Insurance Law Alert

July/August 2022

In This Issue
Eleventh Circuit Rules That Reinsurance Agreement Lacks A Follow The
Fortunes Clause And Declines To Infer One
The Eleventh Circuit ruled that a reinsurance agreement does not contain a follow the fortunes
clause and refused to infer application of the doctrine, finding that such a reading would
be inconsistent with the agreement’s plain language. Public Risk Mgmt. of Fla. v. Munich
Reinsurance Am., Inc., 2022 WL 2338572 (11th Cir. June 29, 2022). (Click here for full article)“Renownedin the market
as accomplished trial
lawyers and coverageexperts who offer quality
representation to clients in
the insurance industry.”– Chambers USA
2022

Reinsurer Has No Duty To Reimburse Cedent’s Payments Notwithstanding
Follow The Settlements Clause, Says New York Appellate Court
A New York appellate court ruled that a cedent was not entitled to reimbursement of defense
costs it paid under its umbrella policies because the reinsurance policies did not cover suchcosts and a follow the settlements provision did not apply in such circumstances. Utica Mutual
Ins. Co. v. Abeille Gen. Ins. Co., 2022 WL 2092908 (N.Y. App. Div. 4th Dep’t June 10, 2022).
(Click here for full article)

New York Court Rules That Insured Is Responsible For Costs Allocated To
Self-Insured Periods
A New York trial court ruled that a policyholder was responsible for its pro rata share ofdefense costs attributable to self-insured periods. National Hockey League v. TIG Ins. Co.,
2022 WL 2733210 (N.Y. Sup. Ct. New York Cnty. June 24, 2022). (Click here for full article)

Reversing Lower Court, Wisconsin Supreme Court Rules That Assignment
Was Valid, Notwithstanding Lack Of Insurer Consent
The Supreme Court of Wisconsin ruled that an assignment of insurance benefits was valid,
notwithstanding the lack of insurer consent, because the losses at issue had already occurred.
Pepsi-Cola Metropolitan Bottling Co., Inc. v. Employers Ins. Co. of Wausau, 2022 WL
2542321 (Wisc. July 8, 2022). (Click here for full article)

New Jersey Supreme Court Rules That Claimants May Seek Recovery
From Insurer Pursuant To Direct Action Statute But Subject To
Arbitration Clause In Insurance Contracts
The Supreme Court of New Jersey ruled that underlying claimants were entitled to assert
claims against an insurance company pursuant to New Jersey’s Direct Action Statute, butthat the dispute was subject to the arbitration clause in the insurance policies. Crystal Point
Condominium Assoc., Inc. v. Kinsale Ins. Co., 2022 WL 2793326 (N.J. July 18, 2022).
(Click here for full article)

Simpson Thacher & Bartlett LLP

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Second Circuit Addresses Coverage Limits Under Stub Policies And
Application Of Non-Cumulation Clauses
The Second Circuit addressed the coverage limits available under stub policies, the effect of
non-cumulation provisions, and the duty of an excess insurer to “drop down” upon a primary
insurer’s insolvency. Ferguson Enterprises, Inc. v. American Home Assurance Co., 2022 WL
2165921 (2d Cir. June 16, 2022). (Click here for full article)

New York Court Rules On Allocation And Exhaustion In Asbestos
Coverage Suit
A New York trial court addressed the allocation of losses across policy periods and exhaustionof primary policies in a recent asbestos coverage lawsuit. Meissner v. Ridge Construction,Inc., 2022 N.Y. Misc. LEXIS 3106 (N.Y. Sup. Ct. Monroe Cnty. July 18, 2022). (Click here forfull article)

South Dakota Supreme Court Declines To Apply Concurrent Causation
Doctrine
The Supreme Court of South Dakota refused to apply the concurrent causation doctrine andheld that policyholders were not entitled to coverage based on a policy exclusion. Nationwide
Agribusiness Ins. Co. v. Fitch, 2022 WL 2165952 (S.D. June 15, 2022). (Click here forfull article)

Liability Policies Cover Property Damage Caused By Seismic Activity
Related To Oil And Gas Exploration, Says Oklahoma Supreme Court
The Supreme Court of Oklahoma ruled that a general liability policy covered property damage
losses resulting from seismic activity stemming from the policyholder’s oil and gas exploration
activity. Crown Energy Co. v. Mid-Continent Cas. Co., 2022 OK 60 (June 14, 2022).
(Click here for full article)

Addressing Matter Of First Impression, Montana Supreme Court Rules
That Earth Movement Exclusion In Liability Policy Bars Coverage For
Construction Defect Claims
The Supreme Court of Montana ruled that a trial court erred in deeming an earth movement
exclusion ambiguous as to property damage claims arising out of negligent construction.
Loendorf v. Employers Mutual Cas. Co., 2022 WL 2816311 (Mont. July 19, 2022). (Click here
for full article)

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Reinsurance
Alerts:Eleventh Circuit Rules That
Reinsurance Agreement Lacks A
Follow The Fortunes Clause And
Declines To Infer One
The Eleventh Circuit ruled that a reinsurance
agreement does not contain a follow
the fortunes clause and refused to inferapplication of the doctrine, finding thatsuch a reading would be inconsistent withthe agreement’s plain language. Public Risk
Mgmt. of Fla. v. Munich Reinsurance Am.,
Inc., 2022 WL 2338572 (11th Cir. June29, 2022).
Public Risk Management (“PRM”), a selfinsured risk management program that
insures local government entities in Florida,sought reinsurance coverage from Munich
for a settlement PRM had reached with
underlying claimants. Munich denied thatit had any obligation to provide reinsurance
because the underlying loss occurred before
the inception of the reinsurance agreement. A
Florida district court ruled in Munich’s favor,
finding that the evidence indicated that theoperative occurrence happened outside thepolicy period. On appeal, PRM argued that
Munich was obligated to cover the settlement
pursuant to the follow the fortunes doctrine.
The Eleventh Circuit disagreed and affirmed
the district court decision.
The Eleventh Circuit ruled that thereinsurance contract did not contain afollow the fortunes clause. The agreement
required Munich to indemnify PRM for“Ultimate Net Loss” “paid by PRM as aresult of Occurrences . . . during the termof this Agreement under PRM’s Coverage
Document underwritten by PRM and covered
under this Agreement.” The agreement
defined “Ultimate Net Loss” as “the sum
or sums paid by PRM for which it is liable,
under the Coverage Document reinsured
hereunder.” Additionally, the agreement
specified that Munich must issue payment
after it receives “proof of payment . . . andcoverage hereunder.” The court explainedthat pursuant to this language, Munich would
not be required to reimburse PRM for defense
or indemnity if PRM was not liable under
the policy reinsured by Munich. The court
further held that this language is squarely

inconsistent with the follow the fortunes
doctrine, which would bind Munich to PRM’sgood faith coverage decisions.
Finally, the court declined to infer thatthe follow the fortunes doctrine applies toall reinsurance agreements under Florida
law. The court held that where, as here, areinsurance agreement “contains terms thatare plainly and unambiguously inconsistent
with the follow the fortunes doctrine . . . . theSupreme Court of Florida would not inferapplication of the doctrine.” Notably, thecourt did not decide whether such inference
would be appropriate in other circumstances,such as when an agreement lacks an express
follow the fortunes clause and language that isinconsistent with the doctrine.

Reinsurer Has No Duty To
Reimburse Cedent’s Payments
Notwithstanding Follow The
Settlements Clause, Says New YorkAppellate Court
A New York appellate court ruled that acedent was not entitled to reimbursementof defense costs it paid under its umbrella
policies because the reinsurance policies
did not cover such costs and a follow thesettlements provision did not apply in suchcircumstances. Utica Mutual Ins. Co. v.
Abeille Gen. Ins. Co., 2022 WL 2092908 (N.Y.
App. Div. 4th Dep’t June 10, 2022).
Utica issued primary and umbrella policies tothe underlying insured, who had been sued in
an asbestos-related bodily injury action. Utica
paid defense costs under the primary policies,
but disputed its obligation to pay defense
costs under the umbrella policies after
primary policy exhaustion. Utica ultimately
settled with its policyholder and agreed to pay
defense costs and losses under the umbrella
policies. Thereafter, Utica sought reinsurance.
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The reinsurer refused to pay, arguing that
Utica had no obligation to pay under theumbrella policies, rendering reinsurance
coverage unavailable.
A New York trial court agreed with thereinsurer, finding that the unambiguous
terms of Utica’s umbrella policy indicated thatit did not cover the disputed defense costs
and were thus not reinsured. However, thetrial court declined to grant the reinsurer’ssummary judgment motion based on
purported issues of fact relating to the follow
the settlements doctrine. The appellate
court modified the order and granted thereinsurer’s motion.
The appellate court affirmed the trial court’s
ruling that the umbrella policies did notcover the defense costs in the underlying
action. In addition, the court ruled that follow
the settlements clauses in the reinsurance
agreements did not require the reinsurer toreimburse Utica. While such clauses require areinsurer to indemnify payments “reasonably
within the terms of the original policy, evenif technically not covered by it,” they do not
require reinsurance coverage where, as here,
the payments are “clearly beyond the scope ofthe original policy.”

Allocation Alert:
New York Court Rules That Insured
Is Responsible For Costs AllocatedTo Self-Insured Periods
A New York trial court ruled that apolicyholder was responsible for its pro rata
share of defense costs attributable to selfinsured periods. National Hockey League v.
TIG Ins. Co., 2022 WL 2733210 (N.Y. Sup. Ct.
New York Cnty. June 24, 2022).
In the underlying multidistrict litigation,
a putative class of retired hockey players
sued the NHL, alleging repetitive
concussive injuries during their careers.
The NHL provided notice of the litigation
to its insurers, who agreed, pursuant to areservation of rights, to front defense costs
for the independent counsel that NHL had
retained. In the present action, the NHLsought to recover the unpaid portions of its
defense costs.

The insurers argued that they had no
obligation to reimburse those costs because
the NHL never tendered the defense of
the underlying action to them and instead
retained independent counsel. Additionally,
the insurers argued that to the extent defense
costs must be reimbursed, allocation to the
NHL is warranted because it was uninsured
for almost 60 of the 95 years at issue in theunderlying litigation.
The court rejected the insurers’ tenderargument, emphasizing that they were
notified of the litigation, aware of the NHL’s
selection of counsel, and agreed to fund thedefense costs in part without disclaiming
coverage or demanding to control the defense.
As to allocation, the court held that policy
language limiting the insurers’ obligations
to losses or occurrences “during the policy
period” requires pro rata allocation ofindemnity costs. Further, the court held thatpro rata allocation of defense costs, with pro
rata apportionment to the NHL for uninsured
periods, was appropriate.

Assignment Alert:
Reversing Lower Court,
Wisconsin Supreme Court Rules
That Assignment Was Valid,
Notwithstanding Lack Of Insurer
Consent
The Supreme Court of Wisconsin ruled thatan assignment of insurance benefits was valid,
notwithstanding the lack of insurer consent,
because the losses at issue had alreadyoccurred. Pepsi-Cola Metropolitan BottlingCo., Inc. v. Employers Ins. Co. of Wausau,
2022 WL 2542321 (Wisc. July 8, 2022).
Wausau issued primary and umbrella
policies to “Old Waukesha” in the 1960s.
Thereafter, over the course of the next few
decades, Old Waukesha participated in aseries of assignments and transfers, after
which Pneumo Abex became the successor
in interest to Old Waukesha and Pepsi was
the “net of insurance” indemnitor of Pneumo
Abex for numerous asbestos suits. When
Pepsi sought coverage from Wausau, theinsurer refused to defend on the basis thatthe assignment of policies without its consent
was invalid. A lower court agreed and granted
Wausau’s summary judgment motion.
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The Supreme Court of Wisconsin reversed,
holding that under long-standing state law, ananti-assignment provision is not enforceable
where the assignment occurs after a “loss”
has occurred under an occurrence-based
policy. The court found that exposure toasbestos was the operative occurrence andsince it took place during the relevant policy
periods, the “loss” had already occurred
before the assignments took place. In soruling, the court emphasized that a “loss”
is the actual “occurrence” in this context,
rejecting Wausau’s assertion that anassignment is not “post-loss” unless the loss
has actually been reported and the insurer
acknowledges liability.

Direct Action/
Arbitration Alert:
New Jersey Supreme Court Rules
That Claimants May Seek Recovery
From Insurer Pursuant To Direct
Action Statute But Subject To
Arbitration Clause In Insurance
Contracts
The Supreme Court of New Jersey ruledthat underlying claimants were entitled toassert claims against an insurance company
pursuant to New Jersey’s Direct Action
Statute, but that the dispute was subject to thearbitration clause in the insurance policies.
Crystal Point Condominium Assoc., Inc. v.
Kinsale Ins. Co., 2022 WL 2793326 (N.J. July18, 2022).
Crystal Point, a building managementcompany, sued contractors after it discovered
construction defects. The suit resulted ina default judgment and writs of execution
against the contractors. Thereafter, Crystal
Point sued Kinsale, the contractors’ insurer,

seeking a declaration of coverage, as allowedby the New Jersey Direct Action Statute(N.J.S.A. 17:28-2). Kinsale argued that thestatute did not apply because Crystal Point
had not demonstrated that the contractors
were insolvent and alternatively, that the
dispute was subject to arbitration pursuant toan arbitration clause in the insurance policies.
A New Jersey trial court ruled that the Direct
Action statute did not apply because Crystal
Point failed to establish that the insured
contractors were insolvent or bankrupt, as
required by the statue. In addition, the trial
court granted Kinsale’s motion to compel
arbitration. An intermediate appellate court
reversed. After considering supplemental
evidence, the intermediate appellate court
ruled that the contractors’ failure to satisfy
the writs of execution sufficiently establishedinsolvency or bankruptcy. The court also
reversed the arbitration ruling, finding thatthe arbitration clause in the policies did notencompass the claims.
The Supreme Court of New Jersey reversedin part and affirmed in part. The court ruledthat while Crystal Point was entitled to assert
direct claims against Kinsale, the claims
must be arbitrated. The court agreed that the
supplemental record established prima facie
evidence of insolvency or bankruptcy basedon the unsatisfied writs of execution. As toarbitration, the court explained that claims
under Direct Action Statute are derivative,
subject to “the terms of the policy,” which,here, included an arbitration clause.

Coverage Alerts:
Second Circuit Addresses Coverage
Limits Under Stub Policies And
Application Of Non-Cumulation
Clauses
The Second Circuit addressed the coverage
limits available under stub policies, the effectof non-cumulation provisions, and the dutyof an excess insurer to “drop down” upona primary insurer’s insolvency. Ferguson
Enterprises, Inc. v. American Home
Assurance Co., 2022 WL 2165921 (2d Cir.
June 16, 2022).
In this declaratory judgment action, various
insurers sought rulings as to their rights and5obligations in connection with underlying
asbestos litigation. Applying California law, a
New York district court granted the insurers’
summary judgment motion as to three issues.
The Second Circuit affirmed in part andreversed in part.
Stub Policies
Reversing the district court, the Second
Circuit ruled that with respect to threepolicies, the full aggregate limits wereavailable during stub policy periods.
One policy covered a three-year period andprovided a limit of liability of $10 million“in the aggregate of each annual period.”
By endorsement, and in consideration ofan additional premium, the policy period
was extended by ten days. The endorsement
documenting the extension stated that “[a]llother terms and conditions remain the same.”
The court concluded that this language wasambiguous as to whether the ten-day stubperiod carried with it a full endorsement
limit, separate and apart from preceding
annual period, or whether it simply extended
the annual period. Resolving this ambiguity infavor of the insured’s “objectively reasonable
expectations,” the court concluded that thepolicy had four annual aggregate limits of $10
million each. Applying the same reasoning,
the court deemed a similar extension
endorsement in a second policy ambiguous.
A third policy in effect from December 18,
1984 to April 1, 1986, included an aggregate
limit of $5 million “during each policy year.”
The court held that the undefined term“policy year” was ambiguous in the context of
this 15.5-month policy period. In particular,
the court explained that it could be reasonablyinterpreted to mean no less than 365 days,in which case the policy had only one policy
year and one aggregate limit, or conversely,
to mean that a new “policy year” begins oneach anniversary of the policy’s effective
date, such that there were two policy years(each beginning on December 18) and two
aggregate limits. In accordance with thepolicyholder’s reasonable expectations, thecourt adopted the latter interpretation.
Non-Cumulation Provision
The district court granted an insurer’ssummary judgment motion with respect toa non-cumulation provision in its umbrella
and excess policies, holding that the policy“clearly and unambiguously limit[ed] thepotential liability under both . . . policies andthis per-occurrence limit applie[d] acrosspolicy periods,” thereby making “[a]ny
potential reduction . . . depend[ent] on thelimits reached in previous policies.” The
Second Circuit vacated the ruling, deeming
it unclear in its scope. More specifically, theSecond Circuit noted that the ruling was
ambiguous as to whether it held, as a generalmatter, that non-cumulation clauses may
be enforced as anti-stacking provisions orthat in this particular case, the provision
was actually triggered such that aggregate
limits under specific policies were reducedby virtue of payments under earlier policies.
Finding a lack of factual support for the latterconclusion, the court remanded the matter for
further proceedings.
Drop Down Obligation
The Second Circuit affirmed the district
court’s ruling that an excess insurer need not“drop down” to provide coverage following
the primary insurer’s insolvency. The court
explained that exhaustion of primary policies,
for purposes of triggering an excess insurer’s
coverage obligations, occurs by virtue of
payment, not insolvency.

New York Court Rules On
Allocation And Exhaustion In
Asbestos Coverage Suit
A New York trial court addressed theallocation of losses across policy periods andexhaustion of primary policies in a recent
asbestos coverage lawsuit. Meissner v. Ridge
Construction, Inc., 2022 N.Y. Misc. LEXIS
3106 (N.Y. Sup. Ct. Monroe Cnty. July18, 2022).
In the underlying suit, a claimant wasawarded $8 million for asbestos-related
injuries. Because the defendant construction
6

company was dissolved, the claimant broughtsuit against its excess insurers to collect theverdict pursuant to New York Insurance Law§3420. Underwriters argued that its policies
did not cover the underlying losses andasserted several coverage defenses.
Relying on the New York Court of Appeals’
decision in In re Viking Pump, 27 N.Y.3d 244(2016) (discussed in our May 2016 Alert),
the court ruled that where, as here, policies
contain prior insurance and non-cumulation
provisions, all sums allocation and verticalexhaustion are appropriate.

With respect to exhaustion, the court ruledthat a buy-back settlement agreement
between a primary insurer and thepolicyholder established full and proper
exhaustion of the primary policy so as totrigger coverage under the excess policy.
The court held that the “actual payment”
requirement of the excess policy was met
because the claimants granted Underwritersa credit for the full amount of the primarypolicy. The court explained that if the
dissolved policyholder had been financially
viable, it could “fill the gap” in coverage forthe primary policy limits. Since the claimants“stand in the shoes” of the policyholder inthis action, they adequately filled the gap by
issuing a credit against the excess policy so as
to meet the exhaustion requirement.

South Dakota Supreme Court
Declines To Apply Concurrent
Causation Doctrine
The Supreme Court of South Dakota refused
to apply the concurrent causation doctrine
and held that policyholders were not entitled
to coverage based on a policy exclusion.
Nationwide Agribusiness Ins. Co. v. Fitch,2022 WL 2165952 (S.D. June 15, 2022).

The policyholders, a family of farmers andcattle ranchers, were sued by a nephew who
sustained injuries while riding on a utilityterrain vehicle on their property. Nationwide
initially defended under a reservation ofrights, but then sought a declaration thatit had no duty to defend or indemnify theunderlying claims. The trial court granted
Nationwide’s summary judgment motion,
ruling that a policy exclusion relating torecreational vehicles excluded coverage.
The Supreme Court of South Dakota affirmed,
ruling that the lower court correctly refused
to apply the concurrent causation doctrine.
Under that doctrine, a court may findcoverage, notwithstanding a valid exclusion,
if a loss is also attributable to a covered peril.
The underlying claimant argued that thedoctrine applied because his injuries were
the result of two independent causes—theuse of the recreational vehicle (excluded) andthe policyholders’ negligence (covered). The
court noted that it has not expressly accepted
the doctrine, but held that even if it did, thedoctrine would be inapplicable here because
the concurrent events were not “distinct
from each other,” but rather, “inextricablyintertwined.” More specifically, the court
explained that any alleged acts of negligenceby the policyholders “are part and parcel” of
their nephew’s use of the vehicle and that the
injuries could not have occurred without useof the excluded recreational vehicle.

Liability Policies Cover Property
Damage Caused By Seismic Activity
Related To Oil And Gas Exploration,
Says Oklahoma Supreme Court
The Supreme Court of Oklahoma ruled thata general liability policy covered property
damage losses resulting from seismic activity
stemming from the policyholder’s oil and gas
exploration activity. Crown Energy Co. v.
Mid-Continent Cas. Co., 2022 OK 60 (June14, 2022).
Crown, an oil and gas producer, was named
as a defendant in a class action suit alleging
property damage caused by seismic activity
stemming from Crown’s use of waste waterdisposal wells. Mid-Continent denied
coverage, arguing that the damage was notcaused by an “occurrence” and that in any
event, a pollution exclusion barred coverage.
The court rejected both contentions and ruledin Crown’s favor.
7

Mid-Continent argued that because Crown’s
injection of waste water into the disposal
wells was intentional, its activities could
not constitute an “accident” for insurance
coverage purposes. Rejecting this assertion,
the court reasoned that the resulting seismic
activity was not a “natural and probableconsequence” of Crown’s disposal activities.
The court explained that “some risk” ofseismic activity does not mean that it is anatural and probable consequence of Crown’s
waste water disposal activities.
The court also ruled that the pollution
exclusion did not bar coverage, deeming
it ambiguous under the factual scenariopresented. The court relied on National
American Ins. Co. v. New Dominion, 2021
OK 62 (2021) (discussed in our December
2021 Alert), in which it ruled that a pollution
exclusion did not apply to similar underlying
losses. Mid-Continent argued that theexclusion here was broader than that in New
Dominion because it contained expansive“arising out of” language and because unlike
in New Dominion, the present exclusion
did not rely on a separate definition of“pollutants.” The court acknowledged these
distinctions, but concluded that they did not“expand [the exclusion’s] scope to such an
extent that it would preclude coverage for theunderlying claims.”

Addressing Matter Of First
Impression, Montana Supreme
Court Rules That Earth Movement
Exclusion In Liability Policy Bars
Coverage For Construction DefectClaimsThe Supreme Court of Montana ruledthat a trial court erred in deeming anearth movement exclusion ambiguous
as to property damage claims arising outof negligent construction. Loendorf v.
Employers Mutual Cas. Co., 2022 WL
2816311 (Mont. July 19, 2022).

filed a declaratory judgment action seeking
a ruling that Employers was obligated toindemnify the underlying claims.
A trial court ruled in the homeowners’ favor,
ruling that an earth movement exclusion,
which applied to damage “arising out of,caused by, resulting from, contributed to,
aggravated by, or related to . . . settling . . . or
any other movement of land, earth or mud,”did not apply. The trial court reasoned thatthe exclusion applied only where earth
movement is the result of “settling of theearth rather than earth movement as aresult of the insured’s actions” and that theexclusion was limited to “long-term earth
movement that spanned years.”
Addressing this matter of first impression
under Montana law, the Supreme Courtof Montana reversed, ruling that theunambiguous language of the exclusion
encompassed claims of property damage
caused by the insured’s negligence andinvolving the movement of earth. The
court stated:
Applying the Earth Movement Exclusion
based on a perceived distinction between“natural” and “human-caused” earth
movements is an erroneous frameworkthat improperly injects further
causation concepts into the Policy.
While the Homeowners are correctthat the Exclusion does not attempt
to differentiate between natural andhuman-caused earth movement, that
does not render it ambiguous, but rather
encompassing, by design. The Exclusion
broadly eliminates coverage for the
insured’s liability for damage that is
related to any earth movements.

After discovering foundation cracks
and structural damage in their homes,
homeowners sued the builder, alleging
negligent construction. The complaint allegedthat the damage resulted from the faulty
construction of foundation systems and thesettling of soil near and beneath the homes.
Employers, the builder’s liability insurer,
defended under a reservation of rights. Whilethe litigation was pending, the homeowners
8

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

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trobinson@stblaw.com

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irethy@stblaw.com

This edition of the
Insurance Law Alert was prepared by
Mary Beth Forshaw / +1-212-455-2846
mforshaw@stblaw.com andBryce L. Friedman / +1-212-455-2235
bfriedman@stblaw.com
with contributions by Karen Cestarikcestari@stblaw.com.

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