Insurance Law Alert

May 2020

In This Issue
Reversing Jury Verdict, Second Circuit Rules That Reinsurer’s Refusal To
Indemnify Settlement Was Not Breach Of Contract
The Second Circuit reversed a jury verdict and ruled that a reinsurer did not breach its
obligations under reinsurance contracts by refusing to indemnify a ceding insurer’s settlement.
Utica Mut. Ins. Co. v. Fireman’s Fund Ins. Co., 2020 WL 2047431 (2d Cir. Apr. 28, 2020).
(Click here for full article)“They’rethe hardestworking, smartest,
most practical and most
responsive attorneys from
top to bottom.”– Chambers USA 2020
(quoting a client)Insurer’s Failure To Reference Specific Exclusion In Reservation Of Rights
Rendered It Deficient, Says Pennsylvania Court
Reversing a lower court, the Superior Court of Pennsylvania ruled that an insurer’s reservationof rights was deficient because it failed to reference a specific exclusion that would haveprecluded coverage. Selective Way Ins. Co. v. MAK Services, Inc., 2020 WL 1973964 (Pa.
Super. Ct. Apr. 24, 2020). (Click here for full article)

Ohio Supreme Court Rejects “All Sums” Allocation For Discrete Injury
ClaimsThe Supreme Court of Ohio held that damage for which liability was sought that occurred at adiscernible time should be allocated to specific policy periods based on actual damage, rejecting
application of “all sums” or pro rata allocation approaches. Lubrizol Advanced Materials, Inc.
v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa, 2020 WL 1943212 (Ohio Apr. 23, 2020).
(Click here for full article)

Pennsylvania Supreme Court Rules That Insurer Must Defend Personal
Injury Suit Arising Out Of Shooting During Murder-Suicide
The Pennsylvania Supreme Court ruled that an insurer was obligated to defend a personal
injury suit arising out of a shooting that occurred in the midst of a murder-suicide, reasoningthat the policyholder did not necessarily expect or intend to cause the resulting bystander
injuries. Erie Ins. Exch. v. Moore, 2020 WL 1932642 (Pa. Apr. 22, 2020). (Click here forfull article)

Texas Supreme Court Adopts Fraud Exception To Eight-Corners Rule
The Supreme Court of Texas adopted an exception to the eight-corners rule, ruling that courts
may consider extrinsic evidence regarding whether the insured colluded with a third party inorder to secure coverage that would otherwise not exist. Loya Ins. Co. v. Avalos, 2020 WL
2089752 (Tex. May 1, 2020). (Click here for full article)

Simpson Thacher & Bartlett LLP

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California Court Rules That Faulty Construction Suit Arose Out Of
Multiple Occurrences
A California federal district court ruled that a construction defect lawsuit arose out of three
separate occurrences, requiring the policyholder’s payment of three deductibles. Liberty Mut.
Fire Ins. Co. v. Bosa Dev. Cal. II, Inc., 2020 WL 1864645 (S.D. Ca. Apr. 13, 2020). (Click here
for full article)

Arbitration Panel Did Not Exceed Authority By Reconsidering Initial
Determination, Says New York Court Of Appeals
The New York Court of Appeals ruled that an arbitration panel acted within the bounds of its
authority in reconsidering a “Partial Final Award” in an arbitration proceeding. American Int’lSpecialty Lines Ins. Co. v. Allied Capital Corp., 2020 WL 2066743 (N.Y. Apr. 30, 2020).
(Click here for full article)

STB News Alerts
Click here to read more about the Firm’s insurance-related publications and honors.

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Reinsurance Alert:a trial, in which a jury issued judgment in
Utica’s favor.

Reversing Jury Verdict, Second
Circuit Rules That Reinsurer’s
Refusal To Indemnify Settlement
Was Not Breach Of Contract

The Second Circuit reversed the verdict,ruling as a matter of law that Fireman’s Fund
had no obligation to pay for losses that were
not covered by the umbrella policies. The
court explained that the umbrella policies
only covered losses that exceeded thelimits stated in the schedules of underlying
insurance. In referencing the primary policies
underlying Utica’s umbrella policies, thoseschedules did not list any aggregate limits
applicable to bodily injury claims (and instead
only provided aggregate limits for property
damage claims). On this basis, the court
found that Fireman’s Fund had no contractual
duty to pay for the bodily injury losses. The
court rejected Utica’s contention that theschedules did not need to list aggregate limits
for bodily injury claims because they included
per-occurrence limits, finding that assertion
unsupported by case law or principles ofpolicy interpretation.

The Second Circuit reversed a jury verdict
and ruled that a reinsurer did not breach
its obligations under reinsurance contracts
by refusing to indemnify a ceding insurer’s
settlement. Utica Mut. Ins. Co. v. Fireman’s
Fund Ins. Co., 2020 WL 2047431 (2d Cir.
Apr. 28, 2020).
Fireman’s Fund issued several reinsurance
contracts to Utica, each reinsuring umbrella
policies that Utica had issued to Goulds
Pump, Inc. The reinsurance certificatesstated that Fireman’s Fund’s liability
followed Utica’s liability pursuant to theumbrella policies. The umbrella policies,
in turn, provided that Utica was liable“for the ultimate net loss resulting fromany one occurrence in excess of . . . theamounts of the applicable limits of liabilityof the underlying insurance as stated in the
Schedule of Underlying Insurance Policies.”
The underlying insurance for Utica’s umbrella
policies were primary policies that Utica had
also issued to Goulds.
Utica and Goulds disputed the extent ofcoverage available for asbestos bodily injury
claims brought against Goulds, including
whether Goulds’ primary policies included
aggregate limits for bodily injury claims.
Utica and Goulds ultimately stipulated thateach primary policy contained an aggregate
limit for bodily injury claims that had been
exhausted and that Utica’s umbrella policies
would therefore provide coverage. Thereafter,
Utica sought to recover reinsurance from
Fireman’s Fund in the amounts that Utica
had paid out under the umbrella policies.
In doing so, Utica relied upon a “follow
the settlements” clause in the reinsurance
contracts, arguing that it bound the reinsurer
to all good faith, reasonable settlements
within the terms of the policies, including
Utica’s settlement-related stipulation as
to the exhaustion of the primary policies.
Fireman’s Fund denied liability, arguing thatthe umbrella policies were not triggered until
the bodily injury losses exceeded any limits
specified in the underlying schedules, which
had not occurred. That matter proceeded to

In addition, the court rejected Utica’s
argument that Fireman’s Fund wasnevertheless obligated by the follow thesettlements clauses to accept Utica’s
interpretation of when the umbrella policies
were required to respond to claims, as set
forth in the underlying settlement with
Goulds. The court explained that follow thesettlements does not override the termsof the reinsurance policies. Where suchterms expressly limit coverage, follow thesettlements cannot be used to vacate thoselimitations. The court stated: “a reinsurer
cannot be held accountable for an allocationthat is contrary to the express language of thereinsurance policy.” The court further notedthat although follow the settlements prohibits
de novo review of a cedent’s settlement andallocation decisions, it does not insulate acedent from application of unambiguous
policy terms.
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Reservation Of
Rights Alert:
Insurer’s Failure To Reference
Specific Exclusion In Reservation
Of Rights Rendered It Deficient,
Says Pennsylvania Court
Reversing a lower court, the Superior Courtof Pennsylvania ruled that an insurer’s
reservation of rights (“ROR”) was deficientbecause it failed to reference a specificexclusion that would have precluded
coverage. Selective Way Ins. Co. v. MAK
Services, Inc., 2020 WL 1973964 (Pa. Super.
Ct. Apr. 24, 2020).

language insufficient to preclude estoppel, thecourt stated:
While the language in Selective Way’s
letter may have sufficiently apprised
MAK Services that future exigencies
might affect coverage, it provided
no notice whatsoever of the existing
coverage issue appearing on the faceof the Policy, i.e., the snow and ice
removal exclusion. Any complete reviewof the Policy would have immediately
revealed the existence of this exclusion.
Such a revelation which would havevitiated any obligation that Selective
Way had to defend or indemnify MAK
Services with equal speed. Instead, theboilerplate language relied upon by
Selective Way obfuscated this absolutedefense to coverage, and caused MAK
Services to reach the reasonableconclusion there was no pressing needto secure back-up counsel.
Based on the length of the delay, the court
also concluded that prejudice to MAK could
fairly be presumed. Importantly, the court
noted that Pennsylvania law does not require
an insurer to list every potential defense in
an ROR, but that “some level of specificity isnecessary.”

Selective Way issued a liability policy to
MAK Services, a snow removal company.
When MAK was named as a defendant in apersonal injury suit, Selective Way agreed
to defend pursuant to an ROR. The ROR
did not reference an exclusion that barred
coverage for all injuries arising out of snow orice removal. Approximately eighteen months
after assuming MAK’s defense, Selective Way
sought a declaration that it owed no duty
to defend or indemnify based on the snow
and ice removal exclusion. A Pennsylvania
trial court granted Selective Way’s summary
judgment motion, rejecting MAK’s assertion
that the insurer was estopped from raising theexclusion. The appellate court reversed.
The appellate court ruled that Selective
Way’s ROR had failed to preserve the snow
and ice removal exclusion. The ROR statedthat the underlying claims were “potentiallycovered” and that Selective Way generally
reserved all rights under applicable law and
all issues “that may become relevant as thismatter continues to develop.” Deeming this

Allocation Alert:
Ohio Supreme Court Rejects“All Sums” Allocation For Discrete
Injury Claims
The Supreme Court of Ohio held that damage
for which liability was sought that occurred
at a discernible time should be allocatedto specific policy periods based on actual
damage. Lubrizol Advanced Materials, Inc.
v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa,
2020 WL 1943212 (Ohio Apr. 23, 2020). In
doing so, the court rejected application of “allsums” or pro rata approaches to allocation.
Between 2001 and 2008, Lubrizol soldallegedly defective resin that was used inplumbing materials and resulted in property
damage. Lubrizol argued that under Ohiolaw, each of its insurance policies issued
between 2001 and 2008 was subject to “joint
and several liability,” such that Lubrizol
could recover for the resin claims under the4policy of its choice. In contrast, National
Union claimed that “all sums” allocation
was inappropriate in light of policy language
requiring the Insurer to pay “those sums”
that Lubrizol was obligated to pay. National
Union also argued that Ohio precedent
applying “all sums” allocation was inapposite
because those cases involved continuous andindivisible harm or damage, whereas the resin
claims involved discrete harm that triggeredcoverage at individual, discernable points
in time.
The court declined to “engage in a
hypertechnical grammar analysis todetermine whether the phrase ‘those sums’is always more limited than ‘all sums’ andwould always lead to a different allocation.”
The court also left open the possibility that
Lubrizol could establish that the harm wasprogressive and continuous. Nonetheless, thecourt concluded that “all sums” allocation
under which Lubrizol could select the policy
under which it would receive coverage
was unwarranted because the timing of
damage was “known or knowable,” basedon production and sale dates and dates ofdamage. The court explained that under
this scenario, the operative policy language
requires injury or damage “during the policy
period.” The court therefore concluded
that coverage is determined by reference tospecific policy periods during which actual
damage occurred.

Duty To Defend
Alerts:Pennsylvania Supreme Court Rules
That Insurer Must Defend Personal
Injury Suit Arising Out Of Shooting
During Murder-Suicide
Previous Alerts have discussed decisions that
address whether injuries or damage caused by
gun shootings give rise to insurance coverage.
See March 2020 Alert; April 2018 Alert. Lastmonth, the Pennsylvania Supreme Court
ruled that an insurer was obligated to defend
a personal injury suit arising out of a shootingthat occurred in the midst of a murdersuicide, reasoning that the policyholder did
not necessarily expect or intend to cause

the resulting bystander injuries. Erie Ins.
Exch. v. Moore, 2020 WL 1932642 (Pa. Apr.
22, 2020).
The coverage dispute arose out of a murdersuicide. A former husband broke into thehome of his ex-wife and shot and killed her.
Before the former husband took his own
life, the boyfriend of the ex-wife arrived on
the scene. A fight ensued between the twomen, during which the former husband’s
gun was fired several times. The boyfriend
was seriously injured and sued the former
husband’s estate. The estate sought
coverage from Erie under homeowners’ andcatastrophe policies, both of which defined“occurrence” as “an accident” and which
excluded injury or damage “expected orintended by anyone we protect,” including
injury “different than what was expected orintended” in “degree, kind or quality.”
A trial court granted Erie’s summary
judgment motion, ruling that the insurer had
no duty to defend because the injuries could
not be deemed “accidental” and were theresult of deliberate conduct. An intermediate
court reversed, noting that “not all injuries
from gun violence are intentional” and findingthat the underlying allegations “fairly portraya situation in which injury may have been
inflicted unintentionally.” The Supreme
Court affirmed.
The Pennsylvania Supreme Court reasoned
that the complaint, taken as true and liberally
construed, alleged an accidental shooting
as to the boyfriend. The complaint allegedthat there was a sudden struggle between
the men, in which the former husband wasacting “crazy” and “incoherent.” Further,
the complaint asserted that he “negligently,
carelessly and recklessly caused theweapon to be fired.” The court rejected thecontention that the allegations of negligence
were “artful pleading” designed to invoke
insurance coverage. The court distinguishedcases involving conduct that was clearly
intentional (even if couched in allegations of
negligence) and caused unintended injuries,
and which did not trigger an insurer’s defense
obligations. Here, the court explained, theinitial conduct itself was allegedly accidental
and/or negligent.

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Texas Supreme Court Adopts Fraud
Exception To Eight-Corners Rule
The Supreme Court of Texas adopted an
exception to the eight-corners rule, rulingthat courts may consider extrinsic evidence
regarding whether the insured colluded witha third party in order to secure coveragethat would otherwise not exist. Loya Ins.
Co. v. Avalos, 2020 WL 2089752 (Tex. May
1, 2020).
Loya issued an automobile policy to Karla
Guevara that expressly excluded coveragefor her husband, Rodolfo Flores. An accident
occurred while Flores was driving thecar, but all parties involved agreed to tell
the responding police officer and insurerthat Guevara had been driving. When themisrepresentation was discovered, Loyarefused to defend a suit brought against
Guevara. A trial court ruled in Loya’s favor,
but an appellate court reversed, ruling that
Loya’s duty to defend derived solely from theface of the relevant policy and the complaint,
which alleged that Guevara was driving at
the time of the accident. The Texas Supreme
Court reversed, endorsing a new exception to
the eight-corners rule.

The Texas Supreme Court ruled that indetermining an insurer’s duty to defend,
courts may consider extrinsic evidence
regarding collusion to make false statements
for the purpose of obtaining insurance
coverage. In addition, the court heldthat an insurer, when confronted with
undisputed evidence of collusion or fraud,
need not file a declaratory judgment action
before withdrawing its defense. However,
if an insurer terminates its defense
and it is subsequently determined that
there was no collusion, an insurer risks“substantial liability” in terms of damages orattorneys’ fees.

Number Of
Occurrences Alert:
California Court Rules That Faulty
Construction Suit Arose Out Of
Multiple Occurrences
A California federal district court ruled thata construction defect lawsuit arose out of
three separate occurrences, requiring thepolicyholder’s payment of three deductibles
and rejecting the assertion that the claims
arose out of a single negligent supervisionoccurrence. Liberty Mut. Fire Ins. Co. v. Bosa
Dev. Cal. II, Inc., 2020 WL 1864645 (S.D. Ca.
Apr. 13, 2020).
Bosa, the developer of a condominium
project, was named as a defendant in a
lawsuit alleging various construction defects.
Liberty Mutual defended Bosa and ultimately
paid the $4 million aggregate limit to settle
the claims. However, Liberty argued that
Bosa was responsible for the payment ofmultiple deductibles, based on its assertion
that the lawsuit arose out of several distinct
occurrences. In response, Bosa contended
that its allegedly negligent supervision of the
project constituted one occurrence, triggering
only a single $500,000 deductible payment.
Applying California’s cause-oriented testfor determining the number of occurrences,the court concluded that there were threeoccurrences, arising out of three discrete
events that caused damage: (1) the allegedly
defective installation of exterior concrete
structures; (2) the allegedly defective
installation of interior plumbing and HVAC
systems; and (3) the allegedly negligent
selection of materials. The court explainedthat this conclusion was supported by thefact that different subcontractors worked oneach of these distinct areas of the project,
and that each “occurrence” resulted ina qualitatively different type of damage.
Rejecting Bosa’s single-occurrence assertion
based on negligent supervision, the court
stated that “such an interpretation would
mean that there would never be more thana single occurrence in the course of a single
construction project, no matter how disparate
the harms.”

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Arbitration Alert:
Arbitration Panel Did Not Exceed
Authority By Reconsidering Initial
Determination, Says New York
Court Of Appeals
Last year, a New York appellate court vacatedan arbitration award issued in an insurance
dispute on the basis that the arbitration panel
exceeded its authority when it reconsidereda final liability award it had previously
rendered. American Int’l Specialty Lines Ins.
Co. v. Allied Capital Corp., 2018 WL 5285241(N.Y. App. Div. 1st Dep’t Oct. 25, 2018).
See November 2018 Alert. Last month, the
New York Court of Appeals reversed, rulingthat the panel acted within the bounds of its
authority in reconsidering the “Partial FinalAward.” American Int’l Specialty Lines Ins.
Co. v. Allied Capital Corp., 2020 WL 2066743(N.Y. Apr. 30, 2020).
Allied sought defense and indemnity from
American International Specialty Lines
Insurance Company (“AISLIC”) for anunderlying False Claims Act suit that it
had settled for approximately $10 million.
When AISLIC denied coverage, Allied filed
for arbitration. During the arbitration
proceeding, the arbitration panel issued adetermination as to AISLIC’s liability but
stated that a separate hearing would be held
as to the amount of defenses costs, if any,
to which Allied was entitled. In its “Partial
Final Award,” the arbitration panel held thatthe $10 million settlement payment was
not covered, but that Allied was entitled toreimbursement of defense costs.
Thereafter, but prior to the evidentiary
hearing on the amount of expenses, the panel
issued a “Corrected Partial Final Award,”
which deviated from the original Partial
Final Award by holding that the underlying
settlement was a covered loss. After
conducting an evidentiary hearing regarding
the amount of covered defense costs, thepanel issued a Final Award awarding Allied
more than $11 million in damages andinterest. A New York trial court deniedAISLIC’s motion to vacate the Corrected
Partial Final Award and the Final Award.
The appellate court reversed, ruling thatthe arbitration panel exceeded its authority
when it reconsidered the Partial Final Award.
The appellate court explained that under thedoctrine of functus officio, an arbitrator may
not entertain an application to change a final
award, except to correct a deficiency of formor miscalculation.
Reversing the appellate court, the New
York Court of Appeals held that the functus
officio doctrine was inapplicable because
no final award had been issued. The court
explained that even assuming that parties toan arbitration can agree to the issuance of apartial final award resolving some, but notall, of the disputed issues, no such agreement
was reached here. Although counsel hadsuggested a separate proceeding to determine
the amount of defense costs, if recoverable,AISLIC did not consent to bifurcation of theproceedings and “neither the parties nor
the arbitrators ever discussed or otherwise
demonstrated any mutual understanding
regarding whether the proposed severance ofthe calculation of defense costs would resultin a final partial award.” The court held thatabsent such express, mutual agreement,
there was no final award which would trigger
application of the functus officio doctrine.

STB News Alerts:
Bryce Friedman and Nick Goldin authoredan article titled, “Leveraging Cyber Insurance
To Mitigate the Economic Impact of Cyber
Incidents,” which was published by New
York Law Journal this month. The article
provides an overview of the types of insurance
policies that might cover cyber incidents andhighlights some of the issues that are likely
to arise surrounding cyber-related insurance
coverage.
Simpson Thacher has once again been ranked
among the leading law firms in the UnitedStates in Chambers USA 2020. The Firm or
its lawyers were recognized in 55 practice
categories, with a total of 27 firm rankings in
the top two bands, including Band 1 rankings
for Insurance: Dispute Resolution in the
U.S. and New York. In addition, the Firm’s
attorneys received a total of 94 recognitions
as leaders in their respective fields of practice.

7

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

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

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

Lynn K. Neuner+1-212-455-2696
lneuner@stblaw.com

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

Jonathan T. Menitove+1-212-455-2693
jonathan.menitove@stblaw.com

Chet A. Kronenberg+1-310-407-7557
ckronenberg@stblaw.com

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

Bryce L. Friedman+1-212-455-2235
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.

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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