Insurance Law Alert

April 2023

In This Issue
Delaware District Court Upholds Boy Scouts Chapter 11 Bankruptcy Plan
A Delaware district court upheld the Chapter 11 reorganization plan of the Boy Scoutsof America, which provided for a $2.5 billion settlement trust to compensate tens of
thousands of sexual abuse claimants. In re Boy Scouts of America and Delaware BSA,
LLC, 2023 U.S. Dist. LEXIS 53884 (D. Del. Mar. 27, 2023). (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
2022

Reversing District Court, Third Circuit Rules That Issue Of Fact Exists As
To D&O Insurer’s Obligation To Pay Defense Costs Stemming From SEC
Subpoena
The Third Circuit ruled that a Delaware district court erred in granting a D&O insurer’ssummary judgment motion as to its duty to pay defense costs incurred in complying with asubpoena issued by the Securities and Exchange Commission. Liberty Ins. Underwriters,
Inc. v. Cocrystal Pharma, Inc., No. 22-2242 (3d Cir. Apr. 25, 2023). (Click here forfull article)

Eleventh Circuit Rules That Policy Language Trumps Parties’ Clear
Expressions of Intent As To Policy Coverage
Reversing a Florida district court decision, the Eleventh Circuit ruled that property
insurance policies provided coverage for damage stemming from “named windstorms”
notwithstanding express communications between the insurer and policyholder
evidencing their mutual intent to exclude such coverage. Shiloh Christian Center v. Aspen
Specialty Ins. Co., 2023 U.S. App. LEXIS 8847 (Apr. 13, 2023). (Click here for full article)

Missouri Court Rules That Arbitration Clause In Insurance Policies Is
Enforceable Notwithstanding State Statute Precluding Arbitration Of
Insurance Disputes
A Missouri federal district court ruled that arbitration provisions subject to the United
Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards
are enforceable against a policyholder notwithstanding a state anti-arbitration statute.
Foresight Energy, LLC v. Ace American Ins. Co., No. 4:22-cv-00887 (E.D. Mo. Mar. 21,2023). (Click here for full article)

Simpson Thacher & Bartlett LLP

1

Ninth Circuit Enforces Professional Services Exclusion And Rules That
Insurer Is Entitled To Reimbursement Of Settlement Payment
The Ninth Circuit ruled that a professional services exclusion barred coverage forunderlying claims and that the insurer was therefore entitled to reimbursement ofsettlement payments to the policyholder. Mass. Bay Ins. Co. v. Neuropathy Solutions,Inc., 2023 U.S. App. LEXIS 7813 (9th Cir. Apr. 3, 2023). (Click here for full article)

Simpson Thacher News: Insurance Publications and Speaking
Engagements
Click here to learn more about the Firm’s insurance-related publications and speaking
engagements.

2

Delaware District Court Upholds Boy Scouts Chapter 11
Bankruptcy Plan
HOLDINGA Delaware district court upheld the Chapter 11 reorganization plan of the Boy Scouts ofAmerica, which provided for a $2.5 billion settlement trust to compensate tens of
thousands of sexual abuse claimants. In re Boy Scouts of America and Delaware BSA,
LLC, 2023 U.S. Dist. LEXIS 53884 (D. Del. Mar. 27, 2023).

BACKGROUND

Facing a wave of sexual abuse claims, the Boy Scouts of America filed for bankruptcy. Last
year, following a series of evidentiary hearings, a federal bankruptcy judge confirmed theplan, deeming it “fair and equitable.” The plan included a settlement between several
insurers and claimant groups that would help fund the $2.5 billion trust. In particular, theplan contemplated that the settling insurers will buy back policies issued to the Boy Scoutsof America through a $1.6 billion contribution to the fund. The plan also required
contributions from the Boy Scouts of America and its local charters in exchange for an
injunction that channeled existing and future abuse claims to the settlement trust and arelease of liability. More than a dozen non-settling insurers (as well as certain claimantgroups) appealed the plan. One objection to the plan was its alleged failure to include
adequate measures to verify the legitimacy of the sexual abuse claims.

DECISION

In upholding the plan, the district court held that the non-settling insurers had not shown
clear error in the decision confirming the plan. Among other things, the court found noclear error in the overall monetary value of abuse claims or in the bankruptcy court’s
determination that the plan was proposed in good faith. The court also upheld thebankruptcy court’s finding that it had jurisdiction over claims relating to the injunction andreleases of liability. In that context, the court noted the bankruptcy court’s “residual
authority” to approve of plans based on various statutory provisions, even if not expressly
stated in the Bankruptcy Code.

COMMENTS

The plan, which represents the largest sexual abuse settlement in U.S. history, not only
establishes the $2.5 billion trust, but also potentially implicates $4 billion in policy limits
from insurers that were not parties to the settlement, and assets that have not beenliquidated. On March 31, certain insurers filed an emergency motion for a stay pending
appeal of the decision. The insurers argued that the case presents “fundamental questionsof bankruptcy law of vital importance that could have widespread impact in mass tort
bankruptcies for years to come.” This month, the Third Circuit denied the motion, pending
resolution of all appeals.

3

Reversing District Court, Third Circuit Rules That Issue
Of Fact Exists As To D&O Insurer’s Obligation To Pay
Defense Costs Stemming From SEC Subpoena
HOLDINGThe Third Circuit ruled that a Delaware district court erred in granting a D&O insurer’ssummary judgment motion as to its duty to pay defense costs incurred in complying with asubpoena issued by the Securities and Exchange Commission. Liberty Ins. Underwriters,
Inc. v. Cocrystal Pharma, Inc., No. 22-2242 (3d Cir. Apr. 25, 2023).

BACKGROUND

Cocrystal was formed in 2014 following the merger of Biozone Pharmaceutical andCocrystal Discovery. After the merger, Biozone ceased to exist. Cocrystal purchased D&O
coverage from Liberty that covered claims made between 2015 and 2018. In 2015, the SEC
subpoenaed Cocrystal requesting various documents about both Cocrystal and Biozone.
While the SEC did not indicate which entity was the target of its investigation, it appearedthat the SEC was primarily interested in Biozone. Liberty denied coverage for the costs ofcomplying with the subpoena, arguing that there was no “Claim” under the policy.
However, in 2017, after receiving more information about the SEC’s investigation, Liberty
paid Cocrystal $1.1 million to cover its defense costs.
In 2018, after Liberty’s policy expired, the SEC filed an enforcement action against former
Biozone officers and directors. Thereafter, private plaintiffs brought derivative actions
and a securities class action against Cocrystal, alleging that Cocrystal’s officers made false
and misleading statements following the merger. Cocrystal sought coverage for these suits
based on an “Interrelated Wrongful Acts” provision, under which all claims arising fromacts that have a “common nexus” are deemed to have been made on the date the earliest
claim was made. Liberty denied coverage, and also sought reimbursement of the defense
costs it paid based on the SEC enforcement action against only Biozone executives. The
district court granted Liberty’s summary judgment motion and the Third Circuit reversed.

DECISION

The Third Circuit ruled that issues of fact existed as to whether Liberty was obligated to pay
Cocrystal’s costs of complying with the subpoena because the subpoena established the“possibility of wrongful acts” being investigated by the SEC. In so ruling, the court notedthat various document requests related to the actions and operations of Cocrystal following
the merger.
In addition, the Third Circuit concluded that summary judgment could not be issued as to
Liberty’s duty to pay the costs of defending the three private lawsuits filed after expirationof its policy. The court explained: “If it is found that the SEC investigated a Wrongful Act by
Cocrystal—making the subpoena a proper claim under the policy, then the 2018 Lawsuits
may relate back and be covered.”

COMMENTS

The scope of a D&O insurer’s duty to pay the costs of complying with an SEC subpoena is afrequently litigated issue. Outcomes are highly fact specific, turning on both applicablepolicy language and the particular nature of the SEC’s requests. Importantly, in Cocrystal,
the Third Circuit held that the ultimate outcome of SEC investigations was not relevant to
defense cost analysis. In finding that Liberty had no duty to cover Cocrystal’s costs ofcomplying with the subpoena, the district court had relied upon the fact that the eventual
SEC enforcement action charged only former Biozone executives and did not implicate any
Cocrystal directors or officers. The Third Circuit rejected this reasoning, emphasizing thatthe subpoena at issue raised the possibility of wrongful acts by Cocrystal and explainingthat the duty to defend is based on the possibility of liability “at the beginning of the case,not based on its outcome.”4

Eleventh Circuit Rules That Policy Language Trumps
Parties’ Clear Expressions of Intent As To Policy Coverage
HOLDING

Reversing a Florida district court decision, the Eleventh Circuit ruled that property
insurance policies provided coverage for damage stemming from “named windstorms”
notwithstanding express communications between the insurer and policyholder evidencing
their mutual intent to exclude such coverage. Shiloh Christian Center v. Aspen Specialty
Ins. Co., 2023 U.S. App. LEXIS 8847 (Apr. 13, 2023).

BACKGROUND

A 2015 policy issued by Aspen to Shiloh covered damage arising from named windstorms.
However, during the middle of that policy period, Shiloh informed Aspen that it no longer
wished to maintain coverage for named windstorm-related claims. Therefore, Aspen issued
an endorsement removing such coverage and reducing the premium. In 2016, duringnegotiations for a renewal policy, a broker gave Shiloh a quote for the “same coverage” asprovided previously, including, in particular, coverage that excluded named storms. A
binder confirmed the parties’ understanding, by indicating that the agreed-to scope ofcoverage excluded claims arising from named windstorms. However, the 2016 policy did
not contain any exclusion for named windstorms. A 2017 renewal policy, which was issued
following communications between the parties that expressly reiterated continued noncoverage for named windstorms, also failed to include such an exclusion.
When Shiloh sought coverage for two named windstorms that occurred in 2016 and 2017,
Aspen denied coverage. In ensuing litigation, a Florida district court granted Aspen’ssummary judgment motion. The district court reasoned that despite the absence of named
windstorm exclusions in the policies, evidence of the parties’ intent to exclude suchcoverage was overwhelming. The Eleventh Circuit reversed.

DECISION

The Eleventh Circuit explained that unambiguous policy language must be enforced as
written, regardless of whether extrinsic evidence contradicts the policy’s terms. The court
held that the 2016 policy unambiguously covered damage stemming from named
windstorms because there was no explicit or implicit reference to an exclusion for named
windstorms in the policy. In so ruling, the court rejected the district court’s finding that theparties’ annual renewals created a “continuous chain” of coverage under the terms initiallycreated by the 2015 endorsement. The Eleventh Circuit reasoned that even if such a “chain”
of coverage existed, the terms of coverage under each annual policy were not necessarily
identical.
As for the 2017 policy, Shiloh conceded that it was facially ambiguous because it did
not contain a named windstorm exclusion, but in the deductible section, contained aparenthetical that stated “excluding Named Windstorms.” Applying the doctrine of contra
proferentem, the court resolved this ambiguity against the insurer.

COMMENTS

A notable element of the Eleventh Circuit’s decision is the court’s use of contra
proferentem to resolve ambiguity in the 2017 policy, rather than reliance on extrinsic
evidence—evidence which indisputably indicated the parties’ mutual intent to exclude
coverage for damage resulting from named windstorms. While courts employ different
rules of policy construction in interpreting ambiguous policies, the Eleventh Circuit heldthat under Florida law, a facially ambiguous policy should be liberally construed in favor ofcoverage without regard to extrinsic evidence relating to the parties’ intent. In a footnote,however, the court left unanswered the question of whether extrinsic evidence could beconsidered in resolving latent ambiguities in insurance policies.
5Missouri Court Rules That Arbitration Clause In
Insurance Policies Is Enforceable Notwithstanding State
Statute Precluding Arbitration Of Insurance Disputes
HOLDINGA Missouri federal district court ruled that arbitration provisions subject to the United
Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the“Convention”) are enforceable against a policyholder notwithstanding a state antiarbitration statute. Foresight Energy, LLC v. Ace American Ins. Co., No. 4:22-cv-00887(E.D. Mo. Mar. 21, 2023).

BACKGROUND

When the policyholder sought coverage for damage resulting from a coal mine fire, several
insurers invoked the international arbitration clauses contained in their policies.
Thereafter, the policyholder sued, alleging breach of contract and seeking a declaration ofcoverage. The policyholder argued that the arbitration clauses were unenforceable under
Missouri’s Uniform Arbitration Act, Mo. Rev. Stat. § 435.530, which prohibits mandatory
arbitration in insurance contracts. The court granted the insurers’ motion to dismiss or staypending arbitration.

DECISION

The central issue in dispute was whether Missouri’s anti-arbitration statute reversepreempts the Convention, a multi-national treaty that provides for the reciprocal
enforcement of international arbitration agreements by signatory nations. Under the
McCarran-Ferguson Act, state laws may preempt Acts of Congress where the state law
specifically regulates the business of insurance. The court concluded that there was noreverse preemption under the McCarran-Ferguson Act, reasoning that the Act applies only
to domestic legislation and was not intended to allow state laws to preempt international
treaties. The court therefore held that the international arbitration clauses were enforceable
notwithstanding state law barring arbitration of insurance disputes. In so ruling, the court
cited the “mounting precedent favoring the enforcement of the Convention,” including
decisions by Courts of Appeals in the Fourth and Fifth Circuits.

COMMENTS

As the court noted, there is no judicial consensus on whether state laws prohibiting
arbitration of insurance disputes reverse preempt the Convention. The Second Circuit has
ruled that the Convention is subject to reverse preemption under the McCarran-Ferguson
Act, whereas the Ninth Circuit reached the opposite conclusion. Those two decisions werebased on analysis of whether the Convention is a “self-executing” treaty (i.e., isautomatically enforced as domestic law), or conversely, whether it requires an “Act ofCongress” to become domestic law, in which case it would implicate reverse-preemption
under the McCarran-Ferguson Act.
The Foresight court deemed it unnecessary to decide whether the Convention is a selfexecuting treaty or instead required congressional action for its implementation. The
court based its ruling on the more general principle that the Convention is not reversepreempted by state anti-arbitration statutes because the McCarran-Ferguson Act applies
only to domestic laws and not international treaties.

6Ninth Circuit Enforces Professional Services Exclusion
And Rules That Insurer Is Entitled To Reimbursement Of
Settlement Payment
HOLDING

The Ninth Circuit ruled that a professional services exclusion barred coverage for underlying
claims and that the insurer was therefore entitled to reimbursement of settlement payments tothe policyholder. Mass. Bay Ins. Co. v. Neuropathy Solutions, Inc., 2023 U.S. App. LEXIS 7813
(9th Cir. Apr. 3, 2023).

BACKGROUND

An underlying suit against Neuropathy alleged that it falsely advertised and recklessly
administered non-FDA approved “stem cell” injections, which resulted in severe bodily injuries.
The insurer issued a reservation of rights and ultimately settled the underlying suit. Thereafter,
the insurer sued Neuropathy, seeking reimbursement of the settlement amount. A California
district court ruled that the insurer was obligated to defend and indemnify Neuropathy in theunderlying action and was therefore not entitled to reimbursement. The Ninth Circuit reversed.

DECISION

The Ninth Circuit ruled that coverage was precluded by a professional services exclusion thatapplied to bodily injury “caused by the rendering of or failure to render any professional service. . . regardless of whether any such service, advice or instruction is ordinary to any insured’s
profession.” The policy further provided that professional services encompass advertising,
medical treatment and any health or service advice or instruction. The court concluded that
Neuropathy’s liability in the underlying suit stemmed from professional services, since it allegedthat the company engaged in deceptive advertising and practices in connection with theprovision of medical services.

COMMENTS

In ruling that coverage was barred by the professional services exclusion, the Ninth Circuit
deemed it irrelevant that pursuant to a contract with a third party, Neuropathy was only
assigned administrative duties, and that the medical professionals who performed the injections
were not employed by Neuropathy. The court explained that the professional services exclusion
extended to the supervision or monitoring of others who provide professional services.

7

Simpson Thacher News: Insurance Publications andSpeaking Engagements
Bryce Friedman and Karen Cestari served as Contributing Editors of the 2023 edition of
Lexology Getting the Deal Through: Insurance Litigation, authoring the publication’s UnitedStates chapter. The chapter, formatted as a Q&A, highlights preliminary and jurisdictional
considerations in insurance litigation in the U.S. and frequently litigated issues relating to theinterpretation of insurance contracts. It also summarizes recent insurance litigation trends andprovides an outlook for the year ahead.
Chet Kronenberg participated as one of two panelists in a webinar produced by Strafford
Publication titled, “Resolving Insurers’ and Insureds’ Settlement Dilemmas When Policy Limits
Are Insufficient: Multiple Insured and Multiple Claims.” The webinar included discussionof how an insurer’s duty to settle may be impacted by two difficult but recurring situations:(1) when multiple claimants are competing for insufficient policy limits against an insured, and(2) when claimants from a single occurrence will release fewer than all of multiple insureds
sharing the same limit of liability.
Bryce Friedman authored an article titled, “New York Contributes To The Demise Of Every
Exposure Testimony In Asbestos And Talc Litigation,” which was published by Mealey’s. The
article details the New York Court of Appeals’ recent opinion in Nemeth v. Brenntag North
America and its potential impact on asbestos and alleged asbestos-in-talc litigation nationwide.
It further explores the implications of the “any exposure” theory, as well as its impact in New
York and other states across the country.

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

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

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

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

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

Sarah E. Phillips+1-212-455-2891
sarah.phillips@stblaw.com

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

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

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

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

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

This edition of the
Insurance Law Alert was prepared byBryce L. Friedman / +1-212-455-2235
bfriedman@stblaw.com
Summer Craig / +1-212-455-3881
scraig@stblaw.com andKaren 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, https://www.simpsonthacher.com.
Please click here to subscribe to the Insurance Law Alert.
9SimpsonThacherWorldwide

UNITED STATESEUROPEASIANew York
425 Lexington Avenue
New York, NY 10017+1-212-455-2000

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

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

Houston
600 Travis Street, Suite 5400
Houston, TX 77002+1-713-821-5650
Los Angeles
1999 Avenue of the Stars
Los Angeles, CA 90067+1-310-407-7500
Palo Alto
2475 Hanover Street
Palo Alto, CA 94304+1-650-251-5000
Washington, D.C.
900 G Street, NW
Washington, D.C. 20001+1-202-636-5500

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

Hong Kong
ICBC Tower
3 Garden Road, Central
Hong Kong+852-2514-7600
Tokyo
Ark Hills Sengokuyama Mori Tower
9-10, Roppongi 1-Chome
Minato-Ku, Tokyo 106-0032
Japan+81-3-5562-6200

SOUTH AMERICA

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

10