Insurance Law Alert

May 2022

In This Issue
California Appellate Court Rules That Intentional Acts That Cause
Unintended Harm Are Not Covered Occurrences Under Property Policy
A California appellate court ruled that a homeowner was not entitled to coverage undera property policy for losses stemming from the intentional removal of trees based on her
mistaken belief that the trees were located on her property. Ghukasian v. Aegis Security Ins.
Co., 2022 WL 1421511 (Cal. Ct. App. Apr. 14, 2022). (Click here for full article)“[Simpson Thacher is]able to handle both direct
insurance and reinsurance
matters with equal flair, and also
adept at handling the most complex
of disputes regarding insurers’
business practices. Often called
on in cases involving potentiallysignificant exposure.”–Chambers USA
2021

District Of Columbia Circuit Court Dismisses Original Insured’s Claims
Against Reinsurers And Intermediaries
The District of Columbia Circuit Court ruled that reinsurers and reinsurance intermediaries
were not directly liable to the original insured. Vantage Commodities Financial Services I, LLC
v. Assured Risk Transfer PCC, LLC, 2022 WL 1193996 (D.C. Cir. Apr. 22, 2022). (Click here forfull article)

South Carolina Supreme Court Rules That Post-Loss Assignment Of
Insurance Rights Is Valid Notwithstanding Lack Of Insurer Consent
The South Carolina Supreme Court ruled that the operative “loss” for insurance coveragepurposes is determined by the date of occurrence rather than the time of judgment or
settlement, and that a post-loss assignment of insurance rights was valid even without insurer
consent. PCS Nitrogen, Inc. v. Continental Cas. Co., 2022 WL 1101704 (S.C. Apr. 13, 2022).
(Click here for full article)

Two State Supreme Courts Rule That COVID-19-Related Business Losses
Do Not Allege Physical Loss Or Damage
The highest courts in Iowa and Massachusetts have ruled that pandemic-related businesslosses are not covered by all risk property policies, concluding that allegations relating to the
COVID-19 virus do not allege physical loss or damage. Verveine Corp. v. Stratmore Ins. Co.,
2022 WL 1180061 (Mass. Apr. 21, 2022); Wakonda Club v. Selective Ins. Co. of Am., 2022 WL
1194012 (Iowa Apr. 22, 2022); Jesse’s Embers, LLC v. Western Agricultural Ins. Co., 2022 WL
1194006 (Iowa Apr. 22, 2022). (Click here for full article)


Simpson Thacher & Bartlett LLP

1

State And Federal Appellate Courts Continue To Rule In Insurers’ Favor
In Suits Seeking Coverage For Pandemic-Related Business Losses
In recent weeks, several state and federal appellate courts have continued the trend of
dismissing policyholder suits seeking coverage for economic losses incurred in the wake ofgovernment orders relating to COVID-19. (Click here for full article)

Seventh Circuit Rules That Policyholder’s Suit Against Property Insurer Is
Time Barred
The Seventh Circuit dismissed a suit against a property insurer, ruling that the policyholder’s
failure to bring a legal action within two years of the date of damage was fatal to its coverageclaim. Legend’s Creek Homeowners Assoc., Inc. v. Travelers Indem. Co. of Am., 2022 WL
1467456 (7th Cir. May 10, 2022). (Click here for full article)

2

Coverage Alert:
California Appellate Court Rules
That Intentional Acts That Cause
Unintended Harm Are Not Covered
Occurrences Under Property Policy
A California appellate court ruled that ahomeowner was not entitled to coverage
under a property policy for losses stemmingfrom the intentional removal of trees based onher mistaken belief that the trees were locatedon her property. Ghukasian v. Aegis Security
Ins. Co., 2022 WL 1421511 (Cal. Ct. App. Apr.
14, 2022).
The policyholder hired a contractor to remove
trees that she mistakenly believed to be on her
own property. Her neighbors sued, alleging
trespass and negligence. The insurer denied
coverage on the ground that the underlying
suit alleged only intentional conduct. In theensuing litigation, a trial court granted theinsurer’s summary judgment motion, finding
no allegations of a covered “occurrence,” andalternatively that several policy exclusions
barred coverage.
The appellate court affirmed, explainingthat the tree removal and land levelingwere intentional actions, regardless ofthe policyholder’s mistaken beliefs aboutproperty boundaries. The court rejected
the policyholder’s contention that Liberty
Surplus Ins. Corp. v. Ledesma & Meyer
Construction Co., 5 Cal. 5th 216 (2018), in
which the California Supreme Court heldthat a negligent hiring suit stemming from an
employee’s molestation of a third party may
allege a covered occurrence, was controlling.
The court explained that in Liberty Surplus,
the causal chain that led to injury began withthe employer’s alleged negligent act of hiring
the employee, whereas here, the immediate
cause of damage was the policyholder’sintentional action of tree removal. In
addition, the court emphasized that Liberty
Surplus “contain[ed] no language indicating
it intended to overrule prior caselaw holdingthat intentional acts are not ‘accidents’ merely
because the insured did not intend to cause
injury.” Finally, the court deemed it irrelevantthat the underlying suit alleged a cause ofaction sounding in negligence, noting thatthe insurer’s duty to defend turns on the facts
alleged in the underlying complaint, not thelabels of the causes of action.

Reinsurance Alert:
District Of Columbia Circuit Court
Dismisses Original Insured’s
Claims Against Reinsurers And
Intermediaries
The District of Columbia Circuit Court
ruled that reinsurers and reinsuranceintermediaries were not directly liable tothe original insured. Vantage Commodities
Financial Services I, LLC v. Assured Risk
Transfer PCC, LLC, 2022 WL 1193996 (D.C.
Cir. Apr. 22, 2022).
Vantage entered into a loan agreement
extending credit to an energy company. In
order to mitigate the risk of loan default,
Vantage hired Equifin Risk Solutions to create
Assured Risk Transfer (“ART”), a special
purpose “captive” insurance entity backed byreinsurance. In turn, Equifin retained Willis
Towers to assist in the management of ART.
Equifin secured reinsurance from several
carriers to reinsure ART for a portion of
insurance issued to Vantage. When the energy
company defaulted on the loan, Vantage
submitted a claim to ART. ART disputed theclaim and an arbitration panel ultimately
found in Vantage’s favor. ART had insufficient
funds to pay the arbitration award. The
reinsurers notified ART that any future claims
would be denied because ART had failed tocomply with certain notice and proof of loss
requirements in the reinsurance agreements.
Thereafter, Vantage sued ART, the reinsurers
and Willis Towers, alleging negligence, breachof contract, promissory estoppel, unjust
enrichment and professional negligence.
The district court dismissed the suit and theappellate court affirmed.

3

The appellate court held that as to theclaims against the reinsurers, Vantage
failed to plead facts sufficient to establish a
direct contractual relationship. The court
acknowledged that in certain circumstances,a reinsurer may become directly liable to theoriginal insured, but concluded this case did
not present such a scenario. In particular, thecourt held that there was no implied contract
because Vantage never dealt directly withthe reinsurers. Similarly, the promissory
estoppel and unjust enrichment claims failed
because both depended on the existence of anagency relationship between the reinsurers
and either ART or Willis Towers, which
was not established by the allegations orfactual record.
With respect to the professional negligenceclaims against Willis Towers, the court heldthat the “economic loss doctrine” bars suchclaims where, as here, the claimant seeks torecover purely economic losses. The court
rejected Vantage’s assertion that there was a“special relationship” between the parties thatwould create an exception to the economic
loss doctrine. The court noted that Willis
Towers had minimal contact with Vantage,“nothing approaching the ‘close’ or ‘intimate’nexus” needed to trigger the exception.
The court also ruled that the negligent
misrepresentation claims were without merit,citing the lack of false representations orreasonable reliance.

Assignment Alert:
South Carolina Supreme Court
Rules That Post-Loss Assignment
Of Insurance Rights Is Valid
Notwithstanding Lack Of Insurer
Consent
Reversing an appellate court decision, theSouth Carolina Supreme Court ruled thatthe operative “loss” for insurance coveragepurposes is determined by the date ofoccurrence, rather than the time of judgment
or settlement, and that a post-loss assignmentof insurance rights was valid even without
insurer consent. PCS Nitrogen, Inc. v.
Continental Cas. Co., 2022 WL 1101704 (S.C.
Apr. 13, 2022).
From 1966 to 1972, Columbia Nitrogen
Corporation (“Old CNC”) operated fertilizer

plants in Charleston. During that time frame,
Old CNC was insured under policies issued
by Continental. In 1986, Old CNC enteredinto an acquisition agreement which sold
most of its assets to CNC Corp. (“New CNC”).
In addition to the assets, New CNC assumed
some of Old CNC’s liabilities related to the“acquired business.” The agreement also
included a document titled “Assignment of
Insurance Benefits,” which stated that Old
CNC “has agreed to sell, convey, transfer,and assign . . . all of [its] rights, proceeds
and other benefits to and under all of [its]policies.” New CNC later changed its nameand merged with PCS Nitrogen. In 2013, PCS
Nitrogen was found liable for environmental
remediation as a corporate successor to Old
CNC. PCS Nitrogen sought coverage under
Old CNC’s policies, which Continental denied.
A South Carolina trial court granted theinsurer’s summary judgment motion, and theappellate court affirmed.
As discussed in our January 2020 Alert,
the appellate court ruled that the policies
were not assigned to New CNC because Old
CNC did not obtain the consent from theinsurers required by the policies and South
Carolina law. The court further held thatthe assignment was invalid as a post-loss
assignment because there were no vested
claims from prior actions against Old CNC at
the time of assignment. The policies specified
that coverage was not available “until theamount of the insured’s obligation to pay shallhave been finally determined by judgment. . . or by written agreement.” Under thislanguage, and because no actions had been
filed against Old CNC prior to the asset sale,the court held that no losses had occurred andno vested claims existed. The court explainedthat although the operative occurrences (i.e.,
contamination) may have occurred during
the policy period, the insured loss (i.e., theinsured’s obligation to pay a sum of money)
did not occur prior to the assignment.
Last month, the South Carolina Supreme
Court reversed, adopting the “post-loss
exception” and holding that insurer consent is
not required for an assignment of insurance
benefits made after a “loss” has occurred. As
a preliminary matter, the court concluded
that under third-party policies, the operative“loss” arises at the time of the occurrence,
not when judgment is issued against theinsured. Further, the court ruled that in thepresent case, any loss occurred before Old
4

CNC executed the assignment in 1986 andtherefore that the assignment was valid.
The court remanded the matter for adetermination of several other coverage
issues, including whether the dischargeof contaminants constitutes a covered“occurrence” in the first instance, whether apollution exclusion bars coverage, or whether
PCS engaged in any post-loss conduct thatwould operate to void coverage.
Several other state supreme courts haveaddressed this issue. The highest courtsof California and New Jersey have applieda post-loss exception to factual scenarios
similar to the one presented here. However,the State Supreme Courts of Hawaii andOregon have held that post-loss assignments
are not valid without insurer consent.

court emphasized that the relevant inquiry is“not whether the virus is physical, but rather
if it has direct physical effect on property
that can be fairly characterized as ‘loss ordamage.’” (Emphasis in original). Noting thatevery federal appellate court in the nation
has required some “distinct, demonstrable,
physical alteration of the property,” the court
concluded that no such loss or damage isalleged in the context of COVID-19-related
business losses stemming from government
restrictions.
Further, the court held that allegations ofviral “presence” do not amount to physicalloss or damage, stating: “Evanescent presenceof a harmful airborne substance that willquickly dissipate on its own, or surface-levelcontamination that can be removed by simple
cleaning, does not physically alter or affectproperty.” Having reached this conclusion,
the court also held that civil authority
coverage was unavailable because there wasno damage to properties located nearby to theinsured premises.
Finally, the court rejected the policyholder’scontention that the inclusion of a virus
exclusion in one policy but not in others
created “a clear negative implication” that thepolicies without the exclusion were intended
to cover COVID-19-related claims.

The highest courts in Iowa and Massachusetts
have ruled that pandemic-related businesslosses are not covered by all risk property
policies, concluding that allegations relating
to the COVID-19 virus do not allege physicalloss or damage.

In Wakonda Club v. Selective Ins. Co. ofAm., 2022 WL 1194012 (Iowa Apr. 22, 2022),
the Iowa Supreme Court granted an all-risk
property insurer’s motion for summary
judgment, finding that losses suffered as aresult of government closure orders were
not covered by Business Income and Extra
Expense provisions. Addressing this matterof first impression under Iowa law, the court
held that a policyholder’s loss of use of its
property, without more, cannot satisfy thepolicy’s “direct physical loss of” property
requirement. Because the policyholder
disavowed any knowledge that the COVID-19
virus was present at its premises, the court
held there was no potential physical elementthat could implicate coverage.

In Verveine Corp. v. Stratmore Ins. Co.,
2022 WL 1180061 (Mass. Apr. 21, 2022), theSupreme Judicial Court of Massachusetts
ruled that losses incurred by restaurants inthe wake of government shutdown orders
were not covered by all risk property policies
because there was no “direct physical lossof or damage to” property. In so ruling, theThe court rejected the policyholder’s assertion
that coverage was available pursuant to Iowa’s
reasonable expectations doctrine, which turns
on an ordinary layperson’s understandingof policy coverage, regardless of ambiguity.
The court explained that even if a layperson
would not understand the difference
between “loss” and “damage,” the “physical”

COVID-19 Alerts:
Two State Supreme Courts RuleThat COVID-19-Related Business
Losses Do Not Allege Physical Loss
Or Damage5

requirement “defeats any expectation thatthe policy provided coverage for any businessinterruption untethered from a physical lossof the property.”
On the same day that Wakonda Club was
decided, the Iowa Supreme Court also
dismissed a policyholder’s complaint inJesse’s Embers, LLC v. Western Agricultural
Ins. Co., 2022 WL 1194006 (Iowa Apr. 22,2022). There, the court rejected a claim forbusiness interruption coverage for the same
reasons set forth in Wakonda Club, and also
upheld the insurer’s denial of coverage undera civil authority policy provision. The court
reasoned that the government orders were notissued in response to physical loss or damage
to nearby property, but rather in order toreduce the spread of the virus.

State And Federal Appellate Courts
Continue To Rule In Insurers’ Favor
In Suits Seeking Coverage For
Pandemic-Related Business Losses
In recent weeks, several state and federal
appellate courts have continued the trendof dismissing policyholder suits seeking
coverage for economic losses incurred in
the wake of government orders relating
to COVID-19.
State appellate courts in Florida, Illinois andMichigan have recently affirmed the dismissalof policyholders’ claims for business losses
incurred in the wake of the pandemic and its
related government shutdown orders.
In Commodore, Inc. v. Certain Underwriters
at Lloyd’s London, 2022 WL 1481776 (Fla.
Dist. Ct. App. May 11, 2022), a Florida
appellate court upheld the dismissal ofa restaurant’s coverage suit against its
commercial property insurer. The courtemphasized the necessity of a “tangible” loss
in order to satisfy the policy’s “direct physicalloss of or damage to” property requirement,
rejecting the restaurant’s contention that its
inability to use its property for its intended
purpose was sufficient to trigger coverage.
Like many other courts across jurisdictions,the Commodore court also noted that thepolicy’s “period of restoration” provision
further supported its conclusion that loss ofuse alone cannot constitute loss or damage toproperty under the policy.

Two appellate courts in Illinois also rejectedclaims for COVID-19-related coverage. In
GPIF Crescent Court Hotel LLC v. Zurich
Am. Ins. Co., No. 1-21-1335 (Ill. Ct. App.
May 20, 2022), the court held that a hotel’s
implementation of plexiglass barriers,
sanitizer stations and other elements wereinsufficient to satisfy the physical loss
requirement, and in Firebirds International,
LLC v. Zurich Am. Ins. Co., No. 2020 CH
05360 (Ill. Ct. App. May 20, 2022), thecourt ruled that a contamination exclusion
unambiguously barred coverage for the
COVID-19-related business loss claims.
Michigan appellate courts have likewise
concluded that business losses arising outof the COVID-19 virus itself or the related
government orders do not give rise tocoverage under business interruption or civil
authority policy provisions. See Massage
Bliss, Inc. v. Farm Bureau General Ins. Co. ofMichigan, 2022 WL 1591925 (Mich. Ct. App.
May 19, 2022); Three Won Three, Corp. v.
Property-Owners Ins. Co., 2022 WL 1594828(Mich. Ct. App. May 19, 2022).
Employing similar reasoning, federal
appellate courts in the Sixth, Eighth andEleventh Circuits have also upheld dismissalsof COVID-19-related coverage suits. See
Renaissance/The Park, LLC v. Cincinnati
Ins. Co., 2022 WL 1596257 (6th Cir. May
20, 2022) (Kentucky law); Glen R. Edwards,
Inc. v. Travelers Cas. Ins., 2022 WL 1510818(8th Cir. May 13, 2022) (Missouri law); SA
Palm Beach, LLC v. Certain Underwriters at
Lloyd’s London, 2022 WL 1421414 (11th Cir.
May 5, 2022) (Florida law).

6

Suit Limitation
Clause Alert:
Seventh Circuit Rules That
Policyholder’s Suit Against
Property Insurer Is Time Barred
The Seventh Circuit dismissed a suitagainst a property insurer, ruling that thepolicyholder’s failure to bring a legal action
within two years of the date of damage wasfatal to its coverage claim. Legend’s Creek
Homeowners Assoc., Inc. v. Travelers Indem.
Co. of Am., 2022 WL 1467456 (7th Cir. May
10, 2022).
In 2016, Legend’s Creek, a homeowners’
association, filed a claim with Travelers forhail and wind damage that had occurredin May 2016. During the following twoyear period, the public adjuster retainedby Legend’s Creek and Travelers worked
together to evaluate the scope and cost ofcovered damages. During that time frame,
Travelers issued three payments totaling
more than $900,000. In 2018, less than three
weeks before the contractual deadline to bringa legal action, the adjuster made an additional
demand for payment in order to replace nondamaged exterior sides of the building so thatthey would match the newly repaired side.

When Travelers refused, Legend’s Creek sued,
alleging bad faith and breach of contract.
An Indiana district court granted Travelers’summary judgment motion and the Seventh
Circuit affirmed.
The Seventh Circuit noted that Indiana
law recognizes a few limited exceptions tocontractual suit deadlines, but concluded
that none applied here. In particular, thecourt rejected Legend’s Creek’s assertion
that compliance with the suit provision
was impossible where, as here, the claim
investigation takes more than two years. The
court reasoned that Legend’s Creek “points
to no term in the policy that it did not or
could not have abided by within the twoyear window.” In addition, the court rejected
the contention that ongoing cooperation
during the two-year period excused thesuit limitation deadline, stating: “Though
Legend’s Creek may not have had a reason
to litigate in that period, that doesn’t render
the policy requirements incomprehensibleor its obligations impossible.” The court also
rejected Legend’s Creek’s argument that
Travelers was obligated to provide notice of
its intent to rely on the policy’s suit limitation
clause, noting the absence of legal support forthat contention. Finally, the court held that
Travelers did not waive its right to rely on thesuit limitations provision by continuing tonegotiate with the public adjuster.

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

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

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

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

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

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

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

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

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

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

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

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

This edition of the
Insurance Law Alert was prepared byBryce L. Friedman / +1-212-455-2235
bfriedman@stblaw.com and
Joshua Polster / +1-212-455-2266
joshua.polster@stblaw.com
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 STATESEUROPEASIANew York
425 Lexington Avenue
New York, NY 10017+1-212-455-2000

Brussels
Square de Meeus 1, Floor 7
B-1000 Brussels
Belgium+32-472-99-42-26

Beijing
3901 China World Tower A
1 Jian Guo Men Wai Avenue
Beijing 100004
China+86-10-5965-2999

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

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

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

SOUTH AMERICA

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

9