Insurance Law Alert

June 2020

In This Issue
Fourth Circuit Rules That District Court Erred In Dismissing Qui Tam
Coverage Claims Against Insurer“Market leader
for insurer
representation, offering
unmatched ability inhandling bet-the-company
litigation and arbitration
proceedings.”– Chambers USA
2020

The Fourth Circuit ruled that a professional liability insurer was obligated to defend a False
Claims Act suit, finding that allegations that an adult home care center submitted false
Medicaid reimbursement claims “arose out of” a medical incident. Affinity Living Grp., LLC
v. Starstone Specialty Ins. Co., 2020 WL 2630845 (4th Cir. May 26, 2020). (Click here forfull article)

Iowa Supreme Court Rules That Allegations Of Gross Negligence May
Satisfy “Occurrence” Requirement
Reversing a lower court ruling, the Supreme Court of Iowa ruled that allegations of grossnegligence may satisfy the “occurrence” requirement in liability and excess policies. T.H.E.
Insurance Co. v. Glen, 2020 WL 3022764 (Iowa June 5, 2020). (Click here for full article)

New York Court Rules That Insurer Must Continue Funding Opioid
Distributor’s Defense
A New York federal court ruled that an insurer must continue to pay defense costs for abankrupt opioid distributor, finding that the insurer had not conclusively demonstrated thatpolicy exclusions barred coverage. Rochester Drug Co-Operative, Inc. v. Hiscox Ins. Co., Inc.,
2020 WL 3100848 (W.D.N.Y. June 11, 2020). (Click here for full article)

Ohio Appellate Court Rules That Insurer Must Defend Drug Distributor In
National Opioid Prescription Litigation
An Ohio appellate court ruled that an insurer must defend a pharmaceutical distributor against
certain suits filed by government agencies seeking to cover costs for addressing the opioid
problem, finding that the suits sought damages “because of” bodily injury and that coverage
was not precluded by a loss-in-progress provision. Acuity v. Masters Pharmaceutical, Inc.,
2020 WL 3446652 (Ohio Ct. App. June 24, 2020). (Click here for full article)

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Simpson Thacher & Bartlett LLP

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Washington Supreme Court Refuses To Disqualify Insured’s Counsel
Notwithstanding Its Prior Representation Of Insurer
The Washington Supreme Court refused to disqualify insured’s counsel in a bad faith suitagainst its insurer, notwithstanding that the law firm had represented the insurer in over 165
matters over a ten-year period, including numerous bad faith suits. Plein v. USAA Casualty
Ins. Co., 2020 WL 2568541 (Wash. May 21, 2020). (Click here for full article)

Tenth Circuit Rules That Insured Is Prevailing Party Entitled To Fees,
Notwithstanding That Judgment Was Lower Than Insurer’s Settlement
Offer
The Tenth Circuit ruled that an insured that received a favorable judgment was the “prevailingparty” entitled to attorneys’ fees pursuant to Oklahoma statutory law even though the insured
rejected a settlement that was substantially higher than the ultimate judgment. Hamilton v.
Northfield Ins. Co., 2020 WL 3042064 (10th Cir. June 8, 2020). (Click here for full article)

South Carolina Supreme Court Rejects “At Issue” Privilege Waiver In Bad
Faith Dispute
A South Carolina district court ruled that an insurer did not waive attorney-client privilegeby placing the content of certain communications with outside counsel “at issue” in bad faithlitigation. Harriman v. Associated Indus. Ins. Co., Inc., 2020 WL 2793610 (D.S.C. May 29,2020). (Click here for full article)

STB News Alerts
Click here to read about the Firm’s insurance-related honors.

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Coverage Alerts:
Fourth Circuit Rules That District
Court Erred In Dismissing Qui Tam
Coverage Claims Against Insurer
The Fourth Circuit ruled that a professional
liability insurer was obligated to defend a
False Claims Act suit, finding that allegations
that an adult home care center submittedfalse Medicaid reimbursement claims “aroseout of” a medical incident. Affinity Living
Grp., LLC v. Starstone Specialty Ins. Co.,
2020 WL 2630845 (4th Cir. May 26, 2020).
Affinity Living Group was sued under the
False Claims Act for allegedly submitting
Medicaid claims for services that were neverprovided. Affinity’s insurer refused to defend,
arguing that the damages sought in theunderlying action did not “result from a claim
arising out of a medical incident,” as requiredby the policy. A North Carolina district court
agreed, finding that the qui tam complaint
did not seek damages for rendering or failingto render personal care services, but insteadsought recovery based on the submissionof false reimbursement claims. The Fourth
Circuit vacated the ruling.

exists.” In so ruling, the court rejected theinsurer’s contention that billing services are“wholly disassociated from, independent of,and remote from” personal care services.

Iowa Supreme Court Rules That
Allegations Of Gross Negligence
May Satisfy “Occurrence”
Requirement
Reversing a lower court ruling, the Supreme
Court of Iowa ruled that allegations of grossnegligence may satisfy the “occurrence”
requirement in liability and excess policies.
T.H.E. Insurance Co. v. Glen, 2020 WL
3022764 (Iowa June 5, 2020).
The coverage dispute arose out of an incident
at an amusement park in which an employee
was fatally injured. The decedent’s estate
alleged that his death resulted from grossly
negligent acts by the ride’s operator. The
park’s insurer sought a declaration thatit had no duty to defend or indemnify thesuit on the basis that the complaint did notallege a covered “occurrence.” A lower court
granted the insurer’s summary judgment
motion, finding that the gross negligenceclaim could not be covered under the policies
because it did not allege an “accident” thatwas “unexpected and unintended.” The Iowa
Supreme Court reversed.
The Iowa Supreme Court ruled that agross negligence claim is not necessarily
incompatible with a covered occurrence.
Under Iowa statutory law, gross negligencemust amount to “wanton neglect for thesafety of another.” The court explained thatwhen an actor wantonly neglects another’ssafety, it does not necessarily follow thathe “knew or should have known that there
was a substantial probability that certain
consequences will result from his actions.”

Under North Carolina law, “arising out of”
is interpreted broadly, to require only acausal connection (rather than proximate
causation) when it is used in a provisionextending coverage. As such, the Fourth
Circuit concluded that Starstone had a duty
to defend the qui tam suit so long as thefalse billing claims were causally connectedto the “failure to render” services, which
was a covered “medical incident” under thepolicy. The court ruled that this causation
standard was met because “but for the failure
to provide the services, no claim for damages

Addressing a separate issue, the Iowa
Supreme Court ruled that section II of
the liability policy, entitled “WHO IS AN
INSURED,” did not operate to expand thescope of coverage beyond that provided
in section I of the policy. The decedent’s
estate argued that Section II provided
an independent basis for coverage
because it covers acts of employees of theamusement park that are within the scopeof their employment. The court rejected thisassertion, stating:3

The insuring clause in section I sets theparameters of the risks that are insured,
while section II establishes who isinsured. A person with a claim under
the policy must satisfy the coverage
requirements of the insuring clausein section I and be an “insured” under
section II . . . . We find that they are
not in conflict, but instead establish
separate tests, both of which must be
satisfied to give rise to a duty to defend
and indemnify under the CGL policy.

Opioid Litigation
Alerts:New York Court Rules That Insurer
Must Continue Funding Opioid
Distributor’s Defense
A New York federal court ruled that aninsurer must continue to pay defense costs fora bankrupt opioid distributor, finding that theinsurer had not conclusively demonstrated
that policy exclusions barred coverage.
Rochester Drug Co-Operative, Inc. v. Hiscox
Ins. Co., Inc., 2020 WL 3100848 (W.D.N.Y.
June 11, 2020).
Rochester Drug, a drug distribution
cooperative, was sued in numerous state andfederal actions for its alleged involvement in
the unlawful distribution of opioids. Hiscox
initially acknowledged potential coverage forthe lawsuits, but after Rochester Drug enteredinto a delayed prosecution agreement (“DPA”)
and stipulation with the government, Hiscox
notified Rochester Drug that admissions in
the DPA precluded coverage based on an
Illegal Conduct Exclusion.

out of any “deliberate criminal or deliberate
fraudulent act, or any willful violation of any
statute, rule or law, if any final adjudication
establishes that such [conduct] . . . wascommitted.”
The court ruled that the DPA is not a
final adjudication, noting that it was notsubstantively reviewed by a court. As to the
stipulation, which the court deemed a “closer
question,” the court ruled that even if the
stipulation is deemed a final adjudication,
it does not establish that Rochester Drug
committed a deliberate criminal or fraudulent
act, or willfully violated the law. Although
Rochester Drug admitted in the stipulationthat it “knowingly failed to implement
an adequate system to detect, investigate
and report suspicious orders of controlled
substances,” the court concluded that thisstatement did not establish that the company
deliberately committed a crime or violation oflaw.
Finally, the court ruled that coverage was
not necessarily barred by a Prior Knowledge
Exclusion. Although Rochester Drug had
knowledge of a civil investigation by the Drug
Enforcement Agency before the policy wasissued, the court noted that the underlying
claims against Rochester Drug extended
beyond that civil claim and encompassed
numerous other causes of action about which
Rochester Drug had no previous knowledge.

The court granted Rochester Drug’s motion
for a preliminary injunction regarding
Hiscox’s duty to advance defense costs,
finding that Rochester Drug demonstrated
the likelihood of irreparable harm absent
preliminary relief and of success on the merits
regarding Hiscox’s duty to pay defense costs.
More specifically, the court concluded that
Rochester Drug raised “sufficiently serious
questions” as to whether the Illegal Conduct
Exclusion, among others, would bar coveragefor the underlying claims. The Illegal Conduct
Exclusion precludes coverage for loss arising4

Ohio Appellate Court Rules
That Insurer Must Defend Drug
Distributor In National Opioid
Prescription Litigation
Reversing a trial court decision, an Ohio
appellate court ruled that an insurer must
defend a pharmaceutical distributor against
certain suits filed by government agencies
seeking to cover costs for addressing theopioid problem, finding that the suits soughtdamages “because of” bodily injury andthat coverage was not precluded by a lossin-progress provision. Acuity v. Masters
Pharmaceutical, Inc., 2020 WL 3446652(Ohio Ct. App. June 24, 2020).
Acuity sought a declaration that it owed
no defense or indemnity to Masters
Pharmaceutical in national prescription
opioid suits filed by government entities.
The underlying suits alleged that opioid
manufacturers and distributors failed tomonitor and report suspicious opiate orders,which contributed to an epidemic that caused
financial harm to the government entities.
More specifically, the government entities
alleged that they incurred increased expenses
relating to law enforcement, judicial resources
and medical costs.
As discussed in our February 2019 Alert, an
Ohio trial court granted Acuity’s summary
judgment motion, ruling that the damages
sought in the underlying litigation werenot “because of” bodily injury and instead
were economic loss claims. Additionally, thetrial court held that there was no coverage
because the policy excluded claims that werepreviously known to Masters. According to
the underlying suits, Masters filled suspicious
orders and knew of the opioid addiction crisis
prior to obtaining insurance from Acuity.
The appellate court reversed, ruling that“the policies expressly provide for a defense
where organizations claim economic
damages, so long as the damages occurredbecause of bodily injury.” In so ruling, thecourt relied on Cincinnati Ins. Co. v. H.D.
Smith, L.L.C., 829 F.3d 771 (7th Cir. 2016)(discussed in our July/August 2016 Alert), in
which the Seventh Circuit ruled that generalliability policies triggered an insurer’s duty
to defend claims against a pharmaceuticalcompany in opioid litigation. The court
deemed it irrelevant that the government
entities themselves did not sustain bodily

injury, noting that their economic losses
were “because of” bodily injury. The court
distinguished Medmarc Casualty Insurance
Co. v. Avent America, Inc., 612. F.3d 607(7th Cir. 2010), in which the Seventh Circuit
ruled that an insurer had no duty to defend
a suit against a manufacturer based on thepresence of harmful components in baby
bottle products, finding that the suit did notallege bodily injury.
Finally, addressing a matter of first
impression under Ohio law, the appellate
court ruled that a loss-in-progress provision
did not bar coverage. The provision statesthat coverage is unavailable if the insured“knew, prior to the policy period, that thebodily injury or property damage occurred,”and that the “continuation, change orresumption of such bodily injury or property
damage during or after the policy period will
be deemed to have been known prior to thepolicy period.” The court concluded that theinsurer did not establish Master’s knowledgeof bodily injury prior to the 2010 policy
inception, notwithstanding that in 2008, theDrug Enforcement Agency issued a showcause order alleging that Masters had failed
to maintain effective controls against thediversion of opioids and that in 2009, Masters
was required to pay $500,000 and implementa monitoring and compliance system. The
court stated:
We agree that [Masters] may havebeen aware there was a risk that if itfilled suspicious orders, diversion of
its products could contribute to the
opioid epidemic, thus causing damage
to the government entities. But, we holdthat mere knowledge of this risk is notenough to bar coverage under the lossin-progress provision.

Conflict Of
Interest Alert:
Washington Supreme Court
Refuses To Disqualify Insured’s
Counsel Notwithstanding Its Prior
Representation Of Insurer
The Washington Supreme Court refused todisqualify insured’s counsel in a bad faith suit5

against its insurer, notwithstanding that thelaw firm had represented the insurer in over
165 matters over a ten-year period, including
numerous bad faith suits. Plein v. USAA
Casualty Ins. Co., 2020 WL 2568541 (Wash.
May 21, 2020).
Homeowners retained a law firm to represent
them in a bad faith suit against their property
insurer. The suit was based on the insurer’s
refusal to pay for certain costs arising out
of fire damage. Members of the firm had
served as the insurer’s defense counsel formany years, and had thus gained access tothe insurer’s litigation strategies and claims
handling practices, among other things.
In addition, the firm acted as the insurer’s
defense counsel in several suits alleging
bad faith pursuant to Washington statutory
law, including a suit based on the insurer’s
handling of fire damage claims. As such,the insurer moved to disqualify the law firm
pursuant to the Rules of Professional Conduct(“RPC”) 1.9(a), which states:
A lawyer who has formerly represented
a client in a matter shall not thereafter
represent another person in the same ora substantially related matter in whichthat person’s interests are materiallyadverse to the interests of the former
client unless the former client gives
informed consent, confirmed in writing.
A trial court denied the insurer’s motion todisqualify, finding that the instant matter was
not substantially related to the firm’s priorrepresentation of the insurer. An appellate
court reversed. The appellate court reliedon comment 3 to RPC 1.9, which states thatmatters may be substantially related if there“is a substantial risk that confidential factual
information as would normally have beenobtained in the prior representation would
materially advance the client’s position in
the subsequent matter.” The appellate court
reasoned that the law firm learned significant
confidential information about the insurer’s
strategies for bath faith litigation throughits prior representation of the insurer, thus
giving rise to a significant risk that the law
firm had gained information that would
materially advance the homeowners’ suit. The
Washington Supreme Court reversed.

bears the burden of demonstrating a“substantial relationship” between the present
and previous matters, and (2) that no suchshowing had been made. The court reasoned
that “substantially related” requires a factual
relationship between the prior and pending
matters—e.g., that the matters turn on thesame “particular situation or transaction.”

The court concluded that no such factual
relationship existed here, notwithstanding
the firm’s prior representation of the insurer
in a fire damage-related bath faith suit.
Citing to Fifth Circuit precedent, the court
found that an insurer’s business customs,
including “confidential claims handlingmaterials” and “litigation philosophies andstrategies,” constitute general knowledgeof a client’s policies which, under comment
3 to RPC 1.9, “ordinarily will not preclude
a subsequent representation.” In addition,
the court noted that comment 2 to RPC
1.9 states that “a lawyer who recurrently
handled a type of problem for a former client
is not precluded from later representing
another client in a factually distinct problemof that type even though the subsequent
representation involves a position adverse to
the prior client.” Finally, the court declined todisqualify the firm based on the “playbook” or“duty of loyalty” approaches, deeming theminconsistent with RPC 1.9.

Addressing this matter of first impression
under Washington law, the Washington
Supreme Court ruled that (1) the insurer
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Attorney’s Fees
Alert:
Tenth Circuit Rules That Insured Is
Prevailing Party Entitled To Fees,
Notwithstanding That Judgment
Was Lower Than Insurer’s
Settlement Offer
The Tenth Circuit ruled that an insured
that received a favorable judgment was the“prevailing party” entitled to attorneys’ fees
pursuant to Oklahoma statutory law eventhough the insured rejected a settlement thatwas substantially higher than the ultimate
judgment. Hamilton v. Northfield Ins. Co.,
2020 WL 3042064 (10th Cir. June 8, 2020).
Hamilton sued Northfield Insurance
Company, seeking coverage for a leaking
roof. Northfield offered $45,000 to cover
Hamilton’s actual damages, litigation
expenses and other fees. Hamilton rejected
the offer and the case proceeded to trial,
resulting in a $10,642 jury verdict inHamilton’s favor. Thereafter, Hamilton
sought attorneys’ fees and interest pursuant
to Okla. Stat. tit. 36 § 3629. Northfield argued
that Hamilton was not the “prevailing party”
under the statute because the settlement
offer exceed the final damages award. An
Oklahoma district court agreed and denied
Hamilton’s motion. On appeal, the Tenth
Circuit affirmed, but subsequently granted
rehearing and vacated its decision. The Tenth
Circuit certified to the Oklahoma Supreme
Court the following questions:
1. In determining which is theprevailing party under Okla. Stat.
tit. 36 § 3629(B), should a court
consider settlement offers madeby the insurer outside the sixty(formerly, ninety-) day window
for making such offers pursuant tothe statute?
2. In determining which is theprevailing party under Okla. Stat.
tit. 36 § 3629(B), should a court add
to the verdict costs and attorneyfees incurred up until the offer ofsettlement for comparison with asettlement offer that contemplated
costs and fees?

Last month, the Oklahoma Supreme Court
answered the first question in the negative,
stating that a court “may consider only thosetimely offers of settlement of the underlying
insurance claim—and not offers to resolve an
ensuing lawsuit that results from the insurer’s
denial of the same—when determining theprevailing party for the purposes of awarding
attorney fees and costs under section
3629(B).” (Emphasis in original). Having
ruled that section 3629(B) applies only tosettlement offers made by the insurer prior
to litigation (and thus before legal fees havebeen incurred), the court noted that theanswer to the second question was inherently
resolved in the negative.
On remand, the Tenth Circuit ruled thatin light of the Oklahoma Supreme Court’s
answer to the first certified question,
Hamilton was the prevailing party because
he received a favorable judgment. The
court explained that Northfield’s postlitigation settlement offer was not a statutory
settlement offer within the meaning ofsection 3629(B). As such, Hamilton wasentitled to reasonable attorneys’ fees andstatutory interest.

Privilege Alert:
South Carolina Supreme Court
Rejects “At Issue” Privilege Waiver
In Bad Faith Dispute
A South Carolina district court ruled thatan insurer did not waive attorney-client
privilege by placing the content of certain
communications with outside counsel “atissue” in bad faith litigation. Harriman v.
Associated Indus. Ins. Co., Inc., 2020 WL
2793610 (D.S.C. May 29, 2020).

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Harriman sued Associated Industries
Insurance Company seeking coveragefor underlying defamation claims filed
against her. During discovery, AssociatedIndustries produced certain documents in
response to Harriman’s interrogatories anddocument requests. Associated Industries
did not produce a privilege log at that time.
Several months later, Associated Industries
supplemented its production and produced
a privilege log. Thereafter, Harriman moved
to compel production of certain documents,
including communications between
Associated Industries and its outside counsel.
The court denied Harriman’s motion, findingthat the requested documents were protectedby attorney-client privilege. The court rejected
Harriman’s contention that AssociatedIndustries waived privilege by relying on
outside counsel’s advice in denying coverageand by failing to produce a timely privilegelog. Harriman asserted that attorneyclient privilege is waived when an insurer“delegate[s] the initial coverage evaluation tooutside counsel and denie[s] coverage basedon his advice.” The court ruled that relianceon outside counsel is insufficient to constitutewaiver where, as here, the policyholder did
not place outside counsel’s advice “at issue”
in the litigation, explaining that AssociatedIndustries’ defense did not “necessarily
include[] information learned from counsel.”In so ruling, the court emphasized that“privilege is not waived solely when a client
consults counsel for advice and the client
subsequently takes action based on counsel’s
advice.” Additionally, the court refused to findwaiver based on Associated Industries’ failure
to timely produce a privilege log, notingthat waiver was too strong a sanction under
the circumstances.

STB News Alerts
Simpson Thacher has once again been ranked
among the leading law firms in the UnitedStates in The Legal 500 United States 2020.
The Firm was recognized in 45 practice areas,
including a total of 20 rankings in the top
tier and a #1 ranking in “Insurance: Advice
to Insurers.”
Simpson Thacher was named as the 2020
“Litigation Department of the Year” forthe category of Insurance by the New YorkLaw Journal.
Susannah Geltman was named a 2020 “Rising
Star” by the New York Law Journal. The
NYLJ “Rising Stars” series recognizes theregion’s most promising lawyers under theage of 40. Susannah was one of fewer than 30
attorneys chosen for this honor.

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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.

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

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

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

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

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

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

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

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

Jonathan T. Menitove+1-212-455-2693
jonathan.menitove@stblaw.com

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

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

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

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

This edition of the
Insurance Law Alert was
prepared by Mary Beth Forshaw
mforshaw@stblaw.com /+1-212-4552846 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.
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