Insurance Law Alert

January 2017

In This Issue
Sixth Circuit Predicts That Michigan Supreme Court Would Adopt Pro
Rata Allocation Of Defense And Indemnity Costs
The Sixth Circuit ruled that an insurer has no obligation to pay more than its pro rata shareof both defense and indemnity for asbestos-related claims, and that an insurer is entitled toreimbursement from the policyholder for any over-payments. Cont’l. Cas. Co. v. Indian Head
Indus., Inc., 2016 WL 7321362 (6th Cir. Dec. 16, 2016). (Click here for full article)“They are just
exceptional at what
they do, they know
coverage law backwards
and forwards and they areexcellent litigators.”–Chambers 2016,
quoting a client

Florida Statute Does Not Require Insurer To Pay Pre-Tender Defense
Costs, Says Eleventh Circuit
The Eleventh Circuit ruled that an insurer has no obligation to reimburse the policyholder for
pre-tender defense costs, holding that the insurer was not estopped from denying payment
based on its failure to comply with a state statute relating to notice of coverage defenses.
EmbroidMe.com, Inc. v. Travelers Prop. Cas. Co. of Am., 2017 WL 74694 (11th Cir. Jan. 9,2017). (Click here for full article)

New York Appellate Court Affirms Dismissal Of LifeLock’s Coverage
ClaimsA New York appellate court ruled that policy exclusions barred coverage for claims alleging
deceptive practices and misleading advertising. LifeLock, Inc. v. Certain Underwriters at
Lloyd’s, 2017 WL 161045 (N.Y. App. Div. Jan. 17, 2017). (Click here for full article)

Ohio Appellate Court Addresses Scope Of Coverage For Asbestos Claims
An Ohio appellate court ruled that: (1) each exposure to asbestos constitutes a separate
occurrence; (2) the limits of three-year policies apply annually; and (3) “stub” policies are
subject to a single aggregate limit. The William Powell Co. v. OneBeacon Ins. Co., 2016 WL
7231786 (Ohio Ct. App. Dec. 14, 2016). (Click here for full article)

Claims-In-Process Exclusion Bars Coverage For Damage That Pre-Dates
Insured’s Purchase Of Site, Says Indiana Court
An Indiana federal district court ruled that a claims-in-process exclusion bars coverage forproperty damage caused by contamination that began prior to the policyholder’s ownership ofland, even if the owners had no knowledge of the pollution. Atl. Cas. Ins. Co. v. Garcia, 2017
WL 67617 (N.D. Ind. Jan. 5, 2017). (Click here for full article)

Simpson Thacher & Bartlett LLP

1

Nebraska Supreme Court Rules That Post-Loss Assignment Is Valid
Notwithstanding Lack Of Insurer Consent
The Nebraska Supreme Court ruled that a post-loss assignment of a claim under ahomeowner’s policy is valid notwithstanding a lack of insurer consent. Millard Gutter Co. v.
Farm Bureau Prop. & Cas. Ins. Co., 295 Neb. 419 (Neb. 2016). (Click here for full article)

Ninth Circuit Rules That Insured vs. Insured Exclusion Unambiguously
Bars FDIC Claims
The Ninth Circuit ruled that an insured vs. insured exclusion squarely barred coverage forclaims brought by the Federal Deposit Insurance Corporation in its capacity as receiver. Fed.
Deposit Ins. Corp. v. BancInsure, Inc., 2017 WL 83489 (9th Cir. Jan. 10, 2017). (Click here forfull article)

California Court Dismisses Flood Claims As Time-Barred, Rejecting
Tolling Argument
A California federal district court dismissed flood-related property damage claims based on
the homeowner’s failure to comply with the federal jurisdictional requirements of the National
Flood Insurance Program. Apatow v. Am. Bankers Ins. Co. of Florida, 2016 WL 7422288 (C.D.
Cal. Dec. 21, 2016). (Click here for full article)

Massachusetts Appellate Court Reinstates Negligence Claims Against
Insurance Agency Based On Misuse Of Personal Customer Information
A Massachusetts appellate court ruled that an insurance agency was not entitled to summary
judgment on negligence claims arising out of an employee’s misuse of personal customer
information. Adams v. Cong. Auto Ins. Agency, Inc., 65 N.E.3d 1229 (Mass. App. Ct. 2016).
(Click here for full article)

Citing Insufficient Allegations, Second Circuit Affirms Dismissal Of False
Claims Act Suit
The Second Circuit affirmed a New York federal district court decision dismissing a False
Claims Act suit against insurers and other entities. Takemoto v. Nationwide Mut. Ins. Co.,2017 WL 214572 (2d Cir. Jan. 18, 2017). (Click here for full article)

Interlocutory Review For Remand Orders In CAFA Cases Is Limited To
Diversity Issues, Says Ninth Circuit
The Ninth Circuit ruled that the interlocutory review provision in the Class Action Fairness
Act is limited to orders granting or denying remand based on diversity, and does not extend
to remand orders based on federal question jurisdiction. Chan Healthcare Grp., PS v. Liberty
Mut. Fire Ins. Co., 844 F.3d 1133 (9th Cir. 2017). (Click here for full article)

New York Enacts Regulation Prohibiting Insurers From Refusing To Issue
Commercial Crime Policies Based On Employee’s Criminal Record
The New York State Department of Financial Services has enacted a regulation that prohibits
insurers from refusing to issue commercial crime policies to companies based on theiremployment of individuals with criminal records. N.Y. Comp. Codes R. & Regs. tit. 11, §76.
(Click here for full article)

New York Financial Services Regulator Revises Proposed Cybersecurity
Regulations Affecting Insurers
The New York State Department of Financial Services issued revised regulations requiring
insurers and other entities to implement stringent measures to protect against data breaches
and other cyberattacks. N.Y. Comp. Codes R. & Regs. tit. 23, §500. (Click here for full article)2

Allocation Alert:

Sixth Circuit Predicts That
Michigan Supreme Court Would
Adopt Pro Rata Allocation Of
Defense And Indemnity Costs

that the Michigan Supreme Court would allow
reimbursement under an implied-in-fact or
implied-in-contract basis where, as here, theinsurer expressly and timely reserved its rightto reimbursement for uncovered claims.

The Sixth Circuit ruled that an insurer has no
obligation to pay more than its pro rata shareof both defense and indemnity for asbestosrelated claims, and that an insurer is entitled
to reimbursement from the policyholder for
any over-payments. Cont’l. Cas. Co. v. IndianHead Indus., Inc., 2016 WL 7321362 (6th Cir.
Dec. 16, 2016).
Continental sought a declaration that it was
obligated to pay only its pro rata share ofdefense and indemnity for asbestos claims
against Indian Head. A Michigan federal
district court agreed, ordering allocation
based on Continental’s time on the risk. The
Sixth Circuit affirmed.
Although the Michigan Supreme Court has
not directly addressed the issue, the Sixth
Circuit concluded that Michigan law would
reject “all sums” allocation where, as here,
policy language limits coverage to bodily
injury “during the policy period.” The court
distinguished a Michigan appellate court
decision applying all sums, explaining that thepolicy in that case expressly covered injuries
continuing after termination of the policy. The
court further held that pro rata allocation wasappropriate for previously-incurred defense
costs, rejecting Indian Head’s argument thatthe duty to defend is incompatible with pro
rata allocation. Although the Sixth Circuit
has previously rejected pro rata allocationof defense costs, that case involved future,
unknown defense costs that were “not easily
apportioned.”
The court also ruled that Indian Head was
responsible for its own damages and defense
costs for the post-1987 period in which
it had no insurance. Although Michigan
law recognizes an exception to holding a
policyholder liable for its own damages wheninsurance is not available in the marketplace,the court ruled that Indian Head failed todemonstrate that insurance was unavailable
after 1987. Finally, the court ruled that
Continental was entitled to reimbursement ofexcess insurance payments, notwithstanding
the lack of a policy provision addressing
reimbursement. The Sixth Circuit predicted

Defense Costs
Alert:

Florida Statute Does Not Require
Insurer To Pay Pre-Tender Defense
Costs, Says Eleventh Circuit
The Eleventh Circuit ruled that an insurer has
no obligation to reimburse the policyholder
for pre-tender defense costs, holding thatthe insurer was not estopped from denying
payment based on its failure to comply witha state statute relating to notice of coverage
defenses. EmbroidMe.com, Inc. v. Travelers
Prop. Cas. Co. of Am., 2017 WL 74694 (11thCir. Jan. 9, 2017).
EmbroidMe, a promotional products
franchise, was sued for copyright
infringement. It retained defense counsel
without notifying Travelers, its liability
insurer. Nearly eighteen months after acomplaint was filed, EmbroidMe tendered theclaim to Travelers. At that point, EmbroidMe
had paid more than $400,000 in attorneys’
fees. Travelers agreed to defend under areservation of rights, but refused to reimburse
EmbroidMe for pre-tender defense costs. In
ensuing litigation, EmbroidMe alleged breachof contract based on Travelers’ refusal to pay
the pre-tender defense costs. EmbroidMe
acknowledged that the policy expressly
required consent from Travelers before
incurring costs, but argued that Travelers
was estopped from denying payment based3

on its failure to comply with Florida’s Claims
Administration Statute (“CAS”), Fla. Stat.
§627.426 (1983), which requires a liability
insurer to notify its insured within 30 daysof any defense it intends to assert in support
of a coverage denial. EmbroidMe argued
that Travelers was estopped from denying
payment for defense costs because it did not
notify EmbroidMe of its refusal to pay until
42 days after tender. A Florida district court
disagreed and ruled in Travelers’ favor. The
Eleventh Circuit affirmed.
Addressing this matter of first impression,
the Eleventh Circuit reasoned that Travelers’refusal to reimburse expenses to which it had
not consented did not constitute a coverage
defense and therefore, the CAS did not apply.
The court explained that Travelers’ denial
was based on an exclusion, because thepolicy expressly excluded expenses incurred
without insurer consent. This distinction
between a coverage defense and an exclusion
is significant, because the CAS applies tocoverage defenses but not exclusions. The
court stated: “the CAS cannot resurrectcoverage that has been explicitly excluded andbecause the provision here constitutes suchan exclusion … EmbroidMe is not entitled
to reimbursement of legal expenses that it
incurred without the permission of Travelers.”

Coverage Alerts:

New York Appellate Court Affirms
Dismissal Of LifeLock’s Coverage
ClaimsOur November 2015 Alert discussed a New
York Supreme Court decision dismissing
LifeLock’s coverage suit against its insurer.
The trial court ruled that policy exclusions
barred coverage for claims alleging deceptive
practices and misleading advertising.
LifeLock, Inc. v. Certain Underwriters at
Lloyd’s, London, No. 651577/2015 (N.Y. Sup.
Ct. N.Y. Cnty. Nov. 19, 2015). This month,
the Appellate Division affirmed the ruling.
LifeLock, Inc. v. Certain Underwriters at
Lloyd’s, 2017 WL 161045 (N.Y. App. Div. Jan.
17, 2017).
Several class action suits were filed
against LifeLock alleging that it engaged
in fraudulent and deceptive activities to
induce customers to purchase its services.

LifeLock sought coverage from Certain
Underwriters at Lloyd’s London, which theinsurer denied. Underwriters argued thatcoverage was barred by Exclusion L, which
precluded coverage for claims “[a]rising outof any related or continuing acts, errors [or]omissions … where the first such act, error
or omission … was committed or occurredprior to the Retroactive Date.” Underwriters
argued that the underlying claims alleged apattern of false and misleading advertisingsince 2005, more than three years before
the Retroactive Date of January 8, 2008. In
addition, Underwriters argued that coverage
was barred pursuant to Exclusion I, which
precluded coverage for claims “arising outof or resulting from … unfair competition …
false, deceptive or unfair trade practices, or
false or deceptive or misleading advertising.”
The trial court agreed with Underwriters anddismissed the suit. The Appellate Division,
First Department, unanimously affirmed,
with costs. Underwriters are represented by
Simpson Thacher attorneys Bryce Friedman
and Summer Craig.

Ohio Appellate Court Addresses
Scope Of Coverage For Asbestos
ClaimsAn Ohio appellate court ruled that: (1) eachexposure to asbestos constitutes a separate
occurrence; (2) the limits of three-year
policies apply annually; and (3) “stub”
policies are subject to a single aggregate limit.
The William Powell Co. v. OneBeacon Ins.
Co., 2016 WL 7231786 (Ohio Ct. App. Dec.
14, 2016).
OneBeacon issued primary and excess policies
to Powell. Powell filed a declaratory judgment
action seeking a ruling as to several policy
construction issues that affected OneBeacon’s
duty to defend and indemnify asbestos claims
against Powell. An Ohio appellate court ruled
as follows:
Number of Occurrences: Applying a“triggering-event” theory, the appellate
court ruled that each exposure to asbestos
constitutes a separate occurrence. The court
explained that where numerous asbestos
claims span many years and occur at different
locations under different circumstances,a causation theory is inapplicable and thenumber of occurrences is determined by
the “triggering event.” The court concluded
4

that the triggering event was each exposure
to asbestos, not the more remote cause of
the manufacturing of asbestos-containing
products. In so ruling, the court explainedthat a deemer clause (providing that “allbodily injury and property damage arisingout of continuous or repeated exposure to
substantially the same general conditions
shall be considered arising out of one
occurrence”) did not apply because theexposures did not arise out of “the samegeneral conditions.”
Annualization: The court held that certain
three-year policies were ambiguous as
to aggregate limits and therefore should
be construed as providing annual limits.
OneBeacon argued that a single aggregate
limit is supported by policy language
referring to the “total limit” (together withthe absence of annualization language).
Rejecting this argument, the court held that
because the policies were incomplete, theterm “aggregate” is ambiguous and must be
interpreted with the assistance of extrinsic
evidence. Relying on the parties’ courseof conduct, insurance industry norms andpremium amounts, the court concluded thatthe policies should be read to have annual
aggregate limits.
Stub Periods: The court ruled that a single
aggregate limit applied to two “stub” policies
that covered periods of thirteen and fourteenmonths, respectively. Policy language
provided that “if this policy is issued fora period of three years, the limits of thecompany liability shall apply separately toeach consecutive annual period thereof.”With respect to the stub policies at issue, thecourt explained that Powell was not entitledto annual limits because there were noconsecutive annual periods.

Claims-In-Process Exclusion Bars
Coverage For Damage That PreDates Insured’s Purchase Of Site,
Says Indiana Court
An Indiana federal district court ruled that aclaims-in-process exclusion bars coverage forproperty damage caused by contaminationthat began prior to the policyholder’sownership of land, even if the owners had
no knowledge of the pollution. Atl. Cas. Ins.
Co. v. Garcia, 2017 WL 67617 (N.D. Ind. Jan.
5, 2017).
In 2004, the Garcias purchased property that
had previously been the site of a dry cleaning
facility. The site housed underground storage
tanks containing a toxic solvent. In or around
1999, a site assessment revealed that sometanks were leaking. Testing continued through2004, but the Garcias were unaware of thecontamination or testing until 2014, whenthe Indiana Department of Environmental
Management filed a claim seeking payment
for further investigation and remediation. The
Garcias sought coverage from Atlantic, theirgeneral liability insurer, which denied theclaim. Atlantic argued, among other things,
that a claims-in-process exclusion barred
coverage. The court agreed and granted
Atlantic’s summary judgment motion.
The exclusion applies to any “loss or claim fordamages, whether known or unknown, that(a) first occurred before the policy’s inception
date, or (b) is alleged to be in the process ofoccurring as of the policy’s inception date… .” Although the Garcias did not disputethat the pollution predated the inceptionof the Atlantic policy, they argued that therelevant “loss” or “claim for damages” is the
Department of Environmental Management’s
claim, which was filed during the policy
period. They also claimed that the exclusion
did not apply because they did not begin
incurring expenses related to the claim
until they entered a remediation program,which was after the policy’s inception.
The court disagreed, explaining that the
Garcias’ position incorrectly interprets the
exclusion as barring coverage for “claims
or expenses” predating the policy, and that“the relevant question is when the damage
occurred or began occurring.” (Emphasis
in original). Finally, the court rejected theGarcias’ argument that the claims-in-processexclusion merely limits Atlantic’s obligations
to damages that occurred during the policy
period (i.e., its pro rata share).
5

Assignment Alert:

Nebraska Supreme Court Rules
That Post-Loss Assignment Is Valid
Notwithstanding Lack Of Insurer
Consent
The Nebraska Supreme Court ruled thata post-loss assignment of a claim under ahomeowner’s policy is valid notwithstanding alack of insurer consent. Millard Gutter Co. v.
Farm Bureau Prop. & Cas. Ins. Co., 295 Neb.
419 (Neb. 2016).
A homeowner retained Millard Gutter torepair roof damage caused by a storm. Farm
Bureau, which insured the home, stated that
only part of the roof needed to be repaired,
but Millard Gutter believed that the entire
roof should be replaced. The homeownerreplaced the entire roof and then assigned“any and all claims or moneys due or to
become due” under his insurance policy toMillard Gutter. Millard Gutter sued Farm
Bureau, seeking full payment of the roof
repair. Farm Bureau argued, among otherthings, that the assignment was invalid
because it was made without the insurer’s
consent. A Nebraska trial court ruled in favorof Millard Gutter, and the Nebraska Supreme
Court affirmed.
Farm Bureau’s policy expressly statedthat the rights and duties under the policy“may not be assigned without our writtenconsent” and that without such consent, “[n]ochange of interest in this policy is effective.”
Notwithstanding this provision, the court
held that an assignment made after a loss
has occurred is valid and enforceable. Notingthat the majority of courts have held thatanti-assignment clauses do not bar post-loss
assignments, the court stated that the “record
simply does not demonstrate any increased
risk to Farm Bureau or other adverse
consequence of the assignment.” The court
also relied on the absence of state statutory
law barring post-loss assignments in theproperty insurance context. As discussed inprevious Alerts, courts have employed various
standards and reached different conclusions
as to whether an anti-assignment clause bars
post-loss assignments made without insurer
consent. See April and February 2016 Alerts;
September 2015 Alert.

D&O Alert:

Ninth Circuit Rules That Insured vs.
Insured Exclusion Unambiguously
Bars FDIC Claims
Previous Alerts have discussed conflicting
decisions relating to the application of an
insured vs. insured exclusion to claims
brought by the Federal Deposit Insurance
Corporation (“FDIC”). See January 2015
Alert; October and April 2014 Alerts. In a
recent decision, the Ninth Circuit ruled thatan insured vs. insured exclusion squarely bars
coverage for claims brought by the FDIC in its
capacity as receiver. Fed. Deposit Ins. Corp.
v. BancInsure, Inc., 2017 WL 83489 (9th Cir.
Jan. 10, 2017).
The exclusion at issue precludes coverage forlosses arising from actions brought “by, or on
behalf of, or at the behest of” Security Pacific(the insured company), or “any successor,
trustee, assignee or receiver” of Security
Pacific. The court held that this language
unambiguously applies to claims broughtby the FDIC as receiver. The court rejected
the FDIC’s argument that other provisionsof the policy evidenced an intent to cover
FDIC claims, or at a minimum, createdambiguity as to coverage. In particular, thecourt dismissed the FDIC’s contention that
it was not a “receiver” within the meaning of
the exclusion because it had a “unique role”
representing “multiple interests.” Similarly,
the court declined to find that a shareholder
derivative claim exception restored coveragefor the FDIC’s claims. The court explained:“The shareholder derivative suit exception
does not … render the insured-versusinsured exclusion ambiguous with respect
to the FDIC as receiver merely because the
FDIC also succeeded to the right of Security
Pacific’s shareholders to bring a derivative
action” (emphasis in original). Finally, thecourt rejected the argument that the deletionof a regulatory exclusion (which had barred
coverage for losses arising from “any action
or proceeding brought by or on behalf of any
federal or state regulatory or supervisoryagency or deposit insurance organization”)
evidenced an intent to establish coverage forformerly excluded claims.
As reported in our October 2014 Alert, aCalifornia federal district court reached the
opposite conclusion in St. Paul Mercury Ins.
Co. v. Hahn, 2014 WL 5369400 (C.D. Cal.
6

Oct. 8, 2014), aff’d, 2016 WL 6092400 (9thCir. Oct. 19, 2016), which was affirmed by theNinth Circuit. There, the court concluded thatan insured vs. insured exclusion that barredclaims “brought or maintained by or on behalfof any Insured or Company … in any capacity”
was ambiguous in the context of FDIC
receiver claims. Notably, the exclusion there
did not explicitly reference “receiver.”

Property Insurance
Alert:
California Court Dismisses Flood
Claims As Time-Barred, Rejecting
Tolling Argument

A California federal district court dismissed
flood-related property damage claims basedon the homeowner’s failure to comply withthe federal jurisdictional requirements of the
National Flood Insurance Program (“NFIP”).
Apatow v. Am. Bankers Ins. Co. of Florida,2016 WL 7422288 (C.D. Cal. Dec. 21, 2016).

court also rejected the argument that theinsurer had extended the limitations period
by “reopening” the case. Apatow argued thatby engaging in continued communications,and by accepting a new Proof of Loss andissuing a check for partial damage, the insurer
had “reopened” the case. The court disagreed,
explaining that the insurer’s considerationof new information for claim coverage does
not restart the limitations period. The court
ruled that even if the insurer’s decision to
grant coverage for some of the claims could beconstrued as “reopening” the case for purposeof extending the statute of limitations, “onceDefendant denied each of Plaintiff’s claims,
Plaintiff was put on notice that a suit would
need to be filed within one year in federal
court. The later decision to grant certain
claims did not affect the other denials, which
remained in place.”

Privacy Breach
Alert:

Massachusetts Appellate Court
Reinstates Negligence Claims
Against Insurance Agency Based
On Misuse Of Personal Customer
Information

When Apatow’s home was damaged by storm
surge, he sought coverage under a Standard
Flood Insurance Policy. The insurer denied
the claim. Nearly one year later, Apatow filed
suit in state court alleging breach of contract.
The insurer removed the case to federal court
and sought dismissal based on Apatow’s
failure to comply with the requirements of
the NFIP, which requires plaintiffs to sue
insurers in federal court within one year ofa claim denial. The court held that Apatow’s
failure to meet this jurisdictional requirement
warranted dismissal as a matter of law. In soruling, the court rejected Apatow’s argumentthat filing in state court was sufficient toconfer jurisdiction on the federal court. The

Reversing in part a trial court decision, a
Massachusetts appellate court ruled that aninsurance agency was not entitled to summary
judgment on negligence claims arising out ofan employee’s misuse of personal customer
information. Adams v. Cong. Auto Ins.
Agency, Inc., 65 N.E.3d 1229 (Mass. App.
Ct. 2016).
Elizabeth Burgos was employed as a customer
service representative by Congress Auto
Insurance Agency. Through her employment,
she had access to the data systems of Safety
Insurance Company and the Department ofMotor Vehicles. When Burgos’s boyfriend
was involved in a police chase (while driving
Burgos’s car) that resulted in damage to athird party’s automobile, Burgos used her
position to obtain confidential information,
including the identity, address and phone
number of Mark Adams, the third party
who had filed a claim. Burgos’s boyfriend
used that information to make a threatening
call to Adams about the claim. Burgos was
7subsequently terminated and criminal charges
were filed against Burgos and her boyfriend.
Adams sued Congress Auto Agency, alleging
negligence in the safeguarding of confidential
customer data. A Massachusetts trial court
granted Congress’s summary judgment
motion, finding that Adams was unable tosatisfy the elements of negligence (duty,
breach of duty, causal connection between
breach and damages, and damages). The
appellate court reversed in part.
The appellate court ruled that the agency
had a legal duty to prevent the foreseeablemisuse of private information by its
employees. Furthermore, the court ruled thata reasonable jury could find that the agency
breached its duty. In particular, the court
concluded that the agency failed to prevent a
conflict of interest by allowing its employees
to have access to their own claim information.
Similarly, the court ruled that a jury could
find that the agency was negligent by failing toinvestigate Burgos’s fitness to have access todatabases containing confidential information
after it had been put on notice of Burgos’s
prior dishonest and potentially criminal
activity.
The appellate court also found that Adams
sufficiently raised an issue of fact with respect
to causation. The trial court had ruled thatthe agency was entitled to summary judgment
based on the intervening criminal acts of
Burgos and her boyfriend. The appellate
court disagreed, explaining that a causal
connection may be found where the injury
was a foreseeable result of the defendant’s
negligent conduct. The court stated: “A jury
could conclude that the Congress Agency wasput on notice that Burgos should not havebeen entrusted with access to the confidential
information of others, especially where that
information could involve a claim against
her or her boyfriend.” Finally, the court ruledthat Adams’ claims of emotional distresswere sufficiently established to withstandsummary judgment.

False Claims
Act Alert:

Citing Insufficient Allegations,
Second Circuit Affirms Dismissal Of
False Claims Act Suit
The Second Circuit affirmed a New Yorkfederal district court decision dismissing a
False Claims Act suit against insurers andother entities. Takemoto v. Nationwide
Mut. Ins. Co., 2017 WL 214572 (2d Cir. Jan.
18, 2017).
Takemoto filed a complaint pursuant to
the False Claims Act, 31 U.S.C. §3729 etseq., accusing insurers, corporations andadministrators of failing to comply withreimbursement obligations under the
Medicare Secondary Payer Act, 42 U.S.C.
§1395y(b). A New York district court
dismissed the complaint, finding that it
failed to plead facts as to each defendant’s
obligation to reimburse the government, arequired element under the False Claims
Act. Affirming the ruling, the Second Circuit
held that Takemoto failed to allege facts
establishing an inference of a reimbursement
obligation on the part of any defendant.
In particular, the court explained that thecomplaint failed to identify any specificbeneficiaries to whom payment wasallegedly due; rather, allegations were basedon statistics about the overall Medicare
population. As such, the court concluded
that Takemoto’s allegations “‘supply nothing
but low-octane fuel for speculation’ about
the requisite reimbursement obligation
element of his claims, which cannot defeat
Rule 12(b)(6) dismissal even under thebasic pleading requirements of Rule 8(a)”(citations omitted). The Second Circuit denied
Takemoto’s request to amend the complaint
based on his failure to indicate how thedefects would be cured. Simpson Thacher
partner Bryce Friedman represents theTravelers Companies in this matter.
8

Jurisdiction Alert:

Interlocutory Review For Remand
Orders In CAFA Cases Is Limited To
Diversity Issues, Says Ninth Circuit
The Ninth Circuit ruled that the interlocutory
review provision in the Class Action Fairness
Act (“CAFA”) is limited to orders granting or
denying remand based on diversity, and does
not extend to remand orders based on federal
question jurisdiction. Chan Healthcare Grp.,
PS v. Liberty Mut. Fire Ins. Co., 844 F.3d
1133 (9th Cir. Jan. 3, 2017).

Here, the district court had granted fees tothe plaintiff based on the finding that theinsurer’s notice of removal was untimely
under the 30-day time limitation of thegeneral removal statute. 28 U.S.C. §1446(b).
However, the Ninth Circuit ruled that theinsurer’s notice of removal was not untimely,
because no basis for removal existed until
the plaintiff filed a reply brief, which raised adue process issue (i.e., an issue giving rise tofederal question jurisdiction). The court heldthat the notice of removal was timely because
it was filed within 30 days of the filing of the
reply brief. Rejecting arguments that the clock
started running earlier because the insurer
had been put “on notice” that a due process
claim would be raised, the court stated thatsuch an approach “runs afoul of our precedent
and would place a burden on defendants
to read the tea leaves and anticipate claims
where none had been asserted.”

Legislative Alerts:

New York Enacts Regulation
Prohibiting Insurers From Refusing
To Issue Commercial Crime Policies
Based On Employee’s Criminal
RecordAddressing a matter of first impression, theNinth Circuit ruled that the CAFA provisionthat allows appellate review of a district
court’s remand order (28 U.S.C. §1453(c)(1))
is limited to orders granting or denying
remand of diversity class actions. Therefore,
the court ruled that it lacked jurisdiction
under CAFA to review a district court’s
remand order based on federal question
jurisdiction. The court based its decision onlegislative history and statutory language,
including two references in the CAFA that are“linked exclusively to diversity and fail[] toinclude similar provisions to federal question
jurisdiction.” The Fifth, Sixth and Eighth
Circuits have reached the same conclusion.
Addressing a separate issue, the Ninth Circuitalso ruled that the district court improperly
awarded fees to the policyholder. Federal
statutory law allows a district court to award
fees incurred in a removal motion where acase has subsequently been remanded backto state court, but only if the removing party
lacked an “objectively reasonable basis”
for seeking removal. 28 U.S.C. §1447(c).

The New York State Department of Financial
Services has enacted a regulation thatprohibits insurers from refusing to issuecommercial crime policies to companies
based on their employment of individuals
with criminal records. Under N.Y. Comp.
Codes R. & Regs. tit. 11, §76, “it would be an
unfair method of competition or an unfair
or deceptive act and practice in the conductof the business of insurance in this state for
an insurer that writes commercial crime
insurance policies in this state to exclude
coverage where the employer has weighed thefactors set out in Correction Law Article 23-A
and made a determination favorable to theemployee.” Article 23-A, enacted to prevent
discrimination based on prior criminal
convictions, requires an employer to consider
certain specific factors in deciding whether
to hire an individual with a criminal record.
The new regulation—the first of its kind in the
country—aims to protect companies that havemade good faith efforts to employ individuals
who were previously incarcerated.

9New York Financial Services
Regulator Revises Proposed
Cybersecurity Regulations Affecting
Insurers
In September 2016, the New York State
Department of Financial Services proposed
regulations that would require financial
institutions—including insurers—toimplement stringent measures to protect
against data breaches and other cyberattacks.
The proposal mandated several specificrequirements, including the appointmentof a chief information security officer, anannual review process and detailed plans for
dealing with data breaches. Responding to aflood of criticism regarding the regulation’s
stringency, the Department issued a revised
proposed regulation last month. See N.Y.
Comp. Codes R. & Regs. tit. 23, §500. The
revised provision contains many of thesame safeguards included in the originaldraft, but allows for increased flexibility inthe implementation of the requirements. In
particular, the new proposal allows a financial
institution to customize its cybersecurity

program based on the particular risks
inherent to its business. However, theproposal still requires institutions to adhere
to the enumerated protocols included in theregulation and does not allow companies
to design controls based on their own risk
comfort levels. The revised proposal relaxes
certain other requirements, including thefollowing: the required frequency of risk
assessments was changed from “annually” to“periodically”; encryption is not required toprotect non-public data if it is “infeasible,”in which case, alternative methods ofcontrol may be used; and the 72-hour
reporting requirement for security breaches
is applicable only if the company is alreadyotherwise obligated to report the breach(under other laws or regulations) and if
the breach has “a reasonable likelihood ofmaterially harming any material part of thenormal operations” of the company. The
regulation is effective March 1, 2017, andcovered entities will be required to submit
a Certification of Compliance commencing
February 15, 2018.

10

Simpson Thacher has been an international leader in the practice of insurance and reinsurance law for
more than a quarter of a century. Our insurance litigation team practices worldwide.

David J. Woll
+1-212-455-3136
dwoll@stblaw.com

Bryce L. Friedman+1-212-455-2235
bfriedman@stblaw.com

Deborah L. Stein+1-310-407-7525
dstein@stblaw.com

Mary Beth Forshaw+1-212-455-2846
mforshaw@stblaw.com

Michael D. Kibler+1-310-407-7515
mkibler@stblaw.com

Craig S. Waldman+1-212-455-2881
cwaldman@stblaw.com

Andrew T. Frankel+1-212-455-3073
afrankel@stblaw.com

Michael J. Garvey+1-212-455-7358
mgarvey@stblaw.com

Susannah S. Geltman+1-212-455-2762
sgeltman@stblaw.com

Lynn K. Neuner+1-212-455-2696
lneuner@stblaw.com

Tyler B. Robinson+44-(0)20-7275-6118
trobinson@stblaw.com

Elisa Alcabes+1-212-455-3133
ealcabes@stblaw.com

Chet A. Kronenberg+1-310-407-7557
ckronenberg@stblaw.com

George S. Wang
+1-212-455-2228
gwang@stblaw.com

Summer Craig+1-212-455-3881
scraig@stblaw.com

This edition of the
Insurance Law Alert was
prepared by Mary Beth Forshaw
mforshaw@stblaw.com /+1-212455-2846 and Bryce L. Friedman
bfriedman@stblaw.com /+1-212-4552235 with contributions
by Karen Cestarikcestari@stblaw.com.

The contents of this publication are for informational purposes only. Neither this publication nor the
lawyers who authored it are rendering legal or other professional advice or opinions on specific facts
or matters, nor does the distribution of this publication to any person constitute the establishment of an
attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection withthe use of this publication. Please contact your relationship partner if we can be of assistance regardingthese important developments. The names and office locations of all of our partners, as well as ourrecent memoranda, can be obtained from our website, www.simpsonthacher.com.
Please click here to subscribe to the Insurance Law Alert.
11SimpsonThacherWorldwide

UNITED STATESEUROPE

SOUTH AMERICANew York
425 Lexington Avenue
New York, NY 10017+1-212-455-2000

LondonCityPoint
One Ropemaker Street
London EC2Y 9HUEngland+44-(0)20-7275-6500

São Paulo
Av. Presidente Juscelino
Kubitschek, 1455
São Paulo, SP 04543-011
Brazil+55-11-3546-1000

Houston
600 Travis Street, Suite 5400
Houston, TX 77002+1-713-821-5650
Los Angeles
1999 Avenue of the Stars
Los Angeles, CA 90067+1-310-407-7500
Palo Alto
2475 Hanover Street
Palo Alto, CA 94304+1-650-251-5000
Washington, D.C.
900 G Street, NW
Washington, D.C. 20001+1-202-636-5500

ASIA

Beijing
3901 China World Tower
1 Jian Guo Men Wai Avenue
Beijing 100004
China+86-10-5965-2999
Hong Kong
ICBC Tower
3 Garden Road, Central
Hong Kong+852-2514-7600
Seoul
25th Floor, West Tower
Mirae Asset Center 1
26 Eulji-ro 5-gil, Jung-gu
Seoul 100-210
Korea+82-2-6030-3800
Tokyo
Ark Hills Sengokuyama Mori Tower
9-10, Roppongi 1-Chome
Minato-Ku, Tokyo 106-0032
Japan+81-3-5562-6200
12