Insurance Law Alert

September 2020

In This Issue
Growing Number Of Courts Dismiss Policyholders’ Claims For Business
Interruption Coverage“[Simpson Thacher’s]
expertise ranges fromdirect insurance coverage ofvirtually all kinds, through toreinsurance matters and cases
relating to insurance companies’
business practices.”– Chambers USA
2020

In recent weeks, courts in Florida, California, Michigan and Illinois have issued decisions incoverage cases involving alleged COVID-19-related losses, all of which resolved the disputes
in the insurer’s favor. Martinez v. Allied Ins. Co. of Am., 2020 WL 5240218 (M.D. Fla. Sept. 2,2020); Malaube, LLC v. Greenwich Ins. Co., 2020 WL 5051581 (S.D. Fla. Aug. 26, 2020); 10E,
LLC v. Travelers Indem. Co. of Conn., 2020 WL5359653 (C.D. Cal. Sept. 2, 2020); Pappy’s
Barber Shops, Inc. v. Famers Group, Inc., 2020 WL 5500221 (S.D. Cal. Sept. 11, 2020);
Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 2020 WL 5525171 (N.D. Cal. Sept. 14, 2020);
Plan Check Downtown III, LLC v. AmGuard Ins. Co., No. 2:20-cv-06954 (C.D. Cal. Sept. 15,
2020); Turek Enterprises, Inc. v. State Farm Mutual Auto. Ins. Co., 2020 WL 5258484 (E.D.
Mich. Sept. 3, 2020); Sandy Point Dental, PC v. The Cincinnati Ins. Co., No. 20 CV 2160 (N.D.
Ill. Sept. 21, 2020). (Click here for full article)

Cleaning Expenses Do Not Satisfy “Direct Physical Loss” Requirement,
Says Eleventh Circuit
The Eleventh Circuit ruled that a restaurant was not entitled to coverage for cleaning expenses
or lost revenue related to nearby construction because it failed to allege “direct physical loss” asrequired by the policy. Mama Jo’s Inc. v. Sparta Ins. Co., 2020 WL 4782369 (11th Cir. Aug. 18,
2020). (Click here for full article)

Two Courts Rule That Delayed Reservation Of Rights Results In Waiver Of
Coverage Defense
The Tenth Circuit and Georgia Court of Appeals ruled that an insurer was estopped fromdenying coverage based on its delay in reserving its rights. Interstate Fire & Cas. Co. v.
Apartment Management Consultants LLC, 2020 WL 5049018 (10th Cir. Aug. 27, 2020);
Penn-America Ins. Co. v. Morgan Fleet Services Inc., 2020 WL 4726544 (Ga. Ct. App. Aug. 14,
2020). (Click here for full article)

Invoking Filed-Rate Doctrine, Third Circuit Dismisses Force-Placed
Insurance Claims Against Mortgage Company
The Third Circuit ruled that force-placed insurance claims alleging fraud, unjust enrichment
and violations of state and federal statutes were barred by the filed-rate doctrine. Leo
v. Nationstar Mortgage LLC of Delaware, 964 F.3d 213 (3d Cir. 2020). (Click here forfull article)


Simpson Thacher & Bartlett LLP

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Eleventh Circuit Rules That Each Alleged Act Of Theft Constitutes A
Separate Occurrence For Purpose Of Applying Deductibles
The Eleventh Circuit ruled that each alleged theft of gas at a filling station constituted aseparate occurrence subject to a separate deductible, notwithstanding that all thefts occurred
due to the same computer malfunction. Port Consolidated, Inc. v. International Ins. Co. of
Hannover, PLC, 2020 WL 5372281 (11th Cir. Sept. 8, 2020). (Click here for full article)

Excess Insurer May Not Challenge Payment Decisions Of Underlying
Insurers, Says Ninth Circuit
The Ninth Circuit dismissed an “improper exhaustion” claim, ruling that an excess insurer
may not challenge the payment decisions of underlying insurers absent a showing of fraud
or bad faith, or the reservation of such a right in the governing policy. AXIS Reinsurance Co.
v. Northrop Grumman Corp., 2020 WL 5509743 (9th Cir. Sept. 14, 2020). (Click here forfull article)

Finding No Allegations Of “Accidental” Conduct, Illinois Appellate
Court Rules That Insurer Has No Duty To Defend Engineering Firm In
Contaminated Water Suit
An Illinois appellate court ruled that a general liability insurer had no duty to defend anengineering firm against a suit seeking damages for personal injuries allegedly caused bycontaminated water, reasoning that the underlying claims did not allege accidental conduct.
General Casualty Co. of Wisconsin v. Burke Engineering Corp., 2020 WL 5514189 (Ill. Ct.
App. Sept. 14, 2020). (Click here for full article)

California Court Rules That Reinsureds May Not Recover Tort Damages
For Breach Of Good Faith And Fair Dealing
A California federal district court predicted that the California Supreme Court would decline
to impose tort liability for a breach of the covenant of good faith and fair dealing in thereinsurance context. California Capital Ins. Co. v. Maiden Reinsurance North America, Inc.,
2020 WL 4018796 (C.D. Cal. July 16, 2020). (Click here for full article)

New York Appellate Court Rules That Bankruptcy Exception To “Insured
v. Insured” Exclusion Restores Coverage For Claims Brought By Creditor
TrustAddressing a matter of first impression under New York law, a New York appellate court ruledthat a bankruptcy exception to an “insured v. insured” exclusion applied to claims brought bya creditor trust against the bankrupt company’s director and officers. Westchester Fire Ins.
Co. v. Schorsch, 2020 WL 4905056 (N.Y. App. Div. 1st Dep’t Aug. 20, 2020). (Click here forfull article)

STB News Alerts
Click here to read more about Simpson Thacher’s insurance-related honors and news.

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COVID-19 Alert:
Growing Number Of Courts Dismiss
Policyholders’ Claims For Business
Interruption Coverage
In recent weeks, courts in Florida, California,
Michigan and Illinois have issued decisions
in coverage cases involving alleged COVID19-related losses, all of which resolved thedisputes in the insurers’ favor.
Two Florida federal district courts dismissed
coverage claims for business losses arisingout of government orders aimed at reducing
the spread of COVID-19. In Martinez v. Allied
Ins. Co. of Am., 2020 WL 5240218 (M.D. Fla.
Sept. 2, 2020), the court ruled that a virus
exclusion expressly excluded such coverage.
In ruling on the insurer’s motion to dismiss,the court accepted as true the policyholder’sallegation that his business incurred losses asa result of government orders that limited his
ability to provide dental services during the
pandemic. The court concluded that coverage
was nonetheless unavailable based on an
exclusion for loss or damage caused “directly
or indirectly” by “[a]ny virus, bacterium
or other microorganism that induces or iscapable of inducing physical distress, illness
or disease.”
In Malaube, LLC v. Greenwich Ins. Co.,
2020 WL 5051581 (S.D. Fla. Aug. 26, 2020),
the court dismissed a restaurant’s COVID19-related coverage claims based on a lackof “physical loss or damage” to property.
The restaurant alleged that state emergency
orders limited its use of its facilities, resulting
in significant business losses. The court
deemed this allegation insufficient to satisfy
the “physical loss or damage” requirement,
rejecting contentions that physical loss does
not require structural alteration and may
encompass loss of use. Emphasizing theabsence of allegations of physical harm or
the presence of COVID-19 on the premises,
the court noted that “the restaurant merely
suffered economic losses—not anythingtangible, actual, or physical.” Finally, thecourt held that even accepting the restaurant’s
argument that physical loss or damage
could include property that is substantiallyunusable, coverage would still be unavailable
because the restaurant continued to operatetakeout and delivery services during therelevant time period.

Four federal district courts in California
likewise rejected policyholders’ claims forcoverage based on COVID-19-related losses.
In 10E, LLC v. Travelers Indem. Co. of Conn.,
2020 WL 5359653 (C.D. Cal. Sep. 8, 2020),
the court dismissed a restaurant’s suit seeking
coverage for COVID-19-related losses, findingthat the complaint failed to allege “direct
physical loss of or damage to property,”as required by the policy’s civil authority
provision. The court reasoned that losses
arising from an inability to use property
do not constitute direct physical loss of ordamage to property; physical loss or damage
requires a “distinct, demonstrable, physicalalteration.” The court declined to address theapplicability of a virus exclusion or whether
the government orders “prohibit[ed] access”
to the covered property, as required by thecivil authority provision.

Finding the analysis and holding in 10E,
LLC persuasive and applicable, another
California district court dismissed a suitseeking coverage for lost income allegedly
caused by COVID-19-related government
orders. Pappy’s Barber Shops, Inc. v. Famers
Group, Inc., 2020 WL 5500221 (S.D. Cal.
Sept. 11, 2020). In addition to ruling thatthe policyholder’s complaint failed to allege“direct physical loss” as required by thebusiness income, extra expense and civil
authority provisions, the court also concluded
that the government orders did not “prohibit
access” to the insured property, a prerequisite
to civil authority coverage. In so ruling, thecourt distinguished between a prohibition on
the operation of business and a prohibition onaccess to a place of business.
A third California court dismissed a retailer’s
coverage suit. Mudpie, Inc. v. Travelers Cas.
Ins. Co. of Am., 2020 WL 5525171 (N.D.
Cal. Sept. 14, 2020). Mudpie alleged thatits compliance with government closure3

orders resulted in substantial business losses
because its storefront became “useless and/or uninhabitable.” It sought coverage undercivil authority, business income and extra
expense provisions. Travelers denied coveragebased on the lack of requisite “direct physicalloss of or damage to” property and a virus
exclusion, arguing that “direct physical loss”
requires a “distinct, demonstrable, physicalalteration of the property.” The court rejected
this interpretation, explaining that “direct
physical loss of” property (as distinguishedfrom “direct physical loss to” property)
contemplates the “permanent dispossessionof something.” Nonetheless, the court ruledthat Mudpie did not suffer direct physical lossof property because it was not permanently
dispossessed of its storefront or inventory.

Additionally, the court rejected Mudpie’s
assertion that loss of functionality or access toproperty constitutes a direct physical loss ofproperty. In so ruling, the court distinguishedcases frequently cited by policyholders in thiscontext, see, e.g., Gregory Packing, Inc. v.
Travelers Prop. Cas. Co. of Am., 2014 WL
6675934 (D.N.J. Nov. 25, 2014), emphasizingthat decisions that equated loss of use
with physical loss involved an “intervening
physical force which ‘made the premises
uninhabitable or entirely unusable.’” Thecourt noted that its conclusion was supported
by a policy provision excluding coveragefor “loss or damage caused by or resulting
from . . . loss of use or loss of market.” Thecourt also distinguished Studio 417, Inc.
v. Cincinnati Ins. Co., 2020 WL 4962385(W.D. Mo. Aug. 12, 2020) (discussed in lastmonth’s Alert), which, unlike the present
case, involved allegations that COVID-19
particles were present on and caused damage
to property.

Finally, the court held that civil authority
coverage was unavailable because Mudpie
failed to “establish the ‘requisite causal
link between damage to adjacent property
and denial of access’ to its store.” The court
explained that the government orders werepreventative in nature, and were not based on
any alleged damage to adjacent property.
In Plan Check Downtown III, LLC v.
AmGuard Ins. Co., No. 2:20-cv-06954 (C.D.
Cal. Sept. 15, 2020), the court dismissedwith prejudice a restaurant’s complaint
against its property insurer seeking businessinterruption coverage, rejecting the assertion
that “physical loss of or damage to property”
could include changes in what activities canoccur in the restaurant’s space. Reasoningthat this interpretation would be a “major
expansion of insurance coverage,” the court
sided with the “[w]eight of California law”
in holding that some tangible alteration isrequired in order to satisfy the “physical lossof or damage to” requirement for coverage.
AmGuard Insurance, Co. is represented by
Simpson Thacher in this matter.
A Michigan federal district court similarly
dismissed COVID-19 coverage claims in
Turek Enterprises, Inc. v. State Farm
Mutual Auto. Ins. Co., 2020 WL 5258484(E.D. Mich. Sept. 3, 2020). A chiropractic
office, suing State Farm on behalf of itself
and all others similarly situated, sought
coverage for business losses incurred in thewake of government-mandated closures andrestrictions. The policyholder did not allege
that the virus was present on the covered
premises, but asserted that it lost income
when it suspended operations in compliancewith government orders. State Farm denied
coverage based on the lack of “direct physicalloss.” The court ruled that the undefinedterm “direct physical loss” was unambiguous,
required tangible damage and did notencompass loss of use of property. The court
distinguished Studio 417, which involved
allegations that COVID-19 particles were
present on and caused damage to property
and different policy language (“accidental
physical loss or accidental physical damage”).
Additionally, the court rejected thepolicyholder’s assertion that it sustained
tangible loss because of alleged deterioration
during the several months that its business
was suspended, including the expirationof medication and depreciation of assets.
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Finally, the court ruled that even if thepolicyholder had alleged direct physical loss,
coverage would still be precluded by a virus
exclusion. In so ruling, the court rejected thepolicyholder’s contention that the government
orders, rather than the virus, were theproximate cause of the alleged losses. The
court stated: “Plaintiff’s position essentiallydisregards the Anti-Concurrent Causation
Clause, which extends the Virus Exclusion to
all losses where a virus is part of the causal
chain.” The court also noted that actual
viral contamination was not required by theexclusion, emphasizing that the exclusionary
language applies to any “[v]irus, bacteria
or other microorganism that induces or iscapable of inducing physical distress, illness,or disease.”
Citing to several of the aforementioned
rulings, An Illinois federal district court
dismissed a dentist’s suit seeking businessinterruption and civil authority coverage.
Sandy Point Dental, PC v. The Cincinnati Ins.
Co., No. 20 CV 2160 (N.D. Ill. Sept. 21, 2020).
The court deemed the absence of allegationsof “demonstrable physical alternation to theproperty” fatal to its coverage claims given thepolicy’s “direct physical loss” requirement.
Further, the court noted that civil authority
coverage was unavailable for the independent
reason that access to the insured premises
was never “prohibited.”restaurant claimed that dust and debris
generated by the construction migrated
into the restaurant, which necessitateddaily cleaning. Although the restaurant did
not cease operations during construction,
it asserted that customer traffic decreased
during the period of construction. Sparta
denied the claim, citing a lack of requisite“direct physical loss.” In ensuing litigation,
the restaurant identified additional categoriesof damage, including its roof systems, awning,audio and lighting systems and HVAC
repairs. It relied on three experts to establish
causation between the newly-claimed
damages and the construction.
A Florida district court granted Sparta’s
motion to preclude the expert testimony,finding that their methodologies were“unreliable or nonexistent, and that their
testimony was speculative.” Absent that
testimony, the court concluded that Mama
Jo’s could not establish causation between theconstruction and the newly-claimed damages.
The district court also ruled that the claim
for cleaning was properly denied, stating that“property that must be cleaned, but is notdamaged, has not sustained a ‘direct physicalloss.’” Additionally, the court ruled that theloss stemming from lower-than-expectedsales was not covered because the restaurant
did not suffer a “necessary ‘suspension’” of
its operations as a result of a “direct physicalloss,” as required by the business income loss
provision. The Eleventh Circuit affirmed.

Property Policy
Alert:
Cleaning Expenses Do Not
Satisfy “Direct Physical Loss”
Requirement, Says Eleventh Circuit
In a decision that reaffirms the reasoning andholdings in the aforementioned COVID-19
coverage cases, the Eleventh Circuit ruledthat a restaurant was not entitled to coveragefor cleaning expenses or lost revenue related
to nearby construction because it failed toallege “direct physical loss” as required by
the policy. Mama Jo’s Inc. v. Sparta Ins. Co.,
2020 WL 4782369 (11th Cir. Aug. 18, 2020).
Mama Jo’s restaurant sought coverage underan all-risk policy issued by Sparta for losses
arising from nearby road construction. The
5

The Eleventh Circuit rejected the restaurant’s
assertion that direct physical loss
encompasses property that is uninhabitable
or unusable, noting that under Florida law,
physical loss contemplates an “actual change
in insured property.” With respect to thebusiness loss claim, the Eleventh Circuit
held that even assuming the restaurant had
established a “suspension” of its operations
because it closed down sections of thepremises for cleaning, the claim nonethelessfailed due to a lack of requisite direct
physical loss.

Estoppel Alert:
Two Courts Rule That Delayed
Reservation Of Rights Results In
Waiver Of Coverage Defense
The Tenth Circuit ruled that an insurer was
obligated to indemnify a punitive damages
award notwithstanding a punitive damages
exclusion, finding that the insurer was
estopped from denying coverage based on
its delay in reserving its rights. InterstateFire & Cas. Co. v. Apartment Management
Consultants LLC, 2020 WL 5049018 (10thCir. Aug. 27, 2020).
An apartment tenant sued her landlord andits management company (the “Defendants”)
after sustaining carbon monoxide injuries.
The suit sought compensatory and punitive
damages. Interstate, the Defendants’ primaryand excess insurer, assumed the defense ofthis suit. Approximately eighteen months
later (and one month after Defendants’summary judgment motion was denied
in the underlying suit), Interstate sought
to reserve its right to disclaim coveragefor punitive damages based on a punitive
damages exclusion in the primary policy.
The Defendants argued that Interstate wasestopped from relying on the exclusion
based on its unconditional assumption of the
defense and delay in reserving its rights. A
Wyoming federal district court agreed andgranted the Defendants’ summary judgment
motion. The Tenth Circuit affirmed.
The Tenth Circuit emphasized that Interstate
was on notice that the underlying suit sought
punitive damages, but failed to reserve its
right to deny coverage on that basis until
eleven days before the trial commenced.

In addition, the court noted the failure of
insurer-appointed counsel to “mount afull-bore assault on the claims for punitive
damages under Wyoming law, which createssignificant obstacles for obtaining a punitive
damages award.” The court concluded
that these actions resulted in prejudice tothe Defendants.
Further, the court ruled that coverage
was triggered under Interstate’s excess
policy, which followed form to the primarypolicy. The court reasoned that Interstate
was “legally obligated to pay” the punitive
damages award under the primary policy
by virtue of equitable estoppel. As such, theexcess policy, which applied to sums thatthat the insured “becomes legally obligatedto pay as damages after the primary policy of
insurance has been exhausted,” was triggered.
Refusing to enforce the punitive damages
exclusion, the court stated:
Allowing a retrograde application of
the Primary Policy’s punitive damages
exclusion to cancel the clear coverageobligations of the Excess Policy to pay[the Defendants’] “ultimate net loss”
above the Primary Policy’s aggregate
limit would be inconsistent withthe provisions of the Excess Policythat explicitly agreed to provide
such coverage.
The Court of Appeals of Georgia similarly
granted summary judgment to policyholders,finding that an insurer was estopped
from seeking to void the policy based on
misrepresentations because of a delay in
issuing a reservation of rights. Penn-America
Ins. Co. v. Morgan Fleet Services Inc., 2020
WL 4726544 (Ga. Ct. App. Aug. 14, 2020).
A bus driver sued Morgan Fleet Services(“MFS”) after she was injured exiting a busthat had caught fire. Penn-America, MFS’s
insurer, notified outside counsel that it would
defend under a reservation of rights andthat a “letter w[ould] be forwarded shortly.”
Six months later, Penn-America issued anemail reserving its right to withdraw from thedefense in the future and to “assert additional
defenses to any claims for coverage in the
future as may be necessary or appropriate.”
The letter also noted that in its policy
application, MFS identified its business asseat cover installation and failed to indicate
its bus inspection services, the conduct upon
6

which the underlying lawsuit was based.
Penn-America therefore expressly reserved
its right to rescind or void the policy based onthat misrepresentation.
In ensuing litigation, Penn-America and MFS
cross-moved for summary judgment. PennAmerica sought to void the policy and MFS
argued that Penn-America was estopped
from asserting non-coverage based on its
assumption of the defense without effective
notification of its reservation of rights. A
Georgia trial court ruled in MFS’s favor andthe appellate court affirmed.
The appellate court concluded that PennAmerica’s reservation of rights wasinsufficient to avoid waiver. The court
explained that shortly after it agreed todefend, Penn-America noted (in an email tooutside counsel) that it “was aware of andinvestigating the potential for non-coverage”
based on the inconsistencies between theapplication information and the allegations in
the underlying complaint as to the nature of
MFS’s business. The court reasoned that thisemail was “only a statement of future intent”
to send a reservation of rights at a later date
and was thus not “an actual reservation ofrights.” Moreover, the court emphasized thatthe actual reservation of rights was not sent
until six months later. As a result, the court
concluded that Penn-America waived thedefense of non-coverage.

Filed-Rate
Doctrine Alert:
Invoking Filed-Rate Doctrine, Third
Circuit Dismisses Force-Placed
Insurance Claims Against Mortgage
Company
Affirming a New Jersey federal district court
decision, the Third Circuit ruled that forceplaced insurance claims alleging fraud,
unjust enrichment and violations of state andfederal statutes were barred by the filed-rate
doctrine. Leo v. Nationstar Mortgage LLC of
Delaware, 964 F.3d 213 (3d Cir. 2020).
Borrowers alleged that Nationstar, theirreverse mortgage lender, colluded with aninsurance company and agent to receive
kickbacks on force-placed insurance policies.

They claimed that the insurer inflated therate filed with state regulators in order toreturn a portion of the profits to Nationstar
to induce Nationstar’s continued business.
The complaint alleged violations of state andfederal law, as well as unjust enrichment,
breach of contract and the implied covenantof good faith and fair dealing.
The Third Circuit ruled that the filed-rate
doctrine blocks these claims because thecomplaint sought damages based on analleged overcharge of a rate that was filedwith regulatory agencies. The court stated:“we reiterate that the filed-rate doctrinebrooks no distinction between, on one hand,challenging a filed rate as unreasonable and,on the other hand, challenging an overcharge
fraudulently included in a filed rate.” As
discussed in previous Alerts, several othercourts have dismissed suits against mortgage
service providers based on the filed-rate
doctrine and have declined to create a fraud
exception to the doctrine. See October 2018
Alert; September 2015 Alert; May 2011 Alert;
October 2010 Alert.

Number Of
Occurrences Alert:
Eleventh Circuit Rules That Each
Alleged Act Of Theft Constitutes A
Separate Occurrence For Purpose
Of Applying Deductibles
The Eleventh Circuit ruled that each alleged
theft of gas at a filling station constituted aseparate occurrence subject to a separate
deductible, notwithstanding that all
thefts occurred due to the same computer
malfunction. Port Consolidated, Inc. v.
International Ins. Co. of Hannover, PLC,
2020 WL 5372281 (11th Cir. Sept. 8, 2020).
Port Consolidated, Inc., a fuel distribution
company, operates a cardlock facility in which
only authorized customers with preexisting
contractual relationships can pump gasoline
and diesel fuel. Customers use “CFN” cards at
the filling station and can request restrictions
on the cards, such as limits on the gallons
of fuel or frequency of transactions. Such
restrictions are “pegged” to the CFN cardso that the facility’s computer system can7

enforce them. Port discovered an incorrectly
programmed setting on its fuel pumps thatfailed to enforce a fuel limitation request by
Allied Trucking, one of its customers. The
incorrect setting allowed Allied’s drivers to
exceed the 75-gallon limit that should havebeen in place by up to an extra 100 gallons,
despite Allied only being invoiced for 75
gallons per transaction. According to Port,
Allied’s drivers engaged in thousands of fueltransactions and intentionally exploited theerror to steal fuel. When Allied refused to pay
the difference, Port sought coverage under ageneral liability policy issued by Hannover.

In the ensuing coverage dispute, Hannoverargued that each alleged theft was a separate
occurrence that did not exceed the $1000
deductible in the policy. A Florida district
court agreed and granted Hannover’s
summary judgment motion. The Eleventh
Circuit affirmed, rejecting Port’s assertion
that all of its losses should be construed asa single occurrence pursuant to a definition
included in policy endorsements. The term
“occurrence” is not defined in the generaldefinitions section of the policy, but inthree sections of a supplemental coverageendorsement, it is defined to include “aseries” of unauthorized actions or uses.
Port argued that the supplemental coverage
definitions should be applied to the policy
as a whole, or alternatively, establishedambiguity. Dismissing these arguments, thecourt concluded that under Florida law, theundefined term “occurrence” is unambiguous
and is determined by “the immediate injuryproducing act.” Further, the court emphasizedthat each alleged theft was an act “separated
and distinguishable in ‘time and space.’”
Because no single fuel theft exceeded the$1000 deductible, the court concluded that
Port was not entitled to coverage under
the policy.

Excess Alert:
Excess Insurer May Not Challenge
Payment Decisions Of Underlying
Insurers, Says Ninth Circuit
Reversing a district court decision, the Ninth
Circuit dismissed an “improper exhaustion”
claim, ruling that an excess insurer may
not challenge the payment decisions ofunderlying insurers absent a showing of fraud
or bad faith, or the reservation of such a rightin the governing policy. AXIS Reinsurance
Co. v. Northrop Grumman Corp., 2020 WL
5509743 (9th Cir. Sept. 14, 2020).
Two lawsuits were filed against Northrop
alleging ERISA violations, one by the
Department of Labor (“DOL” action) and theother on behalf of the ERISA plan (“Grabek”
action). Northrop settled both actions andthen sought coverage from insurers in its
multi-layered program of insurance. AXIS
provided secondary excess coverage that“dropped down” when the combined $30
million limit of the underlying policies was
exhausted for “covered loss” under thosepolicies. National Union, a primary insurer,and CNA, a first-level excess insurer, both
determined that the DOL settlement fellwithin coverage of their policies and therefore
indemnified the settlement payment. Because
CNA’s partial payment did not fully exhaust
its liability limit, AXIS was not required to pay
any portion of the DOL settlement. However,
because the DOL exhausted National Union’s
primary coverage, CNA covered the Grabek
settlement as primary insurer. That payment
exhausted CNA’s liability limits. Therefore,
AXIS was called upon to pay the remainderof the Grabek settlement—approximately$9.7 million.
AXIS did not contest coverage of the Grabek
settlement under its policy, but sought
reimbursement of the DOL settlement on
the basis that the payments made for that
settlement by National Union and CNA
were not for “covered loss.” In particular,
AXIS argued that the DOL settlement
payment constituted disgorgement,
which is uninsurable under California
law and an “uncovered loss” under theunderlying policies. AXIS filed a declaratory
judgment action against Northrop, seeking
reimbursement of its payment. A California

8district court ruled in AXIS’s favor, endorsing
AXIS’s “improper erosion” theory of recovery.
The Ninth Circuit reversed, finding no basis incase law or policy language for the improper
erosion theory. Further, the Ninth Circuit
reasoned that allowing excess insurers tocontest the soundness of underlying insurers’
payment decisions “would undermine theconfidence of both insureds and insurers
in the dependability of settlements” and“introduce a host of inefficiencies into theinsurance industry.”
Importantly, the court noted that an excess
insurer remains free to contest claims
submitted to it during the claims adjustment
process, even if an underlying carrier has
determined that the same claim constitutes a“covered loss.” Additionally, excess carriers
may dispute payments on the basis of alleged
fraud or bad faith. However, absent a specificcontractual provision, an excess insurer “maynot second-guess other insurers’ paymentsof earlier claims without first showing thatthose payment were motivated by fraud or
bad faith.”

Coverage Alert:
Finding No Allegations Of“Accidental” Conduct, Illinois
Appellate Court Rules That Insurer
Has No Duty To Defend Engineering
Firm In Contaminated Water Suit
An Illinois appellate court ruled that a generalliability insurer had no duty to defend anengineering firm against a suit seeking
damages for personal injuries allegedly
caused by contaminated water, reasoningthat the underlying claims did not allege any
accidental conduct. General Casualty Co. of
Wisconsin v. Burke Engineering Corp., 2020
WL 5514189 (Ill. Ct. App. Sept. 14, 2020).
Burke provided water engineering andconsultation services to the Village of
Crestwood. When residents discoveredthat their drinking water was drawn from acontaminated well, rather that Lake Michigan,
as represented by Crestwood officials, theybrought suit. The complaint alleged claims
for statutory and common law fraud, civil
conspiracy and negligence. All of the claims
against Burke were dismissed, except forcivil conspiracy to commit fraud. Burke’s
professional liability insurer agreed to defend,
but General Casualty, Burke’s general liability
insurer, denied coverage. General Casualty
argued that the underlying claims alleged only
intentional conduct, which did not constitutean “occurrence” under the policy. An Illinois
trial court agreed and granted General
Casualty’s summary judgment motion. The
appellate court affirmed.

Crestwood residents, as assignees of Burke’s
rights under the policy, argued that theunderlying allegations potentially fell within
the scope of coverage because the complaint
alleged that Burke was negligent in breachingits fiduciary duty to inform the public about
the contaminated water. Although that count
was dismissed, the residents claimed thatrecovery was still possible because amended
complaints preserved negligence claims forappeal and because they intended to amend
the complaint to allege negligence basedon statutory violations. Rejecting theseassertions, the court explained that the factual
allegations in the complaint included only
intentional conduct on the part of Burke anddid not allege any “unforeseen occurrence.”
Additionally, the court held that any
potential negligence cause of action would be
irrelevant, explaining that a “court looks at
the actual factual allegations, not the label.”
Finally, the court rejected the residents’contention that facts outside the complaint
triggered General Casualty’s duty to defend.
The court held that correspondence between
General Casualty and Burke did not establish
the insurer’s acknowledgement of coverage.
Further, the insurer’s supposed knowledge
that the residents intended to pursue
common law negligence claims on appeal wasinsufficient to trigger its defense obligations.

9Reinsurance Alert:
California Court Rules That
Reinsureds May Not Recover Tort
Damages For Breach Of Good Faith
And Fair Dealing
A California federal district court predictedthat the California Supreme Court would
decline to impose tort liability for a breach of
the covenant of good faith and fair dealing in
the reinsurance context. California CapitalIns. Co. v. Maiden Reinsurance North
America, Inc., 2020 WL 4018796 (C.D. Cal.
July 16, 2020).
California Capital sued its reinsurer, Maiden,
alleging breach of contract and the covenantof good faith and fair dealing. California
Capital alleged that Maiden refused to pay
valid claims and demanded return of previous
payments for covered claims, among otherthings. Maiden moved to dismiss the breachof good faith cause of action on the basis thatreinsureds may not recover tort damages forsuch claims under California law. The court
agreed and dismissed the cause of action to
the extent it sought to recover tort (rather
than contractual) damages.
Although the California Supreme Court has
strictly limited tort recovery for the breachof the duty of good faith and fair dealing
for contract-based disputes, it has allowed
such recovery in the context of insurance
disputes. California Capital asserted that“because reinsurance is a form of insurance,
tort remedies should be available in
the reinsurance context.” Rejecting thiscontention, the court emphasized thedistinction between the policyholder-insurer
relationship and the reinsured-reinsurer
relationship. In particular, the court reasoned
that a breach of a reinsurance contract does
not violate the same social policies as a breachof an insurance contract because insurance
contracts are typically “marked by elementsof adhesion and unequal bargaining power,”whereas reinsurance contracts are not.
Further, the court explained that reinsurers
do not have the same fiduciary duties that
insurers do.
The also court dismissed California Capital’s
claims for attorneys’ fees and statutory
penalties, finding them unsupported bylaw and the allegations in the complaint.
However, the court declined to strike thebreach of the covenant of good faith and fairdealing cause of action to the extent it seeks
contractual damages. The court reasoned thatthe bad faith conduct alleged in the complaint
went beyond mere contractual breaches
sufficient to withstand a motion to dismiss.

D&O Alert:
New York Appellate Court Rules
That Bankruptcy Exception To“Insured v. Insured” Exclusion
Restores Coverage For Claims
Brought By Creditor Trust
Addressing a matter of first impression
under New York law, a New York appellate
court ruled that a bankruptcy exception toan “insured v. insured” exclusion applied toclaims brought by a creditor trust against thebankrupt company’s director and officers.
Westchester Fire Ins. Co. v. Schorsch, 2020
WL 4905056 (N.Y. App. Div. 1st Dep’t Aug.
20, 2020).
In the wake of a financial scandal and a stock
price plummet, RCS Capital Corp. negotiateda restructuring support agreement (“RSA”)
with its unsecured creditors and thereafter
filed for bankruptcy. The RSA provided forthe creation of a Creditor Trust to pursue
the bankruptcy estate’s legal claims onbehalf of the unsecured creditors. When theCreditor Trust initiated claims against RCS
Capital’s directors and officers, Westchester
Fire denied coverage on the basis of an
insured v. insured exclusion, which bars
coverage for “any Claim made against an
Insured Person . . . by, on behalf of, or at
the direction of the Company or Insured
Person.” The policy defines “Insured Person”
as “any past, present, or future director or
officer.” The defendant insureds argued thatcoverage was restored by an exception to the
exclusion, which applies to claims “broughtby the Bankruptcy Trustee or Examiner of
the Company or any assignee of such Trustee
or Examiner, or any Receiver, Conservator,
Rehabilitator, or Liquidator or comparable
authority of the Company.” A New York trial
court deemed the language ambiguous andconstrued it in favor of coverage. See May
2019 Alert. The appellate court affirmed.

10

The appellate court held that the policy
was ambiguous as to whether the Creditor
Trust was a “comparable authority” underthe exception to the exclusion. The court
reasoned thatby including the undefined and openended phrase “comparable authority”
into the D&O policy’s bankruptcy
exception, the parties created a broadly
applicable exception with no clear
limiting principles other than that there
should be no coverage where the D&O
claims are prosecuted by the DIP or
by individuals acting as proxies for theboard or the company.
However, the appellate court vacated thelower court’s grant of summary judgmentto the defendant insureds on their claim
for breach of contract as to coverage andits issuance of a declaration of coverage.
The appellate court ruled that, although
Westchester Fire was obligated to advancedefense costs, material issues of fact
remain as to the ultimate issue of coverage,
including whether the individual defendant
insureds engaged in wrongdoing in theirpersonal, rather than official capacities,
and whether the remedy sought in theCreditor Trust action constitutes uninsurable
disgorgement payments.

STB News Alerts
Bryce Friedman was quoted in an article by
The Wall Street Journal titled, “Insurance
Firms Gain Early Lead in Coronavirus
Legal Fight With Businesses.” The article
highlighted that, as courts begin to address
the flurry of COVID-19 business-interruption
coverage disputes, U.S. property insurers
have recently won more judicial rulings thanpolicyholders. In discussing trends in theearly decisions, Bryce noted, “[t]he initialdecisions indicate, on the whole, these cases
can ultimately be resolved consistent withinsurers’ underwriting intent as reflectedin the language of the policies.” Bryce wasalso quoted in a Reuters article on the
recent decision by the Judicial Panel on
Multidistrict Litigation rejecting petitions
for a nationwide, multi-district litigation
proceeding to determine whether businesses
that shut down in response to COVID-19
are entitled to insurance coverage based onclaims of property damage or loss as a resultof rules issued by civil authority. Bryce notedthat this decision may mean that judges who
were awaiting a decision on a potential MDL
will move ahead to issue decisions on pending
motions in individual cases quickly and thatupcoming decisions will likely clarify theviability of policyholders’ suits.
Mary Beth Forshaw and Lynn Neuner areamong the six Simpson Thacher partners
named among this year’s “Top 250 Womenin Litigation” by Euromoney’s Benchmark
Litigation. The feature honors theaccomplishments of America’s leading female
litigators who have participated in some of
the most impactful litigation matters in recent
history and who have earned the respect of
their peers and clients. Benchmark selects its
honorees through extensive research, client
feedback surveys and one-on-one interviews.
In addition to being named to the “Top 250
Women in Litigation” list, Lynn was also
recognized as a “Top 10 Female Litigator” in
the United States.
Susannah Geltman and Craig Waldman werenamed to Benchmark Litigation’s fifth annual“40 & Under Hot List.” The feature honors
the most notable up-and-coming litigation
attorneys in the U.S. under the age of 40 andis based on extensive research and feedback
from peers and clients.

11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

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