Insurance Law Alert

February 2022

In This Issue
Texas Supreme Court Adopts Exception To Eight-Corners Rule
The Texas Supreme Court ruled that courts may look to certain information outside theallegations in the complaint and the insurance policy in evaluating whether an insurer has aduty to defend. Monroe Guaranty Ins. Co. v. BITCO Gen. Ins. Corp., 2022 WL 413940 (Tex.
Feb. 11, 2022). (Click here for full article)

Ninth Circuit Rules That Computer Fraud And Funds Transfer Fraud
Provisions May Cover Email Phishing Loss

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insurer representation,offering unmatched ability
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litigation and arbitration
proceedings.”–Chambers New York2021

The Ninth Circuit ruled that a California district court erred by dismissing Computer Fraud
and Funds Transfer Fraud coverage claims arising out of an email phishing scheme. Ernst
and Haas Management Co., Inc. v. Hiscox, Inc., 23 F.4th 1195 (9th Cir. 2022). (Click here forfull article)

New York Court Rules That Four Underlying Actions Arose Out Of“Related” Wrongful Actions And Were Therefore Subject To A Single
Per-Claim Limit
A New York district court ruled that four separate lawsuits against a law firm arose out ofrelated wrongful actions and were therefore subject to a single $1 million per-claim limit.
Lonstein Law Office, P.C. v. Evanston Ins. Co., 2022 WL 311391 (S.D.N.Y. Feb. 2, 2022).
(Click here for full article)

Michigan Court Of Appeals And Sixth Circuit Affirm Dismissals Of
Restaurants’ COVID-19 Coverage Suits
A Michigan appellate court and the Sixth Circuit affirmed dismissals of suits seeking coveragefor losses incurred in the wake of government closure orders under commercial property
policies. Gavrilides Management Co., LLC v. Michigan Ins. Co., 2022 WL 301555 (Mich. Ct.
App. Feb. 1, 2022); Brown Jug, Inc. v. Cincinnati Ins. Co., 2022 WL 538221 (6th Cir. Feb. 23,2022). (Click here for full article)

New Jersey Court Dismisses Law Firm’s COVID-19 Claims Against Insurers
A New Jersey trial court granted insurers’ motion to dismiss a complaint seeking coverage
under business interruption and civil authority provisions of an all risk policy. Fleming
Ruvoldt PLLC v. Sentinel Ins. Co., 2022 WL 401883 (N.J. Super. Ct. Feb. 1, 2022). (Click here
for full article)

Two Courts Reach Opposite Conclusions As To Application Of Pollution
Exclusion To Injuries Stemming From Tank Explosions
The Supreme Court of Mississippi ruled that a pollution exclusion is ambiguous and does
not bar coverage for injuries arising out of an explosion caused by flammable substances,
Omega Protein, Inc. v. Evanston Ins. Co., 2022 WL 178171 (Miss. Jan. 20, 2022), whereas a
Washington district court held that a pollution exclusion barred coverage for claims arising out
of a tank explosion, Country Mutual Ins. Co. v. Jackson, 2022 WL 187808 (E.D. Wash. Jan.
20, 2022). (Click here for full article)



Simpson Thacher & Bartlett LLP

1

Duty To Defend
Alert:
Texas Supreme Court Adopts
Exception To Eight-Corners Rule
The Texas Supreme Court ruled that courts
may look to certain information outside theallegations in the complaint and the insurance
policy in evaluating whether an insurer has
a duty to defend. Monroe Guaranty Ins. Co.
v. BITCO Gen. Ins. Corp., 2022 WL 413940(Tex. Feb. 11, 2022).
The coverage dispute arose out of a negligencelawsuit against a drilling company. The
company tendered defense of the suit to two
insurers, Monroe and BITCO. BITCO agreed
to defend under a reservation of rights, but
Monroe refused, arguing it had no duty to
defend because the property damage did
not occur during its policy period. BITCO
sued, seeking a declaration that Monroe
was obligated to defend the suit. The parties
stipulated that the property damage occurred
during BITCO’s policy period. A Texas district
court determined that it could not consider
the stipulation related to the timing of theproperty damage and therefore granted
BITCO’s summary judgment motion.
On appeal, the Fifth Circuit asked the Texas
Supreme Court to address two issues of law:
(1) whether exceptions to the eight-corners
rule, as set forth in Northfield Ins. Co. v.
Loving Home Care, Inc., 363 F.3d 523 (5thCir. 2004), are permissible under Texas
law; and (2) whether a court may consider
evidence of a stipulated date related to theunderlying occurrence in determining an
insurer’s duty to defend. (See April 2021
Alert). In Northfield, the Fifth Circuit
agreed to consider extrinsic evidence inevaluating an insurer’s duty to defend “whenit is initially impossible to discern whether
coverage is potentially implicated,” and“when the extrinsic evidence goes solely toa fundamental issue of coverage which does
not overlap with the merits of or engage thetruth or falsity of any facts alleged in theunderlying case.”in Northfield. More specifically, the court
held that:[I]f the underlying petition states a claimthat could trigger the duty to defend, andthe application of the eight-corners rule,due to a gap in the plaintiff’s pleading, is
not determinative of whether coverage
exists, Texas law permits considerationof extrinsic evidence provided theevidence (1) goes solely to an issue ofcoverage and does not overlap with themerits of liability, (2) does not contradict
facts alleged in the pleading, and(3) conclusively establishes the coveragefact to be proved.
Notwithstanding this exception, the courtemphasized that the eight-corners rule
remains the “initial inquiry” to determine an
insurer’s defense obligations.
As to the second question, the court held thata court may consider extrinsic evidence ofthe date of an occurrence so long as it meetsthe aforementioned requirements. The court
concluded that here, the extrinsic evidence
did not satisfy the test because the date ofoccurrence stipulation overlapped with themerits of the underlying case. The court
explained: “A dispute as to when property
damage occurs also implicates whether
property damage occurred on that date,forcing the insured to confess damages at aparticular date to invoke coverage, when its
position may very well be that no damage wassustained at all.”Answering the first certified question in theaffirmative, the Texas Supreme Court ruledthat courts may consider extrinsic evidence
under a standard similar to that set forth2Cyber Alert:
Ninth Circuit Rules That Computer
Fraud And Funds Transfer Fraud
Provisions May Cover Email
Phishing Loss
The Ninth Circuit ruled that a California
district court erred by dismissing Computer
Fraud and Funds Transfer Fraud coverageclaims arising out of an email phishing
scheme. Ernst and Haas Management
Co., Inc. v. Hiscox, Inc., 23 F.4th 1195 (9thCir. 2022).

institution to transfer, pay or deliver Moneyand Securities.” The court emphasized thatthe policy defined “instruction” to include an
instruction “initially received by You which
purports to have been transmitted by an
Employee but which was in fact fraudulently
transmitted by someone else.” As the court
noted, the Eleventh Circuit, faced with nearly
identical policy language, reached the sameconclusion in Principle Solutions Group,
LLC v. Ironshore Indemity, 944 F.3d 886(11th Cir. 2019) (discussed in our December
2019 Alert).

The coverage dispute arose after an employeeof the insured management company wired
payments to a fraudulent actor who had
presented himself as her supervisor inspoofed emails. Hiscox denied coverage,
arguing that the loss was caused by theintervening actions of the employee and not“directly” by computer fraud, as required by
the Computer Fraud provision. The insurer
also argued that coverage under a Funds
Transfer Fraud provision was unavailable
because the loss did not result directly from“fraudulent instructions.” A California district
court agreed and dismissed the coverage suit.
The Ninth Circuit reversed.

Coverage Alert:

The Ninth Circuit ruled that the Computer
Fraud provision covered the company’s loss
because it “resulted directly” from use of acomputer to fraudulently cause a transfer ofproperty, notwithstanding the employee’s
actions in effectuating the transfer. The
court relied on American Tooling Center,
Inc. v. Travelers Cas. & Sur. Co. of Am., 895
F.3d 455 (6th Cir. 2018) (discussed in our
July/August 2018 Alert), in which the Sixth
Circuit ruled that fraudulently induced wiretransfers were a “direct loss” and that theinsured company’s multi-step authorization
process did not qualify as an intervening
action sufficient to break the causal chain.
The court distinguished Ninth Circuit
precedent that held there was no coveragefor losses stemming from an authorizeduser’s embezzlement of funds, deeming thatfactual scenario “materially different” fromfraudulently-induced wire transfer losses.

A law firm was retained by DirecTV to
identify and bring claims against businesses
or individuals who had illegally acquired
DirecTV services. Various businesses brought
lawsuits against the law firm and DirecTV,
asserting claims of fraud, federal statutory
violations and other causes of action. The
suits alleged that the law firm participatedin a scheme in which DirecTV would induce
businesses to sign up for a non-commercial
DirecTV package, after which the law firm
would threaten litigation and extort large
sums of money in order to avoid prosecution
for failing to obtain a commercial account.
In turn, the law firm sued Evanston,alleging breach of contract and bad faith
based on the insurer’s refusal to pay thefull aggregate limits rather than a single $1
million per-claim limit. The court dismissed
the complaint.

In addition, the Ninth Circuit ruled thatcoverage was available under a Funds
Transfer Fraud provision, which applied to“loss of Money and Securities resulting froma Fraudulent Instruction directing a financial

New York Court Rules That Four
Underlying Actions Arose Out Of“Related” Wrongful Actions And
Were Therefore Subject To A Single
Per-Claim Limit
A New York district court ruled that four
separate lawsuits against a law firm arose outof related wrongful actions and were therefore
subject to a single $1 million per-claim limit.
Lonstein Law Office, P.C. v. Evanston Ins.
Co., 2022 WL 311391 (S.D.N.Y. Feb. 2, 2022).

The policy included a “related claims”
provision that stated that “[m]ore than
One Claim arising out of a Single Wrongful
Act . . . or a series of related Wrongful
Acts . . . shall be considered a single Claim.”
The court held that the provision was
3unambiguous and that the four underlying
actions were “related” under the policy. Morespecifically, the court explained that eachlawsuit arose from the law firm’s actions in
representing DirecTV and involved “nearly
identical and overlapping allegations” of ascheme to extort money from small businessowners using the same misrepresentations.
The court deemed it irrelevant that theallegations in each action presented distinct
facts, occurred at different times and involved
different claimants. Further, the courtemphasized that the policy provision did not
require claims to be based on the same legal
theories in order to be “related.”

COVID-19 Alerts:
Michigan Court Of Appeals And
Sixth Circuit Affirm Dismissals
Of Restaurants’ COVID-19
Coverage Suits
A Michigan appellate court affirmed a trial
court’s dismissal of a suit seeking coveragefor losses incurred in the wake of government
closure orders under a commercial property
policy. Gavrilides Management Co., LLC v.
Michigan Ins. Co., 2022 WL 301555 (Mich.
Ct. App. Feb. 1, 2022).
The appellate court ruled that the insurers
properly denied coverage based on therestaurant’s failure to allege direct physicalloss or damage to property. The court
explained that even assuming that loss ordamage need not be permanent to qualify
as “direct physical loss of or damage to”
property, there would still be no coverage
because “physical” requires the loss ordamage to “have some manner of tangible
and measurable presence or effect in, on, or to
the premises.” The court emphasized that thecomplaint did not allege that the restaurant
was contaminated with the virus and thateven if it did, such contamination would likely
constitute an “indirect” loss rather than a“direct physical loss.” The court also held thata civil authority provision was inapplicablebecause there were no allegations of damage
to nearby property, which was required underthat coverage provision.
Additionally, the court held that coverage wasbarred by two provisions: an exclusionary
clause that applied to loss or damage caused

directly or indirectly by “enforcement of any
ordinance or law” and a virus exclusion. As
to the first exclusion, the court held that theexecutive orders constituted ordinances orlaws within the meaning of the policy, andas to the virus exclusion, the court deemed itirrelevant that the provision did not include
phrases such as “directly or indirectly” or“regardless of any other cause.”
Citing the appellate court’s decision in
Gavrilides, the Sixth Circuit affirmed thedismissal of restaurants’ business loss
claims and predicted that the Michigan
Supreme Court would rule that allegationsof loss of use of property due to government
shutdown orders are not sufficient to allege“direct physical loss.” Brown Jug, Inc. v.
Cincinnati Ins. Co., 2022 WL 538221 (6thCir. Feb. 23, 2022). The court noted thatgeneral, conclusory allegations that the virus“impaired some unidentified property insome unidentified manner” are not sufficient
to withstand a motion to dismiss and that
allegations of harm to individuals are not
the same as harm to property. In addition,
the court explained that allegations thatviral particles were present on surfaces andwere capable of spreading the virus do notallege actual harm to property because suchparticles can be eliminated with cleaning.
Finally, the court ruled that there could
be no civil authority coverage because (1)the complaints failed to allege more thanconclusory statements of loss to otherproperty, and (2) the shutdown orders did notprohibit access to insured property and in factencouraged businesses to remain operational
for takeout or delivery service.

New Jersey Court Dismisses Law
Firm’s COVID-19 Claims Against
Insurers
A New Jersey trial court granted insurers’
motion to dismiss a complaint seeking
coverage under business interruption andcivil authority provisions of an all risk policy.
Fleming Ruvoldt PLLC v. Sentinel Ins. Co.,
2022 WL 401883 (N.J. Super. Ct. Feb. 1,2022). The court found that the law firm’s
financial losses were caused by government
shutdown orders, rather than “physical loss”
or “physical damage” as required under thepolicy. In so ruling, the court rejected thenotion that a loss of use of property could
constitute direct physical loss. The court
further noted that even if the virus was
4physically present at the covered property,
it would be insufficient to meet the “physicaldamage” requirement. Moreover, the court
held that civil authority coverage wasunavailable because the government orders
did not “completely prohibit” the law firmfrom accessing its property. Finally, the court
ruled that a virus exclusion was unambiguous
and barred coverage for all claims.

The court ruled that the pollution exclusion
is ambiguous because the undefined terms“irritant” and “contaminant” in the definitionof “pollutant” are susceptible of more than
one reasonable interpretation. In particular,
the court noted that a substance can be an
irritant or contaminant “at its core and by
its very nature” regardless of where it exists,or conversely, may only be an irritant or
contaminant when it comes into contact withsomething else. Construing this ambiguity
in favor of coverage, the court ruled that theexclusion did not apply.
In contrast, a Washington district court
granted an insurer’s summary judgment
motion, finding that a pollution exclusion
barred coverage for claims arising out of atank explosion. Country Mutual Ins. Co. v.
Jackson, 2022 WL 187808 (E.D. Wash. Jan.
20, 2022).

Pollution Exclusion
Alert:
Two Courts Reach Opposite
Conclusions As To Application Of
Pollution Exclusion To Injuries
Stemming From Tank Explosions
The Supreme Court of Mississippi ruled thata pollution exclusion is ambiguous and does
not bar coverage for injuries arising out of an
explosion caused by flammable substances.
Omega Protein, Inc. v. Evanston Ins. Co.,
2022 WL 178171 (Miss. Jan. 20, 2022).
The injuries arose while contractors were
working on a storage tank containing
stickwater, a liquid composed of water, fish
oil and fish solids—the byproducts of fish oil
production. During welding and grinding of
the metal tank, an explosion occurred, killing
one person and injuring others. The explosion
was allegedly caused by the “extremely
flammable” gases inside the tank. Evanston
sought a declaration that coverage under
its excess policy was barred by a pollution
exclusion that applied to loss “arising out ofor contributed to in any way by the actual,
alleged or threatened discharge, dispersal,
release, migration, escape, or seepageof pollutants.”

During the transport of several items to berecycled, a metal tank that was believed
to be harmless exploded. The pressurizedtank contained poisonous chlorine gas, andthe accident resulted in the death of one
individual and injuries to several others.
The insurer defended the resulting lawsuits
under a reservation of rights and later soughta declaration that it had no further duty
to defend. The court granted the motion,
ruling that the pollution exclusion precluded
coverage for all claims.
The policyholder conceded that the injuriesarose from a “pollutant” but argued
that coverage nonetheless existed underWashington’s efficient proximate cause
analysis. In particular, the policyholder
claimed that the initial peril of the underlying
injuries was the tortfeasor’s negligence infailing to inspect the cylinder, which is acovered peril under the policy. Under statelaw, if the initial event is a covered peril, “thenthere is coverage under the policy regardless[of] whether subsequent events within the
chain, which may be causes-in-fact of theloss, are excluded by the policy.” The court
rejected this argument, explaining that it“need not consider the efficient cause of the
injuries because the initial peril—negligent
identification of a metal cylinder for recycling
or disposal—fits within the ‘pollution
exclusion’ and is an uncovered peril.” Thecourt further noted that “general negligencein this context is not an independent peril
distinct from the pollution exclusion.”5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 by
Mary Beth Forshaw / +1-212-455-2846
mforshaw@stblaw.com andBryce L. Friedman / +1-212-455-2235
bfriedman@stblaw.com
with contributions by Karen Cestarikcestari@stblaw.com.

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Please click here to subscribe to the Insurance Law Alert.
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