Insurance Law Alert

June 2023

In This Issue
Applying English Law, Second Circuit Rules That Reinsurer’s Obligations
Are Co-extensive With Cedent’s Obligations Under Umbrella Policy
Affirming a New York district court decision, the Second Circuit ruled that a facultativereinsurer’s indemnity obligations were co-extensive with the obligations of the underlying
policy. Ins. Co. of the State of Pa. v. Equitas Ins. Ltd., 2023 U.S. App. LEXIS 12461 (2d Cir.
May 22, 2023). (Click here for full article)

Seventh Circuit Rules That “Catch-All” Provision In Violation-Of-Statutes
Exclusion Is Ambiguous“Marketleader for insurer
representation, offering
unmatched ability inhandling bet-the-company
litigation and arbitration
proceedings.”– Chambers USA
2023

The Seventh Circuit ruled that a policy exclusion was ambiguous and therefore that an insurer
was obligated to defend a suit against an insured alleging violations of Illinois’ Biometric
Information Privacy Act. Citizens Ins. Co. of Am. v. Wynndalco Enters., LLC, 2023 U.S. App.
LEXIS 14834 (7th Cir. June 15, 2023). (Click here for full article)

Reversing District Court, Third Circuit Rules That Insurer Owes No
Coverage For Fracking-Related Damage Claims
The Third Circuit ruled that an insurer had no duty to indemnify its insured against property
damage claims arising out of the insured’s own faulty workmanship in connection with fracking
activities, finding that the claims did not arise out of a covered “occurrence” and that a policy
endorsement providing “equipment coverage” did not eliminate the “occurrence” requirement.
Am. Home Assurance Co. v. Superior Well Services, Inc., 2023 U.S. App. LEXIS 13355 (3d Cir.
May 31, 2023). (Click here for full article)

First Circuit Grants Motion To Compel Arbitration Notwithstanding State
Law Prohibiting Arbitration Of Insurance Disputes
The First Circuit ruled that a Puerto Rico law that prohibits mandatory arbitration of insurance
disputes does not reverse-preempt the Convention on the Recognition and Enforcement of
Foreign Arbitral Awards and therefore granted the insurer’s motion to compel arbitration.
Green Enters., LLC v. Hiscox Syndicates Ltd., 2023 U.S. App. LEXIS 12421 (1st Cir. May 19,2023). (Click here for full article)

Third Circuit Says That Pennsylvania Law Does Not Recognize Exceptions
To “Four Corners” Rule For Duty To Defend
The Third Circuit declined to determine whether, under Pennsylvania law, an insurer ina dispute over a duty to defend can introduce extrinsic evidence relevant to a dispositive
coverage issue when that issue is unrelated to the merits of the underlying liability case. The
court observed that Pennsylvania follows the “four corners” rule and has not yet recognized any
exceptions to that approach. Republic Franklin Ins. Co. v. Ebensburg Ins. Agency, 2023 U.S.
App. LEXIS 14528 (3d Cir. June 9, 2023). (Click here for full article)
Simpson Thacher & Bartlett LLP

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Applying English Law, Second Circuit Rules That
Reinsurer’s Obligations Are Co-extensive With Cedent’s
Obligations Under Umbrella Policy
HOLDING

Affirming a New York district court decision, the Second Circuit ruled that a facultativereinsurer’s indemnity obligations were co-extensive with the obligations of the underlying
policy. Ins. Co. of the State of Pa. v. Equitas Ins. Ltd., 2023 U.S. App. LEXIS 12461 (2d Cir.
May 22, 2023).

BACKGROUND

Homeowners in California sued Dole Food Company (“Dole”) for alleged pollution of soil
and groundwater that spanned more than four decades. Dole and its insurer, the Insurance
Company of the State of Pennsylvania (“ICSOP”), settled the claims and allocated $20
million of the settlement payment to a three-year ICSOP policy in effect from 1968-1971. In
so allocating the settlement, Dole and ICSOP applied California’s “all sums” approach toallocation; under this approach, ICSOP was jointly and severally liable (up to applicablepolicy limits) for all property damages and personal injuries caused by a pollutant, without
regard to ICSOP’s time on the risk compared to other Dole insurers. ICSOP then sought
coverage from Equitas Insurance Limited (“Equitas”) under a facultative reinsurance policy
in effect during the same three-year period.
Equitas denied the claim on the ground that the law governing the parties’ reinsurance
policy did not recognize “all sums” allocation. ICSOP sued, and the parties crossmoved for summary judgment. The district court granted ICSOP’s summary judgment
motion and found Equitas liable to ICSOP for the full $20 million payment. The Second
Circuit affirmed.

DECISION

Equitas asked the court to distinguish between ICSOP’s liability to Dole (which Equitas
conceded) and Equitas’s liability to ICSOP under the reinsurance agreement. Equitas
argued that it had no liability to ICSOP because the parties’ reinsurance agreement wasgoverned by English law and English law does not follow the “all sums” approach toallocation. Because ICSOP’s obligation to Dole arose from an “all sums” allocation, Equitas
argued that no coverage applied under the reinsurance agreement. For its part, ICSOP
argued that, under English law, the reinsurance agreement provided co-extensive coveragewith ICSOP’s policy issued to Dole.
The Second Circuit favored ICSOP’s position. As the court framed the issue, “the questionis whether, once ICSOP’s liability was properly allocated, as Equitas concedes that it
was, English law would then interpret the reinsurance policy as providing co-extensive
coverage.” Answering this question in the affirmative, the Second Circuit held that English
law has a “strong presumption” that facultative reinsurance policies provide “back-to-back”
coverage with the cedent’s underlying policy, “meaning that the liability of the insured
is generally equivalent to the liability of the reinsured.” In so ruling, the court rejected
Equitas’s assertion that English law would not apply that presumption where, as here,
a foreign jurisdiction’s law results in coverage for damage beyond the policy’s coverage
period.

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The Second Circuit also rejected Equitas’s contention that, because California’s “all sums”
rule did not come into existence until long after the parties had executed the umbrella andreinsurance policies at issue, English law would not impose an “all sums” approach in thepresent case. Although it acknowledged that the argument had “some merit,” the court
ultimately concluded that when parties fail to define contract terms such as “all sums,” theynecessarily “adopt the meaning a common law court will ascribe to it, and thereby bear the
rewards and risks of the common law’s dynamic nature.” Thus, Equitas could not “confine
its current obligations to what those obligations would have been had this dispute arisen
fifty years ago.”
COMMENTSIn decisions governed by the law of U.S. jurisdictions, the presence or absence of a followthe-settlements clause can be outcome-determinative in terms of a reinsurer’s obligations
to indemnify an underlying settlement that has been allocated to a reinsured policy. Here,
while the reinsurance policy did include such a clause, the Second Circuit’s decision was
driven largely by the presumption of co-extensive coverage for facultative reinsurance
agreements under English precedent rather than the text of the particular
contract provision.

Seventh Circuit Rules That “Catch-All” Provision In
Violation-Of-Statutes Exclusion Is Ambiguous
HOLDING

The Seventh Circuit ruled that a policy exclusion was ambiguous and therefore that aninsurer was obligated to defend a suit against an insured alleging violations of Illinois’
Biometric Information Privacy Act (“BIPA”). Citizens Ins. Co. of Am. v. Wynndalco Enters.,
LLC, 2023 U.S. App. LEXIS 14834 (7th Cir. June 15, 2023).

BACKGROUND

The coverage dispute arose out of two putative class action lawsuits initiated against
Wynndalco Enterprises, LLC (“Wynndalco”), alleging BIPA violations. Citizens Insurance
Company of America (“Citizens”) sought a declaration that it had no duty to defend orindemnify Wynndalco based on a violation-of-statutes exclusion. The exclusion, entitled“Distribution of Material in Violation of Statutes,” encompassed bodily injury and property
damage arising out of four specified statutes: the Telephone Consumer Protection Act (the“TCPA”), the CAN-SPAM Act of 2003, the Fair Credit Reporting Act, and the Fair andAccurate Credit Transaction Act. The exclusion also contained a “catch-all” provision thatapplied to “[a]ny other laws, statutes, ordinances, or regulations, that address, prohibit orlimit the printing, dissemination, disposal, collecting, recording, sending, transmitting,communicating or distribution of material or information.” The Illinois district court heldthat the catch-all provision was facially ambiguous and therefore unenforceable. As aresult, the court granted Wynndalco’s motion for judgment on the pleadings. The district
court reasoned that “a literal reading of the expansive wording of that provision would
preclude coverage not only for violations of privacy-related statutes like BIPA, but anumber of other statutory causes of action that the policy in the first instance purported tocover, including slander, libel, trademark, and copyright.” The Seventh Circuit affirmed.

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DECISIONThe Seventh Circuit acknowledged that “[t]here is no dispute that a literal, plain-text
reading of the catch-all provision would include BIPA violations.” Nonetheless, the court
concluded that the provision was ambiguous because a liberal and broad reading of it
would exclude from coverage injuries or damage arising from a large category of claims(including intellectual property claims, in particular) that the policy by its express terms
otherwise purported to cover.
Citizens argued that the catch-all provision in the exclusion was not overbroad because it
applied only to privacy-related statutory claims, as indicated by the four privacy-related
statutes specified in the exclusion immediately prior to the catch-all provision. Rejecting
this contention, the Seventh Circuit noted that neither the title of the exclusion nor thecatch-all provision evidenced an intention to limit its application to privacy-related
statutory claims. While the interpretative canon of ejusdem generis holds that broad or
general contract terms are construed according to the specific terms that precede them, thecourt held that this interpretative canon did not resolve the ambiguity in this case because
there was no “readily discernible theme” among the four specified statutes in the exclusionthat “points to privacy as the focus of the exclusion.”

COMMENTS

Illinois courts are divided on the proper application of similar catch-all provisions inviolation-of-statues exclusions; some have concluded that such provisions apply squarely to
BIPA claims, while others have deemed them ambiguous. As discussed in our May 2021
Alert, the Illinois Supreme Court ruled that an insurer was obligated to defend a suitalleging BIPA violations, finding that a violation-of-statutes exclusion did not apply. West
Bend Mut. Ins. Co. v. Krishna Schaumburg Tan, Inc., 2021 Ill. LEXIS 430 (Ill. May 20,2021). In that case, the exclusion specifically referenced only two statutes, the TCPA andthe CAN-SPAM Act of 2003, and it also included a “catch-all” provision that applied to “anystatute, ordinance or regulation” that prohibits or limits the distribution of material orinformation. The Illinois Supreme Court, applying the interpretative canon of ejusdem
generis, reasoned that the catch-all provision applied only to statutes that regulate methodsof communication (such as telephone calls, emails, or faxes) and therefore did not extend
to BIPA, which regulates the collection of personal data.
In Wynndalco, the Seventh Circuit distinguished Krishna Schaumburg, explaining thatthe exclusion in that case presented a clear theme relating to claims involving methodsof communication, which allowed the Krishna Schaumburg court to limit the catch-all
provision in a reasonable way, whereas the exclusion at issue in Wynndalco failed toestablish a cohesive or clear theme relating to privacy claims. It is notable that, in making
this distinction, the Seventh Circuit focused on the title of the exclusion in each case as arelevant factor, emphasizing the absence of the word “privacy” in the title of the exclusion
in Wynndalco. In a footnote, the Seventh Circuit acknowledged that the title of an
exclusion plays only a limited role in its construction, but noted that titles “are permissible
indicators of the meaning of the text that follows them.”4Reversing District Court, Third Circuit Rules That
Insurer Owes No Coverage For Fracking-Related
Damage Claims
HOLDINGThe Third Circuit ruled that an insurer had no duty to indemnify its insured against
property damage claims arising out of the insured’s own faulty workmanship in connection
with fracking activities, finding that the claims did not arise out of a covered “occurrence”
and that a policy endorsement providing “equipment coverage” did not eliminate the“occurrence” requirement. Am. Home Assurance Co. v. Superior Well Services, Inc., 2023
U.S. App. LEXIS 13355 (3d Cir. May 31, 2023).

BACKGROUND

U.S. Energy Development Corporation (“U.S. Energy”) contracted with Superior Well
Services, Inc. (“Superior”) for hydraulic fracking services to extract natural gas from wells
owned by U.S. Energy. When certain wells incurred damage, U.S. Energy filed suit.
American Home Assurance Company (“American Home”) defended Superior under areservation of rights. A jury found in favor of U.S. Energy, returning a special verdict that
Superior “fail[ed] to perform its contract . . . in a workman like manner.” Thereafter,
American Home sought a declaration that its general liability policy did not cover theunderlying claims based on the absence of an “occurrence.” U.S. Energy intervened as adefendant and, in response to American Home’s argument, argued that an “undergroundresources and equipment coverage” endorsement—which encompassed property damage to“[a]ny well, hole, formation . . . [or] [a]ny casing, pipe, bit, tool, pump or other drilling orwell servicing machinery or equipment”—provided coverage. A Pennsylvania district court
awarded summary judgment to Superior (and, by extension, U.S. Energy), ruling that theendorsement encompassed the fracking operations and provided coverage regardless ofwhether Superior’s faulty workmanship constituted a covered “occurrence.” The Third
Circuit reversed.

DECISION

As a preliminary matter, the Third Circuit ruled that the property damage at issue was notcaused by an “occurrence” because, under established Pennsylvania precedent, faulty
workmanship is not an accident or an unexpected and unintended event. Turning to thequestion of whether the endorsement superseded the “occurrence” requirement, the Third
Circuit held that it did not. The court explained that an endorsement might supersede apolicy provision if the two clauses were in conflict, but that no such conflict existed here.
The endorsement defined “underground resources andequipment hazard” to include property damage to oil andgas wells, among other property, and therefore
incorporated the “occurrence” requirement via the“property damage” requirement.

COMMENTS

In coverage disputes, policyholders often argue thatendorsements displace original policy provisions that
operate to limit coverage. The Third Circuit’s opinion
clarifies that, unless an endorsement directly conflicts
with a coverage provision, the former should not be
construed to displace the requirements set forth in thelatter. This decision suggests that, in order for an
endorsement to trump a core policy requirement, clear
language to that effect may be required.

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First Circuit Grants Motion To Compel Arbitration
Notwithstanding State Law Prohibiting Arbitration Of
Insurance Disputes
HOLDINGThe First Circuit ruled that a Puerto Rico law that prohibits mandatory arbitration of insurance
disputes does not reverse-preempt the Convention on the Recognition and Enforcement of
Foreign Arbitral Awards (the “Convention”) and therefore granted the insurer’s motion tocompel arbitration. Green Enters., LLC v. Hiscox Syndicates Ltd., 2023 U.S. App. LEXIS 12421(1st Cir. May 19, 2023).

BACKGROUND

Green Enterprises, LLC (“Green”), a Puerto Rican recycling company, sought coverage from its
insurer following a fire at one of its plants. When the insurer denied coverage, Green filed suit.
The insurer moved to compel arbitration pursuant to an arbitration clause in the insurance
policy. A Puerto Rico district court granted the motion, and the First Circuit affirmed.

DECISION

The central question before the First Circuit was whether the Puerto Rico statute prohibiting
mandatory arbitration of insurance disputes reverse-preempted the Convention under the
McCarran-Ferguson Act, which provides that “No Act of Congress shall be construed toinvalidate, impair, or supersede any law enacted by any State for the purpose of regulating thebusiness of insurance . . . unless such Act specifically relates to the business of insurance.” Theissue before the court turned on whether the Convention was a “self-executing” treaty: if theConvention constituted a “self-executing treaty,” it would not require an “Act of Congress” to beeffectuated as domestic law, and it would therefore not be subject to reverse-preemption under
the McCarran-Ferguson Act.
The First Circuit concluded that the provision of the Convention that states that courts “shall”
refer parties to arbitration was self-executing and did not require an “Act of Congress” to be
enforceable as domestic law. Therefore, the court held that there was no reverse-preemption
and that the arbitration clause must be enforced pursuant to the Convention.

COMMENTSThe First Circuit’s decision is noteworthy in several
respects. First, the court held that a treaty can have bothself-executing and non-self-executing provisions. The
decision therefore leaves open the possibility that adifferent provision of the Convention is not self-executing
and might thus be subject to reverse-preemption by astate law. Second, the decision signals a growing
consensus among federal circuit courts on this issue.
While the Second Circuit has ruled that the Convention is
not self-executing and therefore that state law prohibiting
arbitration of insurance disputes reverse-preempts theConvention, the Fourth, Fifth, and Ninth Circuits havereached contrary conclusions. Notably, the Ninth Circuit
expressly ruled on the “self-executing” issue, whereas the
Fourth and Fifth Circuits did not reach that issue andinstead held that, regardless of whether the Convention isself-executing, the McCarran-Ferguson Act does not apply
to international treaties and instead limits reversepreemption to the domestic Federal Arbitration Act.

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Third Circuit Says That Pennsylvania Law Does Not
Recognize Exceptions To “Four Corners” Rule For Duty
To Defend
HOLDINGThe Third Circuit declined to determine whether, under Pennsylvania law, an insurer in a
dispute over a duty to defend can introduce extrinsic evidence relevant to a dispositive coverage
issue when that issue is unrelated to the merits of the underlying liability case. The court
observed that Pennsylvania follows the “four corners” rule and has not yet recognized any
exceptions to that approach. Republic Franklin Ins. Co. v. Ebensburg Ins. Agency, 2023 U.S.
App. LEXIS 14528 (3d Cir. June 9, 2023).

BACKGROUND

An insurance agency sought coverage from Republic Franklin Insurance Company (“Republic”),
its professional liability insurer, for a suit alleging professional negligence and fraudulent
misrepresentation, among other claims. Republic defended under a reservation of rights, butlater sought a declaration that it had no duty to defend. Republic argued that its policy did notprovide coverage for the underlying claims because the insurance agency had knowledge of awrongful act that was likely to give rise to a claim prior to the policy’s inception. In support ofthis contention, Republic relied on certain deposition testimony and a reservation of rights
letter related to separate litigation, both of which purportedly established the insurance
agency’s knowledge of wrongful acts likely to give rise to a claim prior to the policy’s effective
date. A Pennsylvania district court dismissed Republic’s suit, ruling that consideration of
extrinsic evidence was impermissible under Pennsylvania law. The Third Circuit affirmed.

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DECISION

The Third Circuit explained that, under Pennsylvania’s “four corners” approach, an insurer’s
duty to defend is determined by comparing the allegations in the underlying complaint to theinsurance contract. In seeking to rely on certain extrinsic evidence in its declaratory judgment
action, Republic noted that the Pennsylvania Supreme Court has acknowledged that, “to theextent there are undetermined facts that might impact on coverage, the insurer has a duty to
defend until the ‘claim is narrowed to one patently outside the policy coverage.’” Republic
argued that this statement means that, once an insurer’s duty to defend is triggered, an insurer
may offer evidence outside the complaint to negate its duty to defend, so long as the coverage
issue is independent of the underlying claims. The Third Circuit viewed this contention withsome skepticism, but declined to decide the question. The Third Circuit noted that thePennsylvania Supreme Court’s holding could mean that a narrowing of the duty to defend could
occur if the underlying plaintiff drops or the court dismisses the claims that had triggered
policy coverage.
The Third Circuit ruled in favor of the policyholder on the ground that Republic could notprove, while the underlying merits action was pending, that an exclusion concerning known
wrongful acts applied. That exclusion precluded coverage for claims arising out of known
wrongful acts. The Third Circuit found that whether such a wrongful act occurred was the
subject of the underlying merits litigation and adjudication of the issue would “overlap with theissues” in that case. Extrinsic evidence related to the underlying merits question would not be
considered under Pennsylvania law.

COMMENTSThe Third Circuit seemed to acknowledge that consideration of extrinsic evidence might beappropriate in some duty to defend disputes, including disputes over a policyholder’s failure toestablish a “condition precedent” to coverage (such as the requirement of when a claim was“first made”). The Third Circuit noted that a Pennsylvania trial court considered extrinsic
evidence relating to a condition precedent to coverage in determining an insurer’s duty to
defend, but distinguished that decision from the present case, in which the insurer sought torely on extrinsic evidence for purposes of enforcing a policy exclusion. Additionally, as the Third
Circuit noted, other jurisdictions, such as Florida and Texas, expressly recognize limited
exceptions to the “four corners” rule.

8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.

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

Laura Lin
+1-650-251-5160
laura.lin@stblaw.com

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

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

Lynn K. Neuner+1-212-455-2696
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Summer Craig+1-212-455-3881
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Sarah E. Phillips+1-212-455-2891
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Chet A. Kronenberg+1-310-407-7557
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Tyler B. Robinson+44-(0)20-7275-6118
trobinson@stblaw.com

Abigail W. Williams+1-202-636-5569
abigail.williams@stblaw.com

This edition of the
Insurance Law Alert was prepared byBryce L. Friedman / +1-212-455-2235
bfriedman@stblaw.com
Laura Lin / +1-650-251-5160
laura.lin@stblaw.com andKaren Cestarikcestari@stblaw.com.

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