Insurance Law Alert

March 2023

In This Issue
Michigan Court of Appeals Rules That Insurer Has No Duty To Indemnify
TCPA Settlement
A Michigan appellate court ruled that an insurer had no duty to indemnify a class action
settlement for claims alleging violations of the Telephone Consumer Protection Act. Bridging
Communities, Inc. v. Hartford Cas. Ins. Co., No. 355955 (Mich. Ct. App. Mar. 2, 2023).
(Click here for full article)

Finding That Policyholder Adequately Alleged “Ownership” Of Funds,
New Jersey Court Declines To Dismiss Suit Seeking Coverage For
Fraudulent Wire Transfer Loss
“Simpson Thacher
is top of the game forcoverage litigation.”– Chambers USA 2022
(quoting a client)

A New Jersey district court denied an insurer’s motion to dismiss, ruling that a policyholder
sufficiently alleged “ownership” of funds it never held for purposes of seeking coverage for wiretransfer losses incurred as a result of an email hacking scheme. Montachem International
Inc. v. Federal Ins. Co., 2023 U.S. Dist. LEXIS 38640 (D.N.J. Mar. 8, 2023). (Click here forfull article)

New Jersey Supreme Court Rules That CGL Coverage Is Primary And
Entity’s Participation in Joint Insurance Fund Does Not Implicate “Other
Insurance” Clause
The New Jersey Supreme Court ruled that a joint insurance fund affords protection through“self-insurance,” not insurance, and therefore that a general liability insurer’s “otherinsurance” clause was not implicated. Statewide Ins. Fund v. Star Ins. Co., 2023 N.J. LEXIS
205 (N.J. Feb. 16, 2023). (Click here for full article)

Georgia Court Rules That Reinsurance Dispute Is Subject To Arbitration
Under Third-Party Beneficiary Doctrine
A Georgia district court ruled that a reinsurance dispute was subject to arbitration under theequitable third-party beneficiary doctrine. Various Insurers, Reinsurers and Retrocessionaires
Subscribing to Policy Numbers v. General Electric International, Inc., No. 1:21-cv-04751 (N.D.
Ga. Mar. 17, 2023). (Click here for full article)

Insurance Coverage for Claims Arising Out Of PFA “Forever Chemicals”
An emerging area of litigation is whether claims arising out of exposure to PFA “forever
chemicals” are excluded from coverage by virtue of pollution exclusions. Click here to readmore.
Simpson Thacher & Bartlett LLP1

Michigan Court of Appeals Rules That Insurer Has No
Duty To Indemnify TCPA Settlement
HOLDINGA Michigan appellate court ruled that an insurer had no duty to indemnify a class action
settlement for claims alleging violations of the Telephone Consumer Protection Act(“TCPA”). Bridging Communities, Inc. v. Hartford Cas. Ins. Co., No. 355955 (Mich. Ct.
App. Mar. 2, 2023).

BACKGROUND

As a result of an advertising campaign initiated by Top Flite, thousands of individuals
received unsolicited fax messages. The recipients filed a class action suit, alleging violationsof the TCPA. After the suit settled, Top Flite sought indemnification from Hartford under acommercial business policy that provided coverage for “property damage” caused by an“occurrence,” as well as “personal and advertising injury,” defined to include violations of aperson’s right to privacy. Hartford denied coverage on several bases, including the lack of acovered occurrence, an expected or intended exclusion and a statutory right to privacy
exclusion. The trial court concluded that both exclusions barred coverage and the appellate
court affirmed.

DECISION

The appellate court ruled that coverage was barred by a statutory right of privacy exclusion,
which applied to personal or advertising injury claims “[a]rising out of the violation of aperson’s right to privacy created by any state or federal act.” However, the exclusion did not
apply to “liability for damages that the insured would have in the absence of such state orfederal act.” The court explained that the claims against Top Flite were brought pursuant to
the TCPA and that no common law cause of action exists under Michigan law for invasionof privacy arising out of unsolicited fax advertising. In so ruling, the court rejected theassertion that a right to seclusion from unwanted fax advertisements preexisted in common
law and that the TCPA merely provided a remedy for violations of that right. Further, thecourt ruled that the exclusion was unambiguous and applied squarely to the underlying
settlement even though the exclusion did not specifically mention the TCPA. In this respect,
the court noted that the inclusion of a specific TCPA exclusion in a subsequent policy did
not create ambiguity as to the exclusion in the operative policy.
The court also held that there was no covered “occurrence” because Top Flite intended totransmit the fax advertisements. The court explained that the “natural consequence” of that
intentional act was the resulting property damage, in the form of depleted paper and ink
supplies and use of the plaintiffs’ fax machines. Based on this same reasoning, the court
concluded that coverage was barred by an exclusion for damage that was “expected orintended from the standpoint of the insured.”

COMMENTS

Numerous courts have addressed coverage for TCPA violations. Courts of Appeals in theNinth and Eleventh Circuits have upheld coverage denials for TCPA claims based on
exclusions for invasion of privacy claims. While those decisions involved different policy
language than that presented in Bridging Communities, a common issue among many
TCPA coverage decisions is whether a “right of solitude” (i.e., the right to be free fromunwanted intrusions) is part of a more general “right to privacy.” Bridging Communities
illustrates that even when a state recognizes a common law right to privacy, policyholders
may face challenges in arguing that such a common law right encompasses unwanted fax
advertising claims because such activity does not involve private information.

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Finding That Policyholder Adequately Alleged“Ownership” Of Funds, New Jersey Court Declines
To Dismiss Suit Seeking Coverage For Fraudulent
Wire Transfer Loss
HOLDINGA New Jersey district court denied an insurer’s motion to dismiss, ruling that apolicyholder sufficiently alleged “ownership” of funds it never held for purposes of seeking
coverage for wire transfer losses incurred as a result of an email hacking scheme.
Montachem International Inc. v. Federal Ins. Co., 2023 U.S. Dist. LEXIS 38640 (D.N.J.
Mar. 8, 2023).

BACKGROUND

A hacker gained access to the email account of a Montachem sales representative andthereafter sent emails providing new payment and banking information for customers. As aresult of the fraudulent emails, a customer sent payment to the hacker’s account. When
Montachem discovered the fraud, it sought coverage from Federal under computer fraud
and forgery provisions. Federal denied coverage, arguing that Montachem never owned thefunds that were transferred, a prerequisite to coverage under the policy. In ensuing
litigation, Federal moved to dismiss the coverage suit.

DECISION

The court denied Federal’s motion, ruling that Montachem adequately alleged ownership ofthe lost funds. The “Ownership” clause in Federal’s policy provided that computer fraud
and forgery coverage apply only to money “owned by” Montachem, “held by” Montachem“in any capacity,” or for which Montachem is “legally liable.” Federal argued that thecomplaint failed to allege any of these requirements because Montachem alleged that its
customer transferred funds from the customer’s own bank account to the hacker. As such,Federal asserted that Montachem never owned or “held” the lost funds. Rejecting thiscontention, the court reasoned that Montachem alleged, indirectly, that it “held” the funds
in its capacity as a holder of an account receivable. The court explained that this allegation
satisfied the requirement of “held . . . in any capacity” for purpose of denying Federal’s
motion to dismiss.

COMMENTS

In a case involving a nearly identical factual scenario, a different New Jersey district court
granted the insurer’s motion to dismiss based on the absence of allegations of “ownership.”See Posco Daewoo Am. Corp. v. Allnex USA, Inc., 2017 U.S. Dist. LEXIS 180069 (D.N.J.
Oct. 31, 2017) (discussed in our November 2017 Alert). The Montachem court distinguishedPosco, noting that the ownership provision in Posco covered property that the insured“owns or leases,” “holds for others,” or for which the insured is “legally liable,” but did notinclude the more expansive phrase “in any capacity.” This decision highlights theimportance of policy language in this context, particularly the arguably expansive phrase“in any capacity.”3

New Jersey Supreme Court Rules That CGL Coverage Is
Primary And Entity’s Participation in Joint Insurance
Fund Does Not Implicate “Other Insurance” Clause
HOLDING

The New Jersey Supreme Court ruled that a joint insurance fund affords protection through“self-insurance,” not insurance, and therefore that a general liability insurer’s “otherinsurance” clause was not implicated. Statewide Ins. Fund v. Star Ins. Co., 2023 N.J.
LEXIS 205 (N.J. Feb. 16, 2023).

BACKGROUND

A city was sued in a negligence action following the death of a young boy. After the suitsettled, a dispute arose as to which party was responsible for indemnification of thesettlement. Statewide Insurance Fund, a public entity joint insurance fund, provided $10
million per-occurrence coverage to the city, excess over any other insurance or selfinsurance. The city also had coverage from Star Insurance under a general liability policythat was excess to both a self-insured retention and to “other insurance.” The Fund andStar each argued that the other had the primary responsibility to indemnify the settlement.
A trial court granted the Fund’s motion, ruling that the Fund did not provide insurance so
as to trigger the “other insurance” clause in Star’s policy, and therefore that Star was
primarily responsible for the settlement. An appellate court affirmed, as did the New Jersey
Supreme Court.

DECISION

The New Jersey Supreme Court ruled that the city’s participation in the Fund constituted
self-insurance, rather than insurance, for purposes of Star’s “other insurance” clause. The
court emphasized that the statute governing the establishment of joint insurance funds,
N.J.S.A. 40A:10-48, provides that a fund is “not an insurance company or an insurer under
the laws of this State” and is therefore not subject to the extensive regulation of insurance
under state law. Further, the court noted that the “risk pooling” nature of joint insurance
funds differs fundamentally from traditional insurance, which contemplates a transfer ofrisk in consideration for premium payments.
Having determined that the Fund was not “insurance” within the meaning of Star’s “otherinsurance” clause, the court ruled that Star’s general liability policy was primary in covering
the city’s underlying settlement.

COMMENTSThe New Jersey Supreme Court’s decision comports
with the majority of decisions holding that participation
in a joint insurance fund is akin to self-insurance, rather
than traditional insurance, for purposes of an “otherinsurance” clause in a general liability policy.
Importantly, the court deemed it irrelevant that theword “insurance” was used in both the Fund’scontracting document and New Jersey’s Joint Fund Act.
The court emphasized that use of that term does not“override the Legislature’s clear mandate that [joint
insurance funds] are not insurance companies, that theycannot insure members, and that their authorized
activities do not constitute ‘the transaction of insurance
nor doing an insurance business.’”

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Georgia Court Rules That Reinsurance Dispute Is Subject
To Arbitration Under Third-Party Beneficiary Doctrine
HOLDINGA Georgia district court ruled that a reinsurance dispute between General Electric andvarious reinsurers and retrocessionaires that indemnified insurance issued to a power plant
was subject to arbitration, notwithstanding that the contract between the power plant andGeneral Electric did not contain an arbitration provision. Various Insurers, Reinsurers andRetrocessionaires Subscribing to Policy Numbers v. General Electric International, Inc.,
No. 1:21-cv-04751 (N.D. Ga. Mar. 17, 2023).

BACKGROUND

General Electric (“GE”) designed, manufactured and installed a gas turbine at an Algerian
power plant owned by SKH. When the turbine malfunctioned, SKH allegedly incurred tensof millions of dollars in damage and business interruption losses. SKH was partiallyreimbursed by its insurer. In turn, several reinsurers and retrocessionaires (collectively, the“Plaintiffs”) partially indemnified SKH’s insurer. Plaintiffs, as SKH’s subrogees, thensought reimbursement from GE for those payments. GE moved to compel arbitration eventhough the contract between SKH and GE did not contain an arbitration clause. The court
granted the motion to compel, concluding that SKH was a third-party beneficiary to a
separate service contract between GE and the power plant’s operator, which did contain anarbitration clause.

DECISION

The court ruled that Plaintiffs (as subrogees to SKH) were third-party beneficiaries of theservice contract between GE and the plant operator because SKH received “direct tangible
benefits” from that contract in terms of warranty, maintenance, inspection, testing andrepair of parts and machinery. In addition, the court held that the claims at issue arosefrom the service contract and were therefore subject to arbitration. Plaintiffs argued that
their claims were grounded in tort or statutory law, not contract, and therefore outside thescope of the service contract. The court rejected this contention, explaining that it need notreach “the issue of whether Plaintiffs’ claims are within the scope of the Services Contract’s
arbitration provision, because . . . the provision in question delegates questions ofarbitrability, including scope, to the arbitrator.”

COMMENTS

The question of whether a non-signatory may be bound by an arbitration clause under athird-party beneficiary doctrine (or other equitable doctrines) turns not only on applicablepolicy language, but also on the particular factual record. One fact deemed important by
the General Electric court was the sophisticated nature of the parties. The court stated:“Where contract terms are drafted by sophisticated parties that presumably understand thelegal impact of conferring a substantial benefit on a non-executing third party, the equities
further favor application of non-signatory doctrines.”5Insurance Coverage for Claims Arising Out Of PFA“Forever Chemicals”
Previous Alerts have discussed the limits of general liability coverage for property damage andbodily injury claims arising out of exposure to various harmful substances, such as asbestos, leadpaint particles, carbon monoxide, and toxic fumes. In many cases, policyholders have argued thatsuch claims are not excluded from coverage by a pollution exclusion because they do not arise fromtraditional environmental contamination. An emerging area of litigation is whether claims arising outof exposure to PFA “forever chemicals” are excluded from coverage by virtue of pollution exclusions.
Thus far, a handful of courts have addressed insurers’ coverage obligations for PFA claims against
policyholders in the face of a pollution exclusion. In two cases, the courts granted insurers’ motions to
dismiss, concluding that pollution exclusions barred coverage for alleged bodily injuries and property
damage arising out of PFA claims as a matter of law. See Tonoga, Inc. v. New Hampshire Ins. Co., 159
N.Y.S.3d 252 (N.Y. App. Div. 3d Dep’t 2022); Grange Ins. Co. v. Cycle-Tex Ins. Co., 2022 WL 18781187(N.D. Ga. Dec. 5, 2022). Notably, the Tonoga court held that coverage was not only barred by a total
pollution exclusion but also a qualified pollution exclusion that contained an exception for “sudden
and accidental” discharges. The court held that vague references in the complaint regarding “otherways” or “likely” types of discharge were insufficient to withstand the insurer’s motion to dismiss as toits duty to defend. Additionally, the Tonoga court deemed it irrelevant that PFA substances were notspecifically named in the exclusion or known to have a detrimental effect on the environment at thetime the policy was formed.
However, other courts have ruled that insurers are required to defend suits alleging bodily injury
and property damage arising out of exposure to PFA chemicals. In Wolverine World Wide, Inc. v.
Am. Ins. Co., 2021 U.S. Dist. LEXIS 200978 (W.D. Mich. June 15, 2021), the court held that theunderlying complaint, which alleged bodily injury and property damage claims stemming from thepolicyholder’s historical operations and waste disposal practices, was “arguably” within the scope ofcoverage, noting that the underlying actions were “silent, uncertain, and or unclear as to whether anyof the alleged polluting events were ‘sudden or accidental’ or ‘unexpected or unintended.’” A North
Carolina district court also concluded that an insurer was obligated to defend an underlying PFA suit inColony Ins. Co. v. Buckeye Fire Equip. Co., 2020 U.S. Dist. LEXIS 194709 (W.D.N.C. Oct. 20, 2020).
There, the court explained that under North Carolina law, the terms “discharge, dispersal, release, or
escape” are “environmental terms of art” which apply to “prototypical environmental harms.” Because
the underlying complaints alleged harm caused by both contamination of water well systems andfirefighters’ direct contact with PFA-containing equipment, the court held that the exclusion did not
relieve the insurer of its defense obligations.
An Ohio district court recently declined to exercise jurisdiction over a declaratory judgment action
relating to an insurer’s duty to defend and indemnify underlying PFA claims. In Admiral Ins. Co. v.
Fire-Dex, LLC, 2022 U.S. Dist. LEXIS 198034 (N.D. Ohio Oct. 31, 2022), the court explained that
resolution of the coverage issues, including application of total pollution exclusions, involved “novel
and unsettled matters of state law” which were best left for a state court forum.
Aside from pollution exclusion clauses, future coverage litigation in this context is likely to implicate
other complex questions of fact and law, including issues relating to the date of allegedly coveredbodily injury or property damage (see Crum & Forster Specialty Ins. Co. v. Chemicals, Inc., 2021 U.S.
Dist. LEXIS 146702 (S.D. Tex. Aug. 5, 2021)), questions of causation between PFA exposure and any
potential bodily injury, applicability of a “discharge” requirement in many pollution exclusions forclaims that arise out of PFA-containing products as opposed to environmental contamination, and theapplicability of intended act exclusions, among other things.
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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.

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

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

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

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

Joshua Polster+1-212-455-2266
joshua.polster@stblaw.com

Sarah E. Phillips+1-212-455-2891
sarah.phillips@stblaw.com

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

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

Isaac M. Rethy+1-212-455-3869
irethy@stblaw.com

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

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

Abigail W. Williams+1-202-636-5569
abigail.williams@stblaw.com

This edition of the
Insurance Law Alert was prepared byBryce L. Friedman / +1-212-455-2235
bfriedman@stblaw.com
Chet A. Kronenberg / +1-310-407-7557
ckronenberg@stblaw.com andKaren Cestarikcestari@stblaw.com.

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Please click here to subscribe to the Insurance Law Alert.
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