Insurance Law Alert

October 2023

In This Issue
New York District Court Denies Motion To Compel Arbitration, Finding
That Louisiana Law Reverse Preempts FAA And Convention
A New York district court denied an insurer’s motion to compel arbitration and enjoin a state
court action, ruling that Louisiana law reverse preempts the Federal Arbitration Act andthe Convention on the Recognition and Enforcement of Foreign Arbitral Awards under the
McCarran-Ferguson Act. Certain Underwriters at Lloyd’s, London v. Mpire Props., LLC, 2023
U.S. Dist. LEXIS 175864 (S.D.N.Y. Sept. 28, 2023). (Click here for full article)

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Deeming “Other Insurance” Clauses Irreconcilable, Eleventh Circuit Rules
That Insurers Must Indemnify On Pro Rata Basis
Affirming a Georgia district court, the Eleventh Circuit ruled that “other insurance” clauses in
two policies were irreconcilable and therefore that insurers’ defense and indemnity should beallocated on a pro rata basis. Nat’l Cas. Co. v. Georgia Sch. Bd. Assoc., 2023 U.S. App. LEXIS
24426 (11th Cir. Sept. 14, 2023). (Click here for full article)

Ohio Appellate Court Reverses Trial Court’s Order Requiring Insurer To
Produce Claim File Material In Bad Faith Action
An Ohio appellate court ruled that a trial court erred in granting a motion to compel thedisclosure of an insurer’s claim files, including material relating to the insurer’s valuation of
the claim. The appellate court noted that while such materials may be relevant to the bad faithclaim against the insurer, the trial court’s order requiring production prior to adjudication of
the breach of contract claim was erroneous. Ryan v. State Farm Mut. Auto. Ins. Co., 2023 Ohio
App. LEXIS 3612 (Ohio. Ct. App. Oct. 13, 2023). (Click here for full article)

Reversing Trial Court, Kentucky Appellate Court Rules That Umbrella
Policy Is Unambiguous And Does Not Mirror Underlying Primary Policy
A Kentucky appellate court ruled that a commercial umbrella policy was unambiguous and did
not provide coverage for the underlying claims at issue, notwithstanding that the underlying
primary policy did provide coverage. Grange Ins. Co. v. Georgetown Chicken Coop, LLC, 2023
Ky. App. Unpub. LEXIS 619 (Ky. Ct. App. Oct. 20, 2023). (Click here for full article)

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New York District Court Denies Motion To Compel
Arbitration, Finding That Louisiana Law Reverse
Preempts FAA And Convention
HOLDINGA New York district court denied an insurer’s motion to compel arbitration and enjoin astate court action, ruling that Louisiana law reverse preempts the Federal Arbitration Act
and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the“Convention”) under the McCarran-Ferguson Act. Certain Underwriters at Lloyd’s,
London v. Mpire Props., LLC, 2023 U.S. Dist. LEXIS 175864 (S.D.N.Y. Sept. 28, 2023).

BACKGROUND

Property owners filed claims with their insurers seeking reimbursement for storm-related
damage. After the insurers paid $1.27 million, Mpire, which purchased the properties andthe owners’ rights, sued the domestic insurers in Louisiana state court seeking additional
funds. Relying on an arbitration clause in the policies, the insurers moved to compel
arbitration and enjoin the state court action pursuant to the FAA and the Convention.

DECISION

The court ruled that the Louisiana Insurance Code reverse preempts the FAA and theConvention pursuant to the McCarran-Ferguson Act. The McCarran-Ferguson Act
establishes an exception to the general rule requiring federal preemption over state law
where such state law regulates the business of insurance and the federal law does not
specifically relate to insurance. The court held that the controlling state statue, La. Stat.
Ann. Section 22:868, rendered the arbitration clauses unenforceable. Section 22:868
provides, among other things, that “[n]o insurance contract delivered or issued for delivery
in this state . . . shall contain any condition, stipulation or agreement . . . (2) [d]epriving thecourts of this state of the jurisdiction or venue of action against the insurer.”
The insurers argued Section 22:868 does not prohibit arbitration because sub-part (D) of
that provision states that “this Section does not prohibit a forum or venue selection clausein a policy form that is not subject to approval by the Department of Insurance.” Rejecting
this assertion, the court explained that arbitration clauses are jurisdictional, and not akin toforum or venue selection provisions.
As the court noted, another New York district court
recently addressed this issue and reached the sameconclusion. See Certain Underwriters at Lloyd’s, London
v. 3131 Veterans Blvd. LLC, 2023 U.S. Dist. LEXIS 144956(S.D.N.Y. Aug. 15, 2023).

COMMENTS

The court acknowledged that under Fifth Circuit
precedent, state law does not reverse preempt theConvention under the McCarran-Ferguson Act. However,as the court emphasized, the Second Circuit has reached acontrary conclusion, ruling that the Convention is not“self-executing” (i.e., it requires an act of Congress, the
FAA, for implementation) and therefore is subject to thesame reverse-preemption as the FAA where, as here, state
law specifically relates to the business of insurance. As
discussed in previous Alerts, federal circuit courts are split
on this particular issue.

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Deeming “Other Insurance” Clauses Irreconcilable,
Eleventh Circuit Rules That Insurers Must Indemnify
On Pro Rata Basis
HOLDING

Affirming a Georgia district court, the Eleventh Circuit ruled that “other insurance” clauses
in two policies were irreconcilable and therefore that insurers’ defense and indemnity
should be allocated on a pro rata basis. Nat’l Cas. Co. v. Georgia Sch. Bd. Assoc., 2023 U.S.
App. LEXIS 24426 (11th Cir. Sept. 14, 2023).

BACKGROUND

Several educators who were insured by both National Casualty and the Georgia School
Board Association – Risk Management Fund (the “Fund”) were named as defendants in a
lawsuit. The insurers disputed their respective coverage obligations based on “otherinsurance” clauses in the policies. The provision in National Casualty’s policy stated:
This policy is specifically excess if the insured has other insurance of any
kind whatsoever, whether primary or excess . . . . Other insurance includes,
but is not limited to, insurance policies, state pools, and programs of selfinsurance . . . In addition, [Liability Coverage] is specifically excess over
coverage provided by EDUCATIONAL UNIT’S or school board’s errors andomissions or general liability policies . . . and it is specifically excess over
coverage provided by any policy of insurance which purports to be excess toa policy issued to the insured.
The Fund’s “other insurance” clause stated: “If valid and collectible insurance is available
to the Member for a loss covered by [the Fund] under any coverage parts within thisCoverage Document, the obligations of [the Fund] are excess over the available andcollectible insurance.”
National Casualty sought a declaration that the Fund owed a primary duty to defend andindemnify the educator defendants. The Fund counterclaimed, seeking contribution from
National Casualty for amounts paid to defend and indemnify the educators.
Ruling on the parties’ cross motions for summary judgment and partial summary
judgment, the district court concluded that the “other insurance” clauses conflicted
and that defense and indemnity should be allocated on a pro rata basis. Thereafter, thedistrict court certified to the Georgia Supreme Court the question of whether Georgia’s
irreconcilable clauses rule applied to the Fund, an entity created by statute and “entrustedwith public funds,” or was limited to commercial insurance companies. The Georgia
Supreme Court ruled that “no law or public policy” prohibited application of the rule to
the Fund.

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DECISION

National Casualty argued that the Fund’s “other insurance” clause was not implicated in
the first place because National Casualty’s policies were neither “available nor collectible.”
More specifically, National Casualty claimed that because its own “other insurance” clauserendered its coverage excess over all other coverages, it was not available or collectible as tothe underlying claims. The Eleventh Circuit rejected this reasoning, stating that “National
Casualty’s policies are ‘collectible’ and ‘available’ because they’d pay if liability exceeded
what the other insurance covered.” National Casualty also contended that because its“other insurance” clause is more specific than that in the Fund’s policy in that it expressly
states that coverage is excess to any other coverage, its coverage should be “super excess.”
The court rejected this argument as well, noting that Georgia law does not endorse an ruleof interpretation in this context based on levels of specificity in policy language.

COMMENTS

When a conflict exists between “other insurance” clauses in policies that concurrently
insure the same risk, the rights and obligations depend primarily on the specific policy
language at issue. As the Eleventh Circuit emphasized, where two “other insurance” clauses
are both excess in nature, most courts do not endorse a rule under which a more specificclause governs a more general clause, and instead find them mutually repugnant.
Additionally, while some jurisdictions require insurers to contribute in equal shares where
two excess clauses are deemed irreconcilable, Georgia law endorses the majority rule in thiscontext—pro rata allocation of defense and indemnity costs.

Ohio Appellate Court Reverses Trial Court’s Order
Requiring Insurer To Produce Claim File Material In
Bad Faith Action
HOLDING

An Ohio appellate court ruled that a trial court erred in granting a motion to compel thedisclosure of an insurer’s claim files, including material relating to the insurer’s valuation of
the claim. The appellate court noted that while such materials may be relevant to the badfaith claim against the insurer, the trial court’s order requiring production prior to
adjudication of the breach of contract claim was erroneous. Ryan v. State Farm Mut. Auto.
Ins. Co., 2023 Ohio App. LEXIS 3612 (Ohio. Ct. App. Oct. 13, 2023).

BACKGROUND

After sustaining injuries in an automobile accident with an uninsured motorist, Ryan filed aclaim for uninsured motorist (“UM”) benefits to State Farm, his automobile insurer. State
Farm offered Ryan approximately $15,000 to settle his UM claim, but he rejected the offer,asserting that it did not cover his medical expenses. Thereafter, Ryan sued State Farm
alleging breach of contract based on “State Farm’s failure to pay the $25,000 UM policy
limit and bad faith in its [valuation of the claim].”During discovery, Ryan sought production of State Farm’s entire claim file. State Farm
produced some materials, but held back others based on attorney-client privilege orprotected work product. State Farm also argued that it was entitled to withhold certain
non-privileged materials relating to the valuation of the claim while litigation of thecoverage issue was pending on the basis that the production of such material would be
prejudicial to State Farm in connection with the breach of contract claim. After conducting
an in camera inspection, the trial court issued two rulings. First, it amended a priordecision and ordered bifurcation of the breach of contract and bad faith claims into two

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separate stages. Second, it allowed State Farm to withhold materials protected by attorneyclient privilege, but ordered State Farm to immediately produce any non-privilegedmaterials and certain work-product material. The trial court acknowledged that requiring
production of these materials might provide “insight into State Farm’s defense of the value
dispute in the breach of contract claim,” but held that “any minimal prejudice that mightoccur to State Farm as a result of immediate disclosure is substantially outweighed by theinterest of judicial economy served by not delaying discovery.”
DECISIONThe Ohio appellate court ruled that the trial court erred in ordering State Farm to produce
work product material and confidential information, including its valuation of Ryan’s
claim, in advance of a trial in which the value of the claim was the primary issue to belitigated. The court agreed with State Farm’s argument that “regardless of whether those
documents constituted information protected as work product or by the attorney-client
privilege, the materials should have been deemed protected from discovery so long as
determination of the value of the underlying UM claim remained pending.”
The court acknowledged the relevance of claim file material to the bad faith claim, and thepotential right of a policyholder to discover such information in the context of a bad faithclaim under Ohio law, but held that such discovery should be stayed pending the outcomeof the coverage claim. As the court noted, requiring State Farm to divulge information
pertaining to its evaluation and opinion of Ryan’s claim prior to resolution of the breachof contract claim would “undoubtedly” affect State Farm’s ability to defend the claim andrender the bifurcation order “toothless.”

COMMENTS

Parties frequently dispute the discoverability of claim file materials in coverage actions.
Ryan illustrates that rulings in this context depend not only on whether material isprivileged (a determination that turns on whether the material was created in anticipationof litigation as opposed to in the ordinary course of business), but also on the timing ofsuch production. As the court noted, while much of the claim file materials were likely
relevant and discoverable with respect to the bad faith claim, a discovery stay was
warranted in order to avoid prejudice to the insurer while the breach of contract claim wasstill pending.

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Reversing Trial Court, Kentucky Appellate Court Rules
That Umbrella Policy Is Unambiguous And Does Not
Mirror Underlying Primary Policy
HOLDINGA Kentucky appellate court ruled that a commercial umbrella policy was unambiguous anddid not provide coverage for the underlying claims at issue, notwithstanding that theunderlying primary policy did provide coverage. Grange Ins. Co. v. Georgetown Chicken
Coop, LLC, 2023 Ky. App. Unpub. LEXIS 619 (Ky. Ct. App. Oct. 20, 2023).

BACKGROUND

The coverage dispute arose from a motor vehicle accident resulting in several fatalities. The
decedents’ estates sued Roosters, the bar that had served the driver alcohol prior to theaccident. In turn, Roosters filed a third-party petition against Grange Insurance Company,
which insured Roosters under a business owners’ policy and a commercial umbrella policy.
The parties did not dispute that the business owners’ policy provided coverage pursuant toa liquor liability provision, but Grange sought a declaration of no coverage under theumbrella policy. The trial court granted Roosters’ summary judgment motion, deeming theumbrella policy ambiguous and construing it in favor of coverage. The appellate
court reversed.

DECISION

The appellate court ruled that the umbrella policy was unambiguous and did not provide
coverage for the underlying claims. The body of the umbrella policy contained a liquor
liability exclusion that included an exception “for liability arising from the business of theinsured of serving alcohol.” However, an endorsement to the umbrella policy, entitled“Liquor Liability Exclusion” modified that coverage part. The endorsement contained thesame exclusionary language as that in the body of the policy, but also stated: “Thisexclusion applies only if you are in the business of manufacturing, distributing, selling,
serving or furnishing alcoholic beverages.” The endorsement also specified that it“replaced” the Liquor Liability Exclusion in the policy body.
The appellate court emphasized that use of the word “replace” indicated a clear intent todelete the entirety of the exclusion in the policy body, including the exception that would
have operated to provide coverage. In so ruling, the court rejected Roosters’ assertion thatthe endorsement was intended to supplement, rather than replace the exclusion in thepolicy body.
Having concluded that the endorsement language was operative and controlling, thecourt ruled that the umbrella policy was unambiguous in its exclusion of coverage for theunderlying claims.

COMMENTS

The ruling reinforces the principle that umbrella coverage need not be construed to mirror
primary coverage unless an intent to do so is reflected in policy language. Here, theumbrella policy stated that it followed primary coverage “unless otherwise directed by thisinsurance.” As the court noted, the endorsement was precisely such an “otherwise
direction.” If parties intend umbrella coverage to be a “mirror image” of primary coverage,
an express “broad as primary” provision can be used, the court noted.
Additionally, the ruling speaks to the limits of what can give rise to ambiguity. In deeming
the umbrella policy ambiguous, the trial court relied, in part, on what it perceived to be thegeneral intent and nature of umbrella coverage, stating that “when an insured purchases
both an underlying and umbrella policy, the intent is for them to work in concert. There isno purpose for an umbrella policy if not to supplement the underlying policy if exhausted.”
Rejecting this reasoning, the appellate court emphasized that “general observation[s]”about umbrella policies do not give rise to ambiguity where the actual language of thepolicy is clear.
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Simpson Thacher News
Simpson Thacher’s Litigation Practice was profiled as the New York Law Journal’s 2023 “Insurance Litigation
Department of the Year.” The profile highlights the Firm’s work at the forefront of significant insurance litigation
across the country, ranging from environmental contamination litigation, to COVID-19-related disputes, toemerging challenges confronting the market. Andy Frankel, Head of the Firm’s Insurance and Reinsurance
Practice, spoke to NYLJ about what sets Simpson Thacher apart: “A hallmark of our litigation department is ourability to blend our collaborative nature and collective expertise to the benefit of clients.”
Simpson Thacher was ranked in Tier 1 for its Insurance Practice by Euromoney’s Benchmark Litigation
2024. Clients praised Simpson Thacher as being “strong advocates for their clients and worthy adversaries” inBenchmark Litigation’s guide. The Firm’s “celebrated” Insurance Practice was described as keeping “apace with aseries of engagements for a host of brand-name global carriers.”
Lynn Neuner, Global Co-Chair of the Firm’s Litigation Department, was selected for the sixth consecutive year byEuromoney’s Benchmark Litigation as one of the “Top 100 Trial Lawyers.” The list highlights elite trial attorneys
in the United States who are selected based on client and peer review.
Laura Lin and Pierce MacConaghy authored a Law360 article titled, “What Wis. High Court Ruling Means For
Coverage Analysis,” which discussed a recent Wisconsin Supreme Court majority decision overturning existing
precedent on the economic loss doctrine and integrated systems analysis in a commercial general liability
insurance dispute.

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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.

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

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

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

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

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Joshua Polster+1-212-455-2266
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Chet A. Kronenberg+1-310-407-7557
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Tyler B. Robinson+44-(0)20-7275-6118
trobinson@stblaw.com

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

This edition of the
Insurance Law Alert was prepared byBryce L. Friedman / +1-212-455-2235
bfriedman@stblaw.com
Joshua Polster / +1-212-455-2266
joshua.polster@stblaw.com andKaren Cestarikcestari@stblaw.com.

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