Insurance Law Alert

March 2016

In This Issue
Wisconsin Supreme Court Rules That Incorporation of Defective
Ingredient In Product Is Not “Property Damage”
The Wisconsin Supreme Court ruled that the incorporation of a defective ingredient into a
nutritional supplement tablet is not “property damage” caused by an “occurrence” under
Wisconsin or California law. Wisconsin Pharmacal Co., LLC v. Nebraska Cultures ofCalifornia, Inc., 2016 WL 785203 (Wis. Mar. 1, 2016). (Click here for full article)

Simpson Thacher“[p]rovides deep
expertise and experiencein both direct andreinsurance matters.”–Chambers 2015

New York Court of Appeals Rules That Policyholder Must Pay Deductible
for Each Claimant in Class Action Settlement
The New York Court of Appeals ruled that improper strip searches of each arrestee over a fouryear period constituted separate occurrences subject to separate deductible payments. Selective
Ins. Co. of Am. v. County of Rensselaer, 2016 WL 527098 (N.Y. Feb. 11, 2016). (Click here forfull article)

Washington Appellate Court Rules That Several Collisions Constitute One
Accident as a Matter of Law
A Washington appellate court ruled that a series of automobile collisions constituted a single
accident as a matter of law. State Farm Mut. Auto. Ins. Co. v. Glover-Shaw, 2016 WL 687180(Wash. Ct. App. Feb. 16, 2016). (Click here for full article)

Delaware Supreme Court Addresses Accrual of Bad Faith Failure-to-Settle
ClaimsAddressing a matter of first impression under Delaware law, the Delaware Supreme Court
ruled that a bad faith failure-to-settle claim against an insurer accrues when a judgment
against the policyholder in excess of policy limits becomes final and non-appealable. Connelly
v. State Farm Mutual Auto. Ins. Co., 2016 WL 836983 (Del. Mar. 4, 2016). (Click here forfull article)

No Coverage Where Insured Was Not “Legally Obligated” to Remediate
Mold, Says Eighth Circuit
The Eighth Circuit ruled that a property manager was not legally obligated to remediate molddamage and was therefore not entitled to coverage under general liability policies. Busch
Props., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 2016 WL 722950 (8th Cir. Feb. 24,2016). (Click here for full article)

Simpson Thacher & Bartlett LLP

1

Business Owner’s Policy Does Not Cover Data Breach Losses, Says New
York Appellate Court
A New York appellate court ruled that a business owner’s policy does not provide coveragefor third-party damages stemming from a data breach. RVST Holdings, LLC v. Main St.
Am. Assurance Co., 2016 WL 634611 (N.Y. App. Div. 3d Dep’t Feb. 18, 2016). (Click here forfull article)

Illinois Court Declines to Dismiss Data Breach Suit Against Insurance
Company
An Illinois federal district court denied an insurer’s motion to dismiss a putative class action
suit alleging improper handling of policyholders’ personal information. Dolmage v. Combined
Ins. Co. of Am., 2016 WL 754731 (N.D. Ill. Feb. 23, 2016). (Click here for full article)

New Jersey Court Refuses to Dismiss Qui Tam Action Against Insurer
A New Jersey federal district court denied an insurer’s motion to dismiss a qui tam complaint,
finding that it sufficiently alleged a fraud claim pursuant to the False Claims Act. Negron v.
Progressive Cas. Ins. Co., 2016 WL 796888 (D.N.J. Mar. 1, 2016). (Click here for full article)

Courts Disagree on Whether Pollution Exclusion Encompasses NonTraditional Noxious Odor Claims
Two courts reached opposing conclusions as to whether a pollution exclusion bars coverage forclaims arising out of exposure to noxious fumes. Shaw v. Liberty Mutual Fire Insurance Co.,2016 WL 561409 (M.D. Fla. Feb. 12, 2016); Nat’l Fire Ins. Co. of Hartford v. James River Ins.,
2016 WL 613964 (D. Ariz. Feb. 16, 2016). (Click here for full article)

United States Supreme Court Rules That ERISA Preempts State ClaimsReporting Statutes
The United States Supreme Court ruled that the reporting requirements set forth in the
Employee Retirement Income Security Act preempt those of individual states. Gobeille v.
Liberty Mutual Ins. Co., 136 S. Ct. 936 (2016). (Click here for full article)

Three Courts Address The Scope of a “Claim” in Claims-Made Policies
The Second Circuit ruled that an insurer was not obligated to defend an action because it
related to a claim first made prior to the policy’s effective period. Weaver v. Axis Surplus
Insurance Co., 2016 WL 860363 (2d Cir. Mar. 7, 2016). (Click here for full article)
An Arizona appellate court denied D&O coverage based an exclusion for claims arising out ofInterrelated Wrongful Acts alleged in a prior claim made outside the applicable policy period.
SP Syntax LLC v. Federal Ins. Co., 2016 WL 831532 (Ariz. Ct. App. Mar. 3, 2016). (Click here
for full article)
A California federal district court ruled that seven lawsuits pending against the policyholder
constituted a single claim for the purposes of the per-claim limit in the applicable policy.
Liberty Ins. Underwriters, Inc. v. Davies Lemmis Raphaely Law Corp., 2016 WL 741837 (C.D.
Cal. Feb. 23, 2016). (Click here for full article)2

Property Damage
Alert:
Wisconsin Supreme Court Rules
That Incorporation of Defective
Ingredient In Product Is Not“Property Damage”

The Wisconsin Supreme Court ruled thatthe incorporation of a defective ingredient
into a nutritional supplement tablet is not“property damage” caused by an “occurrence”
under Wisconsin or California law. Wisconsin
Pharmacal Co., LLC v. Nebraska Cultures ofCalifornia, Inc., 2016 WL 785203 (Wis. Mar.
1, 2016).
Pharmacal supplied probiotic supplements
to retailers. One such supplement was atablet that was supposed to contain LRA, aprobiotic bacterial species. However, after
the tablets were shipped to retailers, it was
discovered that the tablets contained LA, adifferent bacterial species. The tablets wererecalled and the remaining inventory wasdestroyed. Pharmacal sued several of its
suppliers and their insurers. The insurers
moved for summary judgment, arguing that
there was no coverage for the underlying
claims. A Wisconsin trial court agreed andruled that the insurers had no duty to defend.
An intermediate appellate court reversed.
The Wisconsin Supreme Court reversed theappellate ruling.
The Wisconsin Supreme Court ruled that
under Wisconsin law, the question ofwhether the incorporation of a defective
ingredient constitutes property damage turns
on “whether the product is to be treatedas a unified whole or whether a defective
component can be separated out such thatthe claimed damage constitutes damage toproperty other than the defective component
itself.” The court concluded that because allof the ingredients were permanently blended
together in the manufacturing process, thetablet constituted an “integrated system.”
The court therefore held that damage to thetablet was damage to the product itself and
not damage to other property. The court
also held that there was no “physical injury
to tangible property” because there was no
physical alteration of other ingredients, thecontainer, or any other packaging component.
Additionally, the court held that there wasno “loss of use of tangible property” because
the destruction of the products constituted
a permanent economic loss rather than atemporary loss of use of property. Finally, thecourt ruled that there was no “occurrence”
even though incorporation of the incorrect
ingredient was accidental. Citing to faulty
workmanship coverage precedent, the court
reasoned that just as defective construction,
standing alone, does not constitute an
occurrence, use of a defective ingredient,in and of itself without resulting property
damage, does not constitute an occurrence.
Applying California law to a second insurance
policy that was at issue, the court concluded
that the failure of a product to perform
as intended does not constitute property
damage. Although California courts haveheld that the incorporation of a hazardous
component can constitute property damage,the court deemed such precedent inapplicablebecause the incorrect ingredient was nothazardous. The court further held that there
was no “occurrence” under California law
because the supply and incorporation of
LA was deliberate, rather than accidental,
even though the provision of the defective
ingredient “may have been occasioned
by negligence.”3

Number ofOccurrences
Alerts:New York Court of Appeals Rules
That Policyholder Must Pay
Deductible for Each Claimant inClass Action Settlement
The New York Court of Appeals ruled that
improper strip searches of each arrestee
over a four-year period constituted separate
occurrences subject to separate deductible
payments. Selective Ins. Co. of Am. v. Countyof Rensselaer, 2016 WL 527098 (N.Y. Feb.
11, 2016).
Class action suits against Rensselaer
County alleged that the County jail’s strip
search policy violated arrestees’ civil rights.
Selective Insurance defended the County
and ultimately reached a settlement with theunderlying plaintiffs. The County refused
to pay Selective more than a single $10,000
deductible payment. Selective filed suit,arguing that harm to each class member
constituted a separate occurrence and wastherefore subject to a separate deductible.
A New York trial court agreed and ruled in
Selective’s favor. An intermediate appellate
court, and the Court of Appeals both affirmed.
The policy defined “occurrence” as “an event,including continuous or repeated exposure
to substantially the same general harmful
conditions, which results in . . . ‘personal
injury’ . . . by any person or organization.”
The court reasoned that this language“makes clear that [the policy] covers personal
injuries to an individual person as a resultof a harmful condition.” The court further
explained that this language does not permit
the grouping of multiple individuals who were
harmed by the same condition unless thatgroup is an organization. The court therefore
concluded that the harm experienced by eachindividual arrestee constituted a “separate
and distinct” occurrence subject to a separate
deductible.

Washington Appellate Court Rules
That Several Collisions Constitute
One Accident as a Matter of Law
Reversing a trial court decision, a Washington
appellate court ruled that a series ofautomobile collisions constituted a single
accident as a matter of law. State Farm Mut.
Auto. Ins. Co. v. Glover-Shaw, 2016 WL
687180 (Wash. Ct. App. Feb. 16, 2016).
Shortly after crossing an intersection, an
intoxicated driver struck three different
vehicles. Those vehicles, in turn, hit or were
hit by other nearby vehicles. State Farmsought a declaration that all of the collisions
constituted a single accident under its
insurance policy, subject to a single $100,000
per-accident limit. A trial court denied State
Farm’s summary judgment motion, and thematter was tried before a jury, which decided
against State Farm. State Farm moved fora new trial, which the court denied. The
appellate court ruled that the trial court
erred in denying State Farm’s summary
judgment motion.
Under Washington law, “[a]ll injuries
or damage within the scope of a single‘proximate, uninterrupted, and continuingcause’ must be treated as arising from asingle accident.” The appellate court ruledthat the intoxicated driver’s loss of controlof the vehicle was the sole, uninterrupted
proximate cause of all of the collisions at
issue. In so ruling, the court noted that therecord established that the collisions occurred
within a span of 160 feet and within four orfive seconds. The court further emphasizedthat the driver never “regained control” of her
vehicle during that time frame. As reported
in our October 2015 Alert, the Second
Circuit, applying New York’s “unfortunate
event test,” reached a different conclusion
in a motor vehicle case, holding that a seriesof related automobile accidents caused by
a common origin and within a short timespan constituted three separate accidents forpurposes of policy coverage. National Liab. &Fire Ins. Co. v. Itzkowitz, 2015 WL 5332109(2d Cir. Sept. 15, 2015), as amended (Sept.
22, 2015).
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Bad Faith Alert:

Delaware Supreme Court Addresses
Accrual of Bad Faith Failure-toSettle Claims
Addressing a matter of first impression under
Delaware law, the Delaware Supreme Court
ruled that a bad faith failure-to-settle claim
against an insurer accrues when a judgment
against the policyholder in excess of policy
limits becomes final and non-appealable.
Connelly v. State Farm Mutual Auto. Ins. Co.,2016 WL 836983 (Del. Mar. 4, 2016).
The bad faith claim arose out of an
automobile accident between Brown
and Connelly. Connelly sued Brown andsubsequently offered to settle for $35,000.
State Farm, which had the exclusive right tocontrol Brown’s defense, rejected the offer. A
trial later awarded Connelly approximately$224,000. State Farm paid part, but not
all of the judgment. Connelly, as Brown’s
judgment creditor, sued State Farm alleging
bad faith based on its refusal to settle for$35,000 given the policy’s $100,000 limit.
State Farm moved to dismiss the complainton the ground that it was barred by theapplicable three-year statute of limitations.
See 10 Del. C. §8106. State Farm argued thatthe statute of limitations began to run either
on the date Connelly made her settlement
offer, or one month later, when the offer
expired. A Delaware trial court granted State
Farm’s motion to dismiss, finding that thebad faith claim accrued at the time that State
Farm allegedly breached its contractual
duties, which was the date State Farm denied
Connelly’s settlement offer. The Delaware
Supreme Court reversed.
Joining “the majority rule of courts in otherstates,” the Delaware Supreme Court ruledthat the accrual date for a bad faith failureto-settle claim is when an excess judgment
becomes final and non-appealable. The court
noted that this holding promotes judicial
economy (i.e., avoiding bad faith litigation
if there is no excess judgment against thepolicyholder) and reduces potential conflictsof interest between insurers and policyholders(i.e., avoiding a bad faith claim during thependency of an underlying suit defended byan insurer). In addition, the court explainedthat using the date of final judgment as theaccrual date comports with Delaware badfaith law, because in order to state a bad faithclaim, a policyholder must plead damages,
which it cannot do until a final excess
judgment is issued.

Coverage Alert:

No Coverage Where Insured
Was Not “Legally Obligated” toRemediate Mold, Says Eighth
Circuit
The Eighth Circuit ruled that a property
manager was not legally obligated to
remediate mold damage and was therefore
not entitled to coverage under general liability
policies. Busch Props., Inc. v. Nat’l Union Fire
Ins. Co. of Pittsburgh, PA, 2016 WL 722950(8th Cir. Feb. 24, 2016).
Busch Properties, Inc., a property manager
and rental agent, discovered mold trapped incondominium walls, which arose from the useof vinyl wallpaper. Busch notified unit ownersof its intention to remediate. Busch issued aconsent form to each unit owner indicatingthat Busch would fund the mold abatement
and repair, but was not admitting liability.
The consent form did not purport to releaseany claims that unit owners might have had
against Busch. Although no lawsuits werefiled against Busch, Busch sought coveragefor the remediation expenses from National
Union, its liability insurer. National Union
denied coverage on the basis that Busch was
not “legally obligated to pay by reason of
liability imposed by law.” A Missouri federal
district court agreed and granted National
Union’s summary judgment motion. The
Eighth Circuit affirmed.
The Eighth Circuit ruled that the policy phrase“legally obligated to pay by reason of liability
imposed by law” (and the correspondingphrase “legally obligated to pay as damages
for liability imposed upon the Insured by law,”as contained in another applicable policy)
may be satisfied by either a court judgment,or alternatively, a claim and settlementagreement. Because neither existed here,
the court concluded that the policies did notprovide coverage. Busch had argued that
notwithstanding the absence of a judgement
or settlement, it “faced liability to unit owners
and the associations for the damage it caused.”
Rejecting this argument, the court explainedthat even if Busch acted to satisfy a preexisting5contractual duty, its remediation expenses “didnot truly spring from ‘liability imposed by law’but rather from a duty it voluntarily assumed.”
In addition, the court rejected Busch’s attempt
to secure coverage under a policy provision
for “damages for . . . liability assumed by
the Insured under contract.” The court
concluded that this clause provides coveragefor indemnity or hold harmless contracts, andnot the consent or maintenance agreements at
issue here.

court rejected the assertion that coverage
was provided by a separate policy provisionthat provided coverage for “direct physicalloss of or damage to” the policyholder’sown property. Although that provision
did not exclude electronic data, the court
reasoned that it was inapplicable to thethird-party claims because it related to firstparty coverage.

Illinois Court Declines to Dismiss
Data Breach Suit Against Insurance
Company

Illinois federal district court denied an
Data Breach Alerts: An
insurer’s motion to dismiss a putative classBusiness Owner’s Policy Does Not
Cover Data Breach Losses, Says
New York Appellate Court

A New York appellate court ruled that abusiness owner’s policy does not provide
coverage for third-party damages stemmingfrom a data breach. RVST Holdings, LLC v.
Main St. Am. Assurance Co., 2016 WL 634611(N.Y. App. Div. 3d Dep’t Feb. 18, 2016).
Restaurant operators stored customers’ credit
card information on their computer network.
The network was hacked and the credit card
information was used to make numerous
fraudulent charges. Thereafter, a bank sued
the restaurant operators, alleging that theynegligently failed to exercise reasonable carein safeguarding the information. When therestaurant operators sought coverage under
their business owner’s policy, the insurer
refused to defend or indemnify, arguing thatthe policy excluded coverage for third-party
claims arising out of the loss of electronic
data. In ensuing litigation, a New York
trial court ruled in favor of the restaurant
operators. The appellate court reversed.
The policy provided coverage for sums
the policyholder is legally obligated to pay
because of “property damage,” defined as“[p]hysical injury to tangible property . . . or
. . . [l]oss of use of tangible property that is
not physically injured.” However, the policy
further stated that “electronic data is nottangible property” and expressly excluded“[d]amages arising out of the loss of . . .
electronic data.” The court held that in lightof this unambiguous language, the alleged
negligent handling of electronic data is nota claim for “property damage,” and is, inany event, excluded from coverage. The

action suit alleging improper handling ofpolicyholders’ personal information. Dolmage
v. Combined Ins. Co. of Am., 2016 WL 754731(N.D. Ill. Feb. 23, 2016).
The insurer issued disability, health, life, andaccident policies to the plaintiff and putativeclass members. In connection with issuanceof the policies, the insurer sent each enrollee
a document entitled “Our Privacy Pledge toYou,” along with other materials relating to
the policies. The Privacy Pledge describes theinsurer’s handling of policyholders’ personal
information and states, among other things,
that it maintains safeguards that comply withfederal regulations to protect personal data,
and that to the extent personal informationis shared with other entities, it will “requirethem to abide by the same privacy standards
as indicated here.”
The insurer retained Enrolltek, a vendor that
performs enrollment and other administrative
functions, and provided it with the proposedclass members’ personal information for
those purposes. According to the complaint,
Enrolltek stored the personal information“online, unsecure and unprotected.” The
information was allegedly “accessible toanyone with an Internet connection.” Theinsurer was allegedly aware of these security
lapses but took no immediate action. The
insurer later issued a formal notification to
the plaintiff and potential class members that
their personal information had been stored
without proper security measures. Based onthese allegations, plaintiff asserted a breachof contract claim, alleging that the data
breach was a direct and foreseeable result of
the insurer’s failure to ensure that Enrolltek
implemented appropriate security measures,as represented in the Privacy Pledge. The
6

insurer moved to dismiss the complaint,
which the court denied.
The court concluded that the complaintstated a viable cause of action for breach of
the insurance contracts. The court held thatthe complaint sufficiently alleged that thePrivacy Pledge was incorporated into the classmembers’ insurance contracts because eachpolicy was defined as “this policy with any
attached application(s), and any riders andendorsements.” The court therefore reasoned
that the Privacy Pledge could arguably beconsidered an endorsement, explainingthat it could “be read to supplement thepolicy by providing additional benefits toinsureds regarding the handling of theirpersonal information.” In this context, thecourt noted that the insurer “could haveavoided any ambiguity by clearly labelingthe documents sent with the policy that wereintended to be incorporated by reference, but
it did not do so.” The court also rejected theinsurer’s argument that the Privacy Pledge
does not give rise to a contractual rightbecause it is “nothing more than a statementthat [Defendant] is complying with its
preexisting duties to follow applicable federal
regulations.” The court explained that, in
addition to promising compliance with federal
regulations, the Privacy Pledge also madeother assurances about the safeguarding ofenrollees’ personal information.

False Claims
Act Alert:

New Jersey Court Refuses to
Dismiss Qui Tam Action Against
Insurer
A New Jersey federal district court denied
an insurer’s motion to dismiss a qui tam
complaint, finding that it sufficiently alleged afraud claim pursuant to the False Claims Act.
Negron v. Progressive Cas. Ins. Co., 2016 WL
796888 (D.N.J. Mar. 1, 2016).
Relator Elizabeth Negron brought a qui
tam action against Progressive, alleging
that it allowed enrollees to select a certain
automobile insurance policy which caused
health care providers to submit medical
claims to Medicare and Medicaid in violationof state and federal “secondary payer” laws.

Under the Medicare Secondary Payer (“MSP”)
Act and applicable New Jersey statutory
law, private health care plans are consideredprimary and Medicare serves as the secondary
payer, available only when the primary payer
does not provide coverage. Relator allegedthat Progressive’s online policy application
system allowed Medicare and Medicaid
beneficiaries to enroll in a “health first”
automobile insurance policy even though
doing so would result in the submission ofreimbursement claims to Medicare and/or
Medicaid as a primary payer, in violation of
the MSP Act. Progressive moved to dismissthe complaint, which the court denied.
To state a claim under the False Claims Act,a plaintiff must show that: (1) the defendantpresented or caused to be presented to agovernment entity a claim for payment;(2) the claim was false or fraudulent; and(3) the defendant knew that the claim wasfalse or fraudulent. The court held that thecomplaint sufficiently alleged each of theserequirements. In particular, the court heldthat the complaint alleged fraud based onan “implied false certification theory,” which
is premised on the notion that “the act ofsubmitting a claim for reimbursement itself
implies compliance with governing federal
rules that are a precondition to payment.”
The court explained that Progressive had
numerous opportunities to prevent the saleof the “health first” policies to Medicare
and Medicaid enrollees, or to prevent thesubmission of claims to Medicare andMedicaid as primary payers, but did not do so.
In so ruling, the court noted that Progressive’s
choice to “remain[ ] ignorant” of Relator’squalifications caused Relator’s health careproviders to submit claims to Medicare inviolation of the MSP Act. Finally, the court
held that the complaint sufficiently pleaded“knowledge” by Progressive by alleging thatthe insurer “failed to make reasonable andprudent inquiries to ensure compliance with
the MSP Act.”
Shortly before the court ruled on Progressive’s
motion to dismiss, Progressive moved to staypending the United States Supreme Court’s
decision in Universal Health Services Inc.
v. United States ex. Rel. Escobar, No. 15-7
(U.S. 2016), arguing that the Supreme Court
will soon decide the viability and scope of
the “implied certification” theory of liability
under the False Claims Act. Oral arguments in
Escobar are scheduled for April 19, 2016.
7

does not constitute traditional
Pollution Exclusion installation
pollution. Notably, the pollution exclusion
at issue in James River was broader thanstandard form language, containing an
Alert:
additional “blanket exclusion” that barred

Courts Disagree on Whether
Pollution Exclusion Encompasses
Non-Traditional Noxious Odor
ClaimsIn Shaw v. Liberty Mutual Fire InsuranceCo., 2016 WL 561409 (M.D. Fla. Feb. 12,2016), the court ruled that Texas law does not
limit a pollution exclusion to claims arisingout of traditional environmental pollution.
The coverage dispute arose out of an insurer’s
denial of coverage for carbon monoxiderelated injuries based on a pollution
exclusion. The court granted the insurer’ssummary judgment motion, finding that thepollution exclusion unambiguously barred
coverage. In so ruling, the court expressly
rejected the policyholder’s argument thatthe exclusion should not apply because
the underlying injuries were caused byventilation, plumbing, and detection system
failures, rather than a “pollutant.” The court
explained: “The Shaws’ injuries arose outof the migration of carbon monoxide, apollutant, from the parking garage to theirroom, on account of improperly maintained
systems, and the failure to use appropriate
detection equipment. Thus, the pollution
exclusion applies, even if the other failures . . .
contributed to their injuries.”
In contrast, a court applying Arizona law
ruled that claims arising out of exposure tohydrogen sulfide (a foul odor produced by asewage leak) were not barred by a pollution
exclusion. Nat’l Fire Ins. Co. of Hartford
v. James River Ins., 2016 WL 613964 (D.
Ariz. Feb. 16, 2016). The court ruled that
Arizona law limits application of the pollution
exclusion to traditional environmental
pollution. Although the Arizona Supreme
Court has not definitively ruled on the issue,
the court reasoned that under appellate court
precedent, an absolute pollution exclusion
does not bar coverage for all injuries
arising from exposure to toxic substances.
Rather, application of the exclusion must
be determined “in light of the historical
purpose of the pollution exclusionary clause.”
The court therefore concluded that, evenassuming that hydrogen sulfide gas was a“contaminant” or “irritant,” the exclusion was
inapplicable because faulty plumbing pipe

coverage for all “[p]ollution/environmental
impairment/contamination.” However, thecourt rejected this provision as overbroad,stating that those terms “must be tethered
to some limiting principle” to prevent theexclusion from eviscerating coverage.

Preemption Alert:

United States Supreme Court Rules
That ERISA Preempts State ClaimsReporting Statutes
The United States Supreme Court ruled thatthe reporting requirements set forth in the
Employee Retirement Income Security Act(“ERISA”) preempt those of individual states.
Gobeille v. Liberty Mutual Ins. Co., 136 S. Ct.
936 (2016).
Vermont statutory law requires healthinsurers to report payments relating tohealth care claims and services to a stateagency for compilation in a database. The
law encompasses health plans establishedby employers and regulated by ERISA.
Liberty Mutual’s health plan, which provides
insurance benefits in all fifty states, is an“employee welfare benefit plan” under ERISA.
The plan’s third-party administrator, Blue
Cross Blue Shield of Massachusetts, Inc.,is subject to Vermont’s disclosure statute.
However, Liberty Mutual directed Blue
Cross to withhold claim data from the stateagency on the basis that it might violate its
fiduciary duties with respect to customers’confidential information. Liberty Mutual
filed suit seeking a declaration that ERISA
preempted the Vermont statute, and an
injunction preventing Vermont from seeking
to obtain data about the plan or its members.
A Vermont district court ruled in favor of thestate, finding that there was no preemption.
The district court reasoned that although
the state scheme might have “some indirect
effect” on health benefit plans, the effect is“so peripheral that the regulations cannot
be considered an attempt to interfere withthe administration or structure of a welfare
benefit plan.” The Second Circuit reversed,
concluding that Vermont’s reporting statute8was preempted by ERISA because the state
regime interferes with the uniformity of
ERISA. The Supreme Court affirmed.
The Supreme Court emphasized thatreporting and record-keeping are integral
aspects of ERISA. Therefore, state regulations
governing these same functions (whether the
regulations are “[d]iffering or even parallel”)
could “create wasteful administrative costs
and threaten to subject plans to wide-ranging
liability.” The Court therefore concluded
that preemption is “necessary to prevent theStates from imposing novel, inconsistent,
and burdensome reporting requirementson plans.”

Claims-MadeCoverage Alert:

Three Courts Address The Scope ofa “Claim” in Claims-Made Policies
In Weaver v. Axis Surplus Insurance Co.,2016 WL 860363 (2d Cir. Mar. 7, 2016), theSecond Circuit ruled that an insurer was not
obligated to defend a policyholder in an action
brought by the Department of Justice (“DOJ”)
because it related to a claim first made prior
to the policy’s effective period.
Axis insured Multivend, a vending machinesales company, under a claims-made policy.
The policy was in effect from 2010 to 2014,
with a “Pending or Prior Claim” date of
February 20, 2008. In 2007, the Office of the
Attorney General of Maryland sent a letter toMultivend requesting information relating
to potential statutory violations. The letter
requested that Multivend immediately ceaseall offers and sales of business opportunities,
noting that failure to respond could resultin formal legal action. In 2012, Weaver,Multivend’s President/CEO, advised Axis
that he had received a DOJ letter identifying
him as a target of a grand jury investigation.
Shortly thereafter, Weaver was indicted.
Weaver sought coverage from Axis, which
denied the claim. In ensuing coveragelitigation, a New York federal district court
granted Axis’s summary judgment motion,
finding that the indictment was based on
the same or “Interrelated Wrongful Acts” as
the 2007 Maryland AG letter, and therefore
constituted a claim “first made” prior to thepolicy period. The district court also ruledthat the coverage was excluded because
the 2007 Maryland AG letter constituted a“demand” made prior to the February 20,
2008 “Pending or Prior Claim” date. The
Second Circuit, addressing only the latterholding, affirmed.
The policy excluded coverage for “any Claim. . . in any way involving . . . any demand, suitor other proceeding pending . . . against any
Insured on or prior to [February 20, 2008],
or any Wrongful Act, fact, circumstancesor situation underlying or alleged therein.”
The parties did not dispute that the DOJ
action constituted a “claim” involving thesame facts and circumstances as the 2007
Maryland AG letter. However, Weaver argued
that the 2007 Maryland AG letter was nota “demand.” The court disagreed. Although
the policy did not define “demand,” thecourt held that it requires “an imperative
solicitation for that which is legally owed,” asopposed to a mere “request carrying no legal
consequences.” The court concluded that the2007 Maryland AG letter met this standard
because it requested information, directed a
cessation of business activities, and indicatedthat a failure to comply could result in formal
legal action. In so ruling, the court notedthat neither the polite tone nor the lack of“specific consequences” in the letter negatedthe “demand” status of the letter. Weaver filed
a petition for rehearing to the Second Circuit
on March 21.
An Arizona appellate court similarly denied
D&O coverage based an exclusion for claims
arising out of Interrelated Wrongful Acts
alleged in a prior claim made outside theapplicable policy period. SP Syntax LLC v.
Federal Ins. Co., 2016 WL 831532 (Ariz. Ct.
App. Mar. 3, 2016).
SBC, a television developer and distributer,
was insured under two “towers” of D&O
coverage. Tower 1 was effective from
November 30, 2006 through November
30, 2007, and Tower 2 was effective from
November 30, 2007 through November 30,
2008. Federal Insurance participated in two
excess coverage layers in Tower 2—an excess
policy and a “Side A Policy.”
SBC was sued in a securities fraud classaction on November 14, 2007. The Tower 1
insurers accepted coverage for this action.
Approximately three months later, a second
complaint was filed against SBC alleging fraud
9and misrepresentations in connection with acredit facility agreement. SBC tendered thesecond complaint to all its insurers. Federal
and the other Tower 2 insurers denied
coverage. An Arizona trial court dismissed
SBC’s coverage claims against Federal, findingthat exclusions in both Federal policies barred
coverage. The appellate court affirmed.
Federal’s excess policy barred coverage forany claim “alleging, arising out of, based
upon, attributable to or in any way related
directly or indirectly, in part or in whole,
to an Interrelated Wrongful Act.” The term
“Interrelated Wrongful Act” included any
wrongful act “which is the same as, similar,
or related to” any wrongful act alleged in
the prior securities fraud class action. The
appellate court ruled that the exclusion
applied because the second complaint
included many of the same allegations set
forth in the prior securities fraud class action.
In so ruling, the court deemed it insignificant
that the second complaint contained
allegations not included in the first complaint,
noting that all allegations were “related.”
For the same reasons, the court ruled thatcoverage was unavailable under Federal’s SideA Policy, which provided that “[a]ll related
claims shall be treated as a single Claim firstmade on the date the earliest of such Related
Claims was first made.”
A California federal district court ruledthat seven lawsuits pending against thepolicyholder constituted a single claim forthe purposes of the per-claim limit in theapplicable policy. Liberty Ins. Underwriters,
Inc. v. Davies Lemmis Raphaely Law Corp.,
2016 WL 741837 (C.D. Cal. Feb. 23, 2016).

Between 2011 and 2013, seven lawsuit werefiled against a real estate firm (DLR) anda real estate investment broker (AMC).
The suits alleged that DLR and AMC madefraudulent misrepresentations relating
to commission payments in connection
with property acquisitions. Each property
acquisition was completed on a different date,purchased from a separate seller, and on
different terms. Liberty, DLR’s professional
liability insurer, funded the defense of
the underlying actions. Liberty sought adeclaration that all seven suits constituted asingle claim under a 2010-2011 claims-madeand-reported policy, and were thus subject toa single per-claim limit. The court agreed andgranted Liberty’s summary judgment motion.
The policy provided that “[c]laims alleging,based upon, arising out of or attributable tothe same or related wrongful acts shall betreated as a single claim.” The court held that
because the underlying suits arose out of 23
distinct transactions, they were not basedon the “same” wrongful act. However, thecourt concluded that the underlying alleged
wrongful acts were sufficiently “related” tobe considered a single claim. In particular,
the court reasoned that although eachunderlying suit was brought by a different
plaintiff, “they all arise from a single courseof conduct, a unified policy of making alleged
misrepresentations to investors in order toinduce them to invest in commercial realestate acquisitions facilitated by AMC.” Thecourt therefore concluded that a single perclaim limit applied to all underlying claims.

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.
Mary Kay Vyskocil+1-212-455-3093
mvyskocil@stblaw.com

Bryce L. Friedman+1-212-455-2235
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Deborah L. Stein+1-310-407-7525
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David J. Woll
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Lynn K. Neuner+1-212-455-2696
lneuner@stblaw.com

George S. Wang
+1-212-455-2228
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Summer Craig+1-212-455-3881
scraig@stblaw.com

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

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