Insurance Law Alert

June 2019

In This Issue
Insurers Must Defend Civil Rights Suit Stemming From Wrongful Acts
That Preceded Policy Period, Says Fifth Circuit
The Fifth Circuit ruled that two insurers are obligated to defend a policyholder in a civil rights
suit arising out of coerced confessions and fabricated evidence, notwithstanding that thearrests and convictions occurred before the relevant policies incepted. Travelers Indem. Co. v.
Mitchell, 925 F.3d 236 (5th Cir. 2019). (Click here for full article)“They[Simpson Thacher]
substantively know thearea extremely well and haveencyclopedic knowledge ofnational laws as they litigate
all over [the] country.”– Chambers USA
2019

First Circuit Rules That SEC Enforcement Action And Related Proceedings
Are A Single Claim “First Made” Prior To Policy Period
The First Circuit ruled that a D&O insurer had no duty to defend a Securities and Exchange
Commission Enforcement Action and related subpoenas because the investigation was a single“claim” that was first made prior to the policy’s inception. BioChemics, Inc. v. AXIS Reins. Co.,924 F.3d 633 (1st Cir. 2019). (Click here for full article)

Sixth Circuit Affirms Dismissal Of Breach Of Contract And Bad Faith
Claims Against D&O Insurer
The Sixth Circuit ruled that four interrelated companies were not entitled to coverage under
D&O policies because one company failed to timely report an underlying lawsuit and anothermade a material misrepresentation in the policy application. US HF Cellular Commc’ns, LLC v.
Scottsdale Ins. Co., 2019 WL 2323802 (6th Cir. May 31, 2019). (Click here for full article)

Missouri Court Rules That Pollution Exclusion Precludes Coverage For
Asbestos Exposure
A Missouri federal district court ruled that an insurer was not obligated to contribute to anunderlying asbestos settlement, finding that coverage was barred by a pollution exclusion.
Zurich Am. Ins. Co. v. Ins. Co. of N. Am., 2019 WL 2184973 (E.D. Mo. May 21, 2019).
(Click here for full article)

New Jersey Supreme Court Declares Stranger-Oriented Life Insurance
Policy Void Ab Initio
The New Jersey Supreme Court ruled that a life insurance policy procured with the intent tobenefit individuals with no insurable interest in the life of the insured is void ab initio. Sun Life
Assurance Co. of Canada v. Wells Fargo Bank, N.A., 2019 WL 2345444 (N.J. June 4, 2019).
(Click here for full article)

Simpson Thacher & Bartlett LLP

1

Eighth Circuit Rules That Batch Clause Operates To Combine All Damage
Occurring Across Multiple Policy Periods Into Single Occurrence
The Eighth Circuit ruled that a batch clause requires all damage that took place across multiple
policy periods as a result of the same defective product to be deemed a single occurrence.
National Union Fire Ins. Co. of Pittsburgh, PA v. Donaldson Co., Inc., 2019 WL 2478044 (8thCir. June 14, 2019). (Click here for full article)

Florida Supreme Court To Decide Whether Insurer Has Standing To Bring
Malpractice Suit Against Law Firm Retained To Represent Insured
The Florida Supreme Court agreed to hear an appeal relating to whether an insurer has
standing to bring a malpractice suit against counsel it hired to represent the insured. Arch Ins.
Co. v. Kubicki Draper, LLP, 2019 WL 2386336 (Fla. June 6, 2019). (Click here for full article)

As Data Breach Litigation Proliferates, Courts Address Scope Of
Actionable Claims
Click here to read more about recent developments relating to the viability of data breachclaims against insured entities.

South Carolina Supreme Court Adopts Case-Specific Approach To “At
Issue” Waiver In Bad Faith Cases
The South Carolina Supreme Court ruled that an insurer does not automatically waive
attorney-client privilege when it denies coverage and asserts good faith in the context of a bad
faith claim; rather, privilege is waived only when the insurer’s defense necessarily relies on
information received from counsel. In re: Mt. Hawley Ins. Co., 2019 WL 2441119 (S.C. June 12,2019). (Click here for full article)2

Duty To Defend
Alert:

Insurers Must Defend Civil Rights
Suit Stemming From Wrongful Acts
That Preceded Policy Period, Says
Fifth Circuit
The Fifth Circuit ruled that two insurers are
obligated to defend a policyholder in a civilrights suit arising out of coerced confessions
and fabricated evidence, notwithstanding thatthe arrests and convictions occurred before
the relevant policies incepted. Travelers
Indem. Co. v. Mitchell, 925 F.3d 236 (5thCir. 2019).
Three men spent a collective 83 years inprison for a crime they did not commit.
One died in prison, while the other two diedshortly after their exoneration and release.
Their estates filed a civil rights lawsuit against
the County. Travelers and Scottsdale soughta declaration that they had no duty to defend
the suit. A Mississippi district court granted
the County’s summary judgment motion, andthe Fifth Circuit affirmed.
The Fifth Circuit ruled that injuries sufferedby the decedents between 2005 and 2011
(while incarcerated and during the operative
policy periods) triggered a duty to defend
even though the wrongful causal acts (i.e.,arrest and conviction) occurred decades
earlier. The Travelers policy covered “injury
or damage that . . . happens while thisagreement is in effect.” The court reasoned
that this language establishes a temporal
requirement for injury only, not the causal
event. The requirement was met, the court
explained, because the civil rights suitalleges that the decedents suffered numerous
incidents of physical and mental harm
between 2005 and 2011.
The Fifth Circuit also held that a duty to
defend was triggered under the Scottsdale
policies, which covered “occurrences,” defined
as “an event . . . which results in personal
injury, bodily injury or property damage
sustained, during the policy period.” Thecourt deemed this language ambiguous as towhether it requires the “occurrence” or thebodily injury to take place during the policy
period. Construing this ambiguity in favor ofcoverage, the court concluded that allegationsof injuries during the policy periods trigger aduty to defend.
Importantly, the court noted that neither
insurer’s defense obligation was triggered by
the ongoing false imprisonment alone. In thisrespect, the court emphasized that it was not
applying a “continuous trigger” or “multiple
trigger” theory. Rather, the court explained,
the policies were triggered because theunderlying complaint alleged “bodily injuries
during the policy periods that were distinct
from the convictions themselves.”

D&O Alerts:

First Circuit Rules That SEC
Enforcement Action And Related
Proceedings Are A Single Claim“First Made” Prior To Policy Period
The First Circuit ruled that a D&O insurer had
no duty to defend a Securities and Exchange
Commission (“SEC”) Enforcement Action andrelated subpoenas because the investigation
was a single “claim” that was first made prior
to the policy’s inception. BioChemics, Inc. v.
AXIS Reins. Co., 924 F.3d 633 (1st Cir. 2019).
In May 2011, the SEC commenced aninvestigation by Formal Order targeting
BioChemics and its officers, which included
the issuance of subpoenas. At that time,
the company was insured by Greenwich
Insurance Company. Beginning November
2011, BioChemics became insured by AXIS
Reinsurance. Shortly thereafter, the SEC
served additional subpoenas under thesame SEC matter number and caption as
the initial Formal Order. In December 2012,
the SEC filed an Enforcement Action against
the company and several individuals. AXIS
denied coverage, arguing that because theentire SEC investigation constituted a single“claim” first made in May 2011, it was outside
the scope of policy coverage. A Massachusetts
federal district court agreed, ruling that AXIS
had no duty to defend. (See January 2015
Alert). The First Circuit affirmed.
The AXIS policy provides that all claims“arising from the same Wrongful Act . . . andall Interrelated Wrongful Acts shall bedeemed one Claim and such Claim shallbe deemed to be first made on the earlier
date that: (1) any of the Claims is first made3

against an Insured under this Policy or
any prior policy . . . .” Based on this policy
language, the First Circuit concluded that
all SEC actions against BioChemics and its
officers over the two-year period were part ofa single “claim.” Additionally, the First Circuit
held that the claim was “first made” in May
2011 (during the Greenwich policy period)
and was not subject to coverage under the
AXIS policy. Notably, the court deemed itirrelevant that some of the misrepresentations
alleged in the SEC enforcement complaint
took place during the AXIS policy period.
The First Circuit expressly rejected theassertion that the 2011 SEC Order, eachindividual subpoena issued thereafter, and the2012 SEC action were each a separate “claim”
under the policy rather than components of asingle claim that encompassed the entire SEC
investigation. Likewise, the court dismissed
BioChemics’ contention that policy language
was ambiguous or that the Interrelated
Wrongful Acts provision applied only to limitsof liability, not to availability of coverage.

Sixth Circuit Affirms Dismissal Of
Breach Of Contract And Bad Faith
Claims Against D&O Insurer
The Sixth Circuit ruled that four interrelatedcompanies were not entitled to coverage
under D&O policies because one company
failed to timely report an underlying
lawsuit and another made a material
misrepresentation in the policy application.
US HF Cellular Commc’ns, LLC v. Scottsdale
Ins. Co., 2019 WL 2323802 (6th Cir. May
31, 2019).

their rights to payment under this Coverage
Section only, give Insurer written notice of
any Claim as soon as practicable, but in no
event later than sixty (60) days after the endof the Policy Period.” The companies were
sued in June 2015, but did not report thelawsuit to Scottsdale until January 2016, sixmonths after the July 2014-July 2015 policy
period had ended.
The Sixth Circuit ruled that the delay
breached the condition precedent noticeprovision. The court rejected the companies’
assertion that the consecutive policies
created a continuous three-year period ofcoverage and that the parties intended eachrenewal to “simply extend the expiration dateof the earlier policies.” Instead, the court
explained that the reporting requirements
for each policy are distinct, indicating that“coverage under each policy is discrete andnot continuous.”
In addition, the court ruled that coverage
under a second policy was barred because of amaterial misrepresentation in the application.
The company answered “no” to a question
concerning prior litigation, notwithstanding
the existence of pending claims against it.
The court held that the application question
was unambiguous, the information asked
was material and to the extent that a “nexus
between that misrepresentation and theClaim” was required, such a nexus wasestablished, given that the misrepresentation
related to the very litigation for which thecompany later sought coverage.

Four companies with overlapping ownershipand executives were sued for allegedly
committing several business-related torts.
The companies sought coverage from
Scottsdale, which the insurer denied. An Ohio
district court granted Scottsdale’s summary
judgment motion, ruling that coverage
under one policy was unavailable based on
the insured’s failure to timely report theunderlying lawsuit and that coverage undera second policy was barred because of amaterial representation in the application.
The Sixth Circuit affirmed.
Scottsdale issued three consecutive one-year
policies, with the first inception date of July
31, 2013. The policies provide that “[t]heInsureds shall, as a condition precedent to4Pollution
Exclusion Alert:

Missouri Court Rules That Pollution
Exclusion Precludes Coverage For
Asbestos Exposure
A Missouri federal district court ruled that aninsurer was not obligated to contribute to anunderlying asbestos settlement, finding thatcoverage was barred by a pollution exclusion.
Zurich Am. Ins. Co. v. Ins. Co. of N. Am., 2019
WL 2184973 (E.D. Mo. May 21, 2019).
Zurich settled an asbestos claim on behalfof its insured and then sought contribution
from Insurance Company of North America(“INA”). INA argued that it was not obligatedto contribute towards the settlement based ona pollution exclusion. The court agreed andgranted INA’s motion to dismiss.

during the course of his employment.
The court rejected the contention that thepollution exclusion applies only to outdoor
environmental contamination, noting thatasbestos is unambiguously an irritant or
contaminant. The court deemed it irrelevantthat asbestos was not specifically identified in
the exclusion, which refers to “smoke, vapors,soot, fumes, acids, alkalis, toxic chemicals,
liquids or gases [and] waste materials.”
Finally, the court rejected the contention
that the pollution exclusion was inapplicablebecause the release of asbestos fibers occurred
inside a building rather than “into theatmosphere,” as required by the exclusion.
The court explained that even accepting
Zurich’s interpretation of “atmosphere,” anysuch requirement was met because the alleged
contamination of the spouse occurred outside
the confines of the factory, meaning that atsome point, the asbestos fibers were released“into the atmosphere.”

Coverage Alerts:

New Jersey Supreme Court
Declares Stranger-Oriented Life
Insurance Policy Void Ab Initio

First, the court ruled that INA properly
asserted the pollution exclusion as anaffirmative defense. In its responsive
pleading, INA stated that “the Underlying
Claim is within an exclusion from coverage,
including but not limited to asbestos
exclusions.” Zurich conceded that INA
properly asserted the asbestos exclusion,
which began in 1989, but argued that thisstatement was insufficient to assert anaffirmative defense based on the pollution
exclusion. The court disagreed. The court
acknowledged that while this affirmative
defense statement was not a “model ofclarity,” it adequately pled any and allasbestos-related exclusions, including thepollution exclusion.
Second, the court concluded that the pollution
exclusion applied to the underlying asbestos
claim, which alleged injury to a spouseof a worker who was exposed to asbestos

The New Jersey Supreme Court ruled thata life insurance policy procured with theintent to benefit individuals with no insurable
interest in the life of the insured is void ab
initio. Sun Life Assurance Co. of Canada v.
Wells Fargo Bank, N.A., 2019 WL 2345444(N.J. June 4, 2019).
In 2007, Sun Life issued a $5 million life
insurance policy. The policy application
listed a trust as the beneficiary, with theinsured’s grandson as a member of that trust.
All other trust members were investors who
were strangers to the insured and who paid
most of the policy’s premiums. About five
weeks after the policy issuance, the grandson
resigned as trustee and the trust agreement
was modified to direct all policy benefits
to the investors. Approximately two years
later, the trust sold the policy. Eventually,
Wells Fargo Bank obtained the policy in abankruptcy settlement, and when the insured
died, attempted to collect the proceeds. Sun
Life sought a declaration that the policy wasstranger-oriented life insurance (“STOLI”)
and therefore void ab initio. Wells Fargo
5counterclaimed for breach of contract or arefund of the premiums it paid.
Noting a lack of dispositive New Jersey law
relating to STOLI policies, the Third Circuit
certified the following two questions of law to
the New Jersey Supreme Court:
1.

Does a life insurance policy that is
procured with the intent to benefit
persons without an insurable
interest in the life of the insured
violate the public policy of New
Jersey, and if so, is that policy void
ab initio?

2. If such a policy is void ab initio,
is a later purchaser of the policy,
who was not involved in the illegal
conduct, entitled to a refund of any
premium payments that they madeon the policy?
The New Jersey Supreme Court answered thefirst question in the affirmative. It explainedthat where, as here, a life insurance policy is
obtained for the purpose of directing financial
benefits to strangers of the insured, the policy
does violate the public policy of New Jersey
and is therefore void ab initio. The court
noted that even if the “insurable interest”
requirement is met at the time the policy is
procured, the policy is nonetheless void if
the “plan from the start was to transfer the
benefits to strangers.” The court explainedthat “a number of considerations” should
guide the STOLI inquiry, including the natureand timing of discussions between the original
purchaser and the strangers and the reasonsfor transfer, among other things. In addition,
the court held that an incontestability clause,
which prevents insurers from contesting thevalidity of policies except based on nonpayment of premiums, does not prohibit
challenge to the validity of a STOLI policy.
As to the second question, the court heldthat a party “may be entitled” to a refund ofpremiums after a STOLI policy is voided,“depending on the circumstances.” Thecourt adopted a “fact-sensitive approach”
to the premium question that focuses on
equitable factors, including the party’s level of
culpability, its participation in or knowledgeof the illicit scheme, and its failure to heed
red flags.
As discussed in previous Alerts, courts inother jurisdictions have addressed whether

and under what circumstances STOLI policies
violate state law and/or public policy. See
October 2016 Alert; October 2011 Alert; andDecember 2010 Alert.

Eighth Circuit Rules That Batch
Clause Operates To Combine
All Damage Occurring AcrossMultiple Policy Periods Into Single
Occurrence
The Eighth Circuit ruled that a batch clauserequires all damage that took place acrossmultiple policy periods as a result of thesame defective product to be deemed a single
occurrence. National Union Fire Ins. Co. of
Pittsburgh, PA v. Donaldson Co., Inc., 2019
WL 2478044 (8th Cir. June 14, 2019).
Donaldson, a manufacturer of air ducts, wasinsured under consecutive general liability
policies issued by AIG and consecutive follow
form umbrella policies issued by Federal.
A lawsuit against Donaldson alleged that adefect in two types of air ducts caused damage
to truck engines. The suit ultimately settled
for $6 million. AIG contributed approximately$3.5 million and Federal nearly $2.5 million.
Thereafter, AIG sued Donaldson and Federal,seeking to recover its settlement payment.
A Minnesota district court issued a series oforders addressing various coverage issues.
Among other things, the district court
ruled that a batch clause in the AIG policies
operated to combine all property damage
arising from the same batch of products into
one occurrence, even if the damage occurred
across multiple policies periods. The district
court further held that the occurrence took
place when the policyholder was first notifiedof that damage. Finally, the district court
ruled that there were two batches or “lots” ofdefective air ducts involved in the underlying
settlement and therefore two occurrences.
The Eighth Circuit affirmed.
The batch clause in the AIG policies
provides that:all “bodily injury” or “property damage”
arising out of and attributable directly
or indirectly to the continuous, repeatedor related exposure to substantiallythe same general conditions affecting
one lot of goods or products . . . shallbe deemed to result from a single“occurrence.” Such “occurrence” will6

be deemed to occur with the first injury
notified to [the insured] during thepolicy period.
The Eighth Circuit ruled that this clauseunambiguously combines all property damage
arising from the same “lot” of defective
products, including damage that occurs acrossmultiple policy periods, into one occurrence
that takes place when Donaldson is first
notified of that damage. The court rejectedFederal’s assertion that the batch clause only
combines injuries that take place during an
individual policy year.
In addition, the Eighth Circuit affirmed the
district court’s finding of two product “lots”
based on Donaldson’s manufacture of two
distinct types of air ducts, each with its own
product number, specifications, and basematerials. The court rejected Donaldson’s
assertion that there were multiple lots over
the years, based on changes in the particle
size of the power form that was used in the
product molds to manufacture the air ducts.
The court explained that the “minor change inparticle size had no bearing on whether a new
type of unique product was formed.”Standing Alert:

Florida Supreme Court To Decide
Whether Insurer Has Standing
To Bring Malpractice Suit Against
Law Firm Retained To Represent
InsuredOur February 2019 Alert reported on a
Florida appellate court decision dismissing an
insurer’s malpractice suit against counsel it
hired to represent the insured. The appellate
court ruled that the insurer lacked standing
to assert such claims. Arch Ins. Co. v. Kubicki
Draper, LLP, 266 So.3d 1210 (Fla. Dist. Ct.
App. 2019). This month, the Florida Supreme
Court agreed to hear the appeal. Arch Ins. Co.
v. Kubicki Draper, LLP, 2019 WL 2386336(Fla. June 6, 2019).
Arch Insurance Company hired counsel todefend its insured in an underlying action.
After the suit settled for policy limits, Arch
sued the law firm for professional negligence,claiming that the law firm’s delay in assertinga statute of limitations defense resulted in
an unnecessarily large settlement. A Florida

trial court granted the law firm’s summary
judgment motion, finding that Arch lacked
standing to sue and that there was no privity
between Arch and law firm. The trial court
acknowledged that some Florida district
courts have recognized an insurer’s right tobring a malpractice claim against an attorneyretained to represent its insured, but deemed
those decisions non-binding, unpersuasive
and distinguishable.
A Florida appellate court affirmed, stating:“where nothing indicates that the law firm
was in privity with the insurer, or thatthe insurer was an intended third-party
beneficiary of the relationship between thelaw firm and the insured, we are unwilling to
expand the field of privity exceptions to apply
to this case.”
We will keep you apprised of the Florida
Supreme Court’s decision in this matter.

Data Breach Alerts:
As Data Breach Litigation
Proliferates, Courts Address
Scope Of Actionable Claims

Litigation arising out of data breaches,hacking activities, and other incidents ofcomputer fraud continues to proliferate. As
a result, a body of case law is developing that
addresses the scope of (1) actionable claims
by consumers or other claimants arising out
of cyber-related incidents; and (2) insurance
coverage for such cyber-related losses. Prior
Alerts have reported on the latter issue. See
April and May 2019 Alerts; April, May andJuly/August 2018 Alerts; March, July/Augustand September 2017 Alerts; June 2016 Alert;
March and July/August 2015 Alerts; andMarch 2014 Alert. Several recent noteworthy
developments relating to the former issue—
the viability of data breach claims against
insured entities—are discussed below.
The Eighth Circuit dismissed a putative classaction based on a data breach, finding that theplaintiff failed to allege actionable claims. In
re: SuperValu, Inc., 2019 WL 2306267 (8thCir. May 31, 2019).
SuperValu, an operator of retail grocery
stores, suffered two cyberattacks thatcompromised customers’ credit and debit
7

card information. Customers brought putativeclass action suits, alleging negligence, breachof implied contract and unjust enrichment,
among other claims. The suits wereconsolidated and dismissed by a Minnesota
district court based on a lack of standing.
The Eighth Circuit affirmed in part, rulingthat with one exception, “no plaintiff had
alleged a prospective injury in fact because, as
pleaded, the likelihood of future identity theft
was purely speculative.” However, the Eighth
Circuit ruled that named plaintiff David
Holmes had standing because he adequately
pled actual present injury based on anallegation of a single fraudulent charge on his
credit card. In re: SupreValu, Inc., 870 F.3d
763 (8th Cir. 2017)
On remand, the district court dismissed
Holmes’ suit for failure to state a claim.
The Eighth Circuit affirmed, ruling that
Holmes failed to allege negligence because
Illinois law does not impose a common law
or statutory duty on retailers to safeguardcustomers’ credit or debit card information.
The court also held that Holmes failed toallege consumer protection claims, noting theabsence of alleged “actual damage.” In thiscontext, the court held that the expenditureof time monitoring a credit account and effort
spent replacing a credit card do not constituteactual damage. Finally, the court dismissed
the unjust enrichment and breach of implied
contract claims, finding no factual support forsuch claims. The Eighth Circuit’s dismissal of
all class action claims alleging both present
and future damage is significant in limiting

the scope of actionable consumer-based data
breach claims. The decision suggests thathacking-related claims must allege morethan inconvenience or speculation about
future pecuniary loss in order to survive
dismissal motions.
Several other data breach suits have been filed
in recent weeks, setting the stage for future
rulings that define the scope of viable claims
against insured entities.
The first of what may be a growing numberof suits was also filed last month against First
American Title Company. The suit comes in
the wake of an announcement that a security
flaw exposed approximately 885 million
mortgage records containing customers’
personal information. The putative classaction alleges that the company ignored
warnings from federal authorities relating tocybersecurity and failed to allocate adequate
resources to ensuring data security. See Gritz
v. First Am. Fin. Corp., No. 8:19-cv-01009(C.D. Cal. Compl. filed May 27, 2019).
In addition, two suits were filed this monthagainst laboratory companies and a third
party billing vendor, alleging harm incurredas the result of data breaches. In Villarrealv. Am. Medical Collection Agency, Inc., No.
7:19-cv-05340 (S.D.N.Y. Compl. filed June 6,2019), a putative class of patients alleged that
LabCorp, a medical diagnostic testing facility,
and its bill collection vendor failed to protect
financial, medical and personal informationeven after being put on notice that hackers’
had gained access to those records. A similar
suit was filed in New Jersey against Quest
Diagnostics and the same bill collection
vendor after the company revealed that it was
the victim of a data breach that compromised
the banking information and medical data ofnearly 12 million patients. The putative classaction complaint in Carbonneau v. Quest
Diagnostics Inc., No. 2:19-cv-13472 (D.N.J.
Compl. filed June 6, 2019) alleges breach of
implied contract, negligence and violation ofstate consumer laws.
The viability of the claims alleged in these andother similar suits will likely be addressed inpreliminary motion practice. Given that thesesuits allege harm based, in part, on the risk of
future injury of identity theft and pecuniary
loss it remains to be seen whether courts will
reject such claims on standing grounds as theEighth Circuit did in In re: SuperValu, Inc.
8

Privilege Alert:

South Carolina Supreme Court
Adopts Case-Specific Approach
To “At Issue” Waiver In Bad
Faith Cases
The South Carolina Supreme Court ruledthat an insurer does not automatically waive
attorney-client privilege when it denies
coverage and asserts good faith in the context
of a bad faith claim; rather, privilege is waived
only when the insurer’s defense necessarily
relies on information received from counsel.
In re: Mt. Hawley Ins. Co., 2019 WL 2441119(S.C. June 12, 2019).
The discovery dispute arose out of an
insured’s bad faith claim against its insurer.
When the insurer asserted that it had acted
in good faith in denying coverage, the insured
sought to discover the basis for the coveragedenial. The insurer refused to produce certain
documents on the basis of attorney-client
privilege. A South Carolina district court
ordered the documents to be submitted for
an in camera inspection. The insurer soughta writ of mandamus from the Fourth Circuit
to vacate the district court order. As reported
in our July/August 2018 Alert, the Fourth
Circuit certified the following question to theSouth Carolina Supreme Court: “Does South
Carolina law support application of the ‘atissue’ exception to attorney-client privilege
such that a party may waive the privilege by
denying liability in its answer?”

The South Carolina Supreme Court answered
the question in the negative, stating “wefind little authority for the untenableproposition that the mere denial of liability
in a pleading constitutes a waiver of theattorney-client privilege.” Addressing thespecific issue of whether asserting good faith
in response to a bad faith claim operates asa waiver to privilege by placing privileged
communications “at issue,” the court
endorsed a fact-specific “middle-ground”
approach. The court adopted the analysis
set forth in State Farm Mutual Automobile
Insurance Co. v. Lee, 13 P.3d 1169 (Ariz.
2000). There, the court held that privilege
is waived when an insurer asserts good faith
based on its “subjective understanding of
the law as informed by counsel—rather thandefending exclusively on an objective readingof the disputed policy exclusions.” (Emphasis
in original).
The court acknowledged that insurers will
likely confer with counsel in virtually all bad
faith cases, and that “most if not all actions
taken will be based on counsel’s advice.”
The court cautioned: “This does not waive
privilege.” Rather, waiver occurs when an
insurer “claims its actions were the resultof its reasonable and good-faith belief thatits conduct was permitted by law and its
subjective belief based on . . . information
and advice received from . . . lawyers.” Thecourt imposed an additional requirement thatthe party seeking waiver of attorney-client
privilege make a prima facie showing of bad
faith.

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.

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

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

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

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

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

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

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

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

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

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

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

Daniel J. Stujenske+1-212-455-2419
dstujenske@stblaw.com

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

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

This edition of the
Insurance Law Alert was
prepared by Mary Beth Forshaw
mforshaw@stblaw.com /+1-212-4552846 and Summer Craig
scraig@stblaw.com /+1-212-455-3881
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
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Please click here to subscribe to the Insurance Law Alert.
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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 A
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
Tokyo
Ark Hills Sengokuyama Mori Tower
9-10, Roppongi 1-Chome
Minato-Ku, Tokyo 106-0032
Japan+81-3-5562-6200

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