Insurance Law Alert

February 2018

In This Issue
Eleventh Circuit Rules That Insurer Cannot Be Held Vicariously Liable
For Appointed Counsel’s Negligence
The Eleventh Circuit ruled that even assuming that appointed counsel was negligent in
defending the policyholder, the insurer cannot be held vicariously liable, so long as appointed
counsel was “competent and qualified.” Kapral v. Geico Indem. Co., 2018 WL 509308 (11thCir. Jan. 23, 2018). (Click here for full article)“[Simpson Thacher]is always responsive
and provides on-point legal
analysis; it has the brightest
and most talented
team around.”– The Legal 500 2017

Arizona Court Rules That Excess Insurer’s Obligation Does Not Arise Until
Underlying Limits Are Actually Paid
An Arizona court ruled that an excess insurer had no coverage obligation until the underlying
policy limits were actually paid. Certain Underwriters at Lloyds London v. Republic Services
Inc., No. CV 2017-005489 (Ariz. Superior Ct. Jan. 30, 2018). (Click here for full article)

Second Circuit Clarifies That Right To Privacy Of Medical Records Is Not
Solely Dependent On Content Of Records
The Second Circuit vacated a district court decision rejecting a constitutional right to privacy
claim based on the improper accessing of personal medical records. Hancock v. County ofRensselaer, 2018 WL 798471 (2d Cir. Feb. 9, 2018). (Click here for full article)

Eighth Circuit Rules That Contamination Of Landscaping Materials Does
Not Constitute Covered Property Damage
The Eighth Circuit affirmed an Iowa federal district court decision holding that contaminationof landscaping materials caused by defective plastic storage bags does not constitute physicalinjury to tangible property under a liability policy. Decker Plastics Corp. v. West Bend Mutual
Ins. Co., 880 F.3d 1017 (8th Cir. 2018). (Click here for full article)

Insurer’s Rejection Of Proof Of Loss Started Running Of Statute Of
Limitations, Says Third Circuit
The Third Circuit ruled that an insurer’s rejection of a policyholder’s proof of loss constituted
a claim denial sufficient to start the running of the statute of limitations. Migliaro v. Fidelity
National Indem. Ins. Co., 880 F.3d 660 (3d Cir. 2018). (Click here for full article)

Simpson Thacher & Bartlett LLP

1

Ohio Supreme Court Rules That Statute Of Limitations On Negligent
Procurement Claim Against Agent Begins To Run Upon Policy Issuance,
Not Claim Denial
The Ohio Supreme Court ruled that negligence claims against an insurance agency accrue atpolicy issuance rather than when the insurer denies coverage. LGR Realty, Inc. v. Frank &London Ins. Agency, 2018 WL 656095 (Ohio Jan. 16, 2018). (Click here for full article)

Tenth Circuit Predicts That Subcontractor’s Faulty Work Would
Constitute Covered Occurrence Under New York Law
The Tenth Circuit predicted that the New York Court of Appeals would find that damage caused
by a subcontractor’s negligence would constitute a covered occurrence under a liability policy
containing a subcontractor exception. Black & Veatch Corp. v. Aspen Ins. (UK) Ltd., 2018 WL
843284 (10th Cir. Feb. 13, 2018). (Click here for full article)

Oklahoma Supreme Court Upholds Attorneys’ Fee Award To Policyholder
In Successful Declaratory Judgment Action
The Oklahoma Supreme Court held that a policyholder is entitled to recover attorneys’ fees
after successful pursuit of a declaratory judgment action against its insurer. JP Energy Mktg.,
LLC v. Commerce & Industry Ins. Co., 2018 WL 703483 (Okla. Feb. 5, 2018).
(Click here for full article)

2Defense Alert:

Eleventh Circuit Rules That Insurer
Cannot Be Held Vicariously Liable
For Appointed Counsel’s Negligence
The Eleventh Circuit ruled that evenassuming that appointed counsel was
negligent in defending the policyholder, theinsurer cannot be held vicariously liable, solong as appointed counsel was “competentand qualified.” Kapral v. Geico Indem. Co.,2018 WL 509308 (11th Cir. Jan. 23, 2018).
Kapral was sued by a party injured in an
automobile accident. Geico appointed
counsel to represent Kapral in the suit.
When judgment was issued against Kapral
in an amount above policy limits, Kapral
sued Geico, asserting that Geico failed toadequately defend him, among other claims.
Following a trial, the district court granted
Geico’s motion for a directed verdict on theinadequate defense claim. The Eleventh
Circuit affirmed, holding that “[u]nder Florida
law, an insurer is not vicariously liable forthe negligence of the attorney it retains to

defend the insured, so long as the attorney
is competent and qualified.” Thus, evenassuming counsel was negligent, the court
held that Geico could not be liable because
the record established that the attorney had
substantial legal experience in practicing
personal injury law. The court acknowledgedthat governing precedent involved outside
counsel, rather than staff counsel (as was
the case here), but deemed that distinction
immaterial. The court explained: “Nor should
the result be different [based on the use ofstaff counsel] because under Florida law aninsurer has no more right to exercise control
over staff counsel’s professional conduct
and independent judgment than it does overoutside counsel’s conduct and judgment.”

Excess Alert:

Arizona Court Rules That Excess
Insurer’s Obligation Does Not
Arise Until Underlying Limits Are
Actually Paid
As reported in previous Alerts, courts haveaddressed whether excess policies are
triggered once the insured has incurredliability in excess of primary policy limits, orwhether underlying limits must actually be
paid out and exhausted in order for excess
coverage to be implicated. See June 2016
Alert, Jan. 2014 Alert, June 2013 Alert,
Oct. 2012 Alert. Last month, an Arizona court
weighed in, ruling that an excess insurer had
no coverage obligation until the underlying
policy limits were actually paid. Certain
Underwriters at Lloyds London v. RepublicServices Inc., No. CV 2017-005489 (Ariz.
Superior Ct. Jan. 30, 2018). The court notedthat the language of the excess policy at issue
was “not 100% clear” on this requirement, but
concluded that the excess insurer’s position
that underlying limits must be fully paid was
the more reasonable interpretation of thepolicy language.
The excess policy required the Underwriters
to “pay on behalf of the Insured excess of
the Underlying Policies any claim or loss
which triggers coverage under the Underlying
Policies, and is not otherwise excluded.”
For purposes of the instant motion, thecourt assumed that the insured incurred
losses exceeding the primary limit of $25
million and that the primary insurer had
yet to pay such an amount. In finding that
actual payment was required to trigger
excess coverage, the court noted that otherprovisions of the excess policy “speak in termsof the payment of claims” by the primary
insurer, thus suggesting that “payment is the
key event.” Although the parties disputed
whether New York law or Arizona law applied,they agreed that there was no difference
between those states’ law on this issue ofpolicy interpretation.

3

Privacy Alert:

Second Circuit Clarifies That RightTo Privacy Of Medical Records Is
Not Solely Dependent On Content
Of Records
The Second Circuit vacated a district court
decision rejecting a constitutional rightto privacy claim based on the improper
accessing of personal medical records.
Hancock v. County of Rensselaer, 2018 WL
798471 (2d Cir. Feb. 9, 2018).
The complaint alleged that the personal
medical records of county jail employees weresecretly accessed without their consent by atleast one co-worker in violation of the Due
Process Clause of the Fourteenth Amendment
and the Computer Fraud and Abuse Act(“CFAA”). A New York federal district court
dismissed the CFAA claim on the pleadings,
and later granted summary judgment to thedefendants on the constitutional privacy
claim. The district court concluded that theprivacy claim failed because the plaintiffs
did not have a “constitutionally protectedinterest in medical privacy because themedical conditions described in theirrecords were insufficiently stigmatizing.” The
Second Circuit affirmed the dismissal of the
CFAA claim but vacated the ruling as to theconstitutional privacy claim.
Clarifying precedent in this context, theSecond Circuit ruled that the presence ofa stigmatizing condition, while relevant tothe analysis, is not a threshold prerequisite
to a constitutional privacy claim. The court
expressly rejected the notion that “onlysufficiently serious medical conditions
give rise to any interest in privacy at all.”Rather, the court explained, individuals
have a fundamental interest in maintaining
the confidentiality of medical information
generally. Alleged privacy violations areevaluated by a case-specific balancing test
that considers the strength of the privacy
interest (based on the content of thepersonal information) as weighed against
the government’s proffered justifications foraccessing that material. “The stronger theindividual interest, the more compelling thegovernment actor’s reasons must be. But
even the weakest privacy interests cannot be
overridden by totally arbitrary or outrightmalicious government action.” Applying thisframework, the Second Circuit concluded thatissues of fact exist as to why the breaches ofconfidentiality occurred, and thus vacatedthe district court’s dismissal of the privacy
claim. More specifically, the court noted thatregardless of the content of the plaintiffs’
medical records, there was likely a violation
if the records were accessed for improper ormalicious purposes, as was alleged here.
The right to privacy as to personal medical
information was also at issue in the recentlysettled matter of Beckett v. Aetna, Inc.,
2017 WL 3701844 (E.D. Pa. Compl. filed
Aug. 28, 2017). That lawsuit alleged that
Aetna “carelessly, recklessly, negligently,
and impermissibly revealed HIV-related
information of their current and former
insureds” through postal mailings thatrevealed personal medical information in
the envelope window. In the proposed classaction settlement, Aetna agreed to pay morethan $17 million and establish “best practices”
to prevent future privacy violations.

Property Damage
Alert:
Eighth Circuit Rules That
Contamination Of Landscaping
Materials Does Not Constitute
Covered Property Damage

The Eighth Circuit affirmed an Iowa
federal district court decision holding that
contamination of landscaping materials
caused by defective plastic storage bags does
not constitute physical injury to tangible
property under a liability policy. Decker
Plastics Corp. v. West Bend Mutual Ins. Co.,
880 F.3d 1017 (8th Cir. 2018)
Decker, a manufacturer of plastic storage
bags, was sued by a landscape supplier after
it discovered that the bags were defective anddeteriorated in sunlight. The deterioration
caused small pieces of plastic to commingle
with landscaping materials. Decker settled
the lawsuit with the landscape supplierand sought coverage from West Bend. The
insurer denied coverage, arguing that there
was no “occurrence” under the policy. The
district court agreed and granted West Bend’s
summary judgment motion. The Eighth
Circuit reversed, ruling that deteriorationof the bags was a covered occurrence and4that covered property damage (if any)
was to property other than the bags. See
Sept. 2016 Alert. On remand, the district
court ruled that there was no covered
property damage and that, in any event,
coverage was barred by policy exclusions. The
Eighth Circuit affirmed.
The court held that existence of covered
property damage turned on whether there
was “physical injury” to “tangible property.”
Noting that “the question is not free fromdoubt,” the court concluded that thelandscaping materials did not suffer physicalinjury. Although the landscaping materials
were no longer saleable because they were
contaminated with shreds of plastic from thedeteriorated bags, the rock and sand werenot “physically altered or destroyed.” Rather,
the contamination diminished only the valueof the materials and thus did not trigger
coverage under the policies.

Statute ofLimitations Alerts:

Insurer’s Rejection Of Proof Of
Loss Started Running Of Statute Of
Limitations, Says Third Circuit
The Third Circuit ruled that an insurer’s
rejection of a policyholder’s proof of loss
constituted a claim denial sufficient to start
the running of the statute of limitations.
Migliaro v. Fidelity National Indem. Ins. Co.,
880 F.3d 660 (3d Cir. 2018).
Migliaro sought coverage under a Standard
Flood Insurance Policy for Hurricane Sandy
damage. The insurer reimbursed him basedon its adjuster’s recommendation. Months
later, Migliaro submitted a proof of loss

claiming additional damage. The insurer
responded with a letter entitled “Rejectionof Proof of Loss,” contesting the additionalamount claimed, but expressly stating that“[t]his is not a denial of your claim.” The
notice also indicated that Migliaro could
provide further documentation to support
the claim, but he did not do so. Instead,nearly two years after receiving the letter,
Migliaro filed suit against the insurer. (Hehad previously sued the insurer within one
year of receiving the letter, but voluntarily
dismissed that action). A New Jersey federal
district court granted the insurer’s summary
judgment motion, finding that the suit wasbarred by the one-year statute of limitations
set forth in the Standard Flood Insurance
Policy. The Third Circuit affirmed.
The Third Circuit held that an insurer’s
rejection of a proof of loss is not a per sedenial of claim. However, the court held that
where, as here, the policyholder treats therejection of proof of loss as a claim denial byfiling suit after receiving the proof of loss,
it should be construed as such for statute oflimitations purposes. The court explainedthat “the very act of bringing suit signaled
that, to Migliaro’s mind, his claim had beendenied.” The court rejected the policyholder’sargument that even if a rejected proof of loss
could constitute a denial of the claim in somecases, the rejection letter at issue did not
because it expressly stated that it was “nota denial of [the] claim.” The court reasoned
that the statement was “technically true atthe time it was made,” because the possibilityof additional compensation still existed.
However, “Migliaro closed the door by
failing to seek an appraisal, file an amended
proof of loss . . . or submit additional
documentation. Instead, he sued, and indoing so acknowledged that, by virtue of theletter rejecting his proof of loss, his claim had
been denied.”5Ohio Supreme Court Rules That
Statute Of Limitations On Negligent
Procurement Claim Against
Agent Begins To Run Upon Policy
Issuance, Not Claim Denial
The Ohio Supreme Court ruled thatnegligence claims against an insurance agency
accrue at policy issuance rather than when
the insurer denies coverage. LGR Realty, Inc.
v. Frank & London Ins. Agency, 2018 WL
656095 (Ohio Jan. 16, 2018).
A realty company utilized the services of an
insurance agency to obtain an Errors andOmissions policy from Continental Casualty.
When a claim was filed against the realty
company, it sought coverage under the policy.
Continental denied the claim pursuant to an
exclusion. Thereafter, the realty company
sued the insurance agency for negligent
procurement, alleging that it negligently
misrepresented the coverage provided by
the policy. An Ohio trial court ruled that theaction was time-barred by the applicablefour-year statute of limitations. The trial court
reasoned that the cause of action against theagency accrued on the date the policy went
into effect, which was five years prior to thelawsuit filing. An intermediate appellate court
reversed, finding that under the “delayeddamage” rule, the cause of action did notaccrue until the plaintiff “suffered an injury,”which occurred when Continental denied
the claim for defense and indemnity. The
Ohio Supreme Court reversed the appellate
court decision.
Under Ohio law, the statute of limitations
begins to run when “the injurious act
complained of is perpetrated, although theactual injury is subsequent.” One exception tothis rule is the “delayed-damage” rule, which
provides that “where the wrongful conduct
complained of is not presently harmful,the cause of action does not accrue until
actual damage occurs.” The Ohio Supreme
Court ruled that the “narrow circumstances”
under which the delayed-damages exception
would apply were not present here. The
court explained that the realty company“was damaged the moment it entered into
the contract and became obligated to pay a
premium for a professional-liability insurance
policy that was less than the coverage that it
believed it would receive.” In so ruling, thecourt emphasized that the policy specifically
excluded the type of claim that the realty

company believed was covered, distinguishingprecedent in which the delayed-damage
exception was applied to a negligent
insurance procurement claim based on thelack of clarity as to the scope of coverage after
consolidation of a property policy into anomnibus policy.

FaultyWorkmanship
Alert:

Tenth Circuit Predicts That
Subcontractor’s Faulty Work Would
Constitute Covered Occurrence
Under New York Law
The Tenth Circuit predicted that the New
York Court of Appeals would find that damage
caused by a subcontractor’s negligence would
constitute a covered occurrence under aliability policy containing a subcontractor
exception. Black & Veatch Corp. v. Aspen Ins.
(UK) Ltd., 2018 WL 843284 (10th Cir. Feb.
13, 2018).
The dispute centered on whether Aspen
Insurance was obligated to reimburse
Black & Veatch (“B&V”), an engineeringand construction company, for the costs it
incurred due to damaged reactor equipment
constructed by one of its subcontractors.
A Kansas federal district court ruled that
there was no coverage under Aspen’s policy,
reasoning that there was no occurrence
because the only damages involved
were to B&V’s own work product. The
Tenth Circuit vacated the district court’s
6determination and remanded the matter for
further consideration.
The Tenth Circuit held that the damage to thereactors constituted an occurrence for two
reasons. First, B&V did not expect or intend
the subcontractor to cause damage. Second,
there was damage to third-party property
because the reactors were the property of
another subcontractor (American ElectricPower) that had also been hired to workon them. The court rejected the argumentthat American Electric Power’s listing as
an Additional Insured under the policy
meant that the reactors were not third-party
property.

state supreme courts that have considered
this issue in recent years have reached “nearunanimity” that property damage caused bysubcontractor negligence can be a covered
occurrence under a liability policy issued toa contractor.

Attorneys’ Fee
Alert:

Oklahoma Supreme Court
Upholds Attorneys’ Fee Award
To Policyholder In Successful
Declaratory Judgment Action
Ruling on a matter of first impression under
Oklahoma law, the Oklahoma Supreme Court
held that a policyholder is entitled to an
attorneys’ fee award after it has successfully
pursued a declaratory judgment action
against its insurer. JP Energy Mktg., LLC
v. Commerce & Industry Ins. Co., 2018 WL
703483 (Okla. Feb. 5, 2018).
The policyholder sought declaratory
relief from its insurers after they denied
coverage and a defense in an underlying
action. An Oklahoma trial court granted thepolicyholder’s summary judgment motion andan appellate court affirmed. Thereafter, thepolicyholder sought attorneys’ fees and costs.

In addition, the court ruled that its occurrence
holding comports with New York’s ruleagainst surplusage. The court explained that
if subcontractor-related damage was not acovered occurrence, several policy provisions
would be rendered meaningless. In particular,
the court reasoned that the “subcontractor
exception” to the “Your Work” exclusion
would be rendered superfluous if the initial
grant of occurrence-based coverage did notencompass property damage caused by asubcontractor’s negligence.
The court distinguished New York appellatecase law in which courts found no coveragefor similar claims, citing several distinctions,
including the following: (1) the policies
at issue did not include a subcontractor
exception; (2) the policies at issue predated
the 1986 standard form revisions; and(3) the underlying claims alleged faulty
work by a contractor, rather than asubcontractor. Finally, the court noted that

Oklahoma statutory law provides for an
attorneys’ fee award to a “prevailing party”
in an insurance dispute. Okla. Stat. tit. 36.
§ 3629 (2011). Citing federal court decisions
applying Oklahoma law, the Oklahoma
Supreme Court concluded that section
3629 applies to prevailing policyholders indeclaratory judgment actions, and is not
limited to first-party actions where the insurer
has denied coverage for a claim. The court
also ruled that the policyholder satisfied thestatutory requirement for submitting a “proofof loss” by issuing a request for defense andindemnity.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

UNITED STATESEUROPE

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

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

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

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

ASIA

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