Insurance Law Alert

January 2020

In This Issue
Massachusetts Supreme Judicial Court Rules That Consent-To-Settle
Clause Does Not Violate Insurer’s Statutory Good Faith Settlement
Obligations
The Supreme Judicial Court of Massachusetts ruled that inclusion of a consent-to-settle clausein a professional liability policy does not violate state statutory law requiring insurers to engage
in good faith settlement negotiations. Rawan v. Cont’l Cas. Co., 136 N.E.3d 327 (Mass. 2019).
(Click here for full article)“[Simpson Thacher]is one of thepreeminent and mostsophisticated coveragelitigation firms.”– Chambers USA 2019(quoting a client)Computer Fraud Provision Covers Loss Caused By Email Phishing Scam,
Says Virginia Court
A Virginia federal district court ruled that losses caused by an email phishing scam arecovered by a computer fraud provision because the losses resulted “directly” from the use of acomputer. Cincinnati Ins. Co. v. Norfolk Truck Ctr., Inc., 2019 WL 6977408 (E.D. Va. Dec. 20,2019). (Click here for full article)

Company’s Loss Of Data, Caused By Ransomware Attack, Is “Direct
Physical Loss” Of Property Under Business Policy
A Maryland federal district court ruled that the loss of data and impairment of a computer
system resulting from a ransomware attack constituted “direct physical loss” under abusinessowner’s policy. Nat’l Ink & Stitch, LLC v. State Auto Prop. & Cas. Ins. Co., 2020 WL
374460 (D. Md. Jan. 23, 2020). (Click here for full article)

South Carolina Court Of Appeals Rules That Successor Company Is Not
Entitled To Coverage Under Predecessor’s Policies
The South Carolina Court of Appeals ruled that a successor company was not entitled toinsurance coverage under policies issued to its predecessor company because the insurer had
not consented to the assignment of policy benefits. PCS Nitrogen, Inc. v. Cont’l Cas. Co., 2019
WL 6884913 (S.C. Ct. App. Dec. 18, 2019). (Click here for full article)


Simpson Thacher & Bartlett LLP

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New York Bankruptcy Court Rules That Fee Exclusions Do Not Bar
Coverage For Class Action Suits Alleging Improper Mortgage FeesA New York bankruptcy court ruled that neither a Return of Fees Exclusion nor a Mortgage
Fee Claim Exclusion barred coverage for class action suits alleging improper origination andclosing fees charged in connection with second mortgages. In re Residential Capital, 2019 WL
7286880 (Bankr. S.D.N.Y. Dec. 27, 2019). (Click here for full article)

Ohio Appellate Court Rules That Umbrella Policy Covers Loss Caused By
Incorporation Of Defective Component Into Final ProductAn Ohio appellate court ruled that an umbrella insurer was obligated to defend and indemnify
claims arising out of the incorporation of a defective component into glass bottles. Motorists
Mut. Ins. Co. v. Ironics, Inc., 2020 WL 261696 (Ohio. Ct. App. Jan. 17, 2020). (Click here forfull article)

Fifth Circuit Rules That Rock Fines Released Into Stream Are
Contaminants, Even Though Not Inherently Hazardous
The Fifth Circuit ruled that coverage for damage caused by the release of small rock particles
into a nearby water source was barred by a pollution exclusion because the particles acted as acontaminant once discharged into the water. E. Concrete Materials, Inc. v. Ace Am. Ins. Co.,
2020 WL 254822 (5th Cir. Jan. 17, 2020). (Click here for full article)

STB News Alert
Click here to read about the Firm’s insurance-related honors.

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Settlement Alert:

Massachusetts Supreme Judicial
Court Rules That Consent-To-Settle
Clause Does Not Violate Insurer’s
Statutory Good Faith Settlement
Obligations
The Supreme Judicial Court of Massachusetts
ruled that inclusion of a consent-to-settle
clause in a professional liability policy does
not violate state statutory law requiring
insurers to engage in good faith settlement
negotiations. Rawan v. Cont’l Cas. Co., 136
N.E.3d 327 (Mass. 2019).
Continental issued a professional liability
policy to Lala, a structural engineer. The
policy included a consent-to-settle clause,
which provided that Continental would notsettle any claim without Lala’s consent. The
policy did not contain a “hammer clause”
stating that Continental’s liability would be
limited if Lala refused to settle. After Lala
was sued by homeowners, Continental agreed
to defend, conducted an investigation, andencouraged Lala to settle. Lala refused, andthe case went to trial, resulting in a judgmentin the homeowners’ favor. Continental paid
the homeowners the remaining policy limits
after payment of defense costs, and Lala paid
the balance.
The homeowners sued Continental, alleging
that it had violated statutory law by failing toeffectuate a prompt and equitable settlementof their claims. The court addressed whether
a consent-to-settle clause in a professional
liability policy inherently conflicts with aninsurer’s statutory obligation to effectuate
a prompt settlement once liability has
been clearly established. The court heldthat such clauses do not violate statutory
law. In reaching this conclusion, the court
acknowledged potential tension between
a consent-to-settle provision and insurers’
statutory settlement obligation, but foundno legislative intent to prohibit such clauses.
Additionally, the court explained that it
would be inappropriate to impute Lala’s
refusal to settle to Continental for purposesof finding a statutory violation given that
Continental’s ability to settle was contingent
upon Lala’s consent. The court therefore heldthat an insurer’s statutory duty to effectuate
a prompt, fair settlement does not require
the insurer to violate a consent-to-settle

clause, even where liability has beenclearly established.
However, the court cautioned that an insurer
who honors a consent-to-settle clause is
not necessarily exonerated from statutory
settlement duties. Rather, the determinationof whether an insurer has complied withits dual obligations is fact specific. The
court concluded that Continental satisfied
its statutory obligations by conducting athorough investigation and value assessmentof the claim against Lala and by engaging ingood faith efforts to convince Lala to settle.
Addressing a separate issue, the court
held that although certain pre-verdict
conduct on the part of the insurer waspotentially “problematic,” it did not harm
the homeowners. More specifically, the court
found that Continental’s decision not to sharean engineering report with the homeowners
and a misstatement regarding policy limits(whether intentional or accidental) did not
result in any harm to the homeowners; rather,
Lala’s refusal to settle was the proximate
cause of plaintiffs’ harm.

Cyber Coverage
Alerts:Computer Fraud Provision Covers
Loss Caused By Email Phishing
Scam, Says Virginia Court
A Virginia federal district court ruled thatlosses caused by an email phishing scam
are covered by a computer fraud provisionbecause the losses resulted “directly” fromthe use of a computer. Cincinnati Ins. Co. v.
Norfolk Truck Ctr., Inc., 2019 WL 6977408(E.D. Va. Dec. 20, 2019).
Norfolk Truck Center ordered truck parts
from Kimble Mixer Company. Following theorder, Norfolk received an email from an
imposter claiming to be a Kimble employeethat provided payment instructions for thepurchase. Norfolk completed the necessary
paperwork with its bank and issued a wiretransfer in the amount of $333,724 inaccordance with the imposter’s instructions.
When Norfolk discovered that the email with
the instructions was fraudulent, it sought
coverage under a computer fraud provision,3

which covered loss “resulting directly fromthe use of any computer to fraudulently cause
a transfer of [money].” The insurer denied
coverage, arguing that the loss did not result“directly” from computer use.
Addressing this matter of first impression
under Virginia law, the court ruled that theterm “directly,” as used in the computer
fraud provision, is unambiguous and means“straightforward” or “proximate” and“without intervening agency.” Applying
this interpretation, the court concluded
that the wire transfer loss resulted directlyfrom computer use. The court explainedthat “[c]omputers were used in every step of
the way including receipt of the fraudulent
instructions and the insured’s compliancewith such instructions by directing its bank towire the funds to the fake payee.”
The court rejected the insurer’s contention
that the loss was not direct because multiple
individuals were involved in the wire transfer
over the course of six days. The court also
found unpersuasive the insurer’s assertion
that coverage was unavailable because
Norfolk was attempting to pay a legitimate
invoice, rather than a fraudulent bill. The
court stated: “[t]he instant insurance
provision does not require a fraudulent
payment by computer; rather it requires
a computer’s use to fraudulently cause atransfer of money.”
As discussed in last month’s Alert, theEleventh Circuit similarly held that a
fraudulently-induced wire transfer initiatedby an email phishing scheme satisfied
the “directly” requirement of a computer
fraud provision.

Company’s Loss Of Data, Caused
By Ransomware Attack, Is “Direct
Physical Loss” Of Property Under
Business Policy
A Maryland federal district court ruled thatthe loss of data and impairment of a computer
system resulting from a ransomware attack
constituted “direct physical loss” under abusinessowner’s policy. Nat’l Ink & Stitch,
LLC v. State Auto Prop. & Cas. Ins. Co., 2020
WL 374460 (D. Md. Jan. 23, 2020).
National Ink, an embroidery and screen
printing business, was the victim of aransomware attack that prevented thecompany from accessing its art files, serverdata and software programs. National
Ink hired a security company to replace
and reinstall its software, along with newprotective measures, on its computer system.
Thereafter, although the computers still
functioned, computer processing was slower,
resulting in a loss of efficiency. In addition,
art files could not be retrieved. The security
company opined that remnants of the virus
could potentially re-infect the system andthat purchasing an entirely new system would
eliminate that risk.
National Ink filed a claim with State Farm for
replacement of the entire computer system.
State Farm denied coverage, arguing that
there was no “direct physical loss or damage,”as required by the policy. More specifically,
State Farm claimed that because National Ink
only lost data, an intangible asset, and could
still use its computer system, there was no
physical loss. The court disagreed and granted
National Ink’s summary judgment motion.

The policy covers “direct physical loss ofor damage to Covered Property,” which isdefined to include “Electronic Media andRecords (Including Software).” Electronic
Media and Records, in turn, is defined to
specifically include: “(a) Electronic dataprocessing, recording, or storage media suchas films, tapes, discs, drums or cells; [and](b) Data stored on such media.” The court
concluded that this language squarely placed
National Ink’s loss of data and software
within the scope of coverage. In addition, thecourt ruled that the loss of efficiency to andreliability of the computer system constituted
covered damage, notwithstanding that thecomputer was still operable. Rejecting State
Farm’s assertion that physical loss requires an“utter inability to function,” the court statedthat “[t]he policy language, and the relevantcase law, impose no such prerequisite.”
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Assignment Alert:
South Carolina Court Of Appeals
Rules That Successor Company Is
Not Entitled To Coverage Under
Predecessor’s Policies

The South Carolina Court of Appeals ruledthat a successor company was not entitled toinsurance coverage under policies issued toits predecessor company because the insurer
had not consented to the assignment of policy
benefits. PCS Nitrogen, Inc. v. Cont’l Cas.
Co., 2019 WL 6884913 (S.C. Ct. App. Dec.
18, 2019).
From 1966 to 1972, Columbia Nitrogen
Corporation (“Old CNC”) operated fertilizer
plants in Charleston. During that time frame,
Old CNC was insured under policies issued
by Continental. In 1986, Old CNC enteredinto an acquisition agreement, which sold
most of its assets to CNC Corp. (“New CNC”).
In addition to the assets, New CNC assumed
some of Old CNC’s liabilities related to the“acquired business.” The agreement also
included a document titled “Assignment of
Insurance Benefits,” which stated that Old
CNC “has agreed to sell, convey, transfer,and assign . . . all of [its] rights, proceeds
and other benefits to and under all of[its] policies.” New CNC later changed its
name and entered into merger agreementswith several other companies, ultimately
becoming part of PCS Nitrogen. In 2013, PCS
Nitrogen was found liable for environmental
remediation as a corporate successor to Old
CNC. PCS Nitrogen sought coverage under
Old CNC’s policies, which Continental denied.
A South Carolina trial court granted theinsurer’s summary judgment motion, and theappellate court affirmed.
The appellate court ruled that the policies
were not assigned to New CNC because Old
CNC did not obtain the consent from theinsurers required by the policies and South
Carolina law. The court further held thatthe assignment was invalid as a post-loss
assignment because there were no vested
claims from prior actions against Old CNC at
the time of assignment. The policies specified
that coverage was not available “until theamount of the insured’s obligation to pay shallhave been finally determined by judgment. . . or by written agreement.” Under thislanguage, and because no actions had been

filed against Old CNC prior to the asset sale,the court held that no losses had occurred andno vested claims existed. The court explainedthat although the operative occurrences (i.e.,
contamination) may have occurred during
the policy period, the insured loss (i.e., theinsured’s obligation to pay a sum of money)
did not occur prior to the assignment.

Coverage Alerts:

New York Bankruptcy Court Rules
That Fee Exclusions Do Not Bar
Coverage For Class Action Suits
Alleging Improper Mortgage FeesA New York bankruptcy court ruled thatneither a Return of Fees Exclusion nor
a Mortgage Fee Claim Exclusion barred
coverage for class action suits alleging
improper origination and closing fees charged
in connection with second mortgages. In
re Residential Capital, 2019 WL 7286880(Bankr. S.D.N.Y. Dec. 27, 2019).
Class action plaintiffs paid origination or
closing fees in connection with second
mortgages or subordinate loans. Those fees
were paid to the originating banks and otherthird parties, but not to Residential Capital
Corporation, a financial services company
that purchased and packaged mortgage loans
for sale to investors. Residential Capital did
not originate or close any of the loans at issueand did not have any contact with the classplaintiffs prior to its purchase of the loans. In
the class action suits, plaintiffs alleged that
Residential Capital was derivatively liable forthe acts of the originating banks and directly
liable based on its conduct after purchasing
the loans.
Residential Capital filed for bankruptcy
and then settled the class action suits.
In connection with the settlements, theclass plaintiffs were assigned Residential
Capital’s rights under its insurance policies.
In the present suit, the class plaintiffs
sought coverage for their settlements under
combined Directors and Officers/Errors
and Omissions policies. The insurers denied
coverage on the basis of two exclusions.
The court granted the plaintiffs’ summary
judgment motion, holding that coverage was
not barred by the Return of Fees Exclusion or
Mortgage Fee Claim Exclusion.
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The Return of Fees Exclusion bars coveragefor “premiums, return premiums, fees,
commissions, costs, expenses or other charges
paid or payable by or to the Assured.” Thecourt held that the exclusion, which expressly
requires payment “to the Assured,” wasinapplicable because the fees were paid tothe originating banks and others, and not
directly to Residential Capital. The court
also rejected the insurers’ contention that a
Deemer clause, which states that an Assured
is “any person or entity for whose conductan Assured is legally responsible,” renders
the Exclusion applicable to any claims thatare based on fees paid to entities for whom
Residential Capital was legally responsible,
such as the originating banks. The court
reasoned: “Even if the definition of the word
‘Assured’ were expanded by the Deemer
Clause, the Plaintiffs’ claims relating to[Residential Capital] are not covered by
the exclusion because [Residential Capital]
was not ‘the’ Assured that engaged in the
excluded conduct.” The court emphasized thedifference between language referencing “the”
Assured and “any” or “an” Assured, implyingthat only the latter would encompass
Residential Capital.
The court also ruled that a Mortgage Fee
Claim Exclusion was inapplicable. That
exclusion defined Mortgage Fee Claim as“a Claim arising out of fees paid to or by aProfessional Liability Assured.” Although theparties agreed that Residential Capital was
a Professional Liability Assured, the court
deemed it determinative that no fees were
paid by or to Residential Capital.

Ohio Appellate Court Rules That
Umbrella Policy Covers Loss
Caused By Incorporation Of
Defective Component Into Final
Product
An Ohio appellate court ruled that anumbrella insurer was obligated to defend
and indemnify claims arising out of theincorporation of a defective component
into glass bottles. Motorists Mut. Ins. Co. v.
Ironics, Inc., 2020 WL 261696 (Ohio. Ct. App.
Jan. 17, 2020).
Ironics sold tube scale to Owens-Brockway
for use in the production of glass bottles.
Unbeknownst to Ironics, foreign particles
were inadvertently mixed into the tube scale,a defect that was not discovered until OwensBrockway had incorporated the tube scale
into its glass bottles. Because the damage wasirreversible, Owens-Brockway was required
to scrap nearly 2,000 tons of bottles. When
Owens-Brockway sued, Ironics sought
defense and indemnity from Motorists undera general liability policy and an umbrella
policy. The trial court ruled that there was nocoverage under either policy. The appellate
court reversed in part.
With respect to the general liability policy, theappellate court assumed, without deciding,that Ironics’ delivery of non-conforming
tube scale constituted an “occurrence” thatcaused “property damage.” However, thecourt concluded that coverage was barred bya contractual liability exclusion. The court
rejected Ironics’ assertion that the exclusion
did not encompass underlying negligence andproduct liability claims. The court explainedthat those tort claims were not cognizable
under Ohio’s economic-loss rule, which
prevents recovery of damages for purely
economic loss.
However, the appellate court ruled that
Motorists was obligated to defend andindemnify Ironics under the umbrella policy.
Emphasizing that the umbrella policy defines“occurrence” broadly to include “an accident,
or a happening or event” resulting in property
damage, the court concluded that Ironics’
supply of defective tube scale was an “event.”
As to whether the event resulted in “property
damage” under the umbrella policy, Motorists
argued that there must be damage to “otherproperty” (aside from the insured’s own
defective tube scale) in order to trigger
coverage. Furthermore, Motorists argued thatthe glass bottles could not be considered such“other property” because, under applicable
case law, once an insured’s defective
component is irreversibly integrated into a
product, the final product cannot be deemed“damage to other property” for the purposesof insurance coverage. The court rejected
these assertions.
First, the court ruled that the umbrella policy
does not require damage to other property
because it defines “property damage” toinclude “physical injury to or destruction of
tangible property . . . including all resulting
loss of use of that property,” without any
reference to “other property.” In addition,
6the court ruled that there was damage toother property (i.e., the glass bottles) and thatcase law relating to integrated products wasinapplicable. The court stated:
Unlike the limited scope of coverageapplicable to CGL policies, the umbrella
policy in this case is, by its very terms,
designed to provide broad coveragefor claims that are not otherwise
covered by Ironics’ CGL policy . . .
Given the differences between a CGL
policy and an umbrella policy, it would
be inappropriate to impose the [ ]integrated system rule here, especiallywhere the rule itself is not contained in
the policy language.
Finally, the court rejected Motorists’contention that a “your product” exclusion,
among others, precluded coverage. The
court held that the glass bottles could not
be deemed Ironics’ product, reiteratingthat “integrated product” case law
was inapplicable in the context of theumbrella policy.

insurers denied coverage to the quarry basedon a pollution exclusion.
A Texas federal district court enforced theexclusion, ruling that the rock fines were
pollutants notwithstanding their “ordinary
usefulness.” Rejecting the quarry’s assertion
that rock fines are a nonhazardous material,
the district court stated: “If they were indeed
innocuous, the State of New Jersey would nothave required remediation.” See July/August
2018 Alert.
The Fifth Circuit affirmed, ruling that therock fines were “contaminants” because
they were “discharged and dispersed where
they did not belong.” The court rejected theinsured’s contention that this interpretation
was “dangerously overbroad because it allows
anything (even water or bricks) to becomecontaminants if left in an inappropriate
place.” The court explained that the rock finesmust be deemed contaminants based on theireffects on the overall ecosystem, including
harm to habitat, fish and other species.

Pollution Exclusion STB News Alert:
Lynn Neuner was honored as a “Notable
Woman in Law” for 2020 by Crain’s
Alert:New York. This annual feature celebrates
Fifth Circuit Rules That RockFines Released Into Stream Are
Contaminants, Even Though Not
Inherently Hazardous

The Fifth Circuit ruled that coverage fordamage caused by the release of small rockparticles into a nearby water source wasbarred by a pollution exclusion because
the particles acted as a contaminant once
discharged into the water. E. Concrete
Materials, Inc. v. Ace Am. Ins. Co., 2020 WL
254822 (5th Cir. Jan. 17, 2020).

trailblazing female attorneys in the New York
City metropolitan area. Lynn was recognizedfor her work advising on complex and highprofile matters, as well as her leadership
positions within and outside the Firm.

The underlying claims arose out of thedispersal of rock fines (small rock particles
resulting from the stone-crushing process
at the insured’s quarry) into an adjacentreservoir. The rock fines were supposed
to be contained in settling ponds, but due
to a pumping accident, were carried into awaterway that led to a reservoir. According togovernment agencies, the rock fines damaged
the stream bed and required remediation. The

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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.

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

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

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

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

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

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

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

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

Jonathan T. Menitove+1-212-455-2693
jonathan.menitove@stblaw.com

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

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

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

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

This edition of the
Insurance Law Alert was
prepared by Mary Beth Forshaw
mforshaw@stblaw.com /+1-212-4552846 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.
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