Insurance Law Alert

July/August 2023

In This Issue
Eleventh Circuit Declines To Recognize Insurers’ Right To Reimbursement
Of Defense Costs Stemming From Reservation Of Rights
The Eleventh Circuit ruled that insurers were not entitled to recoup their defense costs when
the insurers had no duty to defend an underlying lawsuit against the insureds, notwithstanding
a reservation of rights letter that included a right to reimbursement acknowledged by thepolicyholders. Continental Cas. Co. v. Winder Labs., LLC, 73 F.4th 934 (11th Cir. 2023).
(Click here for full article)“Any ‘bet thecompany’ or ‘bet theissue’ litigation requires
the best and [Simpson
Thacher] is the best of
the best.”– The Legal 500(quoting a client)

Fifth Circuit Rules That General Liability Insurers Have No Duty To
Defend Shareholder Suit Against Executives Arising Out Of Product Recall
The Fifth Circuit affirmed a Texas district court decision granting insurers’ summary judgment
motion, ruling that general liability policies did not cover a shareholder suit arising out of arecall of the policyholder’s product. Discover Prop. & Cas. Ins. Co. v. Blue Bell Creameries
USA, 2023 U.S. App. LEXIS 17518 (5th Cir. July 11, 2023). (Click here for full article)

Overruling Precedent, Wisconsin Supreme Court Rejects Use Of“Integrated Systems Analysis” To Determine Whether Property Damage Is
Alleged For Purposes Of General Liability Coverage
The Wisconsin Supreme Court ruled that courts should not employ an “integrated systemanalysis” in evaluating whether an underlying claim alleges property damage for purposesof determining coverage under a general liability policy. 5 Walworth, LLC v. Engerman
Contracting, Inc., 408 Wis.2d 39 (Wis. June 20, 2023). (Click here for full article)

Missouri Court Rules That Policyholder’s Failure To Provide Notice Until
After Underlying Verdict Did Not Establish Prejudice As A Matter Of Law
A Missouri federal district court denied an insurer’s summary judgment motion seeking toestablish that it had no duty to indemnify the insured, finding that while the policyholder’s late
notice was unreasonable, the insurer did not establish prejudice as a matter of law. New Prime,
Inc. v. Federal Ins. Co., 2023 U.S. Dist. LEXIS 123307, (W.D. Mo. July 18, 2023).
(Click here for full article)

Simpson Thacher & Bartlett LLP

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Illinois Appellate Court Says That Trial Court Erred In Dismissing Water
Contamination Coverage Suit, Notwithstanding Pollution And Lead Policy
Exclusions
An Illinois appellate court ruled that underlying bodily injury and property damage claims
arising out of contaminated water were not excluded from coverage as a matter of law. LM Ins.
Corp. v. City of Sycamore, 2023 IL App(2d) 220234 (Ill. App. Ct. June 8, 2023).
(Click here for full article)

Lack Of Adjudication Of Coverage Claim Does Not Render Third-Party Bad
Faith Claim Against Insurer Premature, Says Kentucky Supreme Court
The Kentucky Supreme Court ruled that an intermediate appellate court erred in holdingthat the lack of final adjudication as to policy coverage rendered a third-party bad faith claim
premature. Estate of Lahoma Salyer Bramble v. Greenwich Ins. Co., 2023 Ky. LEXIS 159 (Ky.
June 15, 2023). (Click here for full article)

California Appellate Court Rules That Compromised Frozen Embryos Do
Not Satisfy “Direct Physical Loss” Requirement In Homeowners Policy
A California appellate court ruled that policyholders were not entitled to coverage under ahomeowners policy for the loss of compromised embryos based on a mechanical failure of acryogenic storage tank. Wong v. Stillwater Ins. Co., 2023 Cal. App. LEXIS 496 (Cal. App. 1stDist. July 5, 2023). (Click here for full article)

Simpson Thacher News
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Eleventh Circuit Declines To Recognize Insurers’ Right
To Reimbursement Of Defense Costs Stemming From
Reservation Of Rights
HOLDINGThe Eleventh Circuit ruled that insurers were not entitled to recoup their defense costs
when the insurers had no duty to defend an underlying lawsuit against the insureds,
notwithstanding a reservation of rights letter that included a right to reimbursement
acknowledged by the policyholders. Continental Cas. Co. v. Winder Labs., LLC, 73 F.4th
934 (11th Cir. 2023).

BACKGROUND

A lawsuit against the policyholder alleged false and misleading advertising of apharmaceutical product. The insurance policies at issue did not contain language
conferring a right to reimbursement of defense costs and did not specify whether the
insurer could select defense counsel. The insurers agreed to defend the suit subject to areservation of rights, which included a provision that stated: “VFI specifically reserves its
right to seek reimbursement of defense costs incurred on [the insureds’] behalf for all
claims which are not potentially covered by the VFI Policy.” The policyholder signed andreturned an “Acknowledgement of Defense under a Reservation of Rights.”
While the underlying action was pending, the insurers sought a declaratory judgment thatthey had no duty to defend or indemnify, and that they were entitled to reimbursement ofdefense costs. A Georgia district court agreed only with respect to the absence of a duty to
defend, concluding that the underlying lawsuit fell within a “failure to conform” exclusion.
Thereafter, the insurers stopped paying defense costs and sought to recoup costs previously
incurred on behalf of the insureds. The district court ruled in favor of the policyholder on
this issue, finding that the reservation of rights letter did not entitle the insurers to recoup
their defense costs. The Eleventh Circuit affirmed.

DECISION

The question of whether an insurer may seek reimbursement of defense costs pursuant tostatements in a reservation of rights, where the insurance contract is silent on the issue, is amatter of first impression under Georgia law. The Eleventh Circuit predicted that theGeorgia Supreme Court would not recognize such a right.
The Eleventh Circuit rejected three arguments advanced by the insurers in support of theirclaim for reimbursement: (1) the reservation of rights letter created a new contract because
the insureds were provided a defense and allowed to choose their own defense counsel,(2) the insureds were unjustly enriched because they retained the benefit of a defense towhich they were not entitled, and (3) under Georgia law, an insurer can recoup defense
costs when such a right is provided for in a reservation of rights letter, but not the parties’operative insurance contract.
First, the court held that the reservation of rights, which included a reimbursement
provision, did not create a new binding contract between the parties, notwithstanding
the policyholder’s acknowledgment of its terms. The court explained that the contractual
requirement of consideration was absent, since the reservation of rights did not provide
any additional benefits, as the insurance policies, at least initially, required the insurers to
defend the insureds in the underlying lawsuit.
Second, the court rejected the insurers’ contention that the policyholders were unjustly
enriched by receiving the benefit of a defense to which they were not entitled. The court3explained that the unjust enrichment argument failed both because there was a written
contract (the policy) and because there was nothing “unjust” about requiring the insurers
to fulfill their contractual defense obligations.
Finally, the court ruled that the overall “structure of Georgia’s insurance law” mitigatedagainst finding a right of reimbursement absent a contractual provision in the insurance
policy. In particular, the court emphasized the broad duty to defend and the insurer’s
ongoing defense obligations until a court rules otherwise. The court stated: “we haveconcluded that the insurers no longer have a duty to defend . . . but that does not mean thatthe insurers never had a duty to defend at earlier stages of the case.”
COMMENTS

There is no judicial consensus across jurisdictions as to whether an insurer is entitled torecoup defense costs pursuant to a provision in a reservation of rights where there has beena subsequent judicial ruling that the insurer has no duty to defend. As the Eleventh Circuit
observed, pro-recoupment cases have previously been viewed as the majority position, but
the more recent trend “appears to be in more-or-less equipose, with several current cases
favoring a ‘no recoupment’ rule.” Some pro-recoupment decisions have held that an
express statement in a reservation of rights, if unopposed or acknowledged by the insured,constitutes a quasi-contract regarding reimbursement. In still other cases, courts haveruled that a reservation of rights is sufficient even without the insured’s express consent.

Fifth Circuit Rules That General Liability Insurers Have
No Duty To Defend Shareholder Suit Against Executives
Arising Out Of Product Recall
HOLDINGThe Fifth Circuit affirmed a Texas district court decision granting insurers’ summary
judgment motion, ruling that general liability policies did not cover a shareholder suitarising out of a recall of the policyholder’s product. Discover Prop. & Cas. Ins. Co. v. Blue
Bell Creameries USA, 2023 U.S. App. LEXIS 17518 (5th Cir. July 11, 2023).

BACKGROUND

Blue Bell shut down its factories and issued a nationwide recall of its products following a
listeria outbreak. Thereafter, shareholders filed a lawsuit against the company’s directors
and officers, alleging breach of fiduciary duties arising from those events and the resulting
financial losses. In particular, the complaint alleged that executives knew about the likely
presence of listeria contamination at manufacturing plants, yet continued to manufactureand distribute products in disregard of known risks. Blue Bell’s general liability insurers
sought a declaration that they had no duty to defend or indemnify the underlying suit. A
Texas district court granted the insurers’ summary judgment motion and the Fifth
Circuit affirmed.

DECISION

The Fifth Circuit rejected the district court’s conclusion that the directors and officers were
not additional insureds under the policies. The relevant provision stated that directors andofficers were insureds “only with respect to their duties as officers or directors.” The district
court had reasoned that because the underlying suit alleged violation of fiduciary duties, it
necessarily followed that the executives were not acting within the scope of their duties(and therefore not additional insureds under the policies). The Fifth Circuit disagreed,reasoning that even if executives had breached their fiduciary duties, they were still acting
within their roles as directors or officers. In particular, the Fifth Circuit explained that the4complaint did not allege that the executives took action that was “outside the scope of‘managing and operating the ice cream company.’”
Nonetheless, the Fifth Circuit held that coverage was unavailable for two independent
reasons. First, the court held that the underlying suit did not allege an “occurrence,”
defined as “an accident, including continuous or repeated exposure to substantially thesame general harmful conditions.” The court explained that all underlying claims alleged
a knowing disregard of a contamination risk and a willful failure to exercise care, bothof which constitute intentional or knowing conduct. Additionally, the court emphasizedthat the complaint alleged harm that was foreseeable or reasonably anticipated, given the“increasingly frequent and continuing positive presumptive test results for Listeria.”
Second, the Fifth Circuit ruled that the shareholder suit did not seek “damages because of
bodily injury” and instead sought to recover only “financial harm.” Blue Bell argued that thecomplaint alleged damages “because of bodily injury” because the damages contemplatedby the shareholder suit were “factually attributable to bodily injuries suffered by Blue
Bell customers.” The Fifth Circuit rejected this assertion. Addressing this matter of first
impression under Texas law, the Fifth Circuit concluded that the shareholder suit soughtdamages to compensate for Blue Bell’s economic loss arising from the executives’ alleged
breach of fiduciary duties – not for damages on behalf of customers who may have suffered
physical harm due to the listeria outbreak.
COMMENTSThe Fifth Circuit’s ruling suggests directors and officers cannot rely on general liability
insurance to provide coverage in suits alleging intentional or knowing breaches of fiduciary
duties. Moreover, the decision supports the principle that “damages because of bodily
injury” requires more than a mere “tenuous connection” between alleged bodily injury
actually sustained by an individual and the damages sought in the underlying complaint.
The court expressly distinguished Cincinnati Ins. Co. v. H.D. Smith L.L.C., 829 F.3d 771(7th Cir. 2016), in which the Seventh Circuit ruled that a general liability insurer had aduty to defend opioid-related claims brought by state entities against a pharmaceutical
distributor. There, the Seventh Circuit concluded that a complaint seeking damages arisingfrom the opioid epidemic alleged damages “because of bodily injury.” However, as Fifth
Circuit noted, the policy in Cincinnati included a provision stating that “[d]amages becauseof bodily injury include damages claimed by any person or organization for care, loss ofservices or death resulting at any time from the bodily injury.” The Fifth Circuit explainedthat the costs of combating the opioid epidemic included increased medical “care,” whereas
here, there was no “colorable argument” that the shareholder suits sought damages for any
kind of medical or related “care.”5

Overruling Precedent, Wisconsin Supreme Court Rejects
Use Of “Integrated Systems Analysis” To Determine
Whether Property Damage Is Alleged For Purposes ofGeneral Liability Coverage
HOLDING

The Wisconsin Supreme Court ruled that courts should not employ an “integrated systemanalysis” in evaluating whether an underlying claim alleges property damage for purposesof determining an initial grant of coverage under a general liability policy, overruling prior
Wisconsin precedent. 5 Walworth, LLC v. Engerman Contracting, Inc., 408 Wis.2d 39(Wis. June 20, 2023).

BACKGROUND

A property owner sought damages allegedly caused by the deficient construction of aswimming pool complex. The pool cracked, causing water to leak and requiring the poolcomplex to be demolished and replaced. The property owner sued its general contractor, aconcrete subcontractor and those entities’ general liability insurers.
The insurers argued that there was no “property damage” caused by an “occurrence” under
the policies. The general contractor’s insurers argued that faulty workmanship does notconstitute an “occurrence.” The concrete supplier’s insurer took its defense a step further
and claimed the allegedly defective concrete was part of an integrated system, and therefore
that there was no damage to “other property”—a prerequisite to coverage under Wisconsin
Pharmacal Co. v. Nebraska Cultures of California, Inc., 367 Wis.2d 221 (2016).
In Pharamacal, the Wisconsin Supreme Court enlisted the integrated systems rule, derived
from tort law, to determine whether there was “property damage” for insurance coveragepurposes. The integrated systems rule asks whether the product is part of an integrated
whole such that any damage can be ascribed only to the product itself, rather than toother property. The concrete supplier’s insurer alleged that the integrated systems theory
precluded insurance coverage not only to the product (here, the pool) but to the integrated
system (the entire pool complex).
The lower court granted the insurers’ motions for summary judgment and an intermediateappellate court reversed. The Wisconsin Supreme Court affirmed the appellate court decision.

DECISION

The Wisconsin Supreme Court rejected the insurers’ arguments. Preliminarily, the court
reaffirmed the basic principle that “faulty workmanship is not an occurrence, but faulty
workmanship can lead to an occurrence.” Here, because the faulty workmanship caused thepool to crack and leak, which in turn damaged the surrounding soil, the court concluded
that “property damage” to the soil amounted to an “occurrence.”
The court then turned to the insurers’ integrated systems analysis defense and concluded
that it does not apply to insurance coverage disputes. In overruling the relevant portionof Pharmacal, the court explained that utilizing a tort law analysis to determine coverageobligations “runs headlong into the fundamental principle . . . that policy interpretation
should focus on the language of the insurance policy.” The definition of “property damage”
in the operative policies made no mention of an “other property” requirement as describedin the integrated systems analysis. Thus, the court reasoned, damage to “other property” is
not relevant to the initial determination of whether there is “property damage” caused byfaulty workmanship.

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With those clarifications, the court concluded that a jury could find that the underlying
claims alleged “property damage” caused by an “occurrence.” The court explained that therecord suggested that faulty workmanship resulted in cracks in the pool wall, which worsened
over time, and in turn caused damage to surrounding property – facts that could constituteunexpected and unforeseen events, as well as physical injury to tangible property.
COMMENTS

The court’s ruling clarified that faulty workmanship may result in an “occurrence” if it causes
consequent, accidental property damage. This is so despite the principle that faulty
workmanship itself is not an “occurrence” under Wisconsin law.
The court’s decision is also significant in its holding that tort principles should not displacepolicy language in determining an insurer’s defense and indemnity obligations. Asidefrom rejecting the “integrated systems analysis,” in the context of an insurance coveragedetermination, the court also expressly noted that the economic loss doctrine, which “confines
contracting parties to contract rather than tort remedies for recovery of purely economic losses
associated with the contract relationship,” should not be used to determine whether a generalliability insurer owes coverage.

Missouri Court Rules That Policyholder’s Failure To Provide
Notice Until After Underlying Verdict Did Not Establish
Prejudice As A Matter of Law
HOLDINGA Missouri federal district court denied an insurer’s summary judgment motion seeking toestablish that it had no duty to indemnify, finding that while the policyholder’s late notice was
unreasonable, the insurer did not establish prejudice as a matter of law. New Prime, Inc. v.
Federal Ins. Co., 2023 U.S. Dist. LEXIS 123307, (W.D. Mo. July 18, 2023).

BACKGROUND

Chubb Insurance Company provided coverage to New Prime, excess to a self-insured retentionof $3 million. The policy required notice “as soon as practicable of any occurrence or offensethat may result in a claim” and specified that if a claim does not reasonably appear to involve
the policy, but “later develops into a claim or loss to which this insurance applies, the failure toreport it . . . will not violate this condition, provided the insured gives us immediate notice assoon as the insured is aware that that this insurance may apply.”
During the policy period, a New Prime employee allegedly drove into another vehicle, resulting
in injuries to the car occupants. In ensuing litigation, the injured claimants sought “monetary
relief over $200,000 but not more than $1,000,000” and made numerous settlement demands,
some of which were less than the self-insured retention but one of which was $6 million. The
case proceeded to trial and a jury awarded the claimants $12.45 million in damages. Following
the verdict, New Prime notified Chubb of the suit.

DECISION

The court ruled that New Prime’s notice to Chubb was unreasonable as a matter of law because
the $6 million settlement demand “clearly implicated the notice provision.” Notwithstanding
this ruling, the court held that Chubb did not establish prejudice as a matter of law. In
particular, the court explained that while Chubb presented deposition testimony that it wasdenied the opportunity to investigate claims, participate in the defense of the underlying action
and settlement negotiations, or retain counsel in the underlying suit, such statements amounted
to “bare conclusions” of prejudice, insufficient to establish prejudice as a matter of law.

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COMMENTS

While the court’s decision leaves open the possibility of a finding of prejudice by the finder offact, it appears to set a bar for establishing prejudice under Missouri law that requires
particularized factual evidence of precisely how an insurer was harmed by the delay in notice,
above and beyond an insurer’s inability to participate in the underlying defense or settlement
negotiations. Courts in other jurisdictions have found prejudice as a matter of law where an
insurer is not notified of an underlying claim until after judgment has been issued against
the policyholder.

Illinois Appellate Court Says That Trial Court Erred
In Dismissing Water Contamination Coverage Suit,
Notwithstanding Pollution And Lead Policy Exclusions
HOLDING

Reversing a trial court decision, an Illinois appellate court ruled that underlying bodily injury
and property damage claims arising out of contaminated water were not excluded fromcoverage as a matter of law. LM Ins. Corp. v. City of Sycamore, 2023 IL App(2d) 220234 (Ill.
App. Ct. June 8, 2023).

BACKGROUND

Residents filed a putative class action against the City of Sycamore, alleging that its failure toproperly maintain water mains resulted in unsafe drinking water and damage to equipment inhomes. According to the complaint, water was contaminated with iron, lead and bacteria as aresult of decaying pipes. Liberty, Sycamore’s general liability insurer, sought a declaration of nocoverage. Liberty argued that Sycamore’s ongoing failure to maintain the pipes was not acovered “occurrence” and that in any event, coverage was barred by pollution and lead
exclusions. A trial court agreed and ruled in favor of Liberty as a matter of law. The appellate
court reversed and remanded the matter for further proceedings.

DECISIONFirst, the court rejected Liberty’s assertion that the policies’ pollution exclusion precluded
coverage. The court framed the dispositive question as whether the iron, lead and bacteria
allegedly distributed to residents constituted “traditional environmental pollution” or “pollution
harms as traditionally understood.” Under Illinois precedent, the determination of whether an
event falls within “traditional environmental pollution” turns primarily on whether thehazardous material is confined to the insured’s premises (such as the release of carbon
monoxide contained inside a building), or conversely, dispersed into the land, atmosphere orwater (such as the contamination of ground water by toxic chemicals that escaped from amanufacturing plant). Applying this framework, the appellate court concluded that theunderlying claims did not allege a “textbook” or “unquestionable” example of traditional
environmental pollution. The court reasoned that there was no alleged release, discharge orescape of a pollutant into the ground that caused the water to become contaminated; rather thewater did not become contaminated until it was already in Sycamore’s water pipes.
Additionally, the court noted a lack of case law holding that degrading water mains that result
in contaminated water constitute traditional environmental pollution.
Second, the court held that the policies’ lead exclusion, which applied to any claims “arisingfrom” lead, did not relieve the insurer of its duty to defend or indemnify as a matter of law
because the underlying allegations attributed injury and damage to iron and bacteria, in
addition to lead.

8

Finally, the appellate court declined to affirm the trial court’s holding that there was no alleged“occurrence,” defined by the policy as “an accident, including continuous or repeated exposure
to substantially the same general harmful conditions.” The appellate court explained thatthe occurrence question focuses on whether the insured expected or intended the injury, notwhether the initial injury-causing actions were performed intentionally. The court rejected
Liberty’s contention that Sycamore’s conduct constituted a “nonoccurrence” because the naturaland expected consequences of Sycamore’s decision to neglect maintenance on its water mains
for decades were deterioration and resulting harm to residents.
COMMENTSThis decision applies a narrow reading of pollution exclusions under Illinois law. The alleged
contamination of Sycamore’s water supply with known pollutants appears to fall within thescope of the plain terms of the pollution exclusion (“discharge, dispersal, seepage, migration,
release or escape of ‘pollutants’”) notwithstanding the origin of the harm from pipe
deterioration as opposed to leakage into soil.

Lack Of Adjudication Of Coverage Claim Does Not Render
Third-Party Bad Faith Claim Against Insurer Premature,
Says Kentucky Supreme Court
HOLDINGThe Kentucky Supreme Court ruled that an intermediate appellate court erred in holding thatthe lack of final adjudication as to policy coverage rendered a third-party bad faith claim
premature. Estate of Lahoma Salyer Bramble v. Greenwich Ins. Co., 2023 Ky. LEXIS 159 (Ky.
June 15, 2023).

BACKGROUND

Claimants sued Carty, a drilling company, alleging trespass, conversion of natural gas andproperty damage caused by drilling activities. Greenwich Insurance defended Carty under areservation of rights and ultimately offered to contribute $20,000 to an agreed judgment of$628,000, which Carty was to pay in monthly installments. In negotiating this payment, Carty’s
appointed counsel advised the claimants that Carty would be released in favor of Greenwich
Insurance. When Carty defaulted on payment, the claimants sought payment from Greenwich
Insurance, and brought suit alleging common law bad faith and statutory violations. In thatmatter, the parties cross-moved for summary judgment to whether the policy covered theunderlying claims. A trial court ruled in the claimants’ favor on the coverage issue. Greenwich
Insurance appealed, but the intermediate appellate court dismissed the appeal as interlocutory.
As such, no final determination was made as to coverage under Greenwich Insurance’s policies.
On remand, litigation as to the bad faith claims continued. A jury found in favor of theclaimants, awarding both compensatory and punitive damages. Greenwich Insurance appealed,
and the intermediate appellate court ruled that the trial court improperly permitted theclaimants to pursue bad faith claims because coverage under the policies had not yet beenconclusively established. The Kentucky Supreme Court reversed.

DECISION

Addressing this matter of first impression under Kentucky law, the Kentucky Supreme Court
ruled that a third party may pursue a bad faith claim against an insurer even if a final coveragedetermination is not yet made. The court emphasized that a finding of bad faith is dependent
upon a preliminary finding of coverage under the policy, but clarified that coverage need not “befinally and conclusively determined prior to a third party bringing its bad faith claim.”

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COMMENTS

Kentucky, unlike many other jurisdictions, allows a third party to assert a bad faith claim
against a tortfeasor’s insurer. However, the decision leaves intact two well-established rules oflaw: (1) in order to ultimately prevail on a third-party bad faith claim, the claimant bears theburden of establishing that the policy covers the underlying liability; and (2) a tort victim does
not have a direct contractual cause of action against a tortfeasor’s insurance company without
first obtaining judgment against the insured.

California Appellate Court Rules That Compromised
Frozen Embryos Do Not Satisfy “Direct Physical Loss”
Requirement In Homeowners Policy
HOLDINGA California appellate court ruled that policyholders were not entitled to coverage under ahomeowners policy for the loss of compromised embryos based on a mechanical failure of acryogenic storage tank. Wong v. Stillwater Ins. Co., 2023 Cal. App. LEXIS 496 (Cal. App. 1stDist. July 5, 2023).

BACKGROUND

After completing in vitro fertilization in 2014, the Wongs stored embryos at a fertility center
that utilized cryogenic storage tanks. In 2018, one of the tanks failed to maintain theappropriate temperature, and according to the parties’ joint stipulation of facts, some orpossibly all of the embryos partially or totally thawed. The Wongs filed a claim under their
homeowners policy, which the insurer denied. In ensuing litigation, a California trial court
granted the insurer’s motion for summary judgment, ruling that there was no “direct physicalloss” and that none of the listed perils occurred. The appellate court affirmed.

DECISION

The appellate court explained that direct physical loss contemplates “a distinct, demonstrable
physical alteration” of property. The court ruled that a statement by the Wongs’ fertility
physician that “there is no way to know” whether the embryos were damaged was fatal tohomeowner’s assertion that they incurred direct physical loss. In so ruling, the courtemphasized that deeming the embryos “worthless” was “not a substitute for evidence that any ofthe embryos had actually undergone a physical change.” Additionally, the “mere possibility” ofphysical damage was insufficient to create a triable issue of fact.
The court further held that there was no factual evidence of any of thespecifically enumerated perils in the policy, a prerequisite to coverage.
The Wongs argued that the loss was caused by an “explosion” (one of thecovered perils) because their expert witness utilized the terms implosionand explosion in his testimony regarding the tank failure. The court
ruled that this evidence was not only inadmissible on various procedural
grounds, but also substantively deficient in creating an issue of fact as toan “explosion” for insurance coverage purposes. In particular, the court
explained that the term explosion indicates “a violent expansion or
bursting that is accompanied by noise and is caused by a sudden releaseof energy,” which was not alleged here. Additionally, the court notedthat the witness’s use of the term “explosion” was equivocal (“you havethat type of explosion, as we are calling it”) and in actuality related to an
implosion of vacuum space. The court stated: “Such ‘opinion’ was not‘explosion’ as the insurance cases would have it, as understood by theordinary man, not the scientist.”

10

COMMENTS

Courts are frequently called upon to decide whether the inability to use property for its intended
purpose in various contexts satisfies the “direct physical loss” requirement of first-party
insurance policies. Most notably, the wave of COVID-19-related coverage litigation resulted inan overwhelming consensus among courts that a property owner’s inability to use property due
to actual or potential viral contamination did not constitute direct physical loss. The Wongdecision reaffirms the well-established principle that an “actual change in insured property” isnecessary in order to implicate coverage.

Simpson Thacher News
Simpson Thacher has been recognized by The New York Law Journal as its 2023 “Litigation
Department of the Year” in the category of Insurance. The Firm will be honored on October 5at the New York Legal Awards in New York City. The New York Law Journal previously named
Simpson Thacher its “Litigation Department of the Year” in the Insurance category in 2020
and 2018.
Simpson Thacher has once again been ranked among the leading law firms in the United Statesin The Legal 500 United States 2023. The Firm was recognized in 47 practice areas, with a totalof 23 rankings in the top tier, including “Insurance: Advice to Insurers.”
Chet Kronenberg has been named among the Los Angeles Business Journal’s 2023 “Leaders of
Influence: Litigators & Trial Attorneys,” honoring the top litigators in the Los Angeles area. In
addition, Chet participated as a panelists in a webinar produced by Strafford Publication titled,“Establishing and Challenging Exhaustion of Insurance Policies: Recurring Issues, Factors toConsider, Below Limits Settlements.” The webinar included discussion of exhaustion concepts,
challenges to exhaustion, allocation issues and evidentiary matters.
Josh Polster and Charlotte McCary authored an article titled “4th Circ. Ruling Continues
Trend of Insurer Bump-Up Wins,” published in Law360. The article discusses how courts
applying bump-up exclusions must grapple with new coverage questions as forms of corporatetransactions continue to evolve and the recent ruling in Towers Watson & Co. v. National
Union Fire Insurance Co., in which the Fourth Circuit held that a reverse triangular merger wasan “acquisition” within the meaning of a bump-up exclusion.
Lynn Neuner was honored as a “Notable Women in Law” for 2023 by Crain’s New YorkBusiness. The awards honor outstanding women lawyers who were selected not only for theirskills and accomplishments in the their practice areas, but also for their leadership and impact
across the legal profession. Lynn Neuner was also named among this year’s “Top 250 Womenin Litigation” by Euromoney’s Benchmark Litigation. The feature honors the accomplishmentsof leading women litigators in the United States who have participated in some of the mostimpactful litigation matters in recent history and have earned the respect of their peers andclients. In addition to being named to the “Top 250 Women in Litigation” list, Lynn was also
recognized among the “Top 10 Women in Litigation” in the United States.

11

Simpson Thacher has been an international leader in the practice of insurance and reinsurance law for
more than a quarter of a century. Our insurance litigation team practices worldwide.

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

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

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

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

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

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

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

Joshua Polster+1-212-455-2266
joshua.polster@stblaw.com

Sarah E. Phillips+1-212-455-2891
sarah.phillips@stblaw.com

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

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

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

This edition of the
Insurance Law Alert was prepared byBryce L. Friedman / +1-212-455-2235
bfriedman@stblaw.com
Laura Lin / +1-650-251-5160
laura.lin@stblaw.com andKaren Cestarikcestari@stblaw.com.

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1 Jian Guo Men Wai Avenue
Beijing 100004
China+86-10-5965-2999

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

LondonCityPoint
One Ropemaker Street
London EC2Y 9HUEngland+44-(0)20-7275-6500

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

SOUTH AMERICA

São Paulo
Av. Presidente Juscelino
Kubitschek, 1455
São Paulo, SP 04543-011
Brazil+55-11-3546-1000

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