Insurance Law Alert

July/August 2015

In This Issue
New York Court of Appeals Limits Scope of Cyber Coverage to Hacking
Incidents
The New York Court of Appeals ruled that coverage for the “fraudulent entry” of data is limited
to losses caused by unauthorized access into the policyholder’s computer system and does notencompass losses caused by an authorized user’s entry of such information into the system.
Universal Am. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 2015 WL 3885816 (N.Y.
June 25, 2015). (click here for full article)“SimpsonThacher & Bartlett
is an elite firm that has
demonstrated expertisein handling high-stakes
matters.”–Chambers USA
2015

Consent-to-Settle Provision Not Void as Against Public Policy, Rules New
York Court
A New York federal district court refused to invalidate a consent-to-settle provision on public
policy grounds, noting that to do so would “revolutionize” New York insurance law. SI Venture
Holdings, LLC v. Catlin Specialty Ins., 2015 WL 4191453 (S.D.N.Y. July 10, 2015).
(click here for full article)

Pennsylvania Supreme Court Endorses Modified “Fair and Reasonable”
Standard for Determining Insurer’s Duty to Indemnify Settlement
The Pennsylvania Supreme Court ruled that where an insurer defended subject to a reservationof rights, the duty to indemnify an underlying unauthorized settlement turned on whether thesettlement was “fair and reasonable.” Babcock & Wilcox Co. v. Am. Nuclear Insurers, 2015 WL
4430352 (Pa. July 21, 2015). (click here for full article)

Defendants Have Right to Jury in Private Suits Under Insurance Fraud
Prevention Act, Says New Jersey Supreme Court
The New Jersey Supreme Court ruled that a defendant facing a private civil suit brought underthe Insurance Fraud Prevention Act is entitled to a jury trial. Allstate N.J. Ins. Co. v. Lajara,
2015 WL 4276162 (N.J. July 16, 2015). (click here for full article)

Texas Supreme Court Rules That EPA Proceedings Constitute a “Suit”
Under General Liability Policy
The Texas Supreme Court ruled that proceedings initiated by the Environmental Protection
Agency pursuant to CERCLA constitute a “suit” for purposes of triggering an insurer’s duty to
defend. McGinnes Indus. Maint. Corp. v. Phoenix Ins. Co., 2015 WL 4080146 (Tex. June 26,2015). (click here for full article)

Simpson Thacher & Bartlett LLP

1

Fourth Circuit Rules That Insurer Has No Duty to Defend Suit Alleging
Vicarious Liability for Intentional Acts, Notwithstanding Separation of
Insureds Provision
The Fourth Circuit ruled that a separation of insureds provision did not require an insurer
to defend a suit alleging that a university was vicariously liable for the intentional acts of its
agents. Liberty Univ., Inc. v. Citizens Ins. Co. of Am., 2015 WL 4153840 (4th Cir. July 10,2015). (click here for full article)

California Court Rules that Policy-Limits Settlement Demand is Not
Prerequisite to Bad Faith Failure-to-Settle ClaimA California federal court ruled that that the absence of a policy-limits settlement demand
from an underlying plaintiff is not fatal to a bad faith failure-to-settle claim against an insurer.
Aspen Specialty Ins. Co. v. Willis Allen Real Estate, 2015 WL 3765008 (S.D. Cal. June 15,2015). (click here for full article)

Alabama Supreme Court Compels Non-Signatories to Arbitrate
Homeowner Insurance Claims
The Supreme Court of Alabama ruled that homeowners were bound by an arbitration provisionin their property policies even though they had not signed the arbitration forms and had
allegedly not received notice of the arbitration requirement. Am. Bankers Ins. Co. of Fla. v.
Tellis, 2015 WL 3935260 (Ala. June 26, 2015). (click here for full article)

Delaware Court Rejects Debtor’s Attempt to Limit Insurers’ Audit Rights
Under Settlement Agreement
A Delaware chancery court ruled that a settlement agreement afforded insurers a broad rightto audit payments made by a bankruptcy trust, rejecting the argument that the audit right waslimited to the purpose of verifying that Trust payments were actually made. AIU Ins. Co. v.
Philips Elecs. N. Am. Corp., 2015 WL 3526976 (Del. Ch. June 4, 2015).
(click here for full article)

New Jersey Appellate Court Reinstates Consumer Fraud Act Claim BasedOn Delayed Payment to Homeowner
A New Jersey appellate court ruled that a homeowner was entitled to pursue a Consumer Fraud
Act claim against his mortgage company based on a delay in payment of insurance proceeds forstorm-related losses. Abbas v. PennyMac Corp., 2015 WL 4275962 (N.J. Super. Ct. App. Div.
July 16, 2015) (unpublished decision). (click here for full article)

Statute of Limitations For Declaratory Judgment Action Begins To
Run When Insurer Has Sufficient Basis for Denying Defense, Says
Pennsylvania Court
The Superior Court of Pennsylvania ruled that the statute of limitations for a declaratory
judgment action regarding an insurer’s duty to defend does not start to run until the insurer
has sufficient factual basis for denying a defense. Selective Way Ins. Co. v. Hospitality Grp.
Servs., Inc., 2015 WL 4094398 (Pa. Super. Ct. July 7, 2015). (click here for full article)

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Cyber Coverage
Alert:New York Court of Appeals Limits
Scope of Cyber Coverage to Hacking
Incidents
The New York Court of Appeals ruled thatcoverage for the “fraudulent entry” of data
is limited to losses caused by unauthorizedaccess into the policyholder’s computer
system and does not encompass losses
caused by an authorized user’s entry of suchinformation into the system. Universal
Am. Corp. v. Nat’l Union Fire Ins. Co. of
Pittsburgh, PA, 2015 WL 3885816 (N.Y. June25, 2015).
National Union issued a policy to Universal,
a health care company, that covered losses“resulting directly from a fraudulent … entryof Electronic Data or Computer Program
into … the Insured’s proprietary Computer
System.” When Universal discovered $18
million in losses from the payment offraudulent claims, it sought indemnificationfrom National Union. National Union denied
coverage on the ground that the policy did
not provide coverage for fraudulent claims
entered into Universal’s computer system byauthorized users.
A New York trial court agreed, ruling that theprovision unambiguously provided coverage
only “for an unauthorized entry into thecomputer system by a hacker or through a
computer virus.” The appellate court modified
and affirmed the ruling, holding that thepolicy covered losses from “wrongful acts inthe manipulation of the computer system”
but did not cover losses from fraudulent
content entered by authorized users, as was
the case here. The New York Court of Appeals

affirmed, reasoning that the term “fraudulent”
modified the word “entry,” and that thepolicy therefore covered only losses from
improper entry or access into the computer
system (i.e., hacking), but not losses causedby the submission of fraudulent content byauthorized users. The decision illustrates theimportance of policy language in this context,
as the court expressly distinguished cases
involving broader policy language, including
explicit definitions of “computer fraud.”

Consent-to-Settle
Alerts:Consent-to-Settle Provision Not
Void as Against Public Policy, Rules
New York Court
A New York federal district court refused toinvalidate a consent-to-settle provision on
public policy grounds, noting that to do sowould “revolutionize” New York insurance
law. SI Venture Holdings, LLC v. Catlin
Specialty Ins., 2015 WL 4191453 (S.D.N.Y.
July 10, 2015).
SI Venture Holdings discovered soil
contamination at its property. Based on its
understanding of applicable environmental
law, SI transported the contaminated soil toan out-of-state disposal site. Thereafter, itsought coverage for the clean-up costs from
Catlin Specialty Insurance. Catlin denied
coverage, citing SI’s failure to comply with thepolicy’s “Consent Provision,” which required
SI to obtain consent prior to incurring
clean-up costs. SI brought suit, arguing that
the Consent Provision was unenforceable asagainst public policy because it “impede[d]compliance with environmental regulations.”
The court disagreed.
Addressing this issue of first impression
under New York law, the court concluded that
the Consent Provision should be enforced
as written. Emphasizing that consent-tosettle clauses are routinely enforced, thecourt declined to take the “radical step” ofinvalidating the unambiguous provisionabsent any supporting precedent. In addition,
the court noted that voiding the Consent
Provision would be inequitable because
it would “effectively strip Catlin—and, byextension, all insurers—of the ability toreasonably object to compliance-related
expenditures that an insured party intends to3

make.” The court therefore granted Catlin’ssummary judgment motion, but noted thaton appeal, SI could request certification of theissue to the New York Court of Appeals. We
will keep you posted on further developmentsin this matter.

Pennsylvania Supreme Court
Endorses Modified “Fair andReasonable” Standard for
Determining Insurer’s Duty to
Indemnify Settlement
Our July/August 2013 Alert reported on a
Pennsylvania decision holding that where an
insurer is defending subject to a reservationof rights, the insurer’s duty to indemnify anunderlying unauthorized settlement turns
on whether the insurer acted in bad faith
in rejecting settlement. Babcock & Wilcox
Co. v. Am. Nuclear Insurers, 76 A.3d 1 (Pa.
Superior Ct. 2013). The ruling vacated a trial
court decision that endorsed a more lenient
standard under which an insurer’s indemnity
obligations in the reservation-of-rights
context turned on whether the unauthorized
settlement was “fair and reasonable.” Lastmonth, the Pennsylvania Supreme Court
reversed and reinstated the trial court
decision. Babcock & Wilcox Co. v. Am.
Nuclear Insurers, 2015 WL 4430352 (Pa. July21, 2015).
The coverage dispute arose out of bodily
injury and property damage claims against
Babcock & Wilcox and Atlantic Richfield
Company (“ARCO”) as owners and operatorsof two nuclear fuel processing facilities.
American Nuclear Insurers (“ANI”),
Babcock’s and ARCO’s nuclear liability
insurer, defended under a reservationof rights. Babcock and ARCO settled theclaims over ANI’s objection and then sought
reimbursement. ANI argued that the insureds
had forfeited their right to reimbursement by
violating the policy’s consent-to-settlement

clause. The insureds claimed that ANI
breached its duty to settle and was therefore
obligated to indemnify any fair andreasonable settlement. The trial court agreed
with the insureds, holding that ANI must
reimburse them for all “fair and reasonable”
settlement costs. The appellate court reversed,
reasoning that an insurer does not forfeit
the right to enforce a consent-to-settlement
clause by defending under a reservation ofrights where the insured accepts the defense.
The appellate court therefore held that aninsurer’s duty to indemnify an unauthorized
settlement under such circumstances turns
on whether the insurer acted in bad faith inrejecting the settlement. The Pennsylvania
Supreme Court reversed.
Acknowledging that courts acrossjurisdictions are split on this issue, thePennsylvania Supreme Court ruled in a
3-2 decision that under the factual record
presented, ANI’s duty to indemnify theunauthorized settlement turned on whether it
was fair and reasonable. The court stated:[W]e adopt a variation on the … fairand reasonable standard limited
to those cases where an insured
accepts a settlement offer after aninsurer breaches its duty by refusing
the fair and reasonable settlement
while maintaining its reservation ofrights and, thus, subjects an insurer
to potential responsibility for the
judgment in a case where the policy
is ultimately deemed to cover the
relevant claims.
The court emphasized the fact-specific natureof its analysis, stating that “a determination ofwhether the settlement is fair and reasonable
necessarily entails consideration of theterms of the settlement, the strength of theinsured’s defense against the asserted claims,
and whether there is any evidence of fraud
or collusion on the part of the insured.” The4

court also noted that “not all reservationsof rights are equal” and that “[p]arties
and courts may need to consider whether
a particular reservation of rights justifies
diverging from the contract’s cooperation
clause,” an issue that the court said was not
before it.

Insurance
Fraud Alert:

Defendants Have Right to Juryin Private Suits Under Insurance
Fraud Prevention Act, Says New
Jersey Supreme Court
The New Jersey Supreme Court ruled that adefendant facing a private civil suit brought
under the Insurance Fraud Prevention Act
is entitled to a jury trial. Allstate N.J. Ins.
Co. v. Lajara, 2015 WL 4276162 (N.J. July16, 2015).
Allstate sued numerous doctors, billingcompanies and other entities, alleging
fraud under New Jersey’s Insurance Fraud
Prevention Act (“IFPA”), N.J.S.A. 17:33A1-30. A trial court denied the defendants’request for a jury trial, and an intermediateappellate court affirmed on the bases that
IFPA does not explicitly confer a right to ajury trial and that private IFPA claims seek
only equitable relief. Under New Jersey law,
the right to a jury trial attaches only to claims
that are legal in nature. The New Jersey
Supreme Court reversed.
First, the court reasoned that the remedies
in a private IFPA action—which include
compensatory and treble damages andattorneys’ fees—are “typical form[s] of legal[as opposed to equitable] relief” and therefore
give rise to a jury trial right. Second, the court
explained that in determining whether a causeof action is legal in nature, New Jersey courts
consider whether a statutory action is similar
to a common law action. The court concluded
that an IFPA cause of action is comparable tocommon law fraud, and that the right to a jury
trial is thus implied in IFPA.
Notably, the decision is limited to IFPA
claims brought by private plaintiffs anddoes not address whether a jury trial rightexists when an IFPA action is brought by theCommissioner of Banking and Insurance.

Duty to Defend
Alerts:Texas Supreme Court Rules That
EPA Proceedings Constitute a “Suit”
Under General Liability Policy
The Texas Supreme Court ruled thatproceedings initiated by the Environmental
Protection Agency pursuant to CERCLA
constitute a “suit” for purposes of triggering
an insurer’s duty to defend. McGinnes Indus.
Maint. Corp. v. Phoenix Ins. Co., 2015 WL
4080146 (Tex. June 26, 2015).
After investigating environmental
contamination at a waste disposal site usedby McGinnes Industrial Waste Corporation,
the EPA identified McGinnes as a potentially
responsible party (“PRP”) and demanded
compensation for cleanup costs pursuant
to CERCLA. In addition, the EPA issued anadministrative order directing McGinnes
to conduct a remedial investigation andfeasibility study, warning that a failure tocomply would result in civil penalties andpunitive damages. McGinnes requested
a defense from its liability insurers. The
insurers refused on the ground that the
EPA proceedings were not a “suit” under
their policies. A Texas trial court agreed andgranted the insurers’ summary judgment
motion. See May 2013 Alert. On appeal, theFifth Circuit certified the following question
to the Texas Supreme Court: “Whether
the EPA’s PRP letters and/or unilateraladministrative order, issued pursuant
5to CERCLA, constitute a ‘suit’ within themeaning of the CGL policies, triggering theduty to defend.”
Answering the certified question in theaffirmative, the Texas Supreme Court ruledthat the insurers were required to defend the
EPA proceedings. The court reasoned that the
EPA’s CERCLA enforcement proceedings are
not merely the “functional equivalent” of asuit (a standard used in several jurisdictions
in evaluating an insurer’s duty to defend
administrative agency proceedings; see June2014 Alert; January 2013 Alert) but rather“are the suit itself, only conducted outside a
courtroom.” The court explained that because
CERCLA effectively redefined a “suit,” apolicyholder’s right to a defense “should
not be emasculated by the enactment of[CERCLA].” However, the court emphasizedthat simple demand letters or threats oflitigation do not constitute “suits” because
they do not command compliance, backed
by the threat of fines and penalties. In
reaching its holding, the court noted thatthe “overwhelming majority of jurisdictions”
have held that EPA CERCLA proceedings
constitute a suit for purposes of an insurer’s
duty to defend.

Fourth Circuit Rules That Insurer
Has No Duty to Defend Suit Alleging
Vicarious Liability for IntentionalActs, Notwithstanding Separationof Insureds Provision
Reversing a Virginia district court decision,
the Fourth Circuit ruled that an insurer
had no duty to defend a suit alleging thata university was vicariously liable for theintentional acts of its agents. The Fourth
Circuit held that a separation of insureds
provision does not require an insurer toprovide coverage for claims alleging theinsured’s vicarious liability for the intentional
acts of its agents. Liberty Univ., Inc. v.
Citizens Ins. Co. of Am., 2015 WL 4153840(4th Cir. July 10, 2015).

Company was required to defend Liberty
University. The district court explainedthat a Separation of Insureds provision
requires each insured to be treated as if it had
separate coverage, so that excluded conduct
by one insured does not preclude coveragefor other insureds. The court reasoned that
although the complaint alleged intentional
conduct against the individual agents ofLiberty University, a Separation of Insureds
provision prohibited the court from imputingthat intent to Liberty University. The Fourth
Circuit reversed.
The Fourth Circuit ruled that the underlying
complaint did not plead an “occurrence”
notwithstanding the Separation of Insureds
provision. The court explained that theintentions of the individual defendants were
imputed to Liberty University because, under
Virginia law, the expectations and intent ofagents are imputed to their principal. The
court further held that the Separation of
Insureds provision does not alter this rule oflaw, stating that, “[a]lthough the Separationof Insureds provision requires the coverageclaims of each named insured to be evaluatedseparately …, it does not displace Virginia’srule that an agent’s intentionally tortious act
cannot be ‘unexpected’ by the principal who isvicariously liable for the act.”
Significantly, the court distinguished cases
in which an underlying complaint alleges
liability for intentional acts based on aprincipal’s negligent supervision. In suchcases, a separation of insureds provision may
give rise to coverage if the principal’s liability
sounds in negligence, rather than vicarious
liability for the agent’s intentional acts.

The coverage dispute arose from an alleged
kidnapping. The underlying plaintiff claimed
that Liberty University and its agents helped
a parent abscond with a child to Nicaragua.
The complaint alleged that Liberty University
was directly liable for its involvement in the
kidnapping scheme and vicariously liable forthe intentional acts of its agents. A Virginia
district court ruled that Citizens Insurance
6

Bad Faith Alert:

California Court Rules that PolicyLimits Settlement Demand is Not
Prerequisite to Bad Faith Failureto-Settle Claim
Our November 2013 Alert reported on a
California appellate court decision holdingthat an insurer was not liable for bad faith
failure to settle where the underlying plaintiff
had not made a settlement demand orotherwise indicated an interest in settling,even though there was a significant risk of
judgment that would exceed policy limits.
Reid v. Mercury Ins. Co., 162 Cal. Rptr.
3d 894 (Cal. Ct. App. 2013). A California
federal court recently distinguished Reidand ruled that that the absence of a policylimits settlement demand from an underlying
plaintiff is not fatal to a bad faith failureto-settle claim against an insurer. Aspen
Specialty Ins. Co. v. Willis Allen Real Estate,2015 WL 3765008 (S.D. Cal. June 15, 2015).
Homeowners sued Willis Allen, a real estatecompany, after a landslide resulted insignificant damage to their property. Aspen
agreed to defend Willis Allen pursuant
to a liability policy. After participating insettlement negotiations and mediation,
Willis Allen determined that the claims
could be resolved for substantially less thanpolicy limits. However, Willis Allen claimed
that Aspen thwarted settlement efforts
by making “lowball” settlement offers. A
settlement was eventually reached, but it
exhausted policy limits. Willis Allen sued
Aspen, alleging bad faith based on Aspen’s“gamesmanship” and refusal to give policylimits settlement authority despite thepotential liability exposure. Citing Reid,
Aspen moved to dismiss on the basis that

there was no policy-limits settlement demandin the underlying litigation. Aspen argued
that absent a policy-limits demand, it had noaffirmative duty to settle. The court disagreed
and refused to dismiss the claim.
The court held that Reid does not stand forthe proposition that an injured party must
make a settlement demand or express aninterest in settlement in order to trigger aninsurer’s duty to pursue good faith settlement
discussions. Rather, the court explained that“[a]ll that’s required is some circumstanceshowing that [the insurer] knew settlement
within policy limits was feasible.” The court
concluded that this standard was met because
Willis Allen allegedly informed Aspen thatthe underlying claims could likely be resolved
for substantially less than policy limits.
Accepting that allegation as true, the court
held that dismissal was not warranted. As
reported in our May 2015 Alert, the Louisiana
Supreme Court also recently held that aninsurer may be liable for bad faith failure tosettle even if the insurer did not receive a firm
settlement offer.

Arbitration Alert:

Alabama Supreme Court Compels
Non-Signatories to Arbitrate
Homeowner Insurance Claims
The Supreme Court of Alabama ruled that
homeowners were bound by an arbitration
provision in their property policies eventhough they had not signed the arbitration
forms and had allegedly not received notice of
the arbitration requirement. Am. Bankers Ins.
Co. of Fla. v. Tellis, 2015 WL 3935260 (Ala.
June 26, 2015).
Several homeowners sued American Bankers,
alleging breach of contract, negligence and7fraud based on excessive premium charges.
In each case, American Bankers moved tocompel arbitration pursuant to an arbitration
provision in the homeowners’ policies. The
homeowners opposed the motions, arguingthat they had not consented to arbitration.
More specifically, the homeowners claimed
that they had not received the two particular“forms” in the policies that expresslyreferenced arbitration. In addition, it wasundisputed that none of the homeowners
had signed the arbitration forms even though
they contained a policyholder signature line.
The trial courts denied American Bankers’
motions to compel arbitration. On appeal, theAlabama Supreme Court reversed.
The Alabama Supreme Court ruled that
notwithstanding the absence of signed
consent to the arbitration provision, thehomeowners “manifested their assent
to arbitration … by accepting and acting
upon the insurance policies containing thearbitration provision.” The court further
reasoned that even if the homeowners
did not receive the particular forms thatreferenced arbitration, they presumablyreceived the policy’s declarations page, which
explicitly referenced the list of “forms andendorsements” that comprised the policy,
including the two forms that contained thearbitration provision. The court held that the
homeowners therefore “had some duty toinvestigate the contents of those forms.” In soruling, the court noted that under Alabama
law, a signature or express consent is not
required to enforce an arbitration provision
where the factual record establishes implied
consent via the parties’ continued adherence
to other contract terms.

Bankruptcy Alert:
Delaware Court Rejects Debtor’s
Attempt to Limit Insurers’
Audit Rights Under Settlement
Agreement

A Delaware chancery court ruled that asettlement agreement afforded insurers abroad right to audit payments made by abankruptcy trust, rejecting the argument thatthe audit right was limited to the purpose ofverifying that Trust payments were actually
made. AIU Ins. Co. v. Philips Elecs. N. Am.
Corp., 2015 WL 3526976 (Del. Ch. June4, 2015).
T H Agriculture & Nutrition (“THAN”),
a company facing substantial asbestos
liability, commenced Chapter 11 bankruptcy
proceedings. While the bankruptcy
proceedings were pending, THAN reached asettlement with its insurers. The Settlement
Agreement gave the insurers the right to audit
payments and distributions made by a postbankruptcy Trust at their own expense, nomore than once per year. The audit provision
further stated that the insurers were to keep
all information confidential and prohibiteduse of “any information for anything otherthan to assess whether the Trust in fact madepayments to the claimants.”
Several years later, the insurers sought toaudit Trust payments in accordance with
the Settlement Agreement. THAN refused toprovide the requested information, arguingthat the insurers’ audit rights were limited
solely to verifying that payments wereactually made. In support of its position,
THAN cited to a Cooperation Agreement
between THAN and the Trust, whichcontained a more restrictive audit provision.
The insurers countered that they were notparty to the Cooperation Agreement, andthat the Settlement Agreement contained no“limitation on what may constitute a proper
purpose for inspection.” The insurers filed
suit, alleging breach of contract and tortious
interference on the basis that the Cooperation
Agreement impermissibly impaired theiraudit rights under the Settlement Agreement.
The court held that the insurers’ audit rights
were governed solely by the Settlement
Agreement and that the insurers’ audit
rights were not limited to the verificationof payments. The court explained that the8Settlement Agreement’s clause prohibiting
the insurers from “utiliz[ing] any information
for anything other than to assess whether the
Trust in fact made payments to the claimants”
restricted how the insurers could use theinformation obtained through an audit, but
did not limit the insurers’ broad right toconduct audits. Therefore, the court issued adeclaratory judgment in the insurers’ favor.

Superstorm Sandy
Coverage Alert:
New Jersey Appellate Court
Reinstates Consumer Fraud Act
Claim Based On Delayed Payment
to Homeowner

Reversing a trial court decision, a New Jersey
appellate court ruled that a homeowner wasentitled to pursue a Consumer Fraud Act
claim against his mortgage company basedon a delay in payment of insurance proceeds
for storm-related losses. Abbas v. PennyMac
Corp., 2015 WL 4275962 (N.J. Super. Ct. App.
Div. July 16, 2015) (unpublished decision).
Abbas’s home was damaged during
Superstorm Sandy. His homeowner’s
insurance company assessed the damage
at approximately $12,000 and sent a
check to PennyMac, Abbas’s mortgage
company. Abbas claimed that although hemade repeated requests for payment from
PennyMac, he was forced to pay out-ofpocket for repair costs. After approximately
six months without payment, Abbas sued

PennyMac, alleging common law fraud andviolation of New Jersey’s Consumer Fraud
Act (“CFA”), N.J.S.A. 56:8-1-20, based on thewrongful withholding of the insurance funds.
Shortly thereafter, PennyMac issued Abbas
the insurance proceeds, which Abbas returned
as a rejected settlement offer. PennyMac
moved for summary judgment, arguing that
Abbas did not suffer an ascertainable loss as
required by the CFA because the insurance
funds had been released to him. The trial
court agreed and granted the motion. The
appellate court reversed.
To prevail on a CFA claim, a plaintiff must
establish wrongful conduct, an ascertainable
loss, and a causal relationship between the
two. See N.J.S.A. 56:8-19. The appellate
court concluded that Penny Mac lacked
a good-faith basis for the delay and that
Abbas suffered an ascertainable loss when
PennyMac failed to release the insurance
funds in a timely manner. The court explainedthat PennyMac’s “decision to send theproceeds at a time of its choosing does not
eliminate liability under the CFA because the$12,277.43 in insurance proceeds became
the ascertainable loss the moment the funds
were wrongly withheld.” The court noted thatallowing PennyMac to escape CFA liability
by issuing delayed payment could “leave[ ]the door ajar for unscrupulous operators to
use unconscionable commercial practices, solong as [they] can close the door before thevictimized consumer initiates legal action.”
Pursuant to the appellate court’s decision, full
reimbursement may not insulate a defendantfrom CFA liability if there has been an
unjustified delay in issuing payment.

9

Statute ofLimitations Alert:

Statute of Limitations For
Declaratory Judgment Action
Begins To Run When Insurer
Has Sufficient Basis for Denying
Defense, Says Pennsylvania Court
Addressing a matter of first impression
under Pennsylvania law, the Superior
Court of Pennsylvania ruled that the statuteof limitations (“SOL”) for a declaratory
judgment action regarding an insurer’s duty
to defend does not start to run until the
insurer has sufficient factual basis for denying
a defense. The court expressly rejected theargument that the SOL begins to run when
the insurer receives the complaint in theunderlying action against the policyholder.
Selective Way Ins. Co. v. Hospitality Grp.
Servs., Inc., 2015 WL 4094398 (Pa. Super. Ct.
July 7, 2015).
The insurance dispute arose out of a fatal
car accident. The deceased driver’s family
sued his employer, alleging negligenceand negligent supervision. The employer
forwarded notice of the suit to Selective,
which defended subject to a reservationof rights. Approximately five years later,
Selective filed suit, seeking a declaration thatit had no duty to defend. The policyholder
moved to dismiss on several bases, includingthat the applicable four-year SOL had
expired. The trial court agreed and dismissed

Selective’s complaint. The trial court reasoned
that the SOL began to run when Selective
received the underlying complaint and had
the opportunity to compare the allegations to
the insurance policy. The Superior Court ofPennsylvania reversed.
The court held that a SOL begins to run
when a cause of action accrues, and that acause of action for a declaratory judgment
accrues when an “actual controversy exists
between the parties.” The court explainedthat “[t]his requires a determination of when
the insurance company had a sufficient
factual basis to present the averments in its
complaint for declaratory judgment that theinsurance policy at issue does not provide
coverage for the claims made in the third
party’s action.” Emphasizing the fact-specificnature of this analysis, the court observedthat “[i]t is possible for the insurancecompany to possess sufficient information
at the time it receives a complaint to cause
the [SOL] to begin to run; or that may
not occur until the case develops and theclaim is winnowed down to a recovery the
insurance company believes is not coveredby the policy of insurance.” In adopting thisfact-driven approach, the court rejected
bright-line rules at either extreme (i.e.,that the SOL automatically begins to run
when an insurer receives a complaint, or
conversely, that it does not begin to run
until an insurer issues an official coveragedenial). The court remanded the matter for a
factual determination of when Selective had asufficient basis for denying coverage.

10

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.
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mgarvey@stblaw.com

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

This edition of the
Insurance Law Alert was
prepared by Mary Beth Forshaw(mforshaw@stblaw.com/+1-212455-2846) and Bryce L. Friedman(bfriedman@stblaw.com/+1-212-4552235) with contributions
by Karen Cestari(kcestari@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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