes require notice to a specific person or address. The failure to meet these specific requirements may afford the insurer a coverage defense. Thus we suggest owners obtain copies of their contractor’s insurance policies. The advantage is two-fold. First, it allows the owner to verify the contractor has complied with the insurance requirements of the contract. Second, in the event of a claim, it allows the owner to evaluate the contractor’s coverage and provide notice to the insurers in compliance with the policy’s notice clause. We appreciate not all contractors will be willing to provide their insurance policies to an owner. Nevertheless, when an owner has sufficient leverage to demand this concession, this is a condition worth considering.
Autonomous vehicles (“AVs”) are constantly in the news. A range of technology companies, such as Google and Uber, as well as automotive manufacturers, are leading the development of vehicles with autonomous features. The technology promises improved convenience and safety but questions have naturally arisen about how to insure vehicles under computer control (we will refer to the computer controlling a vehicle as the “autopilot”). Properly insuring AVs and individuals operating AVs is essential to ensure the development and use of the technology.
Travelers has joined a host of other insurers, consultants, attorneys and think tanks by publishing a whitepaper on insuring autonomous vehicles. Insuring Autonomy, How auto insurance can adapt to changing risks, Travelers Institute White Paper (July 2018), available at https://www.travelers.com/travelers-institute/insuring-autonomy (the White Paper). Traveler’s White Paper includes two key proposals: (1) that traditional tort liability and automobile insurance will be able to efficiently handle risk transfer for accidents involving automated vehicles; and 2) auto insurance for AVs will need to include a cyber-insurance component. This blog addresses Traveler’s proposals on assigning tort liability and insuring loss caused by an AV’s autopilot, as well as Traveler’s acknowledgment that auto policies in the future will need to cover cyber-risks, such as hacking.
The Society of Automotive Engineers (SAE) has designated six levels of automation for automobiles, numbered 0 through 5. Level 0 AVs have no automation; level 5 AVs require no input from the operator except entering the destination. Level 3 AVs are just arriving on the market, with Audi and Cadillac introducing vehicles in some areas with advanced autopilot functions that allow hands-free operation under certain conditions, albeit with constant human monitoring of the function. Level 4 vehicles will offer the option of full automation or human control; level 5 vehicles will be driven only by the autopilot. The timeline for the entry of Level 4 and 5 AVs into the market is uncertain.
AVs will make transportation more convenient because AV owner/operators will be able to put driving time to other uses. In addition, AV technology promises to significantly decrease accidents. Human error is causes 94% of all motor vehicle accidents in the United States. Replacing a human with a computer, experts believe, will reduce the frequency and severity of accidents.
The Travelers’ White Paper discusses why the auto insurance industry should remain relevant with respect to AVs. This is in reaction to a number of commentators, including Warren Buffett, who have predicted a vastly diminished role for auto insurers as vehicle safety improves.
We doubt the need for auto insurance will disappear. AV owners, like every other auto owner, will face risk from collision and weather hazards, among others. Up to the point where vehicles are entirely automated, there will be a need for liability coverage for the driver. Even when level 5 AVs enter the market, owners will need liability insurance to cover them in the event their faulty maintenance or neglect of a vehicle leads to an accident, and to cover loading and unloading of a vehicle.
When an autopilot is in control of an AV and an accident occurs, difficult insurance questions arise. Most states’ tort systems assign liability to the person or persons responsible for an accident. The insurer of the party at fault pays, subject to a reduction if the plaintiff is found to have contributed to his or her own loss and the comparative or contributory negligence scheme in place. When a human is not controlling a vehicle, it is unclear how liability should be apportioned and how that liability will be insured. There are no answers yet.
Assuming that the owner of the AV properly maintained the vehicle, the autopilot was engaged within its design parameters and the accident was caused by the autopilot, how should liability be apportioned, and what insurance should respond to the claim? Travelers argues that traditional risk transfer methods (that is – auto liability policies and the traditional tort system) will be sufficient to handle these situations. Travelers notes that traditional auto insurance has the advantage of familiarity to consumers and flexibility to adapt to changes brought on by AVs. Travelers, however, offers no specifics on how the risk transfer would occur in these circumstances. Travelers also suggests the auto industry will need to modify its insurance products, but does not recommend any specific revisions.
Other commentators have suggested that the manufacturer of the vehicle should insure loss causes by an AV autopilot as a products liability claim. This is logical, as the autopilot is the automaker’s product, and the failure of that product has caused injury. Travelers points out, however, that products liability insurance is not designed to quickly compensate victims, and the ponderous nature of products liability litigation will delay compensation for victims of autopilot caused accidents. On the other hand, Travelers does not explain how traditional auto insurance will result in faster compensation for victims when the automaker’s product causes the accident.
The Rand Corporation has suggested a number of schemes for allocation of fault in the event of an AV accident caused by the autopilot, including a no-fault system. In the alternative, Rand suggests a federally mandated no-fault compensation fund, similar to the National Childhood Vaccine Injury Act. This act protects vaccine manufactures from liability for injuries resulting from vaccines. Both schemes offer the advantage of speedy compensation for victims of accidents. No-fault insurance, however, has not proved popular among the states, and a number of states that adopted no-fault schemes have abandoned them. A no-fault compensation fund may prove difficult to reserve, at least initially. There is little data on AV accident rates to support an actuarial analysis. Although AVs are expected to be safer, a chance also exists that accident rates could rise for a time, while drivers learn to use the technology and undiscovered engineering issues are uncovered. It is likely states would also resist federal intervention into auto insurance, which states have traditionally regulated.
A possible compromise between traditional auto liability and products liability would be to treat the autopilot as an insured driver under the owner’s liability policy, or under a separate policy issued by the automaker on the vehicle. Along these lines, Mercedes, Volvo and Google’s affiliate Waymo have reportedly agreed to accept full liability for vehicle accidents while their vehicles are using automated technology. The scope of these automaker’s acceptance of liability is unclear. It is also unclear if these companies intend this acceptance of liability to provide a permanent solution to AV liability. This scheme, however, would likely promote rapid resolution of AV accident claims. It might also allow automakers to cap their liability at the policy limits set for the autopilot.
Travelers’ argument in chief is that “auto insurance should play the same primary risk transfer role in that world as it does now for non-AVs.” The White Paper at 13. We agree role for traditional auto insurance, including liability insurance, will exist for owner/operators of AV. The introduction of fully autonomous autopilots, however, will require a significant modification of traditional auto policies to account for liability attributable to the autopilot. As noted above, insuring the autopilot as an additional driver is one potential solution.
Travelers notes that AV owner/operators will need cyber-insurance. Travelers’ focus, however is on data protection. While insuring owner/operator data is important, insurers such as Travelers need to focus on another potential risk. The hacking of a vehicle or other cyber-security threats puts owner/operators, passengers and others at risk of suffering bodily injury or property damage. Several years ago, “white-hat” hackers demonstrated the ability to hack into a vehicle and control it remotely. The ability to take control of a vehicle suggests the ability to steal the vehicle or cause an accident. Clearly, a need exists for insurance coverage to protect drivers, passengers and third-parties from property damage and bodily injury resulting from the hacking of an AV.
The insurance industry, however, has sought to avoid insuring property damage or bodily injury arising from cyber-risks. Most cyber-insurance policies we have examined specifically exclude coverage for bodily injury and property damage. Many standard general liability insurance policies bar coverage for property damage or bodily injury that result from the loss of use of or corruption of electronic data – which insurers will argue bars coverage for a hacking losses.
We are not aware of any auto policies that exclude coverage for loss resulting from damage to, corruption of or inability to access data, similar to CGL policies. The first auto policy to insure the owner/operators of AVs, issued by Adrian Flux in the U.K., offers only limited coverage for hacking, however. If other auto insurers offer only limited coverage for cyber-risks, there could be a significant gap in protection from hacking that causes loss to AV owners/operators.
Coverage for automobiles is compulsory and highly regulated. To adequately insure AV owner/operators from cyber-risks, traditional auto policies must evolve. Auto insurers must affirmatively insure against bodily injury and property damage that result from the hacking of an AV’s computer systems. To guarantee that the insurance industry adequately covers cyber-risks associated with AVs, state insurance commissioners should take the lead in drafting model legislation to adequately protect AV owners and the general public.
AVs hold the promise to significantly improve road safety. For AVs to succeed in the market place, consumers must have confidence that appropriate insurance exists to protect them from risk, including cyber-risk, or they will refuse to purchase AV technology. Accordingly, if cyber-risks are to be managed through traditional auto insurance policies, it is critical that insurers offer adequate coverage for this risk.
Hurricane Irma was one of the most devastating storms in United States history, with sustained winds of over 190 miles per hour. Insurance industry experts have estimated the insured damages arising from this storm may reach $50 billion. These losses include both direct property damage as well as business interruption losses. In addition, many businesses outside of the areas of storm damage may experience lost revenue as a result of damage suffered by suppliers or customers whose operations were damaged by the storms.
As businesses begin the process of cleanup and recovery in the aftermath of these hurricanes, insurance must be a priority. The following are key steps that businesses should take to ensure that they take full advantage of the insurance they purchased to protect them from catastrophic losses.
1. Review all potentially applicable insurance policies and assess the potential for coverage. An important first step is to collect and analyze your policies to assess the scope of coverage available. The most common policies providing coverage will be first-party property policies, including commercial property, marine property and event cancellation policies. Most property policies are sold on an all-risk basis, meaning that the policy provides coverage for all risks of loss unless the loss is specifically excluded. The key step in evaluating coverage for a hurricane loss under an all-risk policy is to evaluate the policy exclusions.
2. Consider coverage for contingent business interruption losses. Many businesses outside of the storm’s direct impact will experience lost income caused by damage to the operations of suppliers to and customers of the firm. These losses may be covered under your property policy as a contingent business interruption loss.
3. Provide notice of the loss to all insurance companies. Prompt notice to all carriers is essential.
4. Once it is safe to do so, visit the damaged property and record the extent of damage. Photographs and video are crucial.
5. Take steps to mitigate losses and protect property from further loss or damage. Standard property policies require the insured to mitigate the physical damage and business interruption arising from a catastrophic storm. Ensure that your firm takes these steps.
6. Form a claim team. It is essential to form a team involving company employees and outside experts, including outside counsel, independent adjusters and forensic accountants. Claims from catastrophic storms often raise significant coverage issues, and it is important to retain counsel early in the process. Forensic accountants also can be essential in developing and presenting a business interruption claim to a carrier.
7. Document carefully your communications with insurers and their agents. Resolution of catastrophe claims can be slow, and the Wall Street Journal reported last week that there is an acute shortage of qualified insurance adjusters in Florida. This shortage is caused in part by the high demand for adjusters in Texas following Hurricane Harvey. It is essential to keep timely, detailed records of all communications with insurance companies and their representatives in order to discourage delays and to position the company to make a bad faith claim later if necessary.
8. Be cautious about internal and external communications about your claim. Policyholders should be careful with both internal communications and with communications to third parties, including brokers, about your losses and claims. These communications may be discoverable by the insurance company in litigation, and the way the company characterizes its loss may be used by the carrier against the insured. An important principle is for the company to have one point of contact with the broker and with the insurer.
9. Collect and maintain accounting records and documents related to property damage and business interruption. Key documents to include are: (a) production and sales records; (b) records of cost of goods sold; (c) business forecasts and budgets; (d) inventory records; (e) cost accounting records; and (f) payroll records.
10. Collect and maintain records of costs incurred to avoid or reduce the loss. Key documents to include are: (a) overtime records related to maintaining production at pre-loss levels; (b) price premiums and extra shipping charges to expedite delivery of machinery or inventory; (c) relocation costs; (d) costs incurred in the purchase of generator or replacement power; and (e) costs of notifying customers of a relocation or to maintain customer relationships during down-time.
11. Seek partial payments. Carriers often seek to delay full payment of the loss by making a minimal “good faith” payment and claiming that it cannot make full payment until all coverage and claim value issues are resolved. Challenge this approach by insisting that the insurer provide a coverage position in writing, by submitting partial proofs of loss when portions of the claim are quantified, and by demanding payment for the undisputed portion of the claim.
12. Comply with policy requirements. Standard property policies impose a number of requirements on the policyholder, including deadlines for submitting proofs of claim and for filing suit if there is a dispute regarding the claim. It is essential to comply strictly with all policy requirements unless the insurer agrees to an extension in writing.
Our insurance recovery team at McGuireWoods has extensive experience in advising our business clients regarding disputes with insurers regarding property damage and business interruption losses arising from hurricanes. We have secured over $1.5 billion in recoveries for our clients since 2009 and welcome the opportunity to work with you to secure the maximum recovery for your insured losses following the devastation of Hurricane Irma.
Hurricane Harvey has devastated many parts of Texas. As Texans deal with the impact of the storm, policyholders need to be mindful of their rights.
Effective Friday, Sept. 1, 2017, a new law under House Bill 1774 takes effect that governs Texas insurance claims. Specifically, there are differences in this new law that could affect Texas policyholders who suffer claims involving “forces of nature.” The new law lessens penalties against insurance companies that fail to pay valid claims, pay less than amounts owed, or fail to timely pay such claims.
To take advantage of the enhanced penalties of the current law, no later than Thursday, Aug. 31, 2017, policyholders must (1) file claims in writing (which includes electronic mail), and (2) advise the insurance company of the facts relating to the claim.
Telephone calls will not suffice. It is important that policyholders provide notice to their insurance companies in writing. Make sure that the claim notice is dated before September 1, 2017, and keep a copy of the notice.
For additional information concerning House Bill 1774 and your rights and coverage under your policies, please contact Mark Lawless or Pamella Hopper.
The global M&A boom has spurred an increase in the use of representation and warranty insurance (“RWI”), which is designed to protect the insured party against breaches of a sellers’ representations and warranties in a corporate acquisition or merger agreement. RWI is increasingly used by buyers to differentiate their bids in an ultracompetitive marketplace, as well as by sellers look to maximize returns and minimize post-closing risk. A purchase agreement that incorporates a RWI policy can influence a seller’s ultimate decision when selecting a buyer.
For private equity-backed portfolio companies, incorporating RWI in a deal allows sellers to pass profitable returns to the fund’s limited partners and can reduce or eliminate claw back distributions from the LPs when indemnification claims are subsequently made. RWI also gives sellers the full value of the sale without tying proceeds up in escrows, holdbacks, and can reduce or eliminate entirely future indemnification claims.
For buyers, a RWI policy helps to eliminate the need to decide whether to make claims against “friendly” indemnitors (e.g., management), and can often result in a buyer-favorable purchase agreement in a seller-favorable climate. RWI can provide additional indemnification limits above the terms of the purchase and an extended period of time to recover for any breaches beyond the survival period.
Yet at each stage of the acquisition, buyers regularly fail to maximize the value that the RWI policy can provide. By utilizing the RWI policy at each stage of an acquisition, a buyer can add value to its acquisition.
On Friday, May 12, 2017, a massive ransomware attack swept across the globe. As of the date of this post, the attack reportedly had infected more than 100,000 organizations in 150 countries. The attack continues to propagate in different and more malicious forms and it is likely some of our clients have been impacted.
This malware, called “WannaCry,” locks out users and threatens to destroy data unless the victim pays a ransom to decrypt the data. The initial ransom demand was $300, to be paid in Bitcoin, and it is reported that the demand is increasing. It is unclear whether the ransom payment will buy the freedom of a single computer or an entire network. If the former, the attack may prove very expensive if companies agree to pay the ransom.
Impacted companies should immediately review their cyber insurance policy if they have purchased one. Many cyber policies offer ransom or extortion coverage, which includes the cost of the ransom payment. Cyber policies also typically provide coverage for the cost of investigating and responding to a ransomware attack and for lost business income arising from the attack.
Timing is very important. Most cyber insurance policies provide coverage only for costs incurred after the insured notifies the insurance company. Therefore, the costs that businesses are incurring this weekend to respond to the WannaCry attack, including ransom payments, will not be covered unless the business provides notice to the insurance company prior to incurring the payment. Some policies also require that the policyholder inform the applicable law enforcement agency and obtain the insurer’s consent before making any ransom payment. Therefore, despite the urge to move swiftly in response to this crisis, we recommend policyholders understand and comply with the notice provisions of their policies to insure they preserve their right to insurance coverage.
In addition to these insurance considerations, there are a number of critical decision points facing affected companies right now, including whether to pay the ransom, how to comprehensively assess and remediate any damage done, which other parties to include in this process, and what actions may need to be taken to comply with applicable law. Actions that companies take today may have lasting consequences long into the future.
Please contact us if we can assist in responding to these malware attacks.

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