Insurance Law Alert

December 2019

In This Issue
Eleventh Circuit Rules That Crime Policy Covers Email Phishing Scheme
Resulting In Fraudulent Wire Transfer
The Eleventh Circuit ruled that a “fraudulent instruction” provision of a commercial crime
policy covered loss stemming from an email phishing scheme. Principle Solutions Grp., LLC v.
Ironshore Indem., Inc., 2019 WL 6691509 (11th Cir. Dec. 9, 2019). (Click here for full article)“Renownedin the market
as accomplished trial
lawyers and coverageexperts who offer quality
representation to clients in
the insurance industry.”– Chambers USA
2019

Rejecting Policy Renewal-Continuous Coverage Argument, Ohio Appellate
Court Says Late Notice Bars Coverage
An Ohio appellate court ruled that an insurer had no duty to defend or indemnify underlying
claims based on the policyholder’s failure to comply with the notice provision in the claimsmade policy. ISCO Indus., Inc. v. Great American Ins. Co., 2019 WL 6353709 (Ohio. App. Ct.
Nov. 27, 2019). (Click here for full article)

Illinois Supreme Court Rules That For Purposes Of Policy Coverage,
Offense Of Malicious Prosecution Occurs At Time Of Prosecution, Not
Exoneration
The Supreme Court of Illinois ruled that primary and excess liability insurers had no duty to
indemnify a malicious prosecution claim, finding that the operative “occurrence” for triggering
coverage was the original prosecution, not the later exoneration. Sanders v. Illinois Union Ins.
Co., 2019 WL 6199651 (Ill. Nov. 21, 2019). (Click here for full article)

Other Policy Provisions Do Not Create Ambiguity In Pollution Exclusion,
Says Massachusetts Court
A Massachusetts federal district court ruled that a total pollution exclusion bars coverage fordamage caused by a gasoline spill, rejecting the policyholder’s assertion that another policy
provision, which grants coverage for certain fuel spills, creates ambiguity as to the pollution
exclusion. Performance Trans., Inc. v. General Star Indem. Co., 2019 WL 6307227 (D. Mass.
Nov. 25, 2019). (Click here for full article)


Simpson Thacher & Bartlett LLP

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Arizona Appellate Court Limits Application Of Pollution Exclusion To
Claims Arising Out Of Traditional Environmental Contamination
An Arizona appellate court ruled that a pollution exclusion did not bar coverage for personal
injury claims arising out of exposure to hazardous fumes released during construction because
the underlying factual scenario did not constitute “traditional environmental pollution.” Starr
Surplus Lines Ins. Co. v. Star Roofing, Inc., 2019 WL 5617575 (Ariz. Ct. App. Oct. 31, 2019).
(Click here for full article)

Insurer Must Defend Sex Trafficking Claims Against Motel, Says
Massachusetts Court
A Massachusetts court refused to dismiss coverage claims brought by a motel that was sued forsex trafficking, finding that the claims were potentially covered acts of negligence, even though
the complaint alleged only intentional conduct. Ricchio v. Bigal, Inc., 2019 WL 6253275 (D.
Mass. Nov. 22, 2019). (Click here for full article)

Alabama Supreme Court Rules That Insurer’s Contribution Claim Does
Not Trigger “At Issue” Privilege Waiver
The Supreme Court of Alabama ruled that an insurer does not waive privilege as to settlementrelated documents by seeking contribution for settlement costs, even though such contribution
depends, in part, on the reasonableness of the settlement. Ex parte Dow Corning Alabama,Inc., 2019 WL 6337291 (Ala. Nov. 27, 2019). (Click here for full article)

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Cyber Coverage
Alert:

Eleventh Circuit Rules That Crime
Policy Covers Email Phishing
Scheme Resulting In Fraudulent
Wire Transfer
The Eleventh Circuit ruled that a “fraudulent
instruction” provision of a commercial crime
policy covered loss stemming from an email
phishing scheme. Principle Solutions Grp.,
LLC v. Ironshore Indem., Inc., 2019 WL
6691509 (11th Cir. Dec. 9, 2019).
A hacker posing as a Principle Solutions
executive sent an email to the company
controller. The email stated that the company
had been secretly working on a corporate
acquisition that would involve a $1.7 million
wire transfer to a specific account. The email
instructed the employee to await further
information from an attorney. Several
minutes later, someone purporting to be thatattorney sent detailed instructions regarding
the wire transfer. The employee then provided
necessary information to Wells Fargo inorder to effectuate the transfer, including
a confirmatory phone call. It was later
discovered that the emails were fraudulent.
The money was never recovered.
Principle sought coverage under aprovision for “loss resulting directly from afraudulent instruction directing a financial
institution to . . . transfer, pay or delivermoney or securities.” When the insurer
denied coverage, Principle sued for breachof contract. A Georgia district court ruledin Principle’s favor and the Eleventh
Circuit affirmed.
The insurer argued that it had no obligation
to provide coverage because the loss did not
involve a “fraudulent instruction,” defined as“an electronic or written instruction initially
received by [Principle], which instruction
purports to have been issued by an employee,
but which in fact was fraudulently issued bysomeone else without [Principle’s] or theemployee’s knowledge or consent” (emphasis
added). The insurer argued that this provision
did not apply because the wiring instructions
were not sent by a hacker purporting to be
the Principle executive (the first email), butrather came from the fraudster pretending tobe the attorney (the second email). The court
rejected this contention, noting that the two
emails, considered together, constituted a“fraudulent instruction.”
The court also rejected the insurer’s assertion
that the loss did not “result directly” from thefraudulent instruction. The insurer argued
that “directly” requires an “immediate” link
between the fraudulent instruction and loss,
and that several intervening steps occurred
between the fraudulent email and the actual
wire transfer, including the confirmation
phone call with Wells Fargo. Dismissing
this argument, the court held that “resulting
directly from” requires proximate causation(not immediacy), and that the employee’s
interactions with the impersonating attorney
and with Wells Fargo did not constituteintervening acts sufficient to break the causal
chain. The court also rejected the contention
that proximate causation was a question fora jury, finding that under the factual record
presented, the only reasonable conclusion
was that the loss “resulted directly from” thefraudulent instruction.
Notably, in another cyber coverage case also
governed by Georgia law, the Eleventh Circuit
declined to endorse a “proximate cause”
interpretation of the policy term “resulting
directly,” and instead held that it requires
a consequence that follows “straightaway,
immediately, and without intervention
or interruption.” As discussed in our May
2018 Alert, when it considered that case,Interactive Communications International,
Inc. v. Great Am. Ins. Co., 2018 WL 2149769(11th Cir. May 10, 2018), the Eleventh Circuit
held that financial losses did not “result
directly” from computer fraud because of atime lapse and intervening steps between the
fraud and the loss.
Numerous courts, interpreting specific policy
provisions in accordance with governing
jurisdictional law, have reached different
conclusions as to whether coverage isavailable for wire transfer losses initiated byfraudulent emails. Such decisions turn largely
on whether the factual record establishes asufficient connection between computer use
and the loss-causing event. See July/August
2018 Alert; March 2017 Alert; November
2016 Alert.

3Notice Alert:

Rejecting Policy RenewalContinuous Coverage Argument,
Ohio Appellate Court Says Late
Notice Bars Coveragerenewals of claims-made policies. See Juneand March 2019 Alerts; March and February
2015 Alerts. However, at least two courts
have ruled that consecutive claims-madepolicies create continuous coverage for
notice purposes. See December 2016 Alert;
November 2010 Alert.

An Ohio appellate court ruled that aninsurer had no duty to defend or indemnify
underlying claims based on the policyholder’s
failure to comply with the notice provision in
the claims-made policy. ISCO Indus., Inc. v.
Great American Ins. Co., 2019 WL 6353709(Ohio. App. Ct. Nov. 27, 2019).
Great American issued three consecutive
one-year policies to ISCO from March 19,
2013 through March 19, 2016. ISCO wassued in Canada in February 2014, but did not
notify Great American of the lawsuit until
August 2015. Great American denied coveragebased on ISCO’s failure to comply with the“condition precedent” notice provision,
which requires notice to be given during thepolicy period or “as soon as practicable fromthe date [of] . . . knowledge of the Claim,
and in no event later than ninety (90) days
after the end of the Policy Period.” After thecoverage denial, ISCO sued Great American,
alleging breach of contract. An Ohio trial
court dismissed ISCO’s suit, and the appellate
court affirmed.
The appellate court rejected ISCO’s assertion
that the notice provision was ambiguousby virtue of ISCO’s annual renewal of thepolicy. ISCO relied on Ohio case law holdingthat renewals of consecutive claims-madepolicies created an expectation of continuous
coverage, such that notice would not be
deemed untimely so long as it was reported
within a “reasonable time.” In those cases,
the courts expressed concerns about a “trapwherein claims spanning the renewal are
denied.” The court distinguished thosedecisions, explaining that the policy in
one case included a renewal clause that
was ambiguous about the timing of claim
reporting and continuous coverage, and in theother case, there was a factual issue as to thetiming of notice. The court emphasized that
where, as here, a notice provision requires
claims to be reported within a specific timeframe, it must be enforced as written.
Courts in several other jurisdictions haverejected similar “seamless coverage”
arguments based on back-to-back policy

Trigger Alert:

Illinois Supreme Court Rules That
For Purposes Of Policy Coverage,
Offense Of Malicious Prosecution
Occurs At Time Of Prosecution, Not
Exoneration
The Supreme Court of Illinois ruled thatprimary and excess liability insurers had no
duty to indemnify a malicious prosecution
claim, finding that the operative “occurrence”
for triggering coverage was the original
prosecution, not the later exoneration.
Sanders v. Illinois Union Ins. Co., 2019 WL
6199651 (Ill. Nov. 21, 2019).
Following his prosecution in 1994, Rodell
Sanders spent 20 years in prison for crimes
he did not commit. After his exoneration,
he sued Chicago Heights for malicious
prosecution. The City’s insurers disclaimed
coverage on the basis that there was no“occurrence” during the policy period. The
insurers argued that the operative event forcoverage purposes was the 1994 prosecution,and that Sanders’ exoneration in 2014 did
not trigger coverage under the 2011-2014
policy period.

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An Illinois trial court granted the insurers’
motion to dismiss. The trial court
acknowledged that a requisite elementof malicious prosecution is exoneration,
but reasoned that coverage under thepolicies turns on an “act and injury during
the policy period, rather than the accrualof a completed cause of action.” A split
appellate panel reversed. The appellate
court reasoned that because the policy
expressly covered the “offense” of malicious
prosecution, the operative trigger forcoverage was the “completed cause of action”(i.e., exoneration).
The Illinois Supreme Court reversed, rulingthat malicious prosecution occurs, forinsurance coverage purposes, at the time ofprosecution. The court explained that theprosecution itself was the operative “offensive
conduct” and that nothing in the policy
required all of the elements of the tort to besatisfied in order to trigger coverage. The
court stated: “If we were to deem exoneration
the trigger for coverage of a malicious
prosecution claim, liability could be shiftedto a policy period in which none of the acts oromissions giving rise to the claim occurred.
That would violate the intent of the parties toan occurrence-based policy.”
As discussed in our June 2019 Alert, the Fifth
Circuit ruled that insurers were obligatedto defend a suit arising out of wrongfulimprisonment, notwithstanding that thearrests and convictions occurred before
the relevant policies incepted. Travelers
Indem. Co. v. Mitchell, 925 F.3d 236 (5thCir. 2019). There, the court reasoned thatinjuries suffered by the underlying plaintiffs
while incarcerated (and during the operative
policy periods) triggered a duty to defend
even though the wrongful causal acts (i.e.,arrest and conviction) occurred decades
earlier. Importantly, the Fifth Circuit notedthat the duty to defend was not triggeredby the ongoing false imprisonment alone
and that it was not applying a “continuous
trigger.” Rather, the court explained that thepolicies were triggered because the underlying
complaint alleged bodily injuries during thepolicy periods that were distinct from theoriginal convictions.

Pollution
Exclusion Alerts:
Other Policy Provisions Do Not
Create Ambiguity In Pollution
Exclusion, Says Massachusetts
Court

A Massachusetts federal district court
ruled that a total pollution exclusion bars
coverage for damage caused by a gasoline
spill, rejecting the policyholder’s assertion
that another policy provision, which grants
coverage for certain fuel spills, creates
ambiguity as to the pollution exclusion.
Performance Trans., Inc. v. General Star
Indem. Co., 2019 WL 6307227 (D. Mass. Nov.
25, 2019).
The coverage dispute arose out of a car
accident in which a tanker truck drove off theroad and overturned, discharging more than
4,000 gallons of gasoline and diesel fuel onto
the pavement and into a nearby reservoir. The
trucking company’s insurer denied coveragebased on a total pollution exclusion, which
excludes “loss, costs or expenses, arising outof, resulting from, caused by or contributed
to by the . . . discharge, dispersal, seepage,migration, release or escape of pollutants.”
The insured asserted that the policy was
ambiguous and that application of the total
pollution exclusion would improperly rendera “Special Hazards and Fluids Limitation
Endorsement” superfluous. That endorsement
bars coverage for certain spills, but provides
an exception for spills that result from theoverturning of a vehicle. The insured argued
that by including this exception, the insurer
agreed to provide coverage for loss caused byspills resulting from overturned trucks.
Rejecting this contention, the court explainedthat Massachusetts law “flatly reject[s]the concept that, because [one exclusion]5

excludes certain possible coverage and thenprovides for an exception, that exception
creates an ambiguity, or an objectively
reasonable expectation of coverage, when it isconfronted with another explicit exclusion.”

Arizona Appellate Court Limits
Application Of Pollution
Exclusion To Claims Arising Out
Of Traditional Environmental
Contamination
An Arizona appellate court ruled that apollution exclusion did not bar coveragefor personal injury claims arising out of
exposure to hazardous fumes released during
construction because the underlying factual
scenario did not constitute “traditional
environmental pollution.” Starr Surplus
Lines Ins. Co. v. Star Roofing, Inc., 2019 WL
5617575 (Ariz. Ct. App. Oct. 31, 2019).

A woman suffered bodily injury after passingout and falling in a building’s parking lot. Her
injuries were allegedly caused by inhaling
toxic fumes that were released during
the course of roofing work. Star Roofing
tendered the claim to its liability insurer,
which agreed to defend under a reservationof rights. In ensuing litigation, a trial court
ruled that a pollution exclusion did not
apply to the underlying claims. The trial
court relied on Arizona precedent, which has
limited application of pollution exclusions to“traditional environmental pollution.” Theappellate court affirmed.
The appellate court acknowledged thatthe roofing materials “may be classified
as hazardous substances under state andfederal statutes and should not be handled
without the use of protective equipment due
to their caustic nature.” The court also notedthat inhalation of the chemicals can cause“irritation to the respiratory tract, mucous
membranes, dizziness, blurred vision, andheadaches.” Notwithstanding these facts, thecourt held that the pollution exclusion did
not apply because the overall scenario did
not constitute a traditional environmental
event. The court declined to overturn, limit
or re-examine Arizona precedent despite theinsurer’s assertion that Arizona law follows
the “minority” position in this context.

Coverage Alert:

Insurer Must Defend Sex
Trafficking Claims Against Motel,
Says Massachusetts Court
A Massachusetts court refused to dismisscoverage claims brought by a motel that was
sued for sex trafficking, finding that the claims
were potentially covered acts of negligence,even though the complaint alleged only
intentional conduct. Ricchio v. Bigal, Inc.,
2019 WL 6253275 (D. Mass. Nov. 22, 2019).
A motel and two of its employees were sued
for alleged violations of federal sex trafficking
statutes. The complaint alleged that the
motel and employees were aware of andprofited from the kidnapping, abuse andforced prostitution of a woman being held
captive at the motel. Peerless, the motel’sinsurer, intervened in the matter, seeking adeclaration that it had no duty to defend orindemnify the claims.
The court ruled that Peerless had a duty to
defend because the underlying claims werepotentially within the scope of “Personal
Injury” coverage, defined to include damages
caused by “false imprisonment.” The court
ruled that the insurer’s defense obligation was
not negated by an exclusion for injury “arisingout of a criminal act committed by or at thedirection of the insured.” The court explainedthat the underlying claims alleged that the
motel and employees violated the civil (rather
than criminal) provision of the sex trafficking
statutes. The civil provision requires that one“knowingly benefit . . . from participation ina venture which that person knew or shouldhave known has engaged in an act in violation[of the statute].” Interpreting the phrase“knew or should have known” to include
negligence, the court concluded that the motel

6and employees could be held civilly liablewithout having engaged in criminal conduct.
The court acknowledged that all of theunderlying allegations against the motel andemployees were “cast in terms of intentional,
not negligent conduct.” Nonetheless, thecourt deemed coverage possible. The court
stated: “Each [underlying] claim[ ] includes
allegations of criminal conduct by the[employees], but the complaint is ‘reasonably
susceptible’ to an interpretation finding
only negligence.”
As discussed in our July/August 2019 Alert,
in a similar matter, the Third Circuit foundno coverage for a sex trafficking suit against a
hotel. The court reasoned that all underlying
allegations were encompassed by an assault
and battery exclusion, even those alleging
negligence, because all alleged injuries aroseout of assault. See Nautilus Ins. Co. v. Motel
Mgmt. Servs., Inc., 2019 WL 3283221 (3d Cir.
July 22, 2019). Sex trafficking suits against
hotels have increased in recent months, anda number of courts have denied motions
to dismiss such suits, setting the stage for
emerging coverage litigation in this context.

Privilege Alert:

Alabama Supreme Court Rules That
Insurer’s Contribution Claim Does
Not Trigger “At Issue” Privilege
WaiverThe Supreme Court of Alabama ruled thatan insurer does not waive privilege as tosettlement-related documents by seeking
contribution for settlement costs, eventhough such contribution depends, in part,on the reasonableness of the settlement. Ex
parte Dow Corning Alabama, Inc., 2019 WL
6337291 (Ala. Nov. 27, 2019).

defense and settlement costs. In that action,
Alabama Electric and National Trust sought
production of documents relating to theunderlying settlement, including reports andevaluations from counsel. The Dow insurers
moved for a protective order on the grounds
that the requested documents were subject
to attorney-client privilege and work-productprotection. An Alabama trial court denied theDow insurers’ motion for a protective order.
The Alabama Supreme Court granted a writof mandamus and directed the trial court tovacate its order requiring production of therequested information.
The privileged status of documents may be
waived if the party asserting privilege has
placed the content of those materials “atissue” in the litigation. Alabama Electricand National Trust argued that by seeking
contribution for the settlement—a claimthat requires a showing of the settlement’s
reasonableness—the Dow insurers placed theotherwise privileged settlement documents
at issue. They further contended that thereports and recommendations of counsel,
relating to liability exposure and potential
verdict range, were relevant to evaluating thereasonableness of the settlement.
The Alabama Supreme Court disagreed. The
court held that reasonableness is judged by anobjective standard, such that the subjective
advice of counsel is unnecessary in thereasonableness evaluation. The court further
explained that non-privileged materials
generated in the course of the underlying
personal injury claim would be sufficient todetermine Dow’s potential liability and thereasonableness of the settlement.

Dow Corning and its insurers settled apersonal injury suit brought by an Alabama
Electric employee who was injured whileworking at a Dow facility. Alabama Electricand its own insurer, National Trust, had
refused to participate in the defense or
settlement. Following settlement, Alabama
Electric and National Trust sued Dow and its
insurers, seeking a declaration that they owed
no defense or indemnity. The Dow insurers
counterclaimed, seeking contribution for the7

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

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mkibler@stblaw.com

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sgeltman@stblaw.com

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Simpson Thacher sends warm season’s greetings and best wishes for a wonderful new year.

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.

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