Insurance Law Alert

March 2021

In This Issue
Liability Insurer Must Defend Restaurant Against Employees’ Public
Nuisance/Negligence Suit
An Illinois federal district court ruled that a general liability insurer was required to defend a
restaurant against a suit brought by employees alleging public nuisance and negligence basedon the restaurant’s decision to remain open during the pandemic. McDonald’s Corp. v. Austin
Mutual Ins. Co., No. 1:20-CV-05057 (N.D. Ill. Feb. 22, 2021). (Click here for full article)“[SimpsonThacher is] able
to handle both direct
insurance and reinsurance
matters with equal flair, andalso adept at handling the mostcomplex of disputes regarding
insurers’ business practices.”– Chambers USA
2020

In Multi-District Litigation, Business Interruption Claims Survive, While
Civil Authority And Contamination Claims Are Dismissed
An Illinois federal district court overseeing multi-district litigation denied an insurer’s motion
to dismiss claims seeking business interruption coverage, but granted the motion to dismiss
claims under civil authority and contamination coverage provisions and a sue and labor clause.
In re: Society Ins. Co. COVID-19 Bus. Interruption Protection Ins. Litig., MDL No. 2964 (N.D.
Ill. Feb. 22, 2021). (Click here for full article)

Georgia Court Dismisses Coverage Suit, Ruling That Complaint Fails To
Allege Physical Loss Or Damage
A Georgia federal district court ruled that a childcare company was not entitled to businessinterruption or civil authority coverage for losses stemming from its cessation of operations
during the state-mandated shutdown. Lemontree Academy, LLC v. Utica Mutual Ins. Co., No.
3:20-cv-126 (M.D. Ga. Mar. 11, 2021). (Click here for full article)

New Jersey Court Rules That Virus Exclusions Preclude Coverage For
Restaurants’ Business Losses
Applying New Jersey, Washington and Florida law, a New Jersey federal district court ruledthat COVID-19-related coverage claims were barred by virus exclusions in the applicablepolicies. Colby Rest. Grp., Inc. v. Utica National Ins. Grp., No. 1:20-cv-05927 (D.N.J. Mar. 12,2021). (Click here for full article)

Nevada Court Rules That Casino’s Business Losses Were Not Caused By“Direct Physical Loss” And Are Excluded By Contamination Clause
A Nevada federal district court dismissed a casino’s COVID-19-related coverage claims, findingthat the complaint failed to allege “direct physical loss” and that in any event, coverage wasbarred by a contamination exclusion. Circus Circus LV, LP v. AIG Specialty Ins. Co., 2021 WL
769660 (D. Nev. Feb. 26, 2021). (Click here for full article)


Simpson Thacher & Bartlett LLP

1

Delaware Court Rules That Fiduciary Claims Are Not Covered “Securities
Claims”
A Delaware federal district court ruled that an excess D&O insurer had no duty to indemnify
losses arising out of a lawsuit alleging that directors and officers of the insured company
breached their fiduciary duties. Calamos Asset Mgmt., Inc. v. Travelers Cas. & Sur. Co. of Am.,
2021 WL 663056 (D. Del. Feb. 19, 2021). (Click here for full article)

Applying Delaware Law Pursuant To Policy’s “Law Most Favorable”
Clause, Delaware Court Rules That Settlement Funds Are Not Uninsurable
LossesA Delaware court rejected insurers’ “uninsurability defense,” ruling that Delaware law applied
to the insurance dispute and that insurance for disgorgement or restitution is not prohibited asa matter of public policy. Sycamore Partners Management, L.P. v. Endurance American Ins.
Co., 2021 WL 761639 (Del. Super. Ct. Feb. 26, 2021). (Click here for full article)

Delaware Supreme Court Affirms D&O Coverage For Fiduciary And
Securities Settlements, Rejecting Uninsurability Defense
The Delaware Supreme Court ruled that an excess D&O insurer was obligated to fund thetwo underlying settlements, rejecting arguments that coverage was barred by public policy
or contractual language. RSUI Indem. Co. v. Murdock, 2021 WL 803867 (Del. Mar. 3, 2021).
(Click here for full article)

Nevada Supreme Court Rules That Insurer Is Entitled To Defense Cost
Reimbursement After No Duty To Defend Ruling
The Nevada Supreme Court ruled that an insurer that defends under a reservation of rights isentitled to reimbursement of defense costs following a ruling that the insurer had no duty to
defend. Nautilus Ins. Co. v. Access Medical, LLC, 2021 WL 936076 (Nev. Mar. 11, 2021). (Clickhere for full article)

Texas Court Rejects Coverage For Phishing-Related Loss, Finding That
Policyholder Did Not “Hold” Lost Funds
A Texas federal district court granted insurers’ summary judgment motion, ruling that losses
incurred through a phishing scheme were not covered by commercial crime policies because
the policyholder did not have ownership of the lost funds. RealPage Inc. v. National Union
Fire Ins. Co. of Pittsburgh, PA, 2021 WL 718366 (N.D. Tex. Feb. 24, 2021). (Click here for fullarticle)2

COVID-19
Alerts:
As courts across the country continue toissue rulings in COVID-19-related coverage
suits, some clear trends have emerged.
The majority of courts continue to dismiss
claims for coverage under business income
and civil authority provisions based on thelack of “physical loss or damage” and/or avirus exclusion. A few courts, however, havepermitted such claims to proceed basedon the particular facts and policy language
presented and interpretation of governing
law. Several notable decisions are discussed
below.

Liability Insurer Must Defend
Restaurant Against Employees’
Public Nuisance/Negligence Suit
An Illinois federal district court ruled thata general liability insurer was required todefend a restaurant against a suit broughtby employees alleging public nuisance andnegligence based on the restaurant’s decision
to remain open during the pandemic.
McDonald’s Corp. v. Austin Mutual Ins. Co.,
No. 1:20-CV-05057 (N.D. Ill. Feb. 22, 2021).
Employees alleged that McDonald’s remained
open during the COVID-19 pandemic without
enhanced health and safety protocols. The
employees sought an injunction requiring
McDonald’s to provide adequate personal
protective equipment, to enforce maskwearing on premises and to monitor
employees’ COVID-19 infections, among otherthings. The insurer refused to defend, arguingthat the suit did not seek “damages because of
bodily injury,” as required by the policy. The
court disagreed.
The court ruled that under Illinois law,the costs of complying with a mandatory
injunction can constitute “damages.” Thecourt further held that the underlying
claims alleged damages “because of”
bodily injury, explaining that “but for” theemployees’ COVID-19 infection and exposure,
McDonald’s would not have had to incur
costs to comply with a mandatory injunction.
In so ruling, the court rejected the insurer’s
contention that general liability policies
cover only damages paid to a third-party,
noting that this argument is “untethered

to any language in the policy.” Finally, thecourt ruled that the complaint alleged “bodily
injury” for purposes of triggering the insurer’s
duty to defend because several employees had
contracted the COVID-19 virus.

In Multi-District Litigation,
Business Interruption Claims
Survive, While Civil Authority
And Contamination Claims Are
Dismissed
An Illinois federal district court overseeing
multi-district litigation denied an insurer’s
motion to dismiss claims seeking businessinterruption coverage, but granted the motion
to dismiss claims under civil authority andcontamination coverage provisions and a
sue and labor clause. In re: Society Ins. Co.
COVID-19 Bus. Interruption Protection
Ins. Litig., MDL No. 2964 (N.D. Ill. Feb.
22, 2021).
Restaurants and other hospitality businesses
across several states sought coverage from
Society Insurance for business losses
incurred after the enactment of governmentordered restrictions designed to reduce
the spread of COVID-19. The regulations
required the policyholders to modify theirstandard business operations and to suspend
in-person dining. Society denied coverage forthe policyholders’ lost revenue. In ensuingcoverage litigation, Society moved to dismissand for summary judgment, arguing that thepolicyholders failed to allege losses “causedby direct physical loss of or damage tocovered property.”
The court denied Society’s motion to dismissthe claim for business interruption coverage.
Society argued that the policyholders’business losses were caused by the shutdown
orders, not the virus itself, and therefore, evenassuming that COVID-19 qualified as a “direct
physical loss,” there would be no coverage
because causation could not be established.
Rejecting this argument, the court held that
under Illinois, Wisconsin and Minnesota
law, coverage under a business interruption
provision requires only proximate causation
between the business losses and the direct
physical loss or damage. The court further
held that a reasonable jury could findthat COVID-19 proximately caused thepolicyholders’ business interruptions.

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As to the “direct physical loss” requirement,
the court held that policyholders sufficiently
alleged “direct physical loss” to withstanddismissal. The court explained that areasonable jury could find that the restrictions
on the policyholders’ use of their premises
constituted physical loss. In particular,
the court reasoned that the government
orders restricting the use of physical spaceat the insured premises could constitute“physical limit[s].”However, the court dismissed thepolicyholders’ claims for civil authority
coverage because none of the government
orders “prohibit[ed] access” to the insureds’
premises. The court stated:[E]ven if the general public is prohibitedfrom congregating in the covered
premises, there is no allegation that
employees are outright prohibitedfrom accessing the premises—or fromaccessing the immediately surrounding
areas, for that matter. Indeed, for someof the Plaintiffs, take-out customers
and in-room dining guests may accessthe premises (and the immediately
surrounding areas).
Claims for coverage under a contamination
provision were also dismissed based on theabsence of allegations alleging a suspensionof operations, as required by the provision.
Finally, the court dismissed a sue and labor
coverage claim, holding that the sue and laborclause is not a coverage grant, but rather amitigation condition with which policyholders
must comply.
In another COVID-19-related coverage casegoverned by Texas law, Derek Scott Williams
PLLC v. Cincinnati Ins. Co., 2021 WL 767617(N.D. Ill. Feb. 28, 2021), the court also
dismissed a civil authority coverage claim

but allowed a business interruption coverageclaim to proceed, citing In re: Society Ins.
Co. COVID-19 Bus. Interruption Protection
Ins. Litig.

Georgia Court Dismisses Coverage
Suit, Ruling That Complaint Fails
To Allege Physical Loss Or Damage
A Georgia federal district court ruled thata childcare company was not entitled tobusiness interruption or civil authority
coverage for losses stemming from its
cessation of operations during the statemandated shutdown. Lemontree Academy,
LLC v. Utica Mutual Ins. Co., No. 3:20-cv-126(M.D. Ga. Mar. 11, 2021).
The court rejected the policyholder’sassertion that the COVID-19 virus caused“direct physical loss or damage” to property,
emphasizing the absence of allegations
that the virus was present on any insured
structures. Further, the court held that even
if the policyholder could prove that the virus
was present at its facility, coverage would
still be unavailable because the policyholder
did not allege that the virus physicallydamaged or altered its property. While
the policyholder did allege that its facility
became uninhabitable, the court held that this“‘omnipresent specter’ of COVID-19 exposure
is a threat experienced by ‘every home,office, or business that welcomes individuals
into an indoor setting across the globe’ andis insufficient to trigger business income
coverage under the terms of the policies.”
The court also rejected the policyholder’sclaim under a civil authority provision, noting
the absence of allegations of damage to “otherproperty,” a prerequisite to such coverage.

New Jersey Court Rules That Virus
Exclusions Preclude Coverage For
Restaurants’ Business Losses
Applying New Jersey, Washington andFlorida law, a New Jersey federal district
court ruled that COVID-19-related coverageclaims were barred by virus exclusions in theapplicable policies. Colby Rest. Grp., Inc. v.
Utica National Ins. Grp., No. 1:20-cv-05927(D.N.J. Mar. 12, 2021).
A restaurant group that operates food service
businesses in several states sought businessincome, civil authority and extra expense4

coverage for losses incurred during the
pandemic-related shutdown. The court ruledthat even assuming that coverage under theseprovisions was available, virus exclusions
unambiguously barred coverage.
The policyholder argued that virus exclusions
were intended to apply only in the event of
actual contamination at the insured premises,
and that because the insured property was notcontaminated by COVID-19, the exclusions
did not apply. Rejecting this assertion, thecourt noted that nothing in the exclusionary
language requires actual contamination.
Rather, the exclusions bar losses caused
by “any virus . . . that induces or is capableof inducing physical distress, illness ordisease.” Further, the court declined toconsider arguments based on an ISO Circular,
explaining that consideration of such extrinsic
evidence is appropriate only where language
is ambiguous. Finally, the court rejected thepolicyholder’s contention that the states’
respective closure orders (rather than thevirus itself) were the proximate cause of loss.

or damage,” as required by the policy. The
court reasoned that this undefined phrase
requires a “distinct, demonstrable, physicalalteration of the property” or a “physicalchange in the condition of the property”
and does not encompass a temporary loss ofuse. The court noted that to the extent thecomplaint implied that objects and surfaces
were contaminated by the COVID-19 virus, itwould still fail to allege a physical alteration
because such “surface-contamination
is ephemeral.”In addition, the court ruled that coverage
was barred by a contamination exclusion thatapplied to several enumerated pollutants
and contaminants, including “bacteria,
virus, or hazardous substances.” In so ruling,
the court distinguished Nevada Supreme
Court precedent holding that a pollution
exclusion was ambiguous as to whether
it applied to carbon monoxide claims or
was limited to traditional environmental
contamination, explaining that the precedent
involved a third-party policy and different
exclusionary language.

D&O Coverage
Alerts:Three Delaware courts have recently
addressed the scope of coverage available
for breach of fiduciary duty claims againstcompany executives and the proper
application of an “uninsurability” defense.

Nevada Court Rules That Casino’s
Business Losses Were Not Caused
By “Direct Physical Loss” And Are
Excluded By Contamination Clause

Delaware Court Rules That
Fiduciary Claims Are Not Covered“Securities Claims”

A Nevada federal district court dismissed acasino’s COVID-19-related coverage claims,
finding that the complaint failed to allege“direct physical loss” and that in any event,
coverage was barred by a contamination
exclusion. Circus Circus LV, LP v. AIG
Specialty Ins. Co., 2021 WL 769660 (D. Nev.
Feb. 26, 2021).

A Delaware federal district court ruled that an
excess D&O insurer had no duty to indemnify
losses arising out of a lawsuit alleging that
directors and officers of the insured company
breached their fiduciary duties. Calamos
Asset Mgmt., Inc. v. Travelers Cas. & Sur.
Co. of Am., 2021 WL 663056 (D. Del. Feb.
19, 2021).

Circus Circus filed suit after its insurer denied
coverage for business losses incurred in thewake of a state-mandated shutdown. The
court dismissed the suit, finding that thecomplaint did not allege “direct physical loss

Travelers provided excess D&O coverage to
Calamos. The policy covered loss resulting
from a “Securities Claim,” defined as “aclaim . . . for: (1) any actual or alleged
violation of any federal, state, local regulation,5

statute or rule (whether statutory or commonlaw) regulating securities, including but notlimited to the purchase or sale of, or offer
to purchase or sell, securities. . .” Calamos
sought coverage under this provision
for a shareholder suit alleging breach offiduciary duty in connection with a company
merger. Travelers denied coverage, arguingthat the suit was not a covered “securities
claim” under the policy. The court agreed
and granted the insurer’s summary
judgment motion.
The court held that even assuming that thefiduciary duty claims alleged a violationof common law, coverage would still be
unavailable because the Delaware Supreme
Court has ruled that claims for breach offiduciary duties are not “securities claims.”
See In re Verizon Ins. Coverage Appeals,
222 A.3d 566 (Del. Oct. 31, 2019) (discussed
in our November 2019 Alert). Even though
the policy at issue defined “rule” to include
common law, whereas the policy in Verizon
did not, the court deemed this distinction
irrelevant because the phrase “regulating
securities” imposes its own, distinct
requirements. In particular, “regulations,rules or statutes that regulate securities
are those specifically directed towards
securities, such as the sale, or offer for sale,of securities.” The court held that breachof fiduciary duty claims do not meet thistest because they do not depend on the
involvement of a security and can involve avariety of claims arising from breach of trust
or a special duty of care.

Applying Delaware Law Pursuant
To Policy’s “Law Most Favorable”
Clause, Delaware Court Rules
That Settlement Funds Are Not
Uninsurable Losses

duty, among other claims. The investment
funds settled the claims for $120 million andthen sought insurance coverage. The insurers
denied the claim, arguing that the settlement
was uninsurable as a matter of public policy
because it represented disgorgement of or
restitution for ill-gotten gains. The investment
funds moved for judgment on the pleadings as
to the insurability issue and the court granted
the motion.
The coverage question turned primarily on
whether a “law most favorable” policy clause
constituted a choice of law provision. The
provision excluded loss for “amounts which
are uninsurable under the law most favorable
to . . . insurability.” The court ruled that thisclause constitutes a choice of law provisionthat allows the policyholder to select “anyreasonable forum” for determining whethera loss is uninsurable. In addition, the court
ruled that the provision was enforceable,
rejecting the contention that it conflicts withthe public policy of New York, which has
a materially greater interest in the conflict
than Delaware. The court explained thateven absent the choice of law clause, NewYork would not be the “default” state because
Delaware “takes a superseding interest in
the merits of disputes involving insurance
coverage for fiduciary mismanagement ofDelaware organizations.”
Having determined that Delaware law governs
the dispute, the court addressed whether thestate has a public policy prohibiting insurance
coverage for disgorgement or restitution
payments. It held that it does not, noting theabsence of clear legislation on this point.

A Delaware court rejected insurers’“uninsurability defense,” ruling that Delaware
law applied to the insurance dispute and that
insurance for disgorgement or restitution is
not prohibited as a matter of public policy.
Sycamore Partners Management, L.P. v.
Endurance American Ins. Co., 2021 WL
761639 (Del. Super. Ct. Feb. 26, 2021).
The coverage dispute arose after a corporatetransaction led to a bankruptcy filing by theacquired company. The bankruptcy estatesued the acquiring investment funds forfraudulent conveyance and breach of fiduciary
6Delaware Supreme Court Affirms
D&O Coverage For Fiduciary andSecurities Settlements, Rejecting
Uninsurability Defense
The Delaware Supreme Court ruled that an
excess D&O insurer was obligated to fundthe two underlying settlements, rejecting
arguments that coverage was barred by public
policy or contractual language. RSUI Indem.
Co. v. Murdock, 2021 WL 803867 (Del. Mar.
3, 2021).
Following a merger, shareholders of Dole
Food Company filed suit, challenging thefairness of the transaction and alleging breachof fiduciary duty. After a nine-day trial, thecourt issued a Memorandum Opinion findingthat Dole executives breached their duty ofloyalty through intentional and fraudulent
conduct. Dole ultimately settled the suit.
Before the settlement was approved by the
court, a second set of shareholders broughta federal securities action against Dole. Dole
settled that action as well. In turn, several
insurers sought a declaration that they had
no duty to fund the settlements. A Delaware
trial court entered judgment in favor of Dole.
RSUI, a high-level excess insurer, appealed.
The Delaware Supreme Court affirmed thetrial court, rejecting each of RSUI’s assertions.

First, the Delaware Supreme Court ruled thatthe trial court correctly applied Delaware
law. RSUI argued that California law,which bars insurance coverage for willful
acts, governed the dispute under the “mostsignificant relationships” analysis because
the negotiation and procurement of thepolicies occurred at Dole’s headquarters in
California, and the directors and officers
lived and worked in California. RSUI
further argued that Dole’s incorporationin Delaware was “largely irrelevant.” Thecourt disagreed, observing that “in the vast

majority of cases, Delaware law governs
the duties of the directors and officers of[a] Delaware corporation to the corporation,
its stockholders, and its investors.” Thecourt explained that Delaware statutory law
permits Delaware corporations to provide
broad indemnification to their executives andto purchase D&O policies to protect themwhere such indemnification is unavailable.
Thus, “applying Delaware law to the D&O
policies that actually cover those costs
advances the relevant policies of the forum.”
However, the court noted the fact-specificnature of its ruling, acknowledging that the
California contacts presented here “might
be dispositive . . . [for] an insurance policy
covering a different subject matter andinsureds with a more tenuous connection
to Delaware.”Second, the court ruled that Delaware
public policy does not preclude coverage forfraudulent conduct. RSUI argued that because
both underlying settlements were predicatedon a judicial finding of fraud by Dole
executives, Delaware public policy should bar
their insurability. Rejecting “this invitation tovoid the Insureds’ otherwise valid coverage,”the court held that the policy’s “expansive
definition of covered losses, which on its
face does not exclude losses occasioned byfraud,” governs coverage. The court stated:“in the absence of clear guidance from theGeneral Assembly to the contrary, we must
reject RSUI’s invitation to void its contractual
obligations on public-policy grounds.”
Third, the court concluded that a “Fraud/
Profit Exclusion” did not bar coverage forthe settlements. The exclusion applied to
fraud or willful violation of law “if establishedby a final and non-appealable adjudication
adverse to such Insured in the underlying
action.” The court ruled that the exclusion
did not apply to the settlement of the second
shareholder suit because there was no“adjudication of fraud.” The court rejected
RSUI’s contention that the exclusion should
apply because the settlement was based upon
and attributable to the findings of fraud in thefirst stockholder action. The court noted thatit need not address whether the settlementof the first shareholder action was subject tothe exclusion because the settlement of thesecond action alone exhausted the underlying
coverage limits.

7

Fourth, the Delaware Supreme Court ruledthat the “larger settlement rule” (under whicha loss is fully recoverable unless the insurer
can show that the liability for non-covered
conduct increased the insurer’s liability),rather than a “relative exposure” rule (whichweighs the relative exposure between
covered and non-covered losses) governed
the allocation of covered losses. The policy
stated that:
If in any Claim, the Insureds who areafforded coverage for such Claim incur
Loss jointly with others . . . or incur anamount consisting of both Loss coveredby this Policy and loss not covered bythis Policy because such Claim includes
both covered and uncovered matters,then the Insureds and the Insurer agree
to use their best efforts to determine afair and proper allocation of covered
Loss. . . . In making such determination,
the parties shall take into account therelative legal and financial exposuresof the Insureds in connection with thedefense and/or settlement of the Claim.
The trial court held that this provision
governs only situations in which the parties
work together to arrive at a “fair and proper
allocation,” and does not address thesituation presented here, where the parties
have failed to agree on allocation and seek
judicial resolution. See February 2020 Alert.
The Delaware Supreme Court agreed, andnoted that RSUI failed to allege that thesettlement represented a mixture of covered
and non-covered losses or that a relative
exposure theory would lead to a reduction inavailable coverage.

Defense Costs
Alert:
Nevada Supreme Court Rules That
Insurer Is Entitled To Defense Cost
Reimbursement After No Duty To
Defend RulingAnswering a question certified by the Ninth
Circuit, the Nevada Supreme Court ruled thatan insurer that defends under a reservation ofrights is entitled to reimbursement of defense
costs following a ruling that the insurer had
no duty to defend. Nautilus Ins. Co. v. Access
Medical, LLC, 2021 WL 936076 (Nev. Mar.
11, 2021).
Nautilus defended its insured under areservation of rights that referenced its rightto seek reimbursement of defense costs.
While the underlying litigation was pending,Nautilus sought a declaration that it had no
duty to defend. A Nevada federal district court
ruled in Nautilus’ favor and closed the case.
Thereafter, Nautilus sought reimbursement ofdefense costs, which the court denied.
On appeal, the Ninth Circuit noted the lackof clarity under Nevada law regarding an
insurer’s right to reimbursement of defense
costs following a no duty to defend ruling.
See July/August 2019 Alert. Therefore, theNinth Circuit certified the following questionof law to the Nevada Supreme Court:
Is an insurer entitled to reimbursementof costs already expended in defense of
its insureds where a determination has
been made that the insurer owed no
duty to defend and the insurer expressly
reserved its right to seek reimbursementin writing after defense has beentendered but where the insurance policy
contains no reservation of rights?
This month, the Nevada Supreme Court
answered the question in the affirmative. As
a preliminary matter, the court rejected thepolicyholder’s contention that recovery underan “unjust enrichment” theory is unavailable
where there is an express, written contract.
Further, the court concluded that it isequitable for an insurer to receive restitution
for payments that the policyholder was notentitled to in the first place, so long as theinsurer has expressly reserved its right tosuch reimbursement.
8

The court rejected the assertion thatreimbursement is tantamount to allowing theinsurer to unilaterally amend the insurance
contract, stating:when a court holds that there never
was a duty to defend, it is holding thatthe claims were never even potentiallycovered by the policy. Therefore, when
the insurer reserved its right to seek
reimbursement, it was not extracting
an amendment to a contract . . . . No
contract governed its defense. In thesecircumstances, there is no reason
it cannot reserve a right it has, notpursuant to the contract, but pursuant to
the law of restitution.
As the court noted, this ruling accords withthe law of California and the majority ofother jurisdictions.

Cyber Alert:
Texas Court Rejects Coverage For
Phishing-Related Loss, Finding
That Policyholder Did Not “Hold”
Lost Funds
A Texas federal district court granted
insurers’ summary judgment motion, rulingthat losses incurred through a phishing
scheme were not covered by commercial
crime policies because the policyholder
did not have ownership of the lost funds.
RealPage Inc. v. National Union Fire Ins. Co.
of Pittsburgh, PA, 2021 WL 718366 (N.D. Tex.
Feb. 24, 2021).
RealPage provides online rent collection
services for property managers and owners.
RealPage contracted with Stripe, a software
company, to facilitate its payment-processing
services. Under the contract, Stripe processed
payments from renters through its bankaccount before forwarding those payments to
RealPage’s clients. Any fees owed to RealPage
were transferred in a separate transaction.
In May 2018, criminals used a targetedphishing scheme to access the Stripe
dashboard and alter fund disbursement
instructions. Through the scheme, thecriminals diverted more than $10 million thatwas owed to RealPage’s clients. Less than $4
million was recovered. RealPage ultimately
reimbursed its clients for the unrecovered
lost funds and then sought coverage underComputer Fraud and Funds Transfer Fraud
provisions. The insurers denied coverage.
The policies expressly limited coverage toproperty “that you own or lease” or “that you
hold for others whether or not you are legally
liable for the loss of such property.” The court
held that that there was no coverage because
RealPage did not “hold” the lost funds.
The court reasoned that “hold” requires“possession” and does not encompass themere “ability to direct property.” Applying
this definition, the court concluded that
RealPage did not hold the client funds
because those funds remained in Stripe’sbank account until they were diverted to thecriminals’ accounts. While RealPage had
authority to direct the transfer of funds, it had
no rights to the funds and could not withdraw
any funds. The court concluded that “[u]nder
these circumstances, RealPage did not possess
the funds in any manner; thus, RealPage did
not hold the funds.”
The court also rejected RealPage’s assertion
that Stripe served as its agent, noting that thefacts did not support such a finding and thatthe contract expressly disclaimed an agency
relationship. Finally, the court ruled that
because RealPage did not “hold” the funds,
it did not sustain a “direct loss” as requiredby the Computer Fraud and Funds Transfer
Fraud provisions.

9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

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

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

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

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

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scraig@stblaw.com

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+1-212-455-2228
gwang@stblaw.com

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jonathan.menitove@stblaw.com

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ckronenberg@stblaw.com

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cwaldman@stblaw.com

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irethy@stblaw.com

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bfriedman@stblaw.com

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sgeltman@stblaw.com

This edition of the
Insurance Law Alert was
prepared by Mary Beth Forshaw
mforshaw@stblaw.com /+1-212-4552846 and Joshua Polster
joshua.polster@stblaw.com /+1-212455-2266 with contributions
by Karen Cestarikcestari@stblaw.com.

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

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

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

ASIA

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

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