Insurance Law Alert

March 2020

In This Issue
New York Court Addresses Whether Facultative Reinsurance Contracts
Cap Both Indemnity Payments And Expenses, Eroding Bellefonte Rule
A New York federal district court ruled that facultative reinsurance contracts unambiguously
cap both indemnity and expense payments when there are no losses but do not cap expense
payments when there are losses. Global Reinsurance Corp. of Am. v. Century Indem. Co., 13
Civ. 6577 (S.D.N.Y. Mar. 2, 2020). (Click here for full article)“Renownedin the market as
accomplished trial
lawyers and coverageexperts who offer quality
representation to clients in
the insurance industry.”– Chambers USA
2019

Ninth Circuit Deems “Claims First Made” Provision Ambiguous As To
Whether Factually-Related Claims Can Be Considered A Single Claim
The Ninth Circuit ruled that a “claims first made” provision in a liability policy was ambiguous
as to whether a pre-policy demand letter and an action filed during the policy period could beconsidered a single claim “first made” prior to policy inception. National Union Fire Ins. Co. v.
Zillow, Inc., 2020 WL 774366 (9th Cir. Feb. 18, 2020). (Click here for full article)

California Court Rules That State Statutory Law Bars Coverage For Lead
Paint Public Nuisance Claims
A California trial court ruled that a state statute precluding insurance coverage for losses“caused by the willful act of the insured” applied to lead paint public nuisance claims. Certain
Underwriters at Lloyd’s of London v. ConAgra Grocery Products Co., No. CGC-14-536731(Cal. Super. Ct. Feb. 26, 2020). (Click here for full article)

Exclusions Cannot Create Ambiguity Where Named Perils Provision DoesNot Encompass Damage At Issue, Says New Jersey Appellate Court
A New Jersey appellate court ruled that the “named perils” clause in a property policy did
not cover water leak damage and that policy exclusions could not create ambiguity where thecoverage provision was clear. Cusamano v. New Jersey Ins. Underwriting Assoc., 2020 WL
1026748 (N.J. App. Div. Mar. 3, 2020). (Click here for full article)

Supreme Court Of North Carolina Rules That Actual Cash Value
Unambiguously Includes Depreciation Of Labor
The Supreme Court of North Carolina ruled that an Actual Cash Value provision isunambiguous and includes the depreciation of labor. Accardi v. Hartford Underwriters Ins.
Co., 2020 WL 987541 (N.C. Feb. 28, 2020). (Click here for full article)


Simpson Thacher & Bartlett LLP

1

“Voluntary Parting” Exclusion Bars Coverage For Email Phishing Wire
Transfer Loss, Says Virginia Court
A Virginia federal district court ruled that losses arising from a wire transfer induced by afraudulent email were excluded by a “voluntary parting” exclusion, and were not otherwise
covered by a Forgery endorsement. Midlothian Enterprises, Inc. v. Owners Ins. Co., 2020 WL
836832 (E.D. Va. Feb. 20, 2020). (Click here for full article)

Seventh Circuit Rules That Policyholder’s Shipment Of Non-Certified
Lumber, Resulting In Damage To Other Property, Is Not An Occurrence
The Seventh Circuit ruled that a policyholder’s shipment of lumber that was not certified inaccordance with state testing requirements, resulting in its removal and damage to otherproperty, was not a covered occurrence. Lexington Ins. Co. v. Chicago Flameproof & Wood
Specialties Corp., 2020 WL 948509 (7th Cir. Feb. 27, 2020). (Click here for full article)

Intentional Shooting Of Guns Is A Covered “Occurrence” And Insurer’s
Refusal To Defend Policyholder Constituted Bad Faith, Says Washington
Appellate Court
A Washington appellate court ruled that a property insurer acted in bad faith in refusing to
defend a lawsuit alleging that the homeowners shot guns onto neighboring property, findingthat the alleged conduct constituted a covered occurrence. Webb v. USAA Casualty Ins. Co.,
2020 WL 812137 (Wash. Ct. App. Feb. 19, 2020). (Click here for full article)

Coronavirus Alert: Has There Been “Physical Damage” By A Covered
Peril?
Click here to read more about the scope of business interruption coverage for coronavirusrelated losses.

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Reinsurance Alert:
New York Court Addresses Whether
Facultative Reinsurance Contracts
Cap Both Indemnity Payments And
Expenses, Eroding Bellefonte Rule
Following a lengthy history including review
and rulings by the Second Circuit and New
York Court of Appeals (see December 2016
and 2017 Alerts), a New York federal district
court ruled that facultative reinsurance
contracts unambiguously cap both indemnityand expense payments when there are no
losses but do not cap expense payments when
there are losses. Global Reinsurance Corp.
of Am. v. Century Indem. Co., 13 Civ. 6577
(S.D.N.Y. Mar. 2, 2020).
The dispute between Century and Global
Reinsurance concerned the extent of Global
Reinsurance’s obligations under certain
facultative reinsurance contracts issued
to Century. In 2014, a New York federal
district court ruled that the certificatesunambiguously capped Global Reinsurance’s
liability at $250,000 (the amount set forth in
the Reinsurance Accepted provision) for bothlosses and expenses. In so ruling, the district
court relied on Bellefonte Reinsurance Co.
v. Aetna Casualty & Surety Co., 903 F.2d
910 (2d Cir. 1990) and Unigard Security
Insurance Co. v. North River Insurance Co.,
4 F.3d 1049 (2d Cir. 1993), noting that therelevant language in the certificates at issue
was nearly identical to that presented in
Bellefonte.
On appeal, the Second Circuit “cast doubt
on the continued force of Bellefonte andUnigard,” and, by certification, asked the
New York Court of Appeals to decide whether
New York precedent:
impose[s] either a rule of construction,
or a strong presumption, that a per
occurrence liability cap in a reinsurance
contract limits the total reinsurance
available under the contract to theamount of the cap regardless of whether
the underlying policy is understood tocover expenses, such as, for instance,
defense costs.
The Court of Appeals answered the questionin the negative, emphasizing that “thestandard rules of contract interpretation
apply” and that policy language must

be interpreted on a case-by-case basis.
Thereafter, the Second Circuit remanded thematter with directions to the district court to“construe each reinsurance policy solely inlight of its language, and to the extent helpful,specific context.”
Upon remand and following an evidentiary
hearing, the district court ruled that “the plain
and unambiguous meaning of the reinsurance
contracts is that the dollar amount stated on
the facultative certificates caps indemnity
payments and also caps expense payments
when there are no losses, but does not cap
expense payments when there are losses.”
The court relied on several contractual
provisions in the certificates, including a
Following Form clause, which stated that
Global’s liability is “subject in all respects toall the terms and conditions of the Company’s
policy.” The court deemed this provision“highly relevant” because under Century’s
policies, the insurer must pay expenses in
addition to limits of liability.

The court also cited a Payments Provision,
which outlined Global’s payment obligations
upon Century’s submission of a claim.
The court concluded that a sentence inthis provision carved out an exception to
the “follow form” requirement for cases inwhich “there is no loss payment” becausethat sentence referenced the dollar amountthat limits indemnity payments. The court
therefore concluded that for instances inwhich no loss is paid, Global’s total liability
for both indemnity and expenses is cappedat the reinsurance limit. However, whereloss payments are made, the court ruledthat expense payments are not subject toa cap because a different sentence, whichreferred to loss payment scenarios, “does not
limit the expense costs that Global owes byreference to a limit or dollar amount stated3

in the certificate.” Thus, the court ruled thatfor instances in which Global makes a loss
payment, the certificates must “follow” theunderlying insurance as to the payment ofexpenses in addition to indemnity.
The court rejected Global’s argument thatthe certificates’ Preamble, which statedthat reinsurance is “subject to the terms,
conditions and limits of liability set forth
herein,” establishes an overall liability limit.
The court stated: “This prefatory language isinsufficiently detailed or explicit to override
the Payments Provision’s specific directives as
to expenses when there are loss payments andwhen there are no loss payments.” Finally,
the court noted that its textual interpretation
was confirmed by expert testimony regarding
relevant industry custom and practice.

Coverage Alerts:
Ninth Circuit Deems “Claims FirstMade” Provision Ambiguous As To
Whether Factually-Related Claims
Can Be Considered A Single Claim
The Ninth Circuit ruled that a “claims
first made” provision in a liability policy
was ambiguous as to whether a pre-policy
demand letter and an action filed during thepolicy period could be considered a single
claim “first made” prior to policy inception.
National Union Fire Ins. Co. v. Zillow, Inc.,
2020 WL 774366 (9th Cir. Feb. 18, 2020).
The policy at issue provided coverage “solely
with respect to Claims first made against
an Insured during the Policy Period . . . andreported to the Insurer.” A Washington
district court ruled that the policy did notcover a copyright infringement suit brought
against Zillow by VHT, Inc. during the policy
period. The court reasoned that the VHT
action was based on the same wrongfulconduct as that alleged by VHT in a demand
letter sent to Zillow prior to the policy’s
inception, and that the demand letter andaction comprised a single claim that was “firstmade” before the policy period.
The Ninth Circuit reversed, ruling that policy
language did not explicitly allow or require
factually-related claims to be considereda single claim for purposes of the “claims
first made” provision. In so ruling, the court

noted that “unlike a number of other claimsfirst-made policies cited by both parties, thePolicy does not contain a provision expressly
providing for the integration of factuallyrelated Claims.” The court deemed the policy
ambiguous as to whether the pre-policy
demand letter and subsequent action could
be considered a single claim. The court
remanded the matter for consideration of
extrinsic evidence to resolve this ambiguity.

California Court Rules That State
Statutory Law Bars Coverage For
Lead Paint Public Nuisance Claims
A California trial court ruled that a statestatute precluding insurance coveragefor losses “caused by the willful act of theinsured” applied to lead paint public nuisanceclaims. Certain Underwriters at Lloyd’s ofLondon v. ConAgra Grocery Products Co.,
No. CGC-14-536731 (Cal. Super. Ct. Feb.
26, 2020).
In the underlying lead paint litigation, thePeople of Santa Clara asserted a public
nuisance claim based on the promotion oflead paint. In a series of decisions, California
trial and appellate courts ruled that paintmanufacturer W.P. Fuller & Co. willfully
promoted lead paint with actual knowledgeof its hazards and that ConAgra was liable as
Fuller’s successor. An appellate court directly
rejected ConAgra’s assertion that Fuller
lacked actual knowledge of the dangers oflead paint, finding that the factual evidence
contradicted that contention.
In the present case, a California trial court
held that, based on the aforementioned
rulings, insurance coverage for the underlying
nuisance claim was barred by California
Insurance Code § 533, which states that an“insurer is not liable for a loss caused by thewillful act of an insured.” The court rejected
ConAgra’s argument that it was insulated
from its predecessor’s knowledge, noting that
under the Insurance Code, a successor entity“acquires the liabilities of its predecessorand [is] responsible as the wrongdoer.” In
addition, the court dismissed ConAgra’s
assertion that the findings in the previous
rulings did not meet Section 533’s willfulness
standard and that Fuller’s conduct was
merely “reckless.” Finally, the court deemed itirrelevant that Fuller’s senior managers might
not have known about the hazards of leadpaint. The court stated: “This is not a punitive4

damages case in which such issues can berelevant. Instead, for Insurance Code § 533
purposes, an entity’s employees’ collective
knowledge—not just senior managers’
knowledge—is what matters.”

Property Policy
Alerts:Exclusions Cannot Create
Ambiguity Where Named Perils
Provision Does Not Encompass
Damage At Issue, Says New Jersey
Appellate Court
A New Jersey appellate court ruled that the“named perils” clause in a property policy did
not cover water leak damage and that policy
exclusions could not create ambiguity where
the coverage provision was clear. Cusamanov. New Jersey Ins. Underwriting Assoc.,
2020 WL 1026748 (N.J. App. Div. Mar.
3, 2020).
Homeowners filed a claim with their property
insurer for water damage caused by a leaking
pipe. A plumber determined that the leak wascaused by a “rotted connection” in the drainline. When the insurer denied coverage, thehomeowners filed suit, alleging breach ofcontract and bad faith. A trial court ruled thatthe policy was ambiguous because it listed
several excluded perils, which did not include
water damage (except as to breakage of water
pipes by explosion). The trial court reasoned
that because the policy failed to list water
damage from leaking pipes as an excluded
peril, the homeowners had a “reasonable
expectation of coverage” for such losses.
The appellate court reversed, ruling that thetrial court erred by considering exclusionary
clauses in order to find ambiguity when the
coverage-granting clause unambiguously
did not encompass the water damage at
issue. The appellate court emphasized thatan exclusion operates to limit or restrict theinsuring clause, and “does not extend or grantcoverage.” The court stated: “the covered
perils defined the outer bounds of coverage.
The exclusions pertain only to what iscovered. . . . Because water damage was not acovered peril, there was no reason to consider
the policy’s exclusions.”

Supreme Court Of North
Carolina Rules That Actual Cash
Value Unambiguously Includes
Depreciation Of LaborAs discussed in previous Alerts, the Supreme
Courts of Tennessee, Arkansas, Minnesota
and Nebraska have addressed whether andunder what circumstances labor costs can be
depreciated for the purposes of calculating
actual cash value (“ACV”) under a property
policy. See April 2019 Alert, March 2017
Alert, January and February 2016 Alerts. Lastmonth, the Supreme Court of North Carolina
weighed in, ruling that an ACV provision isunambiguous and includes the depreciation oflabor. Accardi v. Hartford Underwriters Ins.
Co., 2020 WL 987541 (N.C. Feb. 28, 2020).
The homeowners submitted a claim toHartford for damage caused by a hailstorm.
Hartford issued an ACV payment of$6,743.36, which reflected the total
estimated cost of repair ($10,287.28), lessthe deductible ($500) and depreciation ofboth labor and materials ($3,043.92). The
homeowners argued that in calculating ACV,
Hartford should have separated the costs oflabor and materials and depreciated only thematerial items. The homeowners sought torepresent a class of North Carolina residents
to whom Hartford paid ACV payments basedon depreciation of both labor and materials. A
lower court dismissed the suit and the North
Carolina Supreme Court affirmed.
Although the term ACV was not defined in
the “definitions” section of the policy, a roof
coverage endorsement stated that:your policy includes Actual Cash
Value (ACV) Loss Settlement forcovered windstorm or hail losses toyour Roof. This means if there is acovered windstorm or hail loss toyour roof, [Hartford] will deduct
depreciation from the cost to repair
or replace the damaged roof. In otherwords, [Hartford] will reimburse forthe actual cash value of the damaged
roof surfacing less any applicablepolicy deduction.
The court concluded that this definition “mustbe read in harmony with the remainder ofthe policy” and is unambiguous in allowing
depreciation of both labor and materials.

5

“covered instruments” as “checks, drafts,
promissory notes, or similar written promises,orders or directions to pay a sum certain
in money.” The court held that an email
directing a wire transfer is not a “covered
instrument” because it is not “of the same
import as that of the specific item[s] posted.”Occurrence Alerts:
Cyber Alert:“Voluntary Parting” Exclusion Bars
Coverage For Email Phishing Wire
Transfer Loss, Says Virginia Court
A Virginia federal district court ruled thatlosses arising from a wire transfer induced
by a fraudulent email were excluded by a
“voluntary parting” exclusion, and were nototherwise covered by a Forgery endorsement.
Midlothian Enterprises, Inc. v. Owners Ins.
Co., 2020 WL 836832 (E.D. Va. Feb. 20,
2020).
A Midlothian employee received an email,purportedly from the company president,
instructing her to wire money to a bankaccount in Alabama. After the transfer was
made, the company discovered that theemail was fraudulent. Owners Insurance
denied coverage based on an exclusion thatbarred coverage for “[l]oss resulting fromyour, or anyone acting on your express or
implied authority, being induced by any
dishonest act to voluntarily part with title
to or possession of any property.” The court
agreed and granted the insurer’s summary
judgment motion.
The court rejected Midlothian’s contentions
that the exclusion was ambiguous and thata victim of fraud can never act voluntarily.
Additionally, the court dismissed Midlothian’sassertion that the exclusion did not apply
because the employee did not act with express
or implied authority when she effectuatedthe wire transfer. The court explained that“[t]he fact that another individual pretended
to authorize the transaction does not negate
the voluntariness of the transfer.” Finally,
the court ruled that there was no coverage
under a separate Forgery or Alteration
Endorsement. The endorsement defined

Seventh Circuit Rules That
Policyholder’s Shipment Of NonCertified Lumber, Resulting In
Damage To Other Property, Is Not
An Occurrence
The Seventh Circuit ruled that apolicyholder’s shipment of lumber that was
not certified in accordance with state testing
requirements, resulting in its removal anddamage to other property, was not a covered
occurrence. Lexington Ins. Co. v. Chicago
Flameproof & Wood Specialties Corp., 2020
WL 948509 (7th Cir. Feb. 27, 2020).
Chicago Flameproof, a distributor of fire
retardant lumber, was sued in three lawsuits
stemming from the company’s sale of lumber
to contractors. The complaints alleged thatthe contractors ordered a specific brand of fire
retardant lumber that met the requirements
set forth in the International Building Code(“IBC”), but that Chicago Flameproof insteaddelivered its in-house brand, which was
not IBC-approved. The complaints further
alleged that the contractors were not awareof this substitution until after the lumber
had been installed in the building projects.
The lumber was ultimately removed andreplaced with IBC-certified lumber, allegedly
causing damage to the surrounding materials.
Lexington sought a declaration that it had
no duty to defend the suits, arguing that
Chicago Flameproof’s knowing decision to
supply non-IBC-compliant lumber was nota covered “occurrence.” An Illinois federal
district court agreed and granted the insurer’ssummary judgment motion. The Seventh
Circuit affirmed.
The Seventh Circuit reasoned that theunderlying complaints did not allege any
unforeseen or unexpected insurable events
because Chicago Flameproof shipped theuncertified lumber deliberately and was
6aware or should have been aware of theconsequences of that action. The court
acknowledged that under Illinois law, faulty
workmanship may constitute an occurrence
if it results in damages separate and apartfrom the insured’s work product, or if theinsured was unaware of the defective natureof a building component. However, neitherof those principles apply where, as here, thepolicyholder allegedly made a deliberate
decision to ship non-conforming products.
The court rejected Chicago Flameproof’s
assertion that a duty to defend was triggered
based on allegations of negligence inthe underlying complaints. The court
reasoned that the negligence “label” is oflittle significance given that the crux of theallegations is that Chicago Flameproof acted
deliberately.

Intentional Shooting Of Guns
Is A Covered “Occurrence” And
Insurer’s Refusal To Defend
Policyholder Constituted Bad Faith,
Says Washington Appellate Court
Reversing a lower court decision, aWashington appellate court ruled thata property insurer acted in bad faith inrefusing to defend a lawsuit alleging that the
homeowners shot guns onto neighboring
property, finding that the alleged conduct
constituted a covered occurrence. Webb v.
USAA Casualty Ins. Co., 2020 WL 812137(Wash. Ct. App. Feb. 19, 2020).
A lawsuit against the Webbs alleged thatthey and others carelessly and recklessly
shot multiple rounds of ammunition onto
neighboring property. The complaint allegedthat the Webbs were advised about thedangers of this conduct, but neverthelesscontinued to engage in this “ultra-hazardous

activity.” Plaintiffs asserted seven causes ofaction, including trespass, assault, negligent
and intentional infliction of emotional
distress, nuisance and violation of county
penal regulations. When USAA denied
coverage, the Webbs sued USAA for breachof contract, bad faith, and violation of the
Insurance Fair Conduct Act (“IFCA”) andthe Consumer Protection Act (“CPA”). A
Washington trial court granted USAA’s
summary judgment motion, finding that theunderlying claims arose from intentional
acts outside the scope of policy coverage. The
appellate court reversed.
The appellate court ruled that USAA
had a duty to defend the suit because it
alleged covered “personal injury,” defined
to include “wrongful entry.” The court
reasoned that allegations of trespass andnuisance constituted claims for wrongfulentry. In addition, the court ruled that thecomplaint alleged an “occurrence,” defined
as an “accident” or “an event or series of
events . . . proximately caused by an act oromission of any ‘insured,’ which results,
during the policy period, in ‘personal injury,’neither expected nor intended from thestandpoint of the insured.” The court deemed
it irrelevant that the complaint did not allege
an “accident,” finding that the occurrence
requirement is satisfied if the Webbs’ actions
resulted in injury that was unexpectedor unintended from their own subjective
perspective. The court stated:the complaint alleged that thetarget shooters acted carelessly andrecklessly, but not that they actuallyknew that bullets were entering the[adjoining] property. . . . Although theshooting was deliberate, the Webbs
must have expected or intended thepersonal injury—here trespass and/or nuisance—to negate the existence ofan occurrence.
The court also ruled that coverage was notbarred by a clause excluding conduct that is“malicious or criminal in nature.” Although
the complaint alleged violations of thelocal penal code, the court held that (1) thecomplaint was ambiguous as to whether the
Webbs’ actions constituted actual violationsof those statutes, and (2) even if they did,criminal act exclusions “apply only to serious
crimes involving some malicious or wrongful
mental state.” The court therefore granted the7Webbs’ summary judgment motion as to theduty to defend.
Finally, the court ruled in the Webbs’ favor
on their bad faith, IFCA and CPA claims.
The court concluded that USAA’s defense
denial was “unreasonable, frivolous, or
unfounded” because its positions on the“occurrence” and “expected or intended”
issue were contradicted by controlling law,based on a “questionable interpretation ofpolicy language,” and/or unsupported by theallegations in the complaint.

Coronavirus Alert:
Has There Been “Physical Damage”
By A Covered Peril?
As the respiratory illness known ascoronavirus disease 2019 (“COVID-19”)
spreads across the globe, so too are its major
impacts on businesses, financial markets,and international trade and commerce.
Businesses are confronting a range of losses
related to the World Health Organizationdeclared pandemic and will look to insurance
to cover those losses. While insurers’ coveragedecisions will be fact-specific and based on
the terms and conditions of the relevant
policy, whether there has been physicaldamage caused by a covered peril is likely to
be at the forefront of early disputes.
Business Interruption Coverage
Policyholders will reflexively look to businessinterruption coverage when normal business
operations are interrupted. Commercial
property insurance policies often insure
against a loss of business income caused bycovered physical damage to the insured’s
own property. In the context of COVID19-related losses, disputes may arise as towhether the loss of use of property that has
become uninhabitable or unusable becauseof COVID-19 contamination sustained a“physical loss” for purposes of businessinterruption coverage. In instances where afacility is quarantined or closed down in an
attempt to minimize the spread of COVID19, policyholders are likely to argue thatthe “physical loss or damage” requirement
has been satisfied for business interruption
coverage purposes.

In other contexts, courts have ruled thatproperty contamination caused by harmful
airborne particles is sufficient to constitutedirect physical loss. See, e.g., Sullivan v.
Standard Fire Ins. Co., 956 A.2d 643 (De.
2008) (mold contamination constitutes aphysical loss under property policy); Farmers
Ins. Co. of Oregon v. Trutanich, 858 P.2d
1332 (Or. Ct. App. 1993) (pervasive odors
from amphetamine laboratory are a direct
physical loss); Matzner v. Seaco Ins. Co.,
9 Mass. L. Rptr. 41 (Mass. Super. Ct. 1998)(direct physical loss or damage encompasses
carbon monoxide contamination); Motorists
Mut. Ins. Co. v. Hardinger, 2005 WL 1163426(2d Cir. 2005) (presence of E. coli in water
well of residence, which caused physicalillness to inhabitants, could constitutephysical loss or damage to property); Gregory
Packaging Inc. v. Travelers Prop. Cas. Co.
of Am., 2014 WL 6675934 (D.N.J. Nov.
25, 2014) (release of ammonia in building
constituted direct physical loss because it“physically transformed” the air and rendered
the property unusable). These courts havereasoned that “physical loss or damage” mayinclude changes or alterations to property
that are intangible and/or invisible to thenaked eye.
However, this body of case law is notnecessarily controlling in the context of
COVID-19-related closures. The question ofwhether the presence of COVID-19 in insured
property is deemed to constitute “physicalloss or damage” will ultimately depend
several factors, including most significantly,
the particular facts related to the property
at issue, applicable policy language, andgoverning law. Additionally, the questionof whether COVID-19 contamination can
be classified as “physical” will turn on thescientific consensus that develops aroundthe virus and its transmission. To the extent
that contamination has occurred throughaccumulation of microscopic viral particles on
surfaces, such as floors, desks and equipment,or through ventilation systems, a policyholder
will make a case for “physical loss or damage.”
Conversely, where business closures haveoccurred preventatively prior to any actual
contamination, or where policies limit thescope of insured property in important
respects, coverage may be unavailable. See
Universal Image Productions, Inc. v. Federal
Ins. Co., 475 F. App’x 569 (6th Cir. 2012)(insured did not suffer “direct physical loss
or damage” as a result of mold and bacterial
8contamination in ventilation system because
premises were not rendered completely
uninhabitable and because policy defined“building” and “personal property” to exclude“air, either inside or outside of a structure”).
In addition to the physical loss condition,
most policies will require the damage to becaused by a “peril not otherwise excluded”
in order to trigger business interruption
coverage. Therefore, policy exclusions may
preclude coverage for business interruption
losses, even where such losses arise fromphysical loss. Moreover, if losses are arguably
caused by a combination of multiple factors,
coverage decisions will become significantly
more complicated, likely involving applicationof ensuing loss and concurrent causation
provisions. Finally, regardless of causation,
valuation issues relating to proof and extent
of business interruption loss are likely tocreate complicated litigation issues.
Contingent Business Interruption Coverage
Property insurance policies also typically
include provisions that insure against a loss
resulting from interruption to a policyholder’s
supply chain or network because of damage tothe supplier’s property. Contingent businessinterruption coverage insures against losses
sustained by an insured’s supplier, distributor
or customer, rather than the policyholder
itself. Given the reality of today’s global

economy, contingent business interruption
provisions are likely to be implicated in losses
stemming from COVID-19-related closures.
All of the same issues that are likely to arise in
the context of business interruption coverage
are similarly present in the contingent
business interruption coverage context.
The outcome of any such COVID-19 litigation
will undoubtedly be fact-dependent, based onan evaluation of applicable policy language
as applied to the record presented, and inaccordance with governing jurisdictionallaw. Overall, early on industry observers
do not foresee a major effect on theproperty insurance market from insured
claims. According to Moody’s, “global P&C
commercial lines exposure is limited withmodest insured losses relative to economic
losses.” With respect to the domestic
market, Fitch Ratings predicts that COVID19 is unlikely to have an “adverse impact
on financial results reported by U.S. P&C
companies, nor their ratings,” explaining that“the nature of insured commercial exposures,along with restrictive language embedded
in policy contracts, will likely limit U.S. P&C
companies from a material level of claims.”1
1. U.S. P&C insurers face 'limited exposures' from coronavirus,
PropertyCasualty360 (Mar. 13, 2020), https://www.
propertycasualty360.com/2020/03/13/u-s-pc-insurersface-limited-exposures-from-coronavirus/?slretu
rn=20200214150727.

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

Elisa Alcabes+1-212-455-3133
ealcabes@stblaw.com

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

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trobinson@stblaw.com

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lneuner@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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bfriedman@stblaw.com

Susannah S. Geltman+1-212-455-2762
sgeltman@stblaw.com

This edition of the
Insurance Law Alert was
prepared by Mary Beth Forshaw
mforshaw@stblaw.com /+1-212-4552846 and Bryce L. Friedman
bfriedman@stblaw.com /+1-212-4552235 with contributions
by Karen Cestarikcestari@stblaw.com.

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UNITED STATESEUROPE

SOUTH AMERICANew York
425 Lexington Avenue
New York, NY 10017+1-212-455-2000

LondonCityPoint
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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