Insurance Law Alert

November 2015

In This Issue
Finding “Arising Out Of” Ambiguous, California Court Rules That Insurer
Must Defend Cosby Defamation Suit
A California federal district court ruled that because language in a sexual misconduct policy
exclusion was ambiguous, the insurer was obligated to provide a defense. AIG Prop. Cas. Co. v.
William H. Cosby et al., No. 15-04842 (C.D. Cal. Nov. 13, 2015). (click here for full article)“A very, very
impressive team whichis completely hands-on interms of shaping the issues,and dealing with otherparties and the judge.”–Chambers USA 2015

Wisconsin Appellate Court Deems Pollution Exclusion Ambiguous as toLegionnaires Illness Claims
Reversing a trial court decision, a Wisconsin appellate court ruled that a pollution exclusion
endorsement was ambiguous in the context of Legionnaires-related illness claims. Connors v.
Zurich Am. Ins. Co., 2015 WL 5972551 (Wis. Ct. App. Oct. 15, 2015). (click here for full article)

Policy Exclusions Bar Coverage for Class Action Claims Against LifeLock,
Says New York Court
A New York court dismissed LifeLock’s coverage suit against its insurer, finding that policy
exclusions barred coverage for deceptive practices and misleading advertising claims. LifeLock,
Inc. v. Certain Underwriters at Lloyd’s, London, No. 651577/2015 (N.Y. Sup. Ct. N.Y. Cnty.
Nov. 19, 2015). (click here for full article)

All-Risk Policy Does Not Cover Losses Related to Quality Control Failures,
Says Massachusetts Appellate Court
A Massachusetts appellate court ruled that an all-risk policy does not provide coverage forlosses sustained in connection with a company’s decision to destroy beverage products after
certain quality control failures. H.P. Hood LLC v. Allianz Global Risks U.S. Ins. Co., 88 Mass.
App. Ct. 613 (Mass. App. Ct. 2015). (click here for full article)

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Simpson Thacher & Bartlett LLP

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Arkansas Court Rules That Policy Provides Contingent Extra Expense
Coverage for Losses Incurred in Connection With Oil Pipeline Shutdown
An Arkansas federal district court ruled that an insurance policy provided Contingent Extra
Expense coverage for losses incurred in connection with an oil pipeline rupture. Lion Oil Co. v.
National Union Fire Ins. Co. of Pittsburgh, PA, 2015 WL 6680900 (W.D. Ark. Nov. 2, 2015).
(click here for full article)

Third Circuit Outlines Scope of “Prior Publication” Exclusion
Addressing a matter of first impression under Pennsylvania law, the Third Circuit clarified thescope of a “prior publication” exclusion to advertising injury coverage. Hanover Ins. Co. v.
Urban Outfitters, Inc., 2015 WL 6405763 (3d Cir. Oct. 23, 2015). (click here for full article)

Third Circuit Adopts Middle-of-the-Road Definition of “Renewal Policy”
Addressing a matter of first impression under Pennsylvania law, the Third Circuit ruled that inorder to constitute a “renewal,” the terms of an insurance policy must be the same or nearly thesame as the initial contract. Indian Harbor Ins. Co. v. F&M Equip., Ltd., 804 F.3d 310 (3d Cir.
2015). (click here for full article)

Fifth Circuit Rules That Excess Coverage Is Contingent Upon Payment ofFull Policy Limits By Primary Insurer
The Fifth Circuit ruled that applicable policy language requires actual payment of full policy
limits by the primary insurer in order to implicate excess coverage. Martin Res. Mgmt. Corp. v.
AXIS Ins. Co., 803 F.3d 766 (5th Cir. 2015). (click here for full article)

Simpson Thacher’s Insurance Practice Recognized as Top Tier(click here for full article)

2Defense Alert:

Finding “Arising Out Of”
Ambiguous, California Court Rules
That Insurer Must Defend Cosby
Defamation Suit
A California federal district court ruled that
because language in a sexual misconduct
policy exclusion was ambiguous, the insurer
was obligated to provide a defense. AIG
Prop. Cas. Co. v. William H. Cosby et al., No.
15-04842 (C.D. Cal. Nov. 13, 2015).

The court concluded that the phrase “arisingout of” in the sexual misconduct exclusion
was ambiguous. Noting a split in California
case law, the court stated that “the sexual
misconduct exclusion could be reasonably
read to require that Dickinson’s claims
merely relate to sexual misconduct, or that
Dickinson’s claims be proximately caused by
the sexual misconduct.” The court went on
to explain that the exclusion would not apply
under the proximate causation interpretation
because the alleged rape and assault did notgive rise to the defamation claim; rather, thecrux of the underlying claims were Cosby’s
denials and personal statements about
Dickinson’s credibility. The court also notedthat even if the exclusion was unambiguous,
the insurers would still be obligated to defend
the suit because some of the underlying
claims were unrelated to the alleged sexual
misconduct and would thus still potentially becovered by the policies.

Pollution Exclusion
Alert:
Wisconsin Appellate Court Deems
Pollution Exclusion Ambiguous as
to Legionnaires Illness Claims

The coverage dispute arose out of a lawsuit
filed by Janice Dickinson against Bill Cosby
alleging defamation and intentional inflictionof emotional distress. Dickinson claimed
that in response to her allegations of assault
and rape, Cosby made numerous publicstatements that injured her reputation.
Cosby tendered defense of the action to his
homeowners and excess insurer. The insurer
defended under a reservation of rights andbrought suit seeking a declaration that it
had no duty to defend and reimbursementof defense costs. Although the insurer did
not dispute that the policies covered claims
for defamation and intentional infliction ofemotional distress, it argued that the claims
fell within a sexual misconduct exclusion,
which barred coverage for “personal
injury arising out of any actual, alleged,or threatened by any person … sexualmolestation, misconduct, or harassment.” Thecourt disagreed and granted Cosby’s motion
to dismiss the insurer’s action.

Reversing a trial court decision, a Wisconsin
appellate court ruled that a pollution
exclusion endorsement was ambiguous in thecontext of Legionnaires-related illness claims.
Connors v. Zurich Am. Ins. Co., 2015 WL
5972551 (Wis. Ct. App. Oct. 15, 2015).
Connors, an employee of a foundry, broughta direct action against the foundry’s insurer,
alleging that cooling towers on his job site
contained and dispersed legionella bacteria,
resulting in illness. The insurer moved
for summary judgment on the basis that apollution exclusion precluded coverage for theclaims. The trial court agreed and granted the
motion. The appellate court reversed.
As discussed in our January 2015 Alert, theWisconsin Supreme Court has enforced
standard form pollution exclusions to bar
coverage for non-traditional contamination
claims (including claims arising from theuse of cow manure and septic waste as
fertilizer). The appellate court deemed thosecases inapposite here, because the policy
contained an endorsement with different3language. The endorsement set forth thestandard pollution exclusion language andalso defined four categories of substances
as pollutants. The court interpreted thisadditional language as limiting the scope of“pollutants” and thus concluded that “there
is ambiguity as to whether the bacteria
alleged to have infected Connors fit into
any of the four categories.” The court also
found ambiguity in another clause of theendorsement, which provided that thedefinition of “pollutants” applies regardless ofwhether the “irritant or contaminant, or theparticular form, type of source of the irritantor contaminant … is specifically identified or
described in this definition … .” Although thecourt acknowledged that this clause might
operate to nullify any limiting effect of the
four-categories clause, it concluded that theclause should more reasonably be interpreted
to require a substance to be similar in kind to
those listed in the four categories in order tobe a “pollutant.” Emphasizing the importanceof policy language in this context, the court
expressly noted that if the policy had included
only a standard form pollution exclusion,
coverage would be barred as a matter of law.
The court reached the same conclusion in
Ramos v. Charter Oak Fire Ins. Co., 2015 WL
5972555 (Wis. Ct. App. Oct. 15, 2015), a caseinvolving the same factual allegations, policy
language and insurer as in Connors.

Coverage Alerts:

Policy Exclusions Bar Coverage
for Class Action Claims Against
LifeLock, Says New York Court
A New York court dismissed LifeLock’s
coverage suit against its insurer, findingthat policy exclusions barred coveragefor deceptive practices and misleading
advertising claims. LifeLock, Inc. v. Certain
Underwriters at Lloyd’s, London, No.
651577/2015 (N.Y. Sup. Ct. N.Y. Cnty. Nov.
19, 2015).
Several class action suits were filed against
LifeLock, a company that provides identity
theft protection services. The suits allegedthat LifeLock engaged in fraudulent anddeceptive activities to induce customers
to purchase its services. LifeLock sought
coverage from Certain Underwriters at
Lloyd’s London, which the insurer denied.

Underwriters argued that coverage wasbarred by Exclusion L, which precluded
coverage for claims “[a]rising out of any
related or continuing acts, errors [or]omissions … where the first such act, error
or omission … was committed or occurredprior to the Retroactive Date. Underwriters
emphasized that the underlying claims allegeda pattern of false and misleading advertisingsince 2005, more than three years before
the Retroactive Date of January 8, 2008. In
addition, Underwriters argued the coverage
was barred pursuant to Exclusion I, which
precluded coverage for claims “arising outof or resulting from … unfair competition …
false, deceptive or unfair trade practices, or
false or deceptive or misleading advertising.”
In a ruling from the bench, the court
dismissed the suit against Underwriters,
agreeing with the insurer that the exclusions
were unambiguous and applied squarely tothe claims against LifeLock. Underwriters are
represented by Simpson Thacher attorneys
Bryce Friedman and Summer Craig.

All-Risk Policy Does Not Cover
Losses Related to Quality Control
Failures, Says Massachusetts
Appellate Court
A Massachusetts appellate court ruled thatan all-risk policy does not provide coveragefor losses sustained in connection with acompany’s decision to destroy beverage
products after certain quality control failures.
H.P. Hood LLC v. Allianz Global Risks U.S.
Ins. Co., 88 Mass. App. Ct. 613 (Mass. App.
Ct. 2015).
4

Hood conducted various quality control tests
in connection with its production of a milkbased beverage. In the May 2009 production
run, a number of bottles (representing aboutnine percent of the total production run)failed the “secure seal test” designed to ensure
the hermetical seal of the bottles. Because
Hood was unable to isolate the problematic
bottles, it chose to destroy the entire May
2009 production run. Thereafter, Hoodsought coverage for the losses associatedwith the destruction under an all-risk policy
issued by Allianz. Allianz denied coverageon the ground that there was no “damage to
Insured Property.” More specifically, Allianz
noted that none of the bottles lost its sealor otherwise sustained physical damage
before Hood made the business decision todestroy the production run. Allianz argued
that “a mere increased risk of future property
damage” is not a covered loss. In response,
Hood argued that once doubts have beenraised as to the fitness of a product intended
for human consumption, the requisite
property damage has occurred.

Arkansas Court Rules That
Policy Provides Contingent Extra
Expense Coverage for Losses
Incurred in Connection With Oil
Pipeline Shutdown

Noting a split of authority on this issue,
the court declined to rule on whether this
scenario presented “property damage.”
Instead, the court ruled that even assuming
there was damage to property, an exclusion
for “faulty workmanship, material,construction or design” barred coverage.
The court further held that coverage was
not restored by an ensuing loss provision,
which stated that “if physical loss or damage
not otherwise excluded … results [from an
excluded loss], then only such resulting
physical loss or damage is covered.” Hoodargued that even if the initial loss was causedby an excluded event (what turned out to be
defective bottle caps), the resulting loss of themilk product was covered under the ensuingloss provision. The court acknowledged the“interpretive challenges” of the ensuing loss
provision, explaining that some courts haverequired damage that is “wholly separate”
from the damage caused by the excluded
event, while other courts have allowed
coverage so long as the resulting damageis “different in kind.” Without deciding theappropriate standard for “ensuing loss”
coverage, the court held that “[o]n theparticular facts of this case, Hood cannot
prevail under any reasonable interpretation of
the resulting loss language.”

The policy contained only one reference to
CEE coverage. That reference was in thedefinition of the term “Time Element” forthe purposes of explaining “Contingent
Time Element” coverage. The policy states:“The term Time Element means any one
or all of the following coverages: Business
Interruption, Extra Expense, Contingent
Business Interruption, Contingent Extra
Expense … and all other Time Element
extensions provided.” The insurers argued
that the absence of any other reference to
CEE coverage in the policy demonstrates thatthe parties did not intend to include CEE
coverage. The insurers further contended

An Arkansas federal district court ruled thatan insurance policy provided Contingent
Extra Expense (“CEE”) coverage for losses
incurred in connection with an oil pipeline
rupture. Lion Oil Co. v. National Union Fire
Ins. Co. of Pittsburgh, PA, 2015 WL 6680900(W.D. Ark. Nov. 2, 2015).
Lion Oil, a refinery owner, experienced aninterruption in business for several months
due to pipeline repairs and remediation by its
oil supplier. Lion Oil sought coverage from its
insurers for business losses incurred during
the pipeline shutdown. Although the parties
disputed the applicability of numerous policy
provisions, the sole question before the courton the parties’ cross motions for summary
judgment was whether an insurance policy
provided CEE coverage.

5

that interpreting the policy to provide CEE
coverage would lead to the “absurd result”
of providing $700 million of CEE coverage(because no specific sub-limits were provided
for CEE) whereas the Direct Extra Expense
coverage was limited to $15 million. The court
rejected these arguments.
The court held that the lack of a formal
definition for CEE in the policy did notindicate the absence of CEE coverage. The
court explained that the policy did not define
other types of coverage (such as Contingent
Business Interruption Coverage), and yet
the parties did not dispute the existence of
those other coverages. In addition, the court
deemed it irrelevant that the policy did notprovide a sub-limit for CEE, even thoughsub-limits were provided for other types ofcontingent coverages. The court concluded
that “[b]ecause CEE is listed as an available
coverage in the Time Element definition, andhas not been excluded in any way,” the policy
unambiguously provides CEE coverage.

Advertising
Injury Alert:

Third Circuit Outlines Scope of“Prior Publication” Exclusion
Addressing a matter of first impression underPennsylvania law, the Third Circuit clarified
the scope of a “prior publication” exclusion toadvertising injury coverage. Hanover Ins. Co.
v. Urban Outfitters, Inc., 2015 WL 6405763(3d Cir. Oct. 23, 2015).
The Navajo Nation sued Urban Outfitters for
trademark infringement and related common
law and statutory violations. The complaint
alleged that the store advertised and soldgoods under the “Navajo” name. Urban
Outfitters tendered the claims to its generalliability and umbrella insurers. The insurers
sought a declaration that they had no duty
to defend or indemnify based on a “priorpublication” exclusion, which barred coverage
for advertising injury liability “arising outof oral or written publication of material
whose first publication took place before thebeginning of the policy period.” The insurers
argued that because the underlying complaint
alleged infringement beginning in March
2009, more than a year before the July 2010
inception of the policy period, the exclusion

applied. A Pennsylvania federal district court
agreed and ruled in the insurers’ favor. The
Third Circuit affirmed.
First, the Third Circuit addressed theproper analysis for determining “whether
Urban Outfitters’ liability-triggering
conduct preceded or postdated [the] policy
period’s inception.” The court held that
this determination must be made solely byreference to allegations in the underlying
complaint, rejecting Navajo Nation’s attempt
to use extrinsic evidence relating to thechronology of trademark infringement
incidents. Second, the court held that there
is an exception to the prior publication
exclusion if the underlying complaint
alleges “fresh wrongs” during the policy
period. Noting a lack of precedent on thisissue, the court defined “fresh wrongs”
as advertisements with a “substantive
difference” from the original infringing
advertisements, as opposed to mere“variations, occurring within a common,
clearly identifiable advertising objective.”
The court further explained that in deciding
whether two or more sets of advertisements
share a “common objective,” relevant
factors include: whether the policyholder
was charged with separate torts for eachadvertising incident; whether there was a“significant lull” between pre and post policy
period advertising initiatives; and whether
the advertisements share a common theme.
Applying these factors to the factual record,
the court found no “fresh wrongs” during therelevant policy periods. Therefore, the court
concluded that the prior publication exclusion
barred coverage for the underlying claims.
6Underwriting
Alert:

Third Circuit Adopts Middle-of-theRoad Definition of “Renewal Policy”
Addressing a matter of first impression underPennsylvania law, the Third Circuit ruled thatin order to constitute a “renewal,” the termsof an insurance policy must be the same ornearly the same as the initial contract. Indian
Harbor Ins. Co. v. F&M Equip., Ltd., 804
F.3d 310 (3d Cir. 2015).

judgment. A Pennsylvania federal district
court denied F&M’s motion and ruled in favorof Indian Harbor. The Third Circuit vacatedthe judgment.
The Third Circuit ruled that for a contract
to be a renewal, it must contain the same,or nearly the same, terms as the originalcontract. In adopting this fact-based
approach, the court rejected bright-line
rules at either end of the spectrum. The
court reasoned that a renewal need not be“identical” to the original policy; however, itcannot be “any offer of a new contract, so longas advance notice is provided for any changed
terms and the terms are commerciallyreasonable.” The court noted that under theinterpretation advocated by Indian Harbor,
the promise to renew would be illusory.
Applying the “same or nearly the same” terms
standard, the Third Circuit concluded thatIndian Harbor’s new offer did not constitutea renewal because the new policy differed interms of price, term length, coverage limits
and site exclusions. However, the court notedthat a reasonable change in price alone would
not render a new contract a non-renewal.

Excess Coverage
Alert:
Indian Harbor Insurance Company issued
an insurance policy to F&M that included
a promise by Indian Harbor to offer arenewal. At the end of the policy term, Indian
Harbor offered a “renewal” that contained
substantially different terms than the original
policy. In particular, it provided $5 million ofcoverage over a one-year term. The original
policy had provided $10 million in coverage
for a ten-year term. In addition, the “renewal”
omitted coverage for a site previously covered
and for which F&M had previously made aclaim. F&M rejected the policy and requested
that Indian Harbor renew under the originalterms and conditions. Thereafter, Indian
Harbor sought a declaratory judgment that it
had complied with its contractual obligation
to offer a renewal and had no further duty
to offer the same terms and conditions as
the expiring policy. F&M counterclaimed forbreach of contract and moved for summary

Fifth Circuit Rules That Excess
Coverage Is Contingent Upon
Payment of Full Policy Limits By
Primary Insurer
Previous Alerts have reported on decisions
addressing whether excess coverage isavailable when a policyholder has settledwith a primary insurer for an amount lessthan primary policy limits. See June 2013
Alert; October 2012 Alert; September andOctober 2011 Alerts. In a recent decision, theFifth Circuit followed what appears to be an
emerging trend, ruling that applicable policy
language requires actual payment of fullpolicy limits by the primary insurer in orderto implicate excess coverage. Martin Res.
Mgmt. Corp. v. AXIS Ins. Co., 803 F.3d 766(5th Cir. 2015).
The policyholder sought excess coverage from
AXIS Insurance Company following a belowlimits settlement with its primary insurer.
In ensuing litigation, a Texas magistrate7

judge granted AXIS’s summary judgment
motion, finding that the excess insurer owed
no coverage because excess coverage wasconditioned upon the primary insurer’s
actual payment of full policy limits. Martin
Res. Mgmt. Corp. v. Zurich Am. Ins. Co.,
No. 6:12-CV-758 (E.D. Tex. May 12, 2014)(discussed in our May 2014 Alert). The Fifth
Circuit affirmed.

court explicitly disagreed with decisions
that deemed similar language ambiguous,emphasizing that an exhaustion clauseis not ambiguous merely because it does
not specify which party must make therequisite payments.

The operative policy provision statedthat excess coverage applied “after all
applicable Underlying Insurance … has been
exhausted by actual payment under such
Underlying Insurance … .” The court heldthat this language unambiguously precluded
exhaustion by a below-limits settlement.
The court reasoned that the phrases “actual
payment” and “all applicable Underlying
Insurance” required both full payment ofprimary policy limits, and payment by the
primary insurer itself. The court cited its
prior ruling in Citigroup Inc. v. Fed. Ins.
Co., 649 F.3d 367 (5th Cir. 2011) (discussed
in September 2011 Alert), which reached
the same result. Although some courts
have deemed primary insurance exhausted
notwithstanding a below-limits settlement,
the Fifth Circuit found these decisions
were distinguishable in light of differing
policy language or not well reasoned. The

Simpson Thacher’s Insurance
Practice Recognized as Top Tier

STB News Alert:

Last month, Euromoney’s Benchmark
Litigation ranked the Firm as Tier 1 for its
Insurance Practice. Describing the Firm,
the publication notes, “[b]oasting whatpeers consider to be a ‘blue-ribbon bench,’
Simpson Thacher & Bartlett continues to see
its reputation soar in the eyes of peer andclients.”
Benchmark Litigation also recognized severalof the Firm’s Insurance Litigation Partners,
including Mary Kay Vyskocil, Andrew Amer,David Woll, Mary Beth Forshaw, Andrew
Frankel, Lynn Neuner, Bryce Friedman andMichael Garvey.

8

Simpson Thacher has been an international leader in the practice of insurance and reinsurance law for
more than a quarter of a century. Our insurance litigation team practices worldwide.
Mary Kay Vyskocil+1-212-455-3093
mvyskocil@stblaw.com

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

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

Andrew S. Amer
+1-212-455-2953
aamer@stblaw.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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