Insurance Law Alert

December 2016

In This Issue
Second Circuit Asks New York Court Of Appeals If Reinsurance Limits
Apply To Both Losses And Expenses
By certified question, the Second Circuit asked the New York Court of Appeals to address
whether the dollar amount provided in a “Reinsurance Accepted” section of a reinsurance
certificate applies to both losses and expenses. Global Reinsurance Corp. of Am. v. Century
Indem. Co., 2016 WL 7156549 (2d Cir. Dec. 8, 2016). (Click here for full article)“They’re the
go-to firm for the
insurance industry forreally serious cases. Their
practice is top-notch.”–Chambers USA 2016,
quoting a client

Florida Supreme Court Rules That Property Policy Covers Loss Caused In
Part By Excluded Perils
The Florida Supreme Court ruled that a homeowner is entitled to coverage under a property
policy where the losses are attributable to both covered and excluded perils. The court rejected
application of the efficient proximate cause doctrine in favor of a concurrent cause analysis.
Sebo v. American Home Assurance Co., Inc., 2016 WL 7013859 (Fla. Dec. 1, 2016).
(Click here for full article)

Eleventh Circuit Rules That Underlying Settlement Reached In Bad Faith
Is Not Enforceable Against Insurer
The Eleventh Circuit ruled that an underlying settlement was negotiated in bad faith and thatan insurer is not obligated to provide indemnity for settlement payments. Sidman v. Travelers
Casualty and Surety, 841 F.3d 1197 (11th Cir. 2016). (Click here for full article)

Rejecting Latent Ambiguity Argument, Sixth Circuit Enforces Consent-ToSettle Clause
The Sixth Circuit ruled that a consent-to-settle provision in an excess policy is unambiguous
and that the insurer is not obligated to indemnify settlements made without its consent.
Stryker Corp. v. National Union Fire Ins. Co. of Pittsburgh, PA, 842 F.3d 422 (6th Cir. 2016).
(Click here for full article)

Insurer Has No Duty To Settle For All Insureds
Addressing a matter of first impression, a New Jersey court ruled that an insurer may settle
claims for one insured, without reaching a settlement for additional insureds, so long as thesettlement was made in good faith. Nat’l Surety Corp. v. First Specialty Ins. Corp., 2016 WL
7057503 (N.J. Superior Ct. Nov. 18, 2016). (Click here for full article)
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Simpson Thacher & Bartlett LLP

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West Virginia Supreme Court Holds That Intentional Acts Exclusion Bars
Coverage For Innocent Co-Insureds, Notwithstanding Severability Clause
The West Virginia Supreme Court ruled that intentional acts exclusions in homeowners’
policies bar coverage for negligence claims against co-insureds, notwithstanding severability
clauses. Am. Nat’l Prop. & Cas. Co. v. Clendenen, 2016 WL 6833123 (W. Va. Nov. 17, 2016).
(Click here for full article)

Consecutive Claims-Made Policies Create Continuous Coverage Period For
Notice Purposes, Says Delaware Court
A Delaware court ruled that coverage is not barred under a claims-made policy even though
the policyholder failed to provide notice of a claim within the policy period, because notice wasprovided during a subsequent renewal policy period. Med. Depot, Inc. v. RSUI Indem. Co.,2016 WL 5539879 (Del. Superior Ct. Sept. 29, 2016). (Click here for full article)

STB News Alerts:
Click here for information relating to the Firm’s recent honors and activities.

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Reinsurance Alert:
Second Circuit Asks New York
Court Of Appeals If Reinsurance
Limits Apply To Both Losses And
Expenses

By certified question, the Second Circuitasked the New York Court of Appeals to
address whether the dollar amount provided
in a “Reinsurance Accepted” section of areinsurance certificate applies to both losses
and expenses. Global Reinsurance Corp. of
Am. v. Century Indem. Co., 2016 WL 7156549(2d Cir. Dec. 8, 2016).
The appeal arises out of a dispute between
Century and Global Reinsurance regarding
the extent of Global Reinsurance’s obligation
to pay Century pursuant to certain
reinsurance certificates. A New York federal
district court ruled that the certificatesunambiguously capped Global Reinsurance’s
liability at $250,000 (the amount set forth in
the Reinsurance Accepted provision) for bothlosses and expenses. In so ruling, the district
court relied on Bellefonte Reinsurance Co.
v. Aetna Casualty & Surety Co., 903 F.2d
910 (2d Cir. 1990) and Unigard Security
Insurance Co. v. North River Insurance Co.,
4 F.3d 1049 (2d Cir. 1993).
Century appealed, arguing that Bellefonteand Unigard were wrongly decided. Century
argued that the certificates should beinterpreted to cover both loss and expenses
because the certificates follow form tounderlying policies, and the underlying
policies expressly provide for payment ofexpenses in addition to loss. Noting that
Century’s argument “is not without force,” theSecond Circuit rejected Global Reinsurance’s
contention that Excess Insurance Co. v.
Factory Mutual Co., 3 N.Y.3d 577 (2004)
is controlling because it did not explicitly
address whether a stated limit representsa coverage limit for losses and expenses
combined. The court further distinguished
Factory Mutual because the expenses inquestion related to the cedent’s cost of
litigating with the underlying insured, notthe insured’s defense costs.

On this basis, the Second Circuit certified thefollowing question to the New York Courtof Appeals:
Does the decision of the New York
Court of Appeals in Excess Insurance
Co. v. Factory Mutual Insurance Co.,
3 N.Y.3d 577 (2004), impose either
a rule of construction, or a strong
presumption, that a per occurrence
liability cap in a reinsurance contract
limits the total reinsurance available
under the contract to the amountof the cap regardless of whether theunderlying policy is understood tocover expenses, such as, for instance,
defense costs?
We will keep you posted on further
developments in this potentially-significant
matter.

First-Party
Coverage Alert:

Florida Supreme Court Rules That
Property Policy Covers Loss Caused
In Part By Excluded Perils
The Florida Supreme Court ruled that ahomeowner is entitled to coverage undera property policy where the losses are
attributable to both covered and excluded
perils. The court rejected application of theefficient proximate cause doctrine in favor ofa concurrent cause analysis. Sebo v. American
Home Assurance Co., Inc., 2016 WL 7013859(Fla. Dec. 1, 2016).
A homeowner sought coverage for waterrelated damage under an all risk policy issuedby American Home, which denied coverage.
In ensuing litigation, a jury found in the
homeowner’s favor. A Florida appellate court
reversed, ruling that the trial court improperly
applied the concurrent cause doctrine, underwhich coverage may exist when a loss iscaused by both insured and excluded perils,
even if a covered peril is not the primarycause. The appellate court held that theproper standard in a first-party property caseinvolving multiple perils is efficient proximate
causation, which requires a covered peril to be
the efficient proximate cause of the loss. The
Florida Supreme Court reversed.
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The Florida Supreme Court held thatthe efficient proximate cause doctrine isinapplicable because “there is no reasonable
way to distinguish the proximate causeof Sebo’s property loss – the rain andconstruction defects acted in concert tocreate the destruction of Sebo’s home. As
such, it would not be feasible to apply the
EPC doctrine because no efficient cause canbe determined.” In this respect, the decision
may be limited to situations in which multiplecauses simultaneously cause loss, and may
not apply where a loss is caused by a sequenceof covered and uncovered events. In addition,
the court noted that insurers may contract
out of concurrent causation through explicit
policy language.

Settlement Alerts:
Eleventh Circuit Rules That
Underlying Settlement Reached
In Bad Faith Is Not Enforceable
Against Insurer

Affirming a Florida district court decision,
the Eleventh Circuit ruled that an underlying
settlement was negotiated in bad faith andthat an insurer is not obligated to provide
indemnity for settlement payments. Sidman
v. Travelers Casualty and Surety, 841 F.3d
1197 (11th Cir. 2016).
Culbreath, a property owner association,
sued Kirkwood, a homeowner, seeking toenforce restrictive covenants relating toproperty care and appearance. Kirkwood
counterclaimed for slander. Travelers agreed
to defend Culbreath with respect to thecounterclaim. When Kirkwood prevailed andsought attorneys’ fees, Travelers refused todefend the attorneys’ fee claim. That refusal
to defend was held to be wrongful by the
Eleventh Circuit.
Culbreath and Kirkwood reached a settlement
under which Culbreath paid $295,000 on
the attorneys’ fee claim (more than threetimes the actual amount of Kirkwood’s fees),
and assigned Kirkwood the proceeds fromany action against Travelers, in exchange
for Kirkwood’s agreement not to executejudgment against Culbreath. Kirkwood
and Culbreath also executed a promissory
note that was not disclosed to the court orTravelers. The note provided that if Kirkwood

was not successful in obtaining $50,000
or more against Travelers, then Culbreath
would pay Kirkwood $50,000. (If Kirkwood
recovered an amount less than $50,000,
then Culbreath would pay the difference up
to $50,000). In ensuing litigation, Travelers
argued that the underlying settlement was the
product of collusion. A Florida district court
agreed, ruling that the settlement was neither
reasonable nor negotiated in good faith andthus was unenforceable against Travelers. The
Eleventh Circuit affirmed.
Under Florida law, an insurer that wrongfully
refuses to defend is generally bound by asettlement, so long as it did not result fromfraud or collusion. In determining whether
there is fraud or collusion, Florida courts lookto “evidence of an unreasonable settlement
amount and of bad faith on the part of
the negotiating parties.” Finding both badfaith and unreasonableness here, the court
noted that Culbreath “was willing to agree
to any fee,” so long as the judgment would
be enforced only against Travelers. The
court held that this fact, together with theundisclosed side arrangement that limited
Culbreath’s exposure to $50,000, establishedbad faith. Bad faith was also evidenced
by Culbreath’s similar settlement withanother homeowner.
The court rejected the argument that thesettlement could not be deemed collusive
as a matter of law because Kirkwood andCulbreath did not share the settlement
proceeds. The court explained that while
shared settlement proceeds may establish
collusion, it is not required. The court also
rejected the argument that Travelers wasbound by the settlement because it failed
to object to it, stating that “the practicaleffect of such a rule would be that once aninsurer is given prior notice of and fails toobject to a settlement agreement … it will bedeemed to have waived all objections despite
underlying fraud or collusion of which it
had no knowledge. There is no such rule in
Florida law.”

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Rejecting Latent Ambiguity
Argument, Sixth Circuit Enforces
Consent-To-Settle Clause
The Sixth Circuit ruled that a consentto-settle provision in an excess policy isunambiguous and that the insurer has no
obligation to indemnify settlements madewithout its consent. Stryker Corp. v. National
Union Fire Ins. Co. of Pittsburgh, PA, 842
F.3d 422 (6th Cir. 2016).
In this longstanding coverage litigation
arising out of defective knee replacement
parts, Stryker sought indemnification forsettlements under excess liability policies
issued by TIG. TIG disputed coverage, arguingthat the direct product liability claims thatwere the subject of the settlement do notconstitute “ultimate net loss” under TIG’s
policy. TIG’s policy defines “ultimate net loss”
as “the amount of the principal sum, award orverdict actually paid or payable in cash in thesettlement or satisfaction of claims for which
the insured is liable, either by adjudicationor compromise with the written consent of[TIG].” Stryker argued that, as applied tothe particular facts presented, the ultimate
net loss provision is latently ambiguous. In
particular, Stryker argued that it “was forced
to present its direct settlements to TIG years
after they were made” because the underlying
primary insurer gave priority payment toclaims against Pfizer (a partially-owned
subsidiary of Stryker), before addressing
any direct liability claims against Stryker. A
Michigan district court agreed and granted
Stryker’s summary judgment motion. The
Sixth Circuit reversed.
Applying Michigan law, the Sixth Circuit heldthat TIG’s policy required written consent for
any and all settlements. The court rejected
Stryker’s contention that “the unusual facts”
of this case give rise to a latent ambiguity. The
court ruled that TIG employees’ testimony
about the provision did not create a latentambiguity. The court also rejected Stryker’s
assertion that TIG waived its right to enforce
the consent provision, explaining “thatcontention rests on the false premise that [theprimary insurer]’s denial of coverage shouldbe imputed to TIG, simply because the excessliability policy followed form.”

Insurer Has No Duty To Settle
For All Insureds
Addressing a matter of first impression, a
New Jersey court ruled that an insurer may
settle claims for one insured without reachinga settlement for additional insureds, so longas the settlement was made in good faith.
Nat’l Surety Corp. v. First Specialty Ins.
Corp., 2016 WL 7057503 (N.J. Superior Ct.
Nov. 18, 2016).
The coverage dispute arose out of a murder
at a shopping mall. The deceased’s family
sued the mall and a security company,
among others. First Specialty, which
provided primary additional insured
coverage to the mall and the security
company, agreed to defend the suit. Afterattempts to reach a global settlement failed,First Specialty reached an agreement withthe underlying plaintiff and the security
company’s excess insurer. Under theagreement, First Specialty would pay its$2 million policy limit to settle the claims
against the security company. The settlement
did not resolve the claims against the malldefendants. National Security, the mall’s
excess insurer, filed suit to prevent First
Specialty from finalizing the settlement.
National Security argued that First Specialty
was obligated to allocate its policy limits
equally among additional insureds in any
settlement. National Security further argued
that even if First Specialty could exhaust its
policy limits by settling the claims on behalfof the security company, it was nonethelessrequired to continue defending the mall inthe underlying action. The court rejectedboth arguments.
First Specialty’s policy states that “We(FSIC) may, at our discretion, investigate
any ‘occurrence’ and settle any claim or‘suit’ that may result.” The court ruled that
this language unambiguously gives theinsurer the discretion to exhaust its limits
to settle on behalf of any insured defendant,
so long as the settlement is made in goodfaith. The court further explained that First
Specialty had engaged in extensive good faithnegotiations, and that the mall defendants
had a substantial amount of coverage anddefense costs available under their own
primary and excess policies. Finally, thecourt held that First Specialty no longer had
a duty to defend once its policy limit was
exhausted because the policy expressly stated5that defense obligations terminate upon
exhaustion of limits by payment of judgment
or settlement.

2. If so, do the unambiguous
severability clauses in the insurance
policies, which state that the insurance
applies separately to each insured,prevail over the exclusions and require
the insurers to apply the exclusions
separately to each insured, despite
the intentional and criminal actionsof co-insureds?

PolicyConstruction Alert: The West Virginia Supreme Court answeredWest Virginia Supreme Court Holds
That Intentional Acts Exclusion
Bars Coverage For Innocent
Co-Insureds, Notwithstanding
Severability Clause
The West Virginia Supreme Court ruled that
intentional acts exclusions in homeowners’
policies bar coverage for negligence claims
against co-insureds, notwithstanding
severability clauses. Am. Nat’l Prop. & Cas.
Co. v. Clendenen, 2016 WL 6833123 (W. Va.
Nov. 17, 2016).
Two teenage girls were convicted ofmurdering a fellow student. The deceased’sfamily sued the girls’ parents for negligent
supervision, among other things. Eachfamily sought coverage under a homeowner’s
policy. The insurers argued that coverage wasbarred by an intentional acts exclusion. The
homeowners claimed that the exclusions did
not apply to them, as innocent co-insureds,
because severability clauses require coverage
to be applied separately to each insured.
A West Virginia federal district certified
the following two questions to the statesupreme court:
1. Applying West Virginia public policy
and rules of contract construction,
do the unambiguous exclusions in
American National’s policy for bodily
injury or property damage “which is
expected or intended by any insured
even if the actual injury of damage isdifferent than expected or intended,”and “arising out of any criminal act
committed by or at the direction of
any insured,” and the unambiguous
exclusion in Eire’s policy for “bodily
injury, property damage, or personal
injury expected or intended by ‘anyone
we protect’ … ,” preclude liability
coverage for insured who did notcommit any intentional or criminal act?

“yes” to first question and “no” to the second.
It reasoned that the plain language of the
exclusions bar coverage for intentional acts
committed by “any insured” or “anyone …
protect[ed].” Rejecting the policyholders’public policy arguments, the court notedthat a majority of jurisdictions have applied
similar exclusions to preclude coverage to an
insured based on the intentional or criminal
acts of a co-insured. The court also ruled thatthe severability clauses have no bearing on
the exclusionary language and do not render
the exclusions ambiguous, contrary to aruling of the California Supreme Court. See
Minkler v. Safeco Ins. Co. of Am., 232 P.3d
612 (Cal. 2010) (discussed in our July/August2010 Alert).

Notice Alert:

Consecutive Claims-Made Policies
Create Continuous Coverage Period
For Notice Purposes, Says Delaware
Court
A Delaware court ruled that coverage is notbarred under a claims-made policy even when
the policyholder fails to provide notice ofa claim within the policy period. The court
reasoned that coverage is available pursuant
to the “claims-made relationship” because
notice was provided during a subsequent
renewal policy period. Med. Depot, Inc. v.
RSUI Indem. Co., 2016 WL 5539879 (Del.
Superior Ct. Sept. 29, 2016).
RSUI issued a claims-made policy to Medical
Depot in effect from June 15, 2013 throughJune 15, 2014, and then renewed the policy
for the June 15, 2014 – June 15, 2015 period.
The policies required notice of any claim
to be provided “as soon as practicable” orwithin 60 days after the policy’s expiration.
On June 18, 2013, Tony Mezzadri sent a
demand letter to Medical Depot threatening6

to sue. In March 2014, Mezzadri filed acomplaint seeking monetary and injunctive
relief. Although Mezzadri did not serve thecomplaint on Medical Depot, the company
was aware of it, but did not notify RSUI of its
existence or the demand letter. On September
2, 2014, during the policy renewal period,
Mezzadri served an amended complaint on
Medical Depot. Medical Depot notified RSUI
within a week. RSUI denied coverage basedon Medical Depot’s failure to give notice ofthe demand letter or initial complaint. Rulingon the parties’ cross-motions for summary
judgment, the court held that: (1) the demand
letter is not a claim; (2) the initial complaint
is a claim; (3) Medical Depot failed to givenotice of the initial complaint as soon aspracticable or within the first policy period;and (4) the claim is nonetheless covered
because it falls within RSUI’s coverage as partof the “claims-made relationship.”You and the cancellation and nonrenewalof the last consecutive claims-made policy
between Us and You, where there has
been no gap in coverage.” The Disclosure
Supplement further states that “coverage isprovided for liability ONLY IF THE CLAIM
FOR DAMAGES IS FIRST MADE AGAINSTTHE INSURED AND REPORTED TO US INWRITING DURING THE POLICY PERIOD,ANY SUBSEQUENT RENEWAL AND ANYAPPLICABLE DISCOVERY PERIOD.” Thecourt ruled that these provisions operate
to provide a seamless two-year period ofcoverage, rejecting RSUI’s argument thatthe policy’s notice provisions override
the Disclosure Statement. The court
acknowledged that the Disclosure Statement
explicitly states that “the provisions of thepolicy and the endorsements attached thereto
are controlling,” but concluded that noconflict exists between the policy provisions
and Disclosure Statement. The court reasoned
that the notice provisions would bar coverage
if there had been no renewal policy, but thatonce a renewal was issued, the DisclosureStatement became operative.
Finally, the court ruled that prejudice isrequired to deny coverage based on late noticeunder a claims-made policy where, as here,
notice is untimely but still within the coverage
period. Under Delaware law, prejudice is not
required in the claims-made context when
notice is provided outside the policy period.

The court ruled that the demand letter is not aclaim because it did not seek monetary relief.
However, the court concluded that the initial
complaint constitutes a “claim” because it is a
written demand for money. The court rejected
Medical Depot’s argument that a “claim”
does not exist until a complaint is served.
The court further held that Medical Depot
failed to comply with the policy’s condition
precedent notice requirements because it did
not notify RSUI of the initial complaint assoon as practicable or within 60 days of thepolicy’s expiration.
Nonetheless, the court ruled that coverage
was not precluded based on a “New York
Regulation 121 Disclosure Supplement” thatdefines “Claims-Made Relationship” as “theperiod of time between the effective date of
the first claims-made policy between Us and

STB News
Alerts:Simpson Thacher’s Insurance Practice was
ranked as Tier 1 by Euromoney’s Benchmark
Litigation for the tenth consecutive year.
Mary Beth Forshaw was named a “Top 10
Star” for Insurance. The lists were compiled
based on six months of intensive peer, client,and case review.
Bryce Friedman spoke on the arbitration
process at the 2016 ARIAS•U.S. Fall
Conference on Thursday, November 17th. His
panel, “Improving the Arbitration Process
through Better Contract Wording,” assessed
the efficacy of the arbitration process inreinsurance disputes.

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.

David J. Woll
+1-212-455-3136
dwoll@stblaw.com

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

Deborah L. Stein+1-310-407-7525
dstein@stblaw.com

Mary Beth Forshaw+1-212-455-2846
mforshaw@stblaw.com

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

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

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

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

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

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

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

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

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

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

Summer Craig+1-212-455-3881
scraig@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 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
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Please click here to subscribe to the Insurance Law Alert.
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