Insurance Law Alert

April 2024

In This Issue
Ohio Court Rules That Salmonella Claims Against Peanut Butter Manufacturer
Arise From A Single Occurrence Under Liability Policies
An Ohio district court ruled that thousands of claims for bodily injury arising from potential
salmonella contamination in peanut butter products constituted a single occurrence undergeneral liability policies. J.M. Smucker Co. v. Ace American Ins. Co., 2024 U.S. Dist. LEXIS 53135(N.D. Ohio Mar. 26, 2024). (Click here for full article)

California Court Rules That Fraudulent Wire Transfer Claims Give Rise To
Possibility Of Coverage Under D&O Endorsement“The attorneys at
Simpson Thacher are
exceptional at handlingcomplex matters. They areintelligent, innovative andextremely well-versed intheir field.”– Chambers USA 2023
(quoting a client)

A California district court denied an insurer’s motion to dismiss, finding that a policyholder
sufficiently alleged breach of contract and breach of the implied duty of good faith and fair dealing
based on the insurer’s refusal to defend an underlying suit arising out of a fraudulent email
hacking scheme. Bridlewood Estates Prop. Owners Assoc. v. State Farm General Ins. Co., 2024
U.S. Dist. LEXIS 47593 (S.D. Cal. Mar. 18, 2024). (Click here for full article)

Colorado Supreme Court Rules That Notice-Prejudice Rule Governs Untimely
Notice Analysis In First-Party Property Cases
Addressing a matter of first impression under Colorado law, the Colorado Supreme Court ruledthat the notice-prejudice rule applies in the context of first-party property insurance policies.
Gregory v. Safeco Ins. Co. of Am., 2024 Colo. LEXIS 202 (Colo. Mar. 11, 2024); Runkel v.
Owners Ins. Co., 2024 Colo. LEXIS 212 (Colo. Mar. 11, 2024). (Click here for full article)

Texas Court Declines To Imply “Reasonableness” Requirement In Reinsurance
Treaty’s Notice Provision
A Texas district court granted a cedent’s summary judgment motion, ruling that it did not breacha notice provision in a reinsurance treaty and that the reinsurer was therefore obligated to pay a
portion of an underlying settlement. United States Fire Ins. Co. v. Unified Life Ins. Co., 2024 U.S.
Dist. LEXIS 58560 (N.D. Tex. Mar. 29, 2024). (Click here for full article)

South Carolina Court Applies All Sums Allocation and Continuous Trigger To
Asbestos-Related Coverage Dispute
A South Carolina trial court ruled that all sums allocation and a continuous trigger applied todetermine coverage obligations for progressive bodily injury claims arising out of exposure
to asbestos. Covil Corp. v. Penn. Nat’l Mutual Cas. Ins. Co., No. 2020-CP-40-02098 (S.C. Ct.
Common Pleas Mar. 1, 2024). (Click here for full article)

Judicial Panel Approves First Official Rule Relating To Multi-District Litigation
This month, the Judicial Conference’s Advisory Committee on Civil Rules approved a new rule
aimed at promoting fairness and efficiency in the context of multi-district litigation.
(Click here for full article)

Simpson Thacher News
Click here to read about the Firm’s insurance-related honors and news.
Simpson Thacher & Bartlett LLP

1

Ohio Court Rules That Salmonella Claims Against
Peanut Butter Manufacturer Arise From A Single
Occurrence Under Liability Policies
HOLDING

An Ohio district court ruled that thousands of claims for bodily injury arising frompotential salmonella contamination in peanut butter products constituted a single
occurrence under general liability policies. J.M. Smucker Co. v. Ace American Ins. Co.,
2024 U.S. Dist. LEXIS 53135 (N.D. Ohio Mar. 26, 2024).

BACKGROUND

Smucker recalled 225 lots of its Jif-brand products due to possible exposure to salmonella.
After the recall, Smucker faced thousands of claims from consumers alleging bodily injury
from consuming the contaminated products. Smucker sought coverage from ACE, its
general liability insurer, for its defense costs under two policies that included a retained
limit of $250,000 per occurrence. Smucker argued that the claims arose from a single
occurrence, the alleged salmonella outbreak, and that it only had to pay one retained limit
before ACE’s duty to reimburse defense costs was triggered. In turn, ACE contended thateach claimant’s exposure to the contaminated products was a separate occurrence, and that
Smucker had to pay 225 retained limits, or $56,250,000, before coverage was available.

DECISION

The court granted partial summary judgment to Smucker, finding that the claims arosefrom a single occurrence as defined by the policies, and that ACE had to reimburse
Smucker for its defense costs once Smucker had paid a single retained limit. The court
applied a cause-based test to determine the number of occurrences under the policies,
holding that the claims arose from a “singular alleged salmonella outbreak.” The court
rejected ACE’s argument that a batching endorsement in the policies required each lot ofcontaminated products to be treated as a separate occurrence. The court found that thebatching endorsement was ambiguous, and that ACE’s interpretation would eviscerate
Smucker’s coverage. The court noted that the Delaware Supreme Court, faced with asimilar fact pattern, deemed a batching clause ambiguous and construed it in favor of thepolicyholder. See ConAgra v. Lexington Ins. Co., 21 A.3d 62 (Del. 2011).

COMMENTS

While the court’s decision aligns with certain otherdecisions holding that claims arising out of the
distribution of a defective or contaminated productarise from a single occurrence, the number-ofoccurrences determination is a fact-driven one,dependent on specific policy language and theevidentiary record as well as applicable state law. For
instance, in cases where contamination arises fromseveral distinct sources or at different locations,courts may conclude that the claims constitutemultiple occurrences. Similarly, where underlying
claims involve property damage at numerous
locations at different points in time due to defective
or contaminated products, courts have foundmultiple occurrences under a cause-based analysis.

2California Court Rules That Fraudulent Wire Transfer
Claims Give Rise To Possibility Of Coverage Under
D&O Endorsement
HOLDINGA California district court denied an insurer’s motion to dismiss, finding that a policyholder
sufficiently alleged breach of contract and breach of the implied duty of good faith and fairdealing based on the insurer’s refusal to defend an underlying suit arising out of afraudulent email hacking scheme. Bridlewood Estates Prop. Owners Assoc. v. State Farm
General Ins. Co., 2024 U.S. Dist. LEXIS 47593 (S.D. Cal. Mar. 18, 2024).

BACKGROUND

The dispute arose when a homeowners association fell victim to an email hacking scheme.
As a result of the scheme, the Treasurer of the association issued a wire transfer to an entitythat he believed was a paving company that had performed work for the association, but infact was a hacker’s bank account. After the fraud was discovered, the paving company
demanded payment and filed a mechanic’s lien on the subject property.
The association tendered the demand and lien to State Farm, which had issued a
Residential Community Association Policy. The policy included a Directors and Officers
Liability Endorsement (“DO Endorsement”) that provided coverage for the wrongful actsof the association’s directors and officers. State Farm denied coverage, arguing that theunderlying claims were outside the scope of coverage because they failed to allege any
wrongful acts. The association sued and State Farm moved to dismiss. The court denied
State Farm’s motion.

DECISION

The court ruled that the association sufficiently alleged claims for breach of contract,
breach of the implied covenant of good faith and fair dealing, and declaratory relief so as towithstand a motion to dismiss. The court reasoned that the underlying claims against theassociation alleged a “wrongful act,” defined in the endorsement as “any actual or alleged
error, misstatement, misleading statement, act, omission, neglect, or breach of duty . . .
arising solely out [ ] of his or her capacity as director, officer ‘manager’ or trustee . . . .” Inparticular, the court explained that extrinsic facts known to State Farm suggested apotential claim based on the Treasurer’s error, negligence, or breach of duty, including his
failure to notice a difference in email addresses or to contact the paving company toconfirm the wiring instructions prior to issuing payment.
The court noted that to the extent that the underlying claim against the association isa breach of contract claim, it is not necessarily excluded from coverage under the DO
Endorsement. The court stated: “The DO Endorsement does not expressly exclude
contractual liabilities from coverage. Indeed, it delineates nineteen different exclusions;none are for contractual violations.”
Importantly, the court did not rule that the underlying claims were covered under the DO
Endorsement. Rather, denying State Farm’s motion to dismiss, the court found only thatthe underlying facts did not conclusively negate coverage. In so ruling, the court relied
not only on the allegations in the underlying complaint, but also on extrinsic facts known
to State Farm in reaching its decision—including the contents of an email chain between

3the fraudster and the Treasurer, which was attached to the policyholder’s tender letterand various “discovery exchanges in the underlying action” related to the cause of theTreasurer’s mistaken payment.
COMMENTS

The decision is noteworthy in several respects. First, most decisions in the emerging bodyof insurance coverage law arising out of email schemes and fraudulently induced wiretransfers involve coverage under “computer fraud” provisions. As discussed in previous
Alerts, those decisions often turn on whether the losses at issue arose “directly” fromcomputer fraud or, conversely, were caused by intervening acts of negligence by innocent
parties. This case presents the question of whether losses arising from a fraudulent email
scheme arise from an executive’s “wrongful act” for purposes of D&O coverage.
Second, the decision does not alter the principle that, under California law, an insured’s
failure to pay amounts due under a contract does not qualify as a “wrongful act” for policy
coverage purposes. Rather, the court deemed this case distinguishable from scenarios inwhich “an insured simply refused to pay amounts due under a contract” and then looked to
its insurer for a “bailout.” As the court explained, the association’s failure to pay arose outof the potential negligence and/or breach of duty on the part of the Treasurer—which thecourt found may constitute a “wrongful act” under the DO Endorsement.
Finally, the decision serves as an important reminder that in some jurisdictions, such as
California, an insurer’s duty to defend is determined not only by the allegations in theunderlying complaint, but also by “extrinsic facts known to the insurer.”4

Colorado Supreme Court Rules That Notice-Prejudice
Rule Governs Untimely Notice Analysis In First-Party
Property Cases
HOLDING

Addressing a matter of first impression under Colorado law, the Colorado Supreme Court
ruled that the notice-prejudice rule applies in the context of first-party property insurance
policies. Gregory v. Safeco Ins. Co. of Am., 2024 Colo. LEXIS 202 (Colo. Mar. 11, 2024);
Runkel v. Owners Ins. Co., 2024 Colo. LEXIS 212 (Colo. Mar. 11, 2024).

BACKGROUND

In two cases, first-party property insurers denied homeowners’ claims for property damage
based on untimely notice. While the language in each policy differed somewhat, both
polices covered losses that occurred during the policy period, and both contained timespecific notice provisions that required notice to be provided within one year after the dateof loss.
Following the insurers’ denials of coverage based on untimely notice, each homeowner
filed suit. The trial courts in both cases ruled in favor of the insurer, finding that the noticeprovisions required the homeowners to provide notice within one year of damage, which
they did not do, and that coverage was therefore unavailable, regardless of prejudice to theinsurers. Both decisions were affirmed by intermediate appellate courts. Reviewing bothcases de novo, the Colorado Supreme Court reversed.

DECISIONCOMMENTSThe Colorado Supreme Court held that, under Colorado law,
an insurer must establish prejudice in order to defeat coverageon the basis of untimely notice under a third-party liability
policy or an uninsured/underinsured motorist policy. Findingthat the justifications for a prejudice requirement in thosecontexts applied with equal force to first-party property
policies, the Colorado Supreme Court held that the lower
courts erred in failing to conduct a prejudice analysis. Morespecifically, the court ruled that, for first-party, occurrencebased policies, such as those at issue here, public policy
considerations relating to the adhesive nature of certain
insurance contracts, the goal of compensating tort victims,
and the inequity of coverage defenses based on “technicalities”
mitigate in favor of the notice-prejudice rule.
The decision does not disturb the well-established principlethat a showing of prejudice is not required in the context ofclaims-made policies. As the court noted, the noticerequirement in claims-made policies is a “material term that is
to be strictly enforced.” In this case, the court noted that theoperative distinction in evaluating whether prejudice isrequired is whether a policy is occurrence-based or claimsmade—not whether the policy contains a “date-certain” forproviding notice.

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Texas Court Declines To Imply “Reasonableness”
Requirement In Reinsurance Treaty’s
Notice Provision
HOLDINGA Texas district court granted a cedent’s summary judgment motion, ruling that it did notbreach a notice provision in a reinsurance treaty and that the reinsurer was therefore
obligated to pay a portion of an underlying settlement. United States Fire Ins. Co. v.
Unified Life Ins. Co., 2024 U.S. Dist. LEXIS 58560 (N.D. Tex. Mar. 29, 2024).

BACKGROUND

Pursuant to a quota share reinsurance agreement between Unified Life and United State
Fire Insurance (“USF”), USF agreed to accept 50% of Unified’s “Net Loss” and to cover any“Extra Contractual Obligations” arising from claims incurred under certain medical
insurance policies issued by Unified. The treaty provided that Unified “shall . . . advise theReinsurer promptly of all Claims which, in the opinion of [Unified], may result in a Claim
hereunder and of all subsequent developments thereto which, in the opinion of [Unified],
may materially affect the position of the Reinsurers.”
The reinsurance dispute arose out of a 2017 lawsuit filed by Butler, a policyholder, against
Unified, alleging improper claims handling. In 2018, after the expiration of the deadline
to amend pleadings, Butler filed a motion for leave to file an amended complaint, whichsought to add a class action claim on behalf of all Unified policyholders. A Montana
district court granted leave to amend. In 2019, a magistrate judge recommended granting
summary judgment on Butler’s individual breach of contract claim, but denying classcertification. The district court granted Butler partial summary judgment on his individual
claim, but rejected the magistrate judge’s recommendation regarding the class claim andgranted the motion for class certification. Unified sought interlocutory review from theNinth Circuit, which denied the request. One month after the Ninth Circuit denied therequest, Unified notified USF of the Butler litigation.
The Butler litigation was ultimately settled for $8 million, and Unified sought payment
from USF for its share of the settlement. USF refused to pay and sought a declaration that
Unified provided unreasonably late notice of the Butler litigation and that USF therefore
had no duty to pay. Both parties moved for summary judgment and the court ruled in
Unified’s favor.

DECISION

The court ruled that Unified complied with its obligations under the treaty’s noticeprovision. The court reasoned that the treaty does not require prompt notice “in the
abstract.” Rather, the notice obligation arises only when—in Unified’s subjective opinion—
the underlying litigation might result in a claim under the treaty. Further, the court heldthat Unified had no such subjective belief until the Ninth Circuit denied its request forinterlocutory appellate review. Prior to that point, “Unified subjectively believed that the
Butler litigation was meritless and would not result in a reinsurance claim.”
The court rejected USF’s contention that it had no obligation to pay because notice was“unreasonably late.” In support of that assertion, USF argued that, because the quota-share6treaty provided coverage to the first dollar of liability, Unified should have provided noticewhen Butler filed the initial complaint in 2017 and when Unified began incurring legal
expenses. Rejecting this argument, the court explained that the notice provision failed toinclude any reasonableness requirement and that under Texas law, courts must be wary of
implying unwritten terms into a contract.
Further, the court ruled that even if Unified had provided late notice, USF’s late-notice
defense would fail because USF was not prejudiced by any late notice. As a preliminary
matter, the court rejected USF’s contention that it need not establish prejudice because
Unified acted in bad faith, finding no factual support for that assertion. Turning to theexistence of prejudice, the court held that a showing of “actual prejudice” is required—i.e.,a “substantial likelihood of avoiding or minimizing the covered loss [had the insured
provided earlier notice].” The court concluded that USF failed to meet this standard
because it had notice of the litigation well before the settlement and in time to at least
partially contribute to Unified’s defense.
COMMENTS

With respect to the issue of prejudice, the court employed a stringent standard. USF offeredspecific bases substantiating its claims of prejudice, including the loss of ability torecommend expert witnesses to support Unified’s claims handling practices in the Butler
litigation. Even construing the facts in USF’s favor, the court rejected USF’s argument,
finding that it raised, at most, a genuine issue of fact as to “theoretical prejudice” rather
than “actual prejudice.” However, that finding was likely driven, at least in part, by theparticular factual record in this case, including the fact that Unified (who had ultimate
control over the underlying defense) had originally considered utilizing such experts evenprior to notifying USF, but had ultimately decided against it. As such, in other cases withdifferent factual records, the inability to recommend expert witnesses or contribute to otherstrategic decisions in the defense of an underlying claim may be deemed to constituteactual prejudice.
Finally, the court acknowledged the absence of authority as to whether Texas law requires
prejudice in context of reinsurance, as opposed to direct insurance, but “discern[ed] norationale for treating reinsurers differently than insurers in the context of asserting a late
notice defense.” This view appears to align with the majority of courts that have addressed
this issue in the reinsurance context. However, such reasoning would be inapplicable toreinsurance agreements that include condition-precedent notice language.

7

South Carolina Court Applies All Sums
Allocation and Continuous Trigger To AsbestosRelated Coverage Dispute
HOLDINGA South Carolina trial court ruled that all sums allocation and a continuous trigger applied
to determine coverage obligations for progressive bodily injury claims arising out of
exposure to asbestos. Covil Corp. v. Penn. Nat’l Mutual Cas. Ins. Co., No. 2020-CP-4002098 (S.C. Ct. Common Pleas Mar. 1, 2024).

BACKGROUNDThis case involved a dispute over the existence, scope and limits of insurance coverage forasbestos personal injury claims against Covil Corporation, a former insulation contractor.
After being named as a defendant in numerous lawsuits, Covil sought coverage from Penn
National under various policies issued in the 1980s. The parties disputed several key issues,
including the appropriate trigger for coverage and the proper method for allocating losses.
Following a non-jury trial, the court issued findings of fact and conclusions of law.

DECISION

As to allocation, the court endorsed an all sums method, deeming that approach consistent
with the policy language. In particular, the court cited language stating that the policies
provided coverage for “all sums which the insured shall become legally obligated to pay as
damages because of . . . bodily injury . . . [to] which this insurance applies” and defined“bodily injury” to mean “bodily injury, sickness, or disease sustained by any person which
occurs during the policy period, including death at any time resulting therefrom.”
In rejecting a pro rata approach, the court found that none of the operative policy
provisions “impose a temporal or proportionate limit on Penn National’s obligation to
defend or indemnify Covil for a progressive bodily injury claim.” The court further statedthat the inclusion of the phrase “at any time” in the definition of bodily injury supported
the conclusion that coverage should not be temporally restricted by policy periods.
With respect to trigger, the court ruled that a continuous trigger applied, such that allpolicies in effect from a claimant’s first exposure to asbestos through manifestation of
disease, and ultimately death, provide coverage unless otherwise excluded. The court
reached this conclusion based its reading of on the aforementioned policy language
defining “bodily injury,” as well as the definition of “occurrence,” as “an accident including
continuous or repeated exposure to conditions.”

COMMENTS

The court expressly distinguished South Carolina precedent endorsing a pro rata allocation
approach to progressive property damage claims that spanned multiple policy periods.
Crossman Cmtys. Of N.C., Inc. v. Harleysville Mut. Ins. Co., 395 S.C. 40 (2011). The court
explained that the policy in Crossman provided coverage for property damage that
occurred “during the policy period,” whereas the policies in the present case did not containsuch verbiage in the “Insuring Agreement” provision.
It should be noted that in the present case, the phrase “during the policy period” was,in fact, included in the definition of bodily injury (“bodily injury, sickness, or disease8

sustained by any person which occurs during the policy period, including death at any time
resulting therefrom”). However, the court found that within that clause, “during the policy
period” conflicted with “at any time,” and that in order to “give meaning to all words” and“harmonize[] all elements of the definition,” the phrase “during the policy period” should
be interpreted to refer to the trigger of coverage, rather than a temporal limitation on
coverage. In other words, the court held that the “during the policy period” clause required
only that “some part of the bodily injury must occur during the policy period to trigger
the policy.”

Judicial Panel Approves First Official Rule Relating To
Multi-District Litigation
This month, the Judicial Conference’s Advisory Committee on Civil Rules approved a new rule aimed atpromoting fairness and efficiency in the context of multi-district litigation (“MDL”).
Rule 16.1 provides guidance to judges presiding over MDL, offering a framework for the initial managementof cases, including matters related to discovery and settlement conferences, and the appointment of andcompensation for lead plaintiffs’ attorneys, among other things. The Rule maintains significant judicial flexibility
in the oversight of MDL.
Additionally, while the new Rule does not directly address the pressing concern of meritless claims in MDL, it
does specify that judges should discuss “how and when the parties will exchange information about the factualbases for their claims and defenses,” which might allow for a more efficient dismissal of insufficient or frivolous
claims. See Rule 16.1(b)(3)(B).
Rule 16.1 marks the first rule in the Federal Rules of Civil Procedure dedicated to multi-district litigation. The
comprehensive rule, which comes after a five-year period of significant debate and public comment, must still
be endorsed by the Committee on Rules of Practice and Procedure, which is expected to occur in upcoming
weeks. Following such endorsement, Rule 16.1 is scheduled for adoption by the United States Supreme Court andtransmittal to Congress in 2025, with a target effective date of December 1, 2025.

Simpson Thacher NewsThe Firm was honored with the National Insurance Firm of the Year award at Euromoney’s Benchmark
Litigation 2024 Awards for the tenth time, and Andy Frankel was shortlisted for Insurance Litigator of theYear. The Benchmark Litigation Awards honor those firms and attorneys that have emerged as leaders in their
particular areas of law over the past year.
Joshua Polster was named to Law360’s 2024 Editorial Advisory Board for Insurance Authority and General
Liability. Board members provide valuable feedback to Law360 about its news coverage and offer insights toeditors and reporters on how best to shape future coverage.

9

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

Matthew C. Penny+1-212-455-2152
matthew.penny@stblaw.com

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

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

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

Laura Lin
+1-650-251-5160
laura.lin@stblaw.com

This edition of the
Insurance Law Alert
was prepared byBryce L. Friedman / +1-212-455-2235
bfriedman@stblaw.com
Matthew C. Penny / +212-455-2152
matthew.penny@stblaw.com andKaren Cestarikcestari@stblaw.com

The contents of this publication are for informational purposes only. Neither this publication nor the
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