Insurance Law Alert

September 2019

In This Issue
California Supreme Court Says California’s Notice-Prejudice Rule May
Override Policy’s Choice-Of-Law Provision
The California Supreme Court ruled that California’s common law notice-prejudice rule is afundamental public policy for the purpose of potentially overriding an explicit choice-of-law
provision in an insurance policy. Pitzer College v. Indian Harbor Ins. Co., 2019 WL 4065521(Cal. Aug. 29, 2019) (Click here for full article).
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2019

Delaware Court Rules That Appraisal Action Is Covered “Securities Claim”
And That Policy Covers Pre-Judgment Interest For Non-Covered Losses
A Delaware court ruled that an appraisal action against an insured company qualifies as acovered “Securities Claim” under a D&O policy and that “Loss” encompasses pre-judgmentinterest for non-covered losses. Solera Holdings, Inc. v. XL Specialty Ins. Co., 2019 WL
3453232 (Del. Super. Ct. July 31, 2019) (Click here for full article).

Indiana Appellate Court Rules That Hacking Losses Are Not Covered By
Policy, But That Insurer’s Assurances In Promotional Materials Create
Issues Of Fact As To Coverage
An Indiana appellate court ruled that financial losses caused by computer hackers were notcovered by a crime policy’s forgery or theft provisions, but that statements relating to cybercoverage in the insurer’s promotional materials create an issue of fact as to coverage by
estoppel. Metal Pro Roofing, LLC v. Cincinnati Ins. Co., 2019 WL 3756738 (Ind. Ct. App. Aug.
9, 2019) (Click here for full article).

Deteriorating Concrete Is Not “Collapse” Under Property Policy, Says
Connecticut District Court
Another Connecticut federal district court joined the growing majority of courts that have heldthat damage caused by defective concrete is not covered by the homeowners’ property policy.
Dumas v. USAA Gen. Indem. Co., 2019 WL 3574920 (D. Conn. Aug. 6, 2019) (Click here forfull article).

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Simpson Thacher & Bartlett LLP

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Loss Of Wine Bottles In Ponzi Scheme Not Covered By Valuable Items
Policy, Says Tenth Circuit
The Tenth Circuit ruled that policyholders were not entitled to recover for the loss of winebottles never delivered by a retailer who had been operating a Ponzi scheme, reasoning that thepolicyholders had never actually “owned” or “possessed” the wine. Hasan v. AIG Prop. Cas.
Co., 2019 WL 4019902 (10th Cir. Aug. 27, 2019) (Click here for full article).

Insurer Is Entitled To Compel Appraisal Because It Did Not “WhollyDeny” Coverage, Says Florida Appellate Court
A Florida appellate court ruled that a property insurer was entitled to compel appraisal eventhough it refused to make payments to the homeowners because it did not “wholly deny”
coverage. Underwriters at Lloyd’s, London v. Sorgenfrei, 2019 WL 4383441 (Fla. Dist. Ct.
App. Sept. 13, 2019) (Click here for full article).

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California Supreme Court answered the
Public Policy Alert: The
first question in the affirmative. It reasoned

California Supreme Court Says
California’s Notice-Prejudice RuleMay Override Policy’s Choice-OfLaw Provision

The California Supreme Court ruled that
California’s common law notice-prejudice rule
is a fundamental public policy for the purposeof potentially overriding an explicit choiceof-law provision in an insurance policy. The
court also held that the notice-prejudice rule
applies to consent provisions in first-party
policies. Pitzer College v. Indian Harbor Ins.
Co., 2019 WL 4065521 (Cal. Aug. 29, 2019).
Pitzer College discovered soil damage at aconstruction site on its campus and promptly
commenced remediation work. Pitzer did
not inform its insurer Indian Harbor of theissue until approximately three months after
remediation had been completed. Indian
Harbor denied coverage based on Pitzer’s
failure to give notice as soon as practicableand its failure to obtain consent prior to
remediation. A California district court
granted Indian Harbor’s summary judgment
motion, finding that Pitzer had violated
the policy’s notice and consent provisions.
The district court applied New York law inaccordance with the policy’s choice-of-law
provision. New York law does not requirea showing of prejudice in order to denycoverage based on late notice for policiesdelivered and issued outside of New York.
The district court also ruled that summary
judgment was warranted based on Pitzer’s
failure to obtain consent prior to incurring
remediation costs.

that requiring an insurer to establish
prejudice as a result of late notice is afundamental state policy because it promotes
fairness, protects against inequity among
contracting parties with unequal bargaining
power, and promotes the public interest byprotecting the public from bearing the costsof harm that insurance purports to cover. The
California Supreme Court remanded to theNinth Circuit the issue of “whether California
has a materially greater interest than New
York in determining the coverage issue, suchthat the contract’s choice of law would be
unenforceable.”
As to the second certified question, the court
held that the notice-prejudice rule applies
to consent provisions in first-party policies.
The court explained that the rationale thatjustifies a showing of prejudice for violationsof notice provisions applies with equal force
to policy provisions that require consent
prior to incurring costs. However, the court
expressly limited this holding to first-party
policies, noting that different concerns are
implicated in the context of third-party
coverage. The court remanded the matterfor a determination of whether Indian
Harbor’s policy provided first-party or thirdparty coverage.

On appeal, the Ninth Circuit explained that if
California’s notice-prejudice rule is deemed a“fundamental public policy,” it can override
the parties’ choice of New York law. Citinga lack of controlling precedent on this andother issues, the court certified the following
questions to the California Supreme Court:(1) Is California’s common law noticeprejudice rule a fundamental public
policy for the purpose of choice oflaw analysis?
(2) If so, does the notice-prejudice rule
apply to the consent provision of theinsurance policy in this case?

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D&O Alert:

Delaware Court Rules That
Appraisal Action Is Covered“Securities Claim” And That Policy
Covers Pre-Judgment Interest For
Non-Covered Losses
A Delaware court ruled that an appraisal
action against an insured company qualifies
as a covered “Securities Claim” under a D&O
policy and that “Loss” encompasses prejudgment interest for non-covered losses.
Solera Holdings, Inc. v. XL Specialty Ins.
Co., 2019 WL 3453232 (Del. Super. Ct. July
31, 2019).
After Solera, a publicly-traded company,
was acquired by another entity, a group ofshareholders filed an appraisal action seeking
determination of the fair value for theirshares. That action culminated in a findingthat the value of the petitioners’ shares at thetime of merger was actually lower than themerger price. Following the ruling, Solera
was ordered to pay the petitioners the fairvalue of their shares plus pre-judgmentinterest. Solera paid more than $13 million in
attorneys’ fees and other costs defending theappraisal action.
Solera’s D&O insurers denied coverage,
arguing that the appraisal action was not a“Securities Claim,” which the policy defined
as a claim “made against [Solera] for any
actual or alleged violation of any federal,state or local statute, regulation, or rule orcommon law regulating securities.” Theinsurers contended that the appraisal action
did not allege any “violation” of law or any
wrongdoing that satisfied the “Securities
Claim” definition. The court disagreed,
noting that allegations of wrongdoing are
not required by the policy language. The
court explained that the undefined term
“violation” includes any breach of the law orcontravention of a right or duty. Allegations of
unfair share valuation in an appraisal action
meet this standard, the court concluded,
because “[b]y its very nature, a demand forappraisal is an allegation that the company
contravened that right by not paying
shareholders the fair value to which they
are entitled.”
Additionally, the court ruled that eventhough Solera’s payment of the fair market
value of the shares was not a covered loss,

the pre-judgment interest on that payment
is covered. The policy defines “Loss” as“damages, judgments, settlement, prejudgment and post-judgment interest
or other amounts . . . that [Solera] islegally obligated to pay.” The court stated:“Defendants’ argument that ‘Loss’ includes
pre-judgment interest only on a covered
judgment is untethered to the language in the
Policy.” However, the court declined to grantsummary judgment on this issue, finding
issues of fact as to whether other provisions
precluded coverage and whether Solera
actually paid the interest award, among
other things.
Finally, the court addressed the insurers’
argument that they had no duty to coverSolera’s pre-notice defense costs because
Solera violated the policy’s consent clauseby failing to give notice before incurring
those costs. The court concluded that acoverage denial based on a violation of aconsent clause requires a showing of material
prejudice under Delaware law. The court
held that the issue of prejudice could not be
decided on summary judgment, explainingthat there is a presumption that the insurers
were prejudiced by the breach, but that
Solera could rebut that presumption withspecific evidence.

Cyber Coverage
Alert:

Indiana Appellate Court Rules That
Hacking Losses Are Not Covered
By Policy, But That Insurer’s
Assurances In Promotional
Materials Create Issues Of Fact As
To Coverage
An Indiana appellate court ruled that financial
losses caused by computer hackers were notcovered by a crime policy’s forgery or theftprovisions, but that statements relating tocyber coverage in the insurer’s promotional
materials create an issue of fact as to coverageby estoppel. Metal Pro Roofing, LLC v.
Cincinnati Ins. Co., 2019 WL 3756738 (Ind.
Ct. App. Aug. 9, 2019).
After computer hackers stole funds from
Metal Pro’s bank accounts, the company
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sought coverage under a crime policy. The
insurer denied coverage on the grounds
that the hacking activities did not fall within
the forgery or theft provisions. A trial court
agreed and dismissed Metal Pro’s breach ofcontract claim. However, the court allowed abad faith claim to proceed based on alleged
misrepresentations made by the insurer
relating to the scope of computer hacking
coverage. Metal Pro alleged that statementsin the insurer’s coverage quotes created areasonable belief that the policy would coverhacking losses. In response, the insurer
argued that even if the representations
could be interpreted to assure coverage, any
reasonable reliance was negated by an express
disclaimer stating that “This is not a policy.
For a complete statement of the coverages
and exclusions, please see the policy
contract.”

The trial court dismissed the bad faith claim.
It reasoned that although language in the
promotional material could be interpreted asa misleading representation of coverage, theclaim nonetheless failed because Metal Pro
did not rely on the document. The trial court
held that any purported reliance was negatedby deposition testimony indicating that
Metal Pro did not read the policy until after
coverage was denied.
The appellate court affirmed in part andreversed in part. The appellate court affirmedthat computer hacking losses were notcovered by the forgery or theft provisionsof the policy. As to the bad faith claim, theappellate court held that the explicit reference
to “computer hackers” in the promotional
material and its assurance of “peace of mind
with Cincinnati’s crime coverage to insure
the money and securities you worked so hardto earn” created a reasonable expectationof coverage for computer hacking loss. The
appellate court ruled that the trial court
erred in finding a lack of reliance, noting that

although Metal Pro conceded that it did notread the policy initially, it did allegedly read(and rely on) the descriptive statements inthe coverage quotes. Finally, the court heldthat the question of whether the disclaimer“neutralizes otherwise misleading quotelanguage” is one for the finder of fact.

Defective Concrete
Alert:
Deteriorating Concrete Is Not“Collapse” Under Property Policy,
Says Connecticut District Court

Another Connecticut federal district court
joined the growing majority of courts thathave held that damage caused by defective
concrete is not covered by the homeowners’
property policy. Dumas v. USAA Gen. Indem.
Co., 2019 WL 3574920 (D. Conn. Aug.
6, 2019).
Homeowners filed a claim with their property
insurer for cracks and deterioration in theconcrete foundation of their home. When theinsurer denied the claim, the homeowners
sued, alleging breach of contract, badfaith and violations of state statutory law.
The court granted the insurer’s summary
judgment motion on all claims.
The policy defines collapse as “a sudden
falling or caving in” or “a sudden breaking
apart or deformation such that thebuilding . . . is in imminent peril of falling or
caving in and is not fit for its intended use.”
The court concluded that this requirement
was not met because the evidence establishedthat the damage occurred gradually overtime. The court noted that although other
Connecticut courts have deemed substantial
impairment sufficient to constitute collapse
for the purposes of insurance coverage, thosecases involved policies that did not definecollapse, whereas here, the policy expressly
includes a “sudden” requirement.
The court rejected several other arguments
asserted by the homeowners, including thatcoverage was available under the ensuingloss or reasonable repairs provisions, or thatthe chemical reaction that occurred in theconcrete was itself a sudden physical loss thatwas covered by the policy.
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Coverage Alert:

Loss Of Wine Bottles In Ponzi
Scheme Not Covered By Valuable
Items Policy, Says Tenth Circuit
The Tenth Circuit ruled that policyholders
were not entitled to recover for the loss ofwine bottles never delivered by a retailer who
had been operating a Ponzi scheme, reasoningthat the policyholders had never actually“owned” or “possessed” the wine. Hasan v.
AIG Prop. Cas. Co., 2019 WL 4019902 (10thCir. Aug. 27, 2019).

The policyholders ordered wine from PremierCru, a California-based wine merchant. In
actuality, however, Premier Cru did not order
or deliver much of the wine that it promised;rather, its president operated a Ponzi schemeand spent most of Premier Cru’s funds on
personal use. In a guilty plea on wire fraudcharges, Premier Cru’s president admitted
to selling $20 million of phantom wine.
After Premier Cru filed for bankruptcy, thepolicyholders submitted a claim to AIG for
approximately $1.7 million—the asserted
market value of the wine that they purchased
but never received.
The AIG policy insured against “direct
physical loss or damage to valuable articles
anywhere in the world.” Valuable articles
is defined as “personal property you own
or possess.” AIG denied coverage on the
ground that the policyholders did not own orpossess the wine at issue, and that the loss
at issue was a loss of money, which is notinsured by the policy. In ensuing litigation,a Colorado district court granted AIG’ssummary judgment motion, holding thateven assuming the policyholders “owned” thewine, they could not establish physical loss

or damage. The Tenth Circuit affirmed on
different grounds.
The Tenth Circuit ruled that the loss was
not insured because the policyholders neverowned or possessed the undelivered winebottles. The court explained that there was
no evidence that Premier Cru ever purchased
the ordered bottles in the first place. The
court stated: “Absent evidence that anyof the 2,448 ordered bottles of wine wereactually purchased by Premier Cru, much lessspecifically purchased for Plaintiffs, Plaintiffs
have failed to carry their burden on an
essential element of their insurance claim—that there are unaccounted for bottles of winethat they owned.”
As discussed in our March 2018 Alert, aCalifornia appellate court similarly denied
coverage under a valuable possessions policy
for wine-related loss in Doyle v. Fireman’s
Fund Ins. Co., 2018 WL 1177929 (Cal. Ct.
App. Mar. 7, 2018). There, the policyholder
purchased nearly $18 million of purportedly
vintage wine that he later discovered to be
counterfeit. The court held that there wasno “direct and accidental loss or damage
to covered property” because there was no
physical harm to the wine, but rather only
financial loss as a result of the fraudulent sale.

Appraisal Alert:

Insurer Is Entitled To Compel
Appraisal Because It Did Not“Wholly Deny” Coverage, Says
Florida Appellate Court
A Florida appellate court ruled that a property
insurer was entitled to compel appraisal eventhough it refused to make payments to thehomeowners because it did not “wholly deny”
coverage. Underwriters at Lloyd’s, London v.
Sorgenfrei, 2019 WL 4383441 (Fla. Dist. Ct.
App. Sept. 13, 2019).
Homeowners filed a claim with their property
insurer for hurricane-related damage. The
insurer admitted coverage under the policy,
but argued that the loss did not meet therequired deductible. Additionally, the insurer
claimed that there was pre-existing damage tothe property. The insurer sought to compel anappraisal, which a trial court denied.

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The appellate court reversed, ruling that
under Florida law, “when an insurer does
not wholly deny coverage, a disagreement
between the parties as to causation presents
an amount-of-loss issue to be determined,
under the contract, by appraisal.” The court
explained that although the insurer refused
to issue payment based on the deductible
and alleged pre-existing damage, the insurer
had conceded that a portion of the claim waswithin the policy’s coverage and thus did not
wholly deny coverage.

STB News Alerts
Susannah Geltman was named to Benchmark
Litigation’s fourth annual “40 and Under Hot
List.” The feature honors the most notable
up and coming litigation attorneys in the
country under the age of 40. The list is basedon extensive research and feedback frompeers and clients. In addition, Susannah was

the featured speaker on a webinar hosted
by Thomson Reuters, titled “The Impact ofSocial Media on Litigation: What you Need toKnow.” She provided an overview of criticalissues for litigators to consider with respect
to social media, including the impact of social
media on discovery and evidentiary issues,jury selection and juror conduct, employee
conduct, and ethical issues for lawyers andjudges.
Mary Beth Forshaw and Lynn Neuner areamong the six litigators at the Firm to berecognized as this year’s “Top 250 Womenin Litigation” by Euromoney’s Benchmark
Litigation. The feature honors theaccomplishments of America’s leading female
litigators who have participated in some of
the most impactful litigation matters in recent
history and who have earned the respect of
their peers and clients. In addition to being
named to the “Top 250 Women in Litigation”
list, Lynn was also recognized as a “Top 10
Female Litigator” in the United States.

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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

Michael D. Kibler+1-310-407-7515
mkibler@stblaw.com

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

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

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

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

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

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

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

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

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

Daniel J. Stujenske+1-212-455-2419
dstujenske@stblaw.com

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

Craig S. Waldman+1-212-455-2881
cwaldman@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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Please click here to subscribe to the Insurance Law Alert.
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