Insurance Law Alert

September 2022

In This Issue
Ohio Supreme Court Rules That Insurer Has No Duty To Defend
Underlying Opioid Litigation
The Ohio Supreme Court ruled that a liability insurer had no duty to a distributor ofpharmaceuticals against lawsuits brought by West Virginia cities and counties alleging
economic losses caused by the opioid epidemic. Acuity v. Masters Pharm., Inc., 2022 WL
4086449 (Ohio Sept. 7, 2022). (Click here for full article)“Marketleader for insurer
representation, offering
unmatched ability inhandling bet-the-company
litigation and arbitration
proceedings.”– Chambers
New York 2022

Seventh Circuit Rejects Umbrella Insurer’s Contract And Tort Claims
Against Policyholder, Finding No Breach Of Settlement Duty
The Seventh Circuit affirmed the dismissal of an umbrella insurer’s suit against its
policyholder, ruling that the policyholder did not breach any contractual or extra-contractual
duty to settle the underlying suit. N. Am. Elite Ins. Co. v. Menard, Inc., 43 F.4th 691 (7th Cir.
Aug. 4, 2022). (Click here for full article)

Washington District Court Rules That Two Actions Were Not “Related
Claims” Under D&O Policy
A Washington district court rejected an insurer’s contention that two actions against directorsof a software company were “related claims” and therefore subject to coverage under only theearliest policy. Smartsheet, Inc. v. Fed. Ins. Co., 2022 WL 3160379 (W.D. Wash. Aug. 8, 2022).
(Click here for full article)

Eleventh Circuit Rules That Indemnification Claim “Correlated” To
Previous Claim And Was Thus Outside The Scope Of Coverage
The Eleventh Circuit ruled that a 2018 claim against a policyholder “correlated” with an act
that gave rise to a previous claim made before the policy incepted and was thus outside thescope of coverage. Datamaxx Applied Tech., Inc. v. Brown & Brown, Inc., 2022 WL 3597311(11th Cir. Aug. 23, 2022). (Click here for full article)

Email Impersonation-Wire Transfer Loss Is Not Covered By Computer
Fraud Provision, Says Minnesota Court
A Minnesota district court granted an insurer’s motion to dismiss, finding that losses stemmingfrom a fraudulent email and subsequent wire transfer were subject to coverage under a social
engineering fraud provision, and not a computer fraud provision. SJ Computers, LLC v.
Travelers Cas. & Sur. Co. of Am., 2022 WL 3348330 (D. Minn. Aug. 12, 2022). (Click here forfull article)

Simpson Thacher & Bartlett LLP

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Eleventh Circuit Says Deceptive Transfer Fraud Provision Does Not
Provide Coverage For Loss Stemming From Email Impersonation Scheme
Affirming a Florida district court decision, the Eleventh Circuit ruled that an insurer had no
duty to indemnify wire transfer losses stemming from an email impersonation scheme. Star
Title Partners of Palm Harbor, LLC v. Illinois Union Ins. Co., 2022 WL 4075048 (11th Cir.
Sept. 6, 2022). (Click here for full article)

Washington Supreme Court Rules That Hybrid Occurrence/Claims-Made
Policy With No Retroactive Date Violates Public Policy
The Washington Supreme Court ruled that a general liability policy that requires a loss to occur
and be reported within the same policy year and provides neither prospective nor retroactive
coverage violates state public policy. Preferred Contractors Ins. Co. v. Baker & Son Constr.
Inc., 514 P.3d 1230 (Wash. Aug. 11, 2022). (Click here for full article)

Three State Supreme Courts Dismiss Suits Seeking Coverage For
Pandemic-Related Losses
The highest courts in Washington, South Carolina and Oklahoma ruled that policyholders
were not entitled to property insurance for business losses incurred during the pandemic. Hill
& Stout, PLLC v. Mutual Enumclaw Ins. Co., 515 P.3d 525 (Wash. Aug. 25, 2022); Sullivan
Mgmt., LLC v. Fireman’s Fund Ins. Co., 2022 WL 3221920 (S.C. Aug. 10, 2022); Cherokee
Nation v. Lexington Ins. Co., 2022 WL 4138429 (Okla. Sept. 13, 2022). (Click here forfull article)

Vermont Supreme Court Rules That Trial Court Erred In Dismissing
Complaint Against Reinsurers For COVID-19-Related Losses
Reversing a lower court decision, the Vermont Supreme Court ruled that a complaint
sufficiently alleged “direct physical loss or damage to property” so as to withstand a motion
to dismiss on the pleadings. Huntington Ingalls Indus., Inc. v. Ace Am. Ins. Co., 2022 WL
4396475 (Vt. Sept. 23, 2022). (Click here for full article)

Reversing Trial Court, California Appellate Court Rules That Civil
Authority Endorsement Provides Coverage For Business Losses
A California appellate court ruled that a business was entitled to coverage for pandemic-related
losses under a civil authority endorsement and that a mold exclusion that referenced viruses
did not apply. Butter Nails and Waxing, Inc. v. Underwriters at Lloyd’s, London, No. B311455(Cal. Ct. App. Aug. 25, 2022). (Click here for full article)

Texas Jury Awards Policyholder $48 Million For Covid-19-Related Loss
In the first jury verdict of its kind, a Texas jury awarded Baylor College of Medicine $48 million
in a suit for COVID-19-related business interruption losses. Baylor College of Medicine v. XL
Ins. Am. Inc., No. 2020-53316 (Tex. Dist. Ct. Sept. 2, 2022). (Click here for full article)

House Subcommittee Report Highlights Lack Of Diversity In U.S.
Insurance Companies
The United States House of Representatives released a report this month that outlines the lackof diversity in the largest property, casualty, and life insurance companies in the United States.
(Click here for full article)

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Opioid Alert:
Ohio Supreme Court Rules That
Insurer Has No Duty To Defend
Underlying Opioid Litigation
The Ohio Supreme Court ruled that a liability
insurer had no duty to a distributor ofpharmaceuticals against lawsuits broughtby West Virginia cities and counties alleging
economic losses caused by the opioid
epidemic. Acuity v. Masters Pharm., Inc.,
2022 WL 4086449 (Ohio Sept. 7, 2022).
The underlying suits alleged that Masters
failed to monitor and report suspicious opioid
pharmaceutical orders which contributed
to an epidemic that caused financial harmto the government entities. As discussed in
our February 2019 Alert, an Ohio trial court
granted the insurer’s summary judgment
motion, ruling that the damages sought inthe underlying litigation were not “becauseof” bodily injury, as required by the policy,
and instead were economic loss claims.
Additionally, the trial court held that
there was no coverage because the policy
excluded claims for bodily injury that werepreviously known to Masters. According to
the underlying suits, Masters filled suspicious
orders and knew of the opioid addiction crisis
prior to obtaining insurance from Acuity.
As reported in our June 2020 Alert, anintermediate appellate court reversed, rulingthat “the policies expressly provide for a
defense where organizations claim economic
damages, so long as the damages occurredbecause of bodily injury.” The appellate court
deemed it irrelevant that the government
entities themselves did not sustain bodily
injury, noting that their economic losses were“because of” bodily injury. The appellate court
also ruled that a loss-in-progress provision
did not bar coverage.

This month, the Ohio Supreme Court
reversed the appellate court decision.
The court rejected Masters’ assertion that“damages because of bodily injury” should
be construed to “include any suit in which
the damages sought merely relate to bodily
injury, regardless of whether the claims arein fact tied to any particular bodily injury
sustained by a person.” Instead, the court
held that damages need to “be tied to aparticular bodily injury sustained by a person
or persons.” That standard was not met here
because the governments’ theories of relief
were not based on specific opioid-related
injuries stemming from Masters’ failure to
take proper care, but rather that Masters’
failure caused a public health crisis resulting
in economic damages to the government
entities. The court noted:
To be sure, the opioid epidemic, as apublic health crisis, necessarily relates
to bodily injuries, such as opioid
addictions, hospitalizations, and deaths.
But allegations of bodily injury alone do
not automatically bring an action within
the coverage for “damages because of
bodily injury.”

Settlement Alert:
Seventh Circuit Rejects Umbrella
Insurer’s Contract And Tort Claims
Against Policyholder, Finding No
Breach Of Settlement Duty
The Seventh Circuit affirmed the dismissalof an umbrella insurer’s suit against its
policyholder, ruling that the policyholder
did not breach any contractual or extracontractual duty to settle the underlying suit.
N. Am. Elite Ins. Co. v. Menard, Inc., 43 F.4th
691 (7th Cir. Aug. 4, 2022).

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An injured customer brought suit against
Menard, a home improvement store. Menard
was insured under a $1 million policy issued
by Greenwich, which sat above a $2 million
self-insured retention. The Greenwich
policy covered up to $1 million of liability.
Liability exceeding $3 million implicated anumbrella policy issued by North American.
In the underlying suit, the claimant offered
to settle for $1.98 million. Menard did
not respond to the offer, despite North
American’s encouragement to accept. Prior
to the verdict, Menard entered into a highlow settlement that capped its obligationsat $6 million. The jury ultimately returned
a verdict of $13 million, which was reduced
to $6 million under the agreement. North
American indemnified Menard for its liability
in excess of $3 million and then sued Menard,
seeking reimbursement. An Illinois district
court dismissed the suit and the Seventh
Circuit affirmed.

The Seventh Circuit rejected North
American’s contention that the self-insured
retention made Menard an insurer, subject
to certain responsibilities to settle. The court
noted the absence of legal support for sucha position and reasoned that a self-insured
retention is more akin to a deductible thana form of “insurance.” In addition, thecourt ruled that Menard did not violate any
contractual duty to North American by failingto accept the initial settlement offer. The
court emphasized the differing language in
the Greenwich primary policy as compared to
the North American umbrella policy, notingthat the former contained broad contractual
obligations to exercise “utmost good faith”
in settling, whereas the latter included lessexpansive language relating to cooperation.
The court concluded that North American’s
claims failed as a matter of law because
they did not allege failure to cooperate, butrather a violation of Menard’s good faith
duties under the Greenwich policy—duties
that were owed only to Greenwich. The court
rejected North American’s assertion thatthe duty of good faith implied in all Illinois
contracts required Menard to give it thesame consideration that it had promised toGreenwich.

Related Claim
Alerts:Washington District Court Rules
That Two Actions Were Not“Related Claims” Under D&O Policy
A Washington district court rejected aninsurer’s contention that two actions against
directors of a software company were “related
claims” and therefore subject to coverage
under only the earliest policy. Smartsheet,
Inc. v. Fed. Ins. Co., 2022 WL 3160379 (W.D.
Wash. Aug. 8, 2022).
All of the claims at issue involved allegations
that directors of Smartsheet duped investors
into selling their shares before the company
went public. A class action complaint brought
in December 2019 alleged that a Smartsheet
director, Ryan Hinkle, failed to disclose
knowledge relating to the company’s plans
to go public after a tender offer. Separately,in June 2018, Megan Colacucio served anarbitration demand on her ex-husband, BrettFrei, a different Smartsheet director, alleging
that she was tricked into selling her shares
to Frei as part of a divorce settlement forsignificantly less than the tender offer price.
Federal issued a series of D&O policies to
Smartsheet during this time frame. The 20182019 policy provided that:
All Related Claims [Claims for Wrongful
Acts based upon, arising from, or inconsequence of the same or related facts,
situations, transactions or events or thesame related series of facts, situations,transactions or events] shall be deemed asingle Claim made in the Policy Period inwhich the earliest of such Related Claims
was first made.
Federal argued that the arbitration demand
and the class action were related claims and4must be treated as a single claim under the
2018-2019 policy. In contrast, Smartsheet
contended that the arbitration demand was
not a “claim” within the meaning of the policy
because it arose out of personal conduct in
the underlying divorce settlement. The court
rejected Smartsheet’s assertion, concludingthat the arbitration demand constituted a“claim” because it accused Frei of breaching
his fiduciary duties as director of Smartsheet.
However, the court concluded that thearbitration demand and class action wereunrelated and distinct claims under Federal’s
policies. The court emphasized that the two
actions shared “only limited overlap” relating
to the alleged misrepresentations pertaining
to the tender offer. More specifically, thecourt explained that the arbitration demandfocused on Frei’s omissions to Megan
Colacurcio individually, relating to her ability
to sell her shares in the tender offer rather
than in the divorce settlement, whereas
the class action concerned Hinkle’s alleged
concealment from investors of the plans totake Smartsheet public after the tender offer.
Given the different injuries and directors
involved and the absence of any allegationsof a common scheme between Hinkle andFrei, the court ruled that the two actions“share[d] little logical connection.” Whilethe court acknowledged some overlap andsimilarity between the two actions, it deemedthat overlap insufficient to meet the “related
claims” standard.

Eleventh Circuit Rules That
Indemnification Claim “Correlated”
To Previous Claim And Was Thus
Outside The Scope Of Coverage
The Eleventh Circuit ruled that a 2018 claim
against a policyholder “correlated” with an act
that gave rise to a previous claim made before
the policy incepted and was thus outside
the scope of coverage. Datamaxx Applied
Tech., Inc. v. Brown & Brown, Inc., 2022 WL
3597311 (11th Cir. Aug. 23, 2022).

it violated the terms of the agreement bymarketing its own competing product using
GTBM’s technology. The parties ultimately
settled. Following settlement, Datamaxx
marketed another new product that also
allegedly used the GTBM technology. GTBM
again initiated arbitration against Datamaxx,
alleging that it breached the 2014 settlementagreement, the original agreement and theimplied covenants of good faith and fairdealing. Datamaxx tendered the claim to
Chubb, which denied coverage. In ensuing
litigation, a Florida district court granted
Chubb’s summary judgment motion and the
Eleventh Circuit affirmed.
The Chubb policy provided that “[a]ll claims
that correlate with an act will be deemed tohave been made at the time the first of suchclaims is deemed to have been made” andthat coverage does not apply to any loss “inconnection with any claim that correlates withan act, if such act also correlates with any
claim deemed to have been made before thebeginning of this policy period.”
As a preliminary matter, the Eleventh Circuit
held that the district court erred in treating“correlate” and “relate” as synonymous and inapplying “related claim” decisions as binding
precedent. The Eleventh Circuit explainedthat while “correlates” is narrower than“relates,” it “requires nothing more than ashowing that acts and claims ‘tend to vary,
be associated, or occur together in a way
not expected on the basis of chance alone.’”Applying this standard, the court concluded
that the acts giving rise to the 2018 claim
against Datamaxx correlated with the 2014claim. The court explained that Datamaxx’s
alleged second attempt to circumvent andviolate its agreement with GTBM necessarily
correlated with its first attempt to do thesame thing.

GTBM developed a software product thatprovides access to motor vehicle and warrant
information from various law enforcement
databases. GTBM entered into an agreementwith Datamaxx to incorporate the productinto Datamaxx’s existing product in order tocreate a jointly-developed enhanced product.
However, GTBM subsequently initiatedarbitration against Datamaxx, alleging that5

Datamaxx argued that there was nocorrelation because each incident involveda different Datamaxx product that operated
through distinct functionality. The
court deemed this a “distinction without
a difference.”

Cyber Coverage
Alerts:Email Impersonation-Wire
Transfer Loss Is Not Covered By
Computer Fraud Provision, Says
Minnesota Court
A Minnesota district court granted aninsurer’s motion to dismiss, finding thatlosses stemming from a fraudulent email
and subsequent wire transfer were subject
to coverage under a social engineering
fraud provision, and not a computer fraud
provision. SJ Computers, LLC v. Travelers
Cas. & Sur. Co. of Am., 2022 WL 3348330(D. Minn. Aug. 12, 2022).
A fraudster tricked SJ Computers into wiring
nearly $600,000 into his bank account. The
bad actor emailed fraudulent invoices to thecompany’s purchasing manager, purporting
to be one of the company’s vendors andproviding new wire transfer instructions. He
then hacked into the purchasing manager’s
email account and, impersonating him,
forwarded the invoices to the CEO for
payment. The CEO made several unsuccessfulattempts to verify the changes with the actual
vendor, but ultimately proceeded with thewire transfer without obtaining verification.
When the fraud was discovered, SJ
Computers sought coverage under asocial engineering provision, which
defined social engineering fraud as “theintentional misleading of an Employee
or Authorized Person by a natural person
impersonating: (1) a Vendor . . . through theuse of a Communication.” Subsequently, SJ
Computers revised its claim to seek coverage
under a computer fraud provision, which
included a significantly higher liability limit
and covered a “direct loss . . . directly caused
by Computer Fraud,” with Computer Fraud
defined as “an intentional, unauthorized,
and fraudulent entry or change of dataor computer instructions directly into a
Computer System.” The policy provided thatthe two provisions were mutually exclusive
and that any loss caused by social engineering
fraud was excluded under the computer
fraud provision and vice versa. Travelers
accepted coverage for the loss under thesocial engineering fraud provision, but denied
coverage under the computer fraud provision.
SJ Computers sued, and the court dismissed
its complaint.
The court agreed with Travelers that the loss
at issue was not caused by computer fraud,defined to expressly exclude any “entry orchange [of data or computer instructions]
made by an Employee . . . in reliance upon any
fraudulent . . . instruction.” The court stated:“That is precisely what happened here.”
SJ Computers argued that the fraudulent
conduct was actually two separate acts (thehacking into the email system and subsequent
wire transfers) and that only the latter act was
excluded from the computer fraud provision,
whereas the former was not because the bad
actor was not an employee. The court rejected
this argument, finding it illogical to fragment
the fraud into separate acts. Further, the court
held that even if the hacking component could
be considered in isolation, computer fraud
coverage would still be unavailable because
the hacking did not “directly cause” a “direct
loss,” as required by that provision. Rather,
the loss was directly caused by a series ofsubsequent actions, including the ultimate
wire transfer of funds.
Finally, the court ruled that even if the loss
could be construed to fall within the computer
fraud provision, coverage would be barred by
an exclusion that applied to losses resulting
from fraudulent instructions used by an
employee to enter data or send instructions.
That exclusion applied to all coverages except
the social engineering fraud provision, thus
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further supporting the conclusion that thetype of fraud experienced by SJ Computers
was social engineering fraud rather thancomputer fraud.

Eleventh Circuit Says Deceptive
Transfer Fraud Provision Does
Not Provide Coverage For
Loss Stemming From Email
Impersonation Scheme
Affirming a Florida district court decision,
the Eleventh Circuit ruled that an insurer
had no duty to indemnify wire transfer losses
stemming from an email impersonation
scheme. Star Title Partners of Palm Harbor,
LLC v. Illinois Union Ins. Co., 2022 WL
4075048 (11th Cir. Sept. 6, 2022).
Star Title, a settlement agent, clears title forproperty to be sold and distributes funds at
closing. For the sale in question, the seller
identified Capital Mortgage Services (“CMS”)
as its lender and lienholder. The fraud arosewhen a fraudster purporting to be a CMS
representative contacted Star Title andprovided payment instructions. When Star
Title realized it was the victim of an email
impersonation scheme, it sought coverage forlosses incurred as the result of a wire transfer.
The operative policy clause provided
coverage for the loss of funds resulting fromthe intentional misleading of an employee. . . “sent by a person purporting to be an
employee, customer, client or vendor.” The
Eleventh Circuit ruled that coverage wasunavailable because CMS was not a customer,
client or vendor of Star Title. The court
reasoned that “Star Title does not employ
CMS for any purpose or control CMS’ work

performance in any manner. Nor does Star
Title sell CMS any particular product orprovide it any particular service.”
Star Title argued that CMS should beconsidered a client or customer because Star
Title provided a service to CMS by holding
payoff funds in escrow and delivering those
funds to CMS on behalf of sellers. Rejecting
this assertion, the court explained that Star
Title’s customer/client was the seller, not
CMS.

Public Policy
Alert:
Washington Supreme Court Rules
That Hybrid Occurrence/ClaimsMade Policy With No Retroactive
Date Violates Public Policy
The Washington Supreme Court ruled thata general liability policy that requires a loss
to occur and be reported within the same
policy year and provides neither prospective
nor retroactive coverage violates state public
policy. Preferred Contractors Ins. Co. v.
Baker & Son Constr. Inc., 514 P.3d 1230
(Wash. Aug. 11, 2022).
The coverage dispute arose out of a wrongfuldeath claim against a construction company.
The injury occurred during a 2019 policy
period, but the claim against the company(and its tender of the claim to its insurer)
occurred during a 2020 policy period.
Each policy was a claims-made policy that
required claims to be made and reported

7

within the policy period. The claims-madeprovisions, set forth in endorsements, also
limited each policy period to one year anddid not provide continuous coverage between
renewal policies. However, the policies also
included occurrence-based language, statingthat bodily injury must take place during thepolicy period.
The Washington Supreme Court addressed
the following certified question:
When a contractor’s liability
insurance policy provides only
coverage for “occurrences” andresulting “claims-made and reported”
that take place within the same oneyear policy period, and provide noprospective or retroactive coverage,
do these requirements together
violate Washington public policy
and render either the “occurrence”
or “claim-made and reported”
provisions unenforceable?
The court answered the question in theaffirmative, finding that Washington statutory
law sets forth public policy that promotes
contractors’ financial responsibility forbodily injuries. In particular, the court heldthat Chapter 18.27 RCW, which regulates
the registration of contractors and requires
contractors to carry at least $100,000 in
financial responsibility for bodily injuries,
primarily through insurance, establishes apublic policy to protect the public from thenegligence of contractors.
As the court noted, the New Jersey Supreme
Court deemed a similar policy unenforceable
as against public policy.

COVID-19 Alerts:
Three State Supreme Courts
Dismiss Suits Seeking Coverage For
Pandemic-Related Losses
In Hill & Stout, PLLC v. Mutual Enumclaw
Ins. Co., 515 P.3d 525 (Wash. Aug. 25, 2022),
the Washington Supreme Court ruled that“direct physical loss” of property does notinclude loss of intended use of property due
to government orders and thus that coverage
was unavailable. The court stated:

HS was still able to physically use theproperty at issue. The property was inHS’s possession, the property was still
functional and able to be used, and HS
was not prevented from entering theproperty. Under the Proclamation, HS
was not able to use the property in theway that it wanted, but this alleged “loss”
is not “physical.”

The court ruled that in any event, coverage
was barred by a virus exclusion. The
policyholder argued that under the efficient
proximate cause test, there may be coverage
if the predominating cause of the loss isdetermined to be the government orders
rather than the virus. Rejecting this assertion,
the court held that the causal chain here
was clear: the virus (an excluded peril)
led to the proclamations, which led to thebusiness losses.
In Sullivan Mgmt., LLC v. Fireman’s Fund
Ins. Co., 2022 WL 3221920 (S.C. Aug. 10,2022), the South Carolina Supreme Court,
answering a certified question, ruled thatthe presence of COVID-19 in or near insured
property, and/or related government orders,
did not constitute “direct physical loss ordamage” to property. The court explainedthat while government orders affectedbusiness operations, the mere loss of accessto a business is not the same as physicalloss or damage. The court further held that
allegations of actual viral presence did notalter its conclusion, noting that the policy’s
restoration provision indicated that “damage”
requires repair or replacing, which was not
required here.
The Oklahoma Supreme Court also ruledthat “direct physical loss or damage” requires“immediate, actual or tangible deprivation
or destruction of property,” and does notencompass a loss of use of property during the
pandemic. Cherokee Nation v. Lexington Ins.
8

Co., 2022 WL 4138429 (Okla. Sept. 13, 2022).
A district court had ruled that several insurers
were obligated to cover business losses
sustained by the Cherokee Nation in the wakeof government-mandated shutdowns (seeFebruary 2021 Alert). Reversing the decision,
the Oklahoma Supreme Court reasoned that“direct physical loss or damage” does notinclude an inability to use property for its
intended purpose.

Vermont Supreme Court Rules That
Trial Court Erred In Dismissing
Complaint Against Reinsurers For
COVID-19-Related Losses
Reversing a lower court decision, the Vermont
Supreme Court ruled that a complaint
sufficiently alleged “direct physical loss ordamage to property” so as to withstanda motion to dismiss on the pleadings.
Huntington Ingalls Indus., Inc. v. Ace
Am. Ins. Co., 2022 WL 4396475 (Vt. Sept.
23, 2022).
A military ship building company and its
captive insurance subsidiary sued reinsurers
seeking a declaratory judgment that they areentitled to coverage for property damage,business interruption and other losses
suffered as a result of the pandemic andrelated government orders. The complaint
alleged that there was direct physical loss
or damage to property because the virus
adhered to surfaces and lingered in the air
at the insured property site. The complaint
further alleged that the viral presence alteredand impaired the functioning of the property,
requiring physical, remedial alterations suchas sanitization efforts, installation of barriers,
and the redesign of space. A Vermont trial
court dismissed the complaint, holding that
there was no loss of or damage to property
because the shipbuilding yards remained
operational despite the alleged viral presence.

The Vermont Supreme Court reversed, rulingthat under Vermont’s “extremely liberal”
notice-pleading standards, the allegations
were sufficient to withstand a motion todismiss on the pleadings. In particular, thecourt held that allegations of a physicalalteration to property based on the viralpresence sufficiently pled “direct physicaldamage.” However, the court emphasizedthat mere allegations of loss of use due toa government order would not satisfy the“direct physical loss or damage” requirement.
The court remanded the matter for factual
development of the record, noting thepossibility that “the science when fully
presented may not support the conclusionthat presence of a virus on a surface
physically alters that surface in a distinct anddemonstrable way.”

Reversing Trial Court, California
Appellate Court Rules That Civil
Authority Endorsement Provides
Coverage For Business Losses
A California appellate court ruled thata business was entitled to coverage for
COVID-19 pandemic-related losses undera civil authority endorsement and that amold exclusion that referenced viruses did
not apply. Butter Nails and Waxing, Inc.
v. Underwriters at Lloyd’s, London, No.
B311455 (Cal. Ct. App. Aug. 25, 2022).
The endorsement provided coverage forloss “caused by interruption of businessdue to ‘Civil Authority Action’ that requires
evacuation of the ‘described premises.’” Theappellate court concluded that the undefinedterm “evacuation” encompassed the publichealth orders requiring non-essential
businesses to close during the pandemic.
Importantly, the court distinguished thisendorsement from the more common civil
authority coverage provisions, which require
damage to nearby property, a prohibitionon access to insured property and a causal
connection between the civil authority orderand the damaged property.
In addition, the court ruled that an exclusion,
which applied to “organic pathogens” anddefined that term to include “mold, fungus,
bacteria or virus,” did not bar coverage. The
court reasoned that the exclusion did not“conspicuously, plainly or clearly” exclude
losses stemming from government orders
addressing a viral pandemic and instead, was9“more reasonably understood” to exclude
losses stemming from mold or mildew. The
court stated:
the inclusion of the term “virus” in thelist of “organic pathogens” does notmake the Mold Exclusion applicableto every claim stemming directly or
indirectly from a virus. Rather, an
insured would reasonably understandthe exclusion to apply only where theclaimed losses were related in some way
to the presence of the “organic pathogen”
on the business premises.

Texas Jury Awards Policyholder$48 Million For COVID-19-Related
Loss
In the first jury verdict of its kind, a Texas
jury awarded Baylor College of Medicine$48 million in a suit for COVID-19-related
business interruption losses. Baylor Collegeof Medicine v. XL Ins. Am. Inc., No. 202053316 (Tex. Dist. Ct. Sept. 2, 2022). The judge
had previously denied the insurer’s summary
judgment motion, finding issues of fact as
to whether the presence of the virus caused
direct physical loss of or damage to property.
We will keep you posted on any appeals inthis matter.

Insurance News
Alert:
House Subcommittee Report
Highlights Lack Of Diversity In U.S.
Insurance Companies
The United States House of Representatives
released a report this month that outlines
the lack of diversity in the largest property,
casualty, and life insurance companies in
the United States. The report, prepared by
the financial services committee and entitled“Diversity and Inclusion: Holding America’s
Largest Insurance Companies Accountable,”is based on data from more than two dozenof the nation’s largest insurance companies.
The report concludes that women and peopleof color are significantly underrepresented
in these entities in terms of both employee
population and executive positions. The
report recommends certain “immediate
actions” to promote diversity and inclusion,
including the collection of workforce data,
pay and equity audits, and the formationof partnerships with minority-centeredinstitutions and universities.

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Simpson Thacher has been an international leader in the practice of insurance and reinsurance law for
more than a quarter of a century. Our insurance litigation team practices worldwide.

Mary Beth Forshaw+1-212-455-2846
mforshaw@stblaw.com

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ckronenberg@stblaw.com

Craig S. Waldman+1-212-455-2881
cwaldman@stblaw.com

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

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lneuner@stblaw.com

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

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

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joshua.polster@stblaw.com

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

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mgarvey@stblaw.com

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

Isaac M. Rethy+1-212-455-3869
irethy@stblaw.com

This edition of the
Insurance Law Alert was prepared byBryce L. Friedman / +1-212-455-2235
bfriedman@stblaw.com and
Joshua Polster / +1-212-455-2266
joshua.polster@stblaw.com
with contributions by Karen 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, www.simpsonthacher.com.
Please click here to subscribe to the Insurance Law Alert.
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