INSURANCE LAW ALERTSEPTEMBER 2014T

his Alert addresses recent decisions relating to the exhaustion of insurance policies
for purposes of accessing excess coverage, the scope of advertising and personal

injury coverage and how to determine the number of occurrences. In addition, we reporton two recent rulings relating to an insurer’s right to contribution of defense costs fromanother insurer. Finally, we discuss decisions relating to D&O coverage, bad faith, late
notice and the common interest doctrine.

• Texas Appellate Court Rules That Exhaustion Provision Does Not Require Full
Payment of Policy Limits by Lower Level Insurers

A Texas appellate court ruled that a high level excess insurer was obligated to contribute to a policyholder’ssettlement notwithstanding that lower level insurers had paid less than their full policy limits. Plantation Pipe Line Co.
v. Highlands Ins. Co., 2014 WL 4346160 (Tex. App. Aug. 29, 2014).
(click here for full article)• Failure to Establish Primary Policy Exhaustion is Fatal to Contribution Claim
Against Excess Insurer, Says Tenth Circuit

The Tenth Circuit ruled that an excess insurer was not entitled to contribution from a fellow excess insurer because it
failed to establish exhaustion of the primary policy underlying the non-contributing excess insurer. Scottsdale Ins. Co.
v. National Union Fire Ins. Co., No. 12-1513 (10th Cir. Sept. 2, 2014).
(click here for full article)• Sixth Circuit Finds No General Liability Coverage for Misappropriation andInfringement Claims

The Sixth Circuit ruled that a general liability insurer had no duty to defend or indemnify claims alleging improperuse of another company’s database and trademarked name. Liberty Corp. Capital Ltd. v. Security Safe Outlet, 2014 WL
3973726 (6th Cir. Aug. 15, 2014).
(click here for full article)• Courts Issue Conflicting Decisions Regarding Validity of Insurer Contribution
ClaimsThe Connecticut Supreme Court and a South Carolina federal district court issued conflicting rulings as to whether
an insurer may seek contribution from a fellow insurer for a pro rata share of defense costs. Travelers Cas. & Sur. Co.
of America v. Netherlands Ins. Co., 312 Conn. 714 (Conn. 2014); Auto-Owners Ins. Co. v. Travelers Cas. & Sur. Co. of America,
2014 WL 3687338 (D.S.C. July 22, 2014).
(click here for full article)

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INSURANCE LAW ALERTSEPTEMBER 2014

• Oregon Court Rules That Construction Defect Claims Arise Out of One Occurrence
An Oregon federal district court ruled that numerous incidents of property damage alleged in a construction defectcase were caused by a single occurrence – namely, the developers’ failure to build the condominiums in a
defect-free manner. Chartis Specialty Ins. Co. v. American Contractors Ins. Co. Risk Retention Grp., 2014 WL 3943722(D. Or. Aug. 12, 2014).
(click here for full article)• New York Bankruptcy Court Lifts Stay to Permit Defense Cost Payment by D&O
Insurers

A New York bankruptcy court ruled that D&O policies were not property of a debtor’s estate and that insurers werepermitted to pay policy proceeds to defend individual directors and officers. In re MF Global Holdings Ltd., 2014 WL
4375687 (Bankr. S.D.N.Y. Sept. 4, 2014).
(click here for full article)• Second Circuit Affirms Dismissal of Reinsurance Claims Based on Late Notice
The Second Circuit affirmed a New York federal district court opinion granting a reinsurer’s summary judgment
motion on the basis of late notice. AIU Ins. Co. v. TIG Ins. Co., 2014 WL 4211080 (2d Cir. Aug. 27, 2014).
(click here for full article)• Florida Appellate Court Rules That Insurer’s Breach of Contract is Not Condition
Precedent to Bad Faith ClaimA Florida appellate court ruled that an insurer’s breach of the insurance policy is not a precondition to a bad faithclaim, so long as the insurer’s liability for coverage and the extent of damages are established. Cammarata v. State Farm
Florida Ins. Co., 2014 WL 4327948 (Fla. 4th DCA Sept. 3, 2014).
(click here for full article)• New Jersey Supreme Court Endorses Common Interest Protection of Privileged
Materials

The New Jersey Supreme Court ruled that attorney-client and work product materials remain privileged despite
disclosure to third parties if the materials were shared “in a manner calculated to preserve their confidentiality,
in anticipation of litigation, and in furtherance of a common purpose.” O’Boyle v. Borough of Longport, 218 N.J. 168(N.J. 2014).
(click here for full article)

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INSURANCE LAW ALERTSEPTEMBER 2014

Excess Alerts:

by the underlying insurers’ payments. Rather, thecourt held that the policy language required only thatthe total sum of payments made (by Plantation and its
insurers) reach the $8 million attachment point, which
was the case here. In so ruling, the court explicitly
distinguished the policy language at issue in Citigroup,
Inc. v. Federal Ins. Co., 649 F.3d 367 (5th Cir. 2011)(discussed in September 2011 Alert), in which the Fifth
Circuit ruled that an exhaustion provision specificallyrequiring payment of policy limits by underlying
insurers warranted dismissal of claims against an
excess insurer where the policyholder had reached
a below-limits settlement with its primary insurer.
Other decisions in this context reach different results,
often driven largely by applicable policy language.
See May 2014 Alert, June 2013 Alert, October 2012 Alert,
and September and October 2011 Alerts.

Texas Appellate Court Rules That Exhaustion
Provision Does Not Require Full Payment of
Policy Limits by Lower Level Insurers
Reversing a trial court decision, a Texas appellate
court ruled that a high level excess insurer was
obligated to contribute to a policyholder’s settlement
notwithstanding that lower level insurers had paid lessthan their full policy limits. Plantation Pipe Line Co. v.
Highlands Ins. Co., 2014 WL 4346160 (Tex. App. Aug. 29,2014).
Plantation, a pipeline operator, spent approximately$12 million to remediate petroleum leaks. Thereafter,
Plantation sought coverage from its primary carrier,American, and its first and second level excess insurers,
Cal Union and Lumbermens. The insurers reached asettlement under which they each paid less than theirfull policy limits. Plantation then demanded indemnityfrom Highlands, which had issued a high level “Special
Risk Policy” covering loss from $8 million to $18
million. Highlands denied coverage on the basis thatthe other insurance policies were not fully exhausted.
In ensuing litigation, a Texas trial court granted
Highlands’ summary judgment motion, finding that itwas not liable because the other insurers had settled
for less than their policy limits. The appellate court
reversed.
The Highlands policy stated that liability attached“only after the Underlying Umbrella Insurers have paidor have been held liable to pay the full amount of theirrespective ultimate net loss liability.” Although the term
“ultimate net loss” was not defined in the Highlands
policy, it was defined in the Lumbermens policy, towhich the Highlands policy followed form, as “allsums which the insured … become[s] legally obligatedto pay as damages, whether by reason of adjudicationor settlement … .” The appellate court reasoned thatthese two provisions, read together, did not require theHighlands policy attachment point to be reached solely

Failure to Establish Primary Policy Exhaustion
is Fatal to Contribution Claim Against Excess
Insurer, Says Tenth Circuit
The Tenth Circuit ruled that an excess insurer
is not entitled to contribution from another excess
insurer because exhaustion of the primary policy
underlying the non-contributing excess insurer had
not been estabished. Scottsdale Ins. Co. v. National Union
Fire Ins. Co., No. 12-1513 (10th Cir. Sept. 2, 2014).
National Union and Scottsdale issued consecutive
excess policies to Northwest Construction Company.
Scottsdale’s policy was in effect from 2002 to 2003
while National Union’s policies were in effect from
This edition of the Insurance Law Alert was
prepared by Mary Beth Forshaw (mforshaw@stblaw.com/212-455-2846) and Bryce L.
Friedman (bfriedman@stblaw.com/212-455-2235)
with contributions by Karen Cestari (kcestari@
stblaw.com).

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SEPTEMBER 20142003 to 2004 and 2004 to 2005. The coverage disputearose after Northwest settled an underlying
construction defect suit. Pursuant to the settlement,
the primary insurers with policies in effect from 2002
to 2003 (Transcontinental) and 2003 to 2004 (Valley
Forge) each paid their full $2 million aggregate
limits. The primary insurer in 2004 to 2005 (American
Zurich) contributed only $75,000 of its $2 million
aggregate limit. Scottsdale also contributed to thesettlement, but National Union refused to do so. In a
related agreement, Scottsdale paid $500,000 to CNA
Financial Corporation, which owned Transcontinental
and Valley Forge. Thereafter, Scottsdale sued National
Union, seeking reimbursement of settlement payments.
A Colorado federal district court granted National
Union’s summary judgment motion, finding that
Scottsdale failed to establish exhaustion of the primarypolicies underlying National Union’s excess policies.
The Tenth Circuit affirmed.
The parties disputed whether exhaustion should
be “horizontal” (such that all primary policies must
be exhausted before excess coverage is triggered) or“vertical” (such that each excess policy in a triggered
year must contribute once the immediate underlying
coverage is exhausted, regardless of whether otherprimary policies are exhausted). The Tenth Circuit
declined to decide that issue, and ruled instead that
Scottsdale had failed to establish exhaustion for the
purposes of triggering National Union’s coverage
under either theory. The court explained thathorizontal exhaustion had not been establishedbecause American Zurich paid only $75,000 of its $2
million limit. Likewise, there was no vertical exhaustion
for either of the National Union policy periods.
Although Valley Forge had paid its policy limits
in the settlement, the exhaustion of that policy wascast in doubt following Scottsdale’s $500,000 payment
to CNA Financial, Valley Forge’s parent company.
The court reasoned that CNA might have distributed
all or part of that payment to Valley Forge, thereby
eradicating the exhaustion of that policy. Although
Scottsdale argued that it did not intend for thepayment to be allocated to Valley Forge, the court held
the record did not establish this fact. In this context,
the court noted that Scottsdale could have specified
the intended allocation of its $500,000 in the settlementagreement.

Advertising Injury Alert:

Sixth Circuit Finds No General Liability
Coverage for Misappropriation andInfringement Claims
Policyholders frequently seek general liability
coverage for claims alleging misappropriation andinfringement of proprietary information. Courts
have largely rejected these claims because they do notpresent “advertising injury” or “property damage”
insured by liability policies. In a recent decision, theSixth Circuit, following this reasoning, ruled thata general liability insurer had no duty to defend orindemnify claims alleging improper use of anothercompany’s database and trademarked name. Liberty
Corp. Capital Ltd. v. Security Safe Outlet, 2014 WL 3973726(6th Cir. Aug. 15, 2014).
The coverage dispute arose out of a business
transaction between two firearms retailers,
BudsGunShop.com (“Buds”) and Security Safe Outlet(“SSO”). Buds alleged that SSO improperly used its
customer database and name in order to establish acompeting company. Liberty, SSO’s general liability
insurer, filed a declaratory judgment action, seeking
a ruling that it had no duty to defend or indemnify
SSO. A Kentucky federal district court agreed,reasoning that the underlying complaint failed toallege advertising injury or property damage. The
Sixth Circuit affirmed.
The court ruled that the improper use of customer
information to generate “mass promotional emails”
does not constitute injury arising out of the use ofan “advertising idea.” The court explained that evenassuming that emails to potential customers were“advertisements,” there was no use of another’s“advertising idea” because a customer list (in contrast
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SEPTEMBER 2014

to a plan, scheme or design for marketing products) is
not an “advertising idea.”
SSO also argued that Lanham Act and otherinfringement-related claims alleged advertising injury
because they arose out of an “oral or written publication… that … disparages a person’s or organization’s
goods, products, or services.” More specifically, SSO
contended that the improper use of another company’s
name causes harm to that company’s identity or
reputation. While other courts have rejected thisargument, see e.g., USF&G Co. v. Ashley Reed Trading,Inc., No. 11 Civ. 4782 (S.D.N.Y. Aug. 20, 2014) (counterfeit
sale of trademarked products in violation of Lanham
Act does not constitute “advertising injury” becausesale of goods is not advertising activity), the Sixth
Circuit declined to decide the issue, ruling that evenassuming such claims alleged disparagement, they
were nonetheless excluded by virtue of trademarkinfringement and breach-of-contract exclusions.
The court rejected SSO’s argument that injury to acompany’s identity and reputation constitutes a “lossof use of tangible property.” The court reasoned that
goodwill and reputation are intangible elements, andthat in any event, the underlying complaint alleged
trademark infringement, not a “loss of use” of a
trademark.

The State of Connecticut sued Lombardo, a masonrycompany, for damages caused by water leaks in abuilding constructed in part by Lombardo. Travelers,
which insured Lombardo during the construction
period, agreed to defend Lombardo. Netherlands,
which issued later policies during the time frame inwhich the leaks were discovered, refused to defend.
Travelers sued Netherlands seeking a pro rata share ofdefense costs. Netherlands moved to dismiss for lackof subject matter jurisdiction, claiming that Travelers
lacked standing because it was neither a party to nor athird-party beneficiary of the Netherlands-Lombardo
insurance contract. The trial court disagreed, findingthat Netherlands had a duty to defend the underlying
complaint and that based on Netherland’s time on therisk, it was obligated to pay nearly half of Lombardo’s
defense costs. The Connecticut Supreme Court
affirmed.
In doing so, the Connecticut Supreme Court joined
the majority of jurisdictions in holding that “an entitythat is not a named insured or otherwise party tocertain insurance policies may demonstrate ‘a specific,
personal and legal interest in [those] policies’ that would
give it standing to commence a declaratory judgment
action.” In some jurisdictions, courts have required
the inclusion of the insured as a necessary party tosuch a declaratory judgment action. The Connecticut
Supreme Court explicitly rejected this requirement,
explaining that under Connecticut case law, the failure
to give notice to or join an indispensable party does not
impact a court’s subject matter jurisdiction.
In contrast, in Auto-Owners Ins. Co. v. Travelers Cas.
& Sur. Co. of America, 2014 WL 3687338 (D.S.C. July22, 2014), a federal district court in South Carolina
dismissed Auto-Owners’ declaratory judgment suitagainst Travelers, ruling that South Carolina law does
not recognize a contribution claim by one insurer
against another with respect to the defense of acommon insured.
Hyperion Towers, a condominium association,
was insured by Auto-Owners under a general liability
policy and by Travelers pursuant to a management andContribution Alert:

Courts Issue Conflicting Decisions Regarding
Validity of Insurer Contribution Claims
In recent months, the Connecticut Supreme Court
and a South Carolina federal district court issued
conflicting rulings as to whether an insurer may seek
contribution from a fellow insurer for a pro rata shareof defense costs.
In Travelers Cas. & Sur. Co. of America v. Netherlands
Ins. Co., 312 Conn. 714 (Conn. 2014), the Connecticut
Supreme Court allowed an insurer to seek pro rata
contribution of defense costs from another insurer,
rejecting an argument that the plaintiff insurer lacked
standing to bring the suit.
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organizational liability policy. When Hyperion Towers
was sued by condominium owners, Auto-Owners
agreed to provide a defense. Auto-Owners then sued
Travelers, seeking a declaration that it was required toparticipate in the defense. The court dismissed the suit,
finding no basis in South Carolina law for the relief
sought.
As a preliminary matter, the court concluded that
Auto-Owners had standing to sue Travelers. However,the court ruled that Auto-Owners failed to state aclaim upon which relief could be granted. The court
explained that under South Carolina Supreme Court
precedent, an insurer’s duty to defend is “several
and the insurer is not entitled to divide the duty nor
require contribution from another absent a specificcontractual right.” In so ruling, the court emphasizedthat a defending insurer is a “stranger to thecontract” between the non-defending insurer and thepolicyholder and thus is not damaged by any alleged
breach of that contract. The court further noted thateven where claims are asserted as contribution, unjust
enrichment or equitable subrogation (rather than as aprospective declaratory judgment action, as was thecase here), they nonetheless fail for the same reasons.
Finally, the court dismissed arguments based on eachpolicy’s “other insurance” clause as irrelevant to thedefense cost contribution analysis.

owners against Hoffman alleging damage caused bynumerous structural and installation defects. Chartis
sought a declaration that the property damage allegedin the underlying suit was caused by more than one“occurrence.” The court disagreed, and granted
Hoffman’s summary judgment motion.
The court reasoned that the underlying complaint
alleged that the property damage was caused by “theDevelopers’ failure to ensure the [condominium] wasproperly developed,” which constituted “exposure to
substantially the same general harmful conditions.”
A critical factor in this case appears to be the role ofthe policyholder as property developer, rather thancontractor, as the court suggested that a different result
might have been reached if separate acts of negligent
construction performed by the policyholder had been
alleged.

D&O Alert:

New York Bankruptcy Court Lifts Stay to
Permit Defense Costs Payment by D&O
Insurers
Our May 2012 Alert discussed a decision that
permitted D&O and E&O insurers to advance defense
costs to individual policyholders, over the objectionsof plaintiffs suing the company, who claimed that theinsurance proceeds were estate property. In re MF
Global Holdings Ltd., 2012 WL 1191892 (Bankr. S.D.N.Y.
Apr. 10, 2012). In that decision, the bankruptcy court
declined to decide whether debtor MF Global had aninterest in the policy proceeds. The court relied insteadon the Priority of Payment provisions in the policies
and principles of equity to set a $30 million limit on
the amount of policy proceeds that the individual
insureds could access (an amount later increased
to $43.8 million). Having exhausted this limit, thepolicyholders sought an order allowing payment for
defense of covered claims up to full policy limits (lessapproximately $13 million – an amount that MF Global
could claim under the policies for indemnification ofcertain individual officers). In a decision issued thisNumber of Occurrences Alert:
Oregon Court Rules That Construction DefectClaims Arise Out of One Occurrence

An Oregon federal district court ruled thatnumerous incidents of property damage alleged ina construction defect case were caused by a single
occurrence – namely, the developers’ failure to build
the condominiums in a defect-free manner. Chartis
Specialty Ins. Co. v. American Contractors Ins. Co. Risk
Retention Grp., 2014 WL 3943722 (D. Or. Aug. 12, 2014).
ACIG and Chartis issued general liability
policies to Hoffman, a development company. The
insurers settled a lawsuit brought by condominium
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month, the court granted the policyholders’ motion,
finding that MF Global has no legal or equitable interestin the D&O policies’ proceeds. In re MF Global Holdings
Ltd., 2014 WL 4375687 (Bankr. S.D.N.Y. Sept. 4, 2014).
The court noted that decisions addressing whether
the proceeds of a liability policy are property ofa debtor’s estate turn largely on applicable policy
language. Where a policy provides only direct coverage
to a debtor, most courts have found that the proceeds
are estate property. In contrast, where a policy covers
only the directors and officers, policy proceeds are
typically not deemed property of the estate. Where, as
here, the policies provided coverage to both entities,
a determinative issue is whether “depletion of theproceeds would have an adverse effect on the estate.”
The court reasoned that depletion of the D&O proceeds
would not adversely affect the estate because MF
Global was unlikely to be named in any lawsuits thatwould give rise to coverage under the D&O policies.
In particular, the court noted that MF Global is not a
defendant in any action alleging covered claims andcan no longer be sued due to applicable statutes oflimitations, and that MF Global had not pursued any
indemnification claims covered by the D&O policies.
In addition, the court noted that even if MF Global had
a contractual claim to the D&O proceeds, the Priorityof Payment provisions required that defense costs
be advanced to the individual insureds before otherpayments.

TIG Ins. Co., 2014 WL 4211080 (2d Cir. Aug. 27, 2014). The
Second Circuit ruled that the district court properly
applied Illinois (rather than New York) law and that
Illinois law does not require a showing of prejudice.
The court stated that “[d]espite the absence of any
statement from either the Illinois Supreme Court or a
court of that State’s appellate division, various courts
addressing this precise issue have held that the lawof Illinois does not require a reinsurer to demonstrateprejudice resulting from late notice.”

Bad Faith Alert:

Florida Appellate Court Rules That Insurer’s
Breach of Contract is Not Condition Precedent
to Bad Faith ClaimResolving an unsettled question under Florida law,a Florida appellate court ruled that an insurer’s breachof the insurance policy is not a precondition to a bad
faith claim, so long as the insurer’s liability for coverageand the extent of damages are established. Cammarata
v. State Farm Florida Ins. Co., 2014 WL 4327948 (Fla. 4th
DCA Sept. 3, 2014).
Appellate courts in Florida have issued mixed
decisions as to whether a breach of contract is acondition precedent to a bad faith claim against an
insurer. In Cammarata, the court addressed this split
in authority, and concluded that a bad faith claim may
be ripe for adjudication notwithstanding the absenceof an insurer’s contractual breach. The court held thatthe only preconditions to a bad faith claim (aside fromstatutory notice requirements) are determinations
relating to (1) the insurer’s liability for coverage and (2)the extent of damages. The court further held that thesetwo conditions may be met by the terms of a settlementagreement, and need not be resolved by litigation.
Finally, citing to Trafalgar at Greenacres, Ltd. v. Zurich
American Ins. Co., 100 So.3d 1155 (Fla. 4th DCA 2012)(discussed in our October 2012 Alert and holding thatan appraisal award constituted a “favorable resolution”
sufficient to form the basis of a bad faith claim), the court
concluded that the parties’ settlement in connection

Reinsurance Alert:

Second Circuit Affirms Dismissal of
Reinsurance Claims Based on Late Notice
Our April 2013 Alert discussed a New York federal
district court opinion granting a reinsurer’s summary
judgment motion on the basis of late notice. AIU Ins.
Co. v. TIG Ins. Co., 2013 WL 1195258 (S.D.N.Y. Mar. 25,
2013). There, the court ruled that under Illinois law,late notice defeats a ceding insurer’s coverage claim
regardless of prejudice to the reinsurer. Last month,
the Second Circuit affirmed the decision. AIU Ins. Co. v.
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with the appraisal process, which determined theextent of damages, satisfied the conditions precedent
to a bad faith action.

OPRA or by common law right of access. The New
Jersey Supreme Court affirmed.
Clarifying the scope of the common interest
doctrine under New Jersey law, the court held that it is
not necessary for parties to share “identical interests” orfor litigation to have actually commenced. Furthermore,
the court ruled that communications need not be
confined to counsel; communications between counsel
and a representative of another party with a common
interest may also be protected. The court pronounced
the following rule of law:

Discovery Alert:

New Jersey Supreme Court Endorses Common
Interest Doctrine to Protect Privileged
Materials
Although New Jersey appellate courts have applied
the common interest doctrine in deciding privilege
disputes, the New Jersey Supreme Court had not until
recently expressly adopted the doctrine or addressed
its parameters. In a decision issued this summer, New
Jersey’s highest court ruled that attorney-client andwork product materials remain privileged despite
disclosure to third parties if the materials were shared“in a manner calculated to preserve their confidentiality,
in anticipation of litigation, and in furtherance of acommon purpose.” O’Boyle v. Borough of Longport, 218
N.J. 168 (N.J. 2014).
The decision arose from several suits against a
local borough and its officials over governance issues.
Two attorneys, each representing different defendants
in the separate lawsuits, decided to cooperate in theirrespective defenses, and executed a joint strategy
memorandum. During litigation, the plaintiff sought
production of materials exchanged between theattorneys pursuant to the Open Public Records Act(“OPRA”) and the common law right to access. The
defendants asserted privilege. A trial court ruled infavor of the defendants on the basis that the documents
were not public records under OPRA, and were inany event privileged. An appellate court declined toresolve whether the withheld documents were publicrecords under OPRA, and instead held that they were
protected from production due to work product andattorney-client privilege. The appellate court reasoned
that the privilege was not waived by the sharing of thematerials because the two attorneys shared a common
interest, and that the common interest doctrine is not
abrogated by a party’s right to public records under

The common interest exception to waiver ofconfidential attorney-client communications orwork product due to disclosure to third parties
applies to communications between attorneys
for different parties if the disclosure is madedue to actual or anticipated litigation for the
purpose of furthering a common interest, andthe disclosure is made in a manner to preserve
the confidentiality of the disclosed material
and to prevent disclosure to adverse parties.
As the court noted, other jurisdictions vary in theirapplication of the common interest doctrine, with somecourts requiring identical legal interests among sharing
parties and/or a threat of actual litigation.

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