Insurance Law Alert

April 2017

In This Issue
New York Court Vacates Reinsurance Award Based On Arbitrator’s
Evident Partiality
A New York federal district court vacated an arbitration award in a reinsurance dispute, findingthat an arbitrator’s failure to disclose his relationship with a party to the dispute reflected
evident partiality. Certain Underwriting Members at Lloyd’s of London v. Insurance Co. of theAmericas, No. 16-CV-323 (S.D.N.Y. Mar. 31, 2017). (Click here for full article)

California Supreme Court Rules Unenforceable Portion Of Arbitration
Clause That Waives Right To Public Injunctive Relief“They’re the
go-to firm for the
insurance industry forreally serious cases. Their
practice is top-notch.”–Chambers USA 2016,
quoting a client

The California Supreme Court ruled that an arbitration provision that waives the right toseek public injunctive relief in any forum is contrary to public policy and thus unenforceable
under California law. McGill v. Citibank, 2017 WL 1279700 (Cal. Apr. 6, 2017). (Click here forfull article)

California Court Rules That Non-Cumulation Clause Prevents Insured
From Stacking Policy Limits
A California federal district court ruled that a non-cumulation clause is an anti-stacking
provision and therefore that the policyholder is entitled to recover only a single policy limit
rather than the sum of three consecutive policy limits. Ins. Co. of the State of PA. v. Cnty. of
San Bernardino, No. CV 16-0128 (C.D. Cal. Mar. 8, 2017). (Click here for full article)

Iowa Court Adopts Per-Claim Approach To Number Of Occurrences In A
Defective Product Suit
An Iowa federal district court ruled that each claim against a window manufacturer is aseparate occurrence for purposes of general liability coverage. Pella Corp. v. Liberty Mutual
Ins. Co., 2017 WL 1231721 (S.D. Iowa Mar. 31, 2017). (Click here for full article)

Each Incident Of Abuse Is A Separate Occurrence, Says Minnesota
Bankruptcy Court
A Minnesota bankruptcy court ruled that each incident of abuse by an individual priest is aseparate occurrence under liability policies. In re Diocese of Duluth, 2017 WL 1194501 (Bankr.
D. Minn. Mar. 30, 2017). (Click here for full article)

Fourth Circuit Affirms That Fireworks-Related Injuries Arise From Single
Occurrence
Applying Pennsylvania law, the Fourth Circuit ruled that injuries caused by a fireworksrelated accident arose from a single occurrence, regardless of the number of victims or alleged
negligent acts. Hollis v. Lexington Ins. Co., 2017 WL 1076706 (4th Cir. Mar. 22, 2017).
(Click here for full article)
Simpson Thacher & Bartlett LLP

1

Indiana Court Of Appeals Rules That Insurer Owes No Additional Insured
Coverage Until Named Insured Satisfies SIR
The Indiana Court of Appeals ruled that a named insured under a general liability policy mustsatisfy the self insured retention before an additional insured may seek coverage under thepolicy. Walsh Constr. Co. v. Zurich American Ins. Co., 2017 WL 1151033 (Ind. Mar. 28, 2017).
(Click here for full article)

New York Appellate Court Rules That Insurer Is Estopped From Denying
Coverage Based On Failure To Timely Disclaim Coverage To Additional
InsuredA New York appellate court ruled that an insurer is estopped from denying coverage to an
additional insured based on its failure to timely disclaim coverage. Harco Constr., LLC v. First
Mercury Ins. Co., 2017 WL 986586 (N.Y. App. Div. 2d Dep’t Mar. 15, 2017). (Click here forfull article)

Rejecting Site-Based Choice Of Law Approach, Delaware Supreme Court
Rules That New York Law Governs All Environmental Claims
Reversing a Superior Court decision, the Delaware Supreme Court ruled that New York law
governs an environmental coverage dispute regardless of the state in which the claims arose.
Certain Underwriters at Lloyds, London v. Chemtura Corp., 2017 WL 1090544 (Del. Mar. 23,2017). (Click here for full article)

Ninth Circuit Rules That Insurer’s Negligence Is Insufficient To Establish
Breach Of Implied Duty To Settle
The Ninth Circuit ruled that a California federal district court erroneously concluded that aninsurer’s negligence was sufficient to constitute a breach of the implied duty to settle. McDanielv. Government Employees Ins. Co., 2017 WL 892516 (9th Cir. Mar. 7, 2017). (Click here forfull article)

Sixth Circuit Rejects Policyholder’s Implicit Disparagement Argument For
Advertising Injury Coverage
The Sixth Circuit ruled that an insurer had no duty to defend or indemnify infringement
and false advertising claims because they did not allege disparagement within the scope ofadvertising injury coverage. Vitamin Health, Inc. v. Hartford Cas. Ins. Co., 2017 WL 1325263(6th Cir. Apr. 11, 2017). (Click here for full article)

Minnesota Supreme Court Rules That State Statute Caps Damages At
Policy Limits
The Minnesota Supreme Court ruled that a state statute that authorizes damages to an insured
when an insurer unreasonably denies policy benefits is subject to a cap based on policy limits.
Wilbur v. State Farm Mutual Auto. Ins. Co., 2017 WL 1245282 (Minn. Apr. 5, 2017).
(Click here for full article)

Texas Supreme Court Announces Five Rules Of Law Governing
Policyholders’ Statutory and Contractual Rights To Damages
Seeking to eliminate confusion among Texas courts, the Texas Supreme Court set forth fiverules addressing when an insured can recover policy benefits or other damages based on
statutory violations, absent a breach of contract by the insurer. USAA Texas Lloyds Co. v.
Menchaca, 2017 WL 1311752 (Tex. Apr. 7, 2017). (Click here for full article)2

Arbitration Alerts:

operated out of the same suite at the same
address.

A New York federal district court vacatedan arbitration award in a reinsurance
dispute, finding that an arbitrator’s failure todisclose his relationship with a party to thedispute reflected evident partiality. Certain
Underwriting Members at Lloyd’s of London
v. Insurance Co. of the Americas, No. 16-CV323 (S.D.N.Y. Mar. 31, 2017).

In granting Underwriters’ motion to vacate,
the court rejected ICA’s contentions thatpartiality was not established because
Campos had no financial or personal stakein the outcome of the arbitration and that amore relaxed standard of impartiality applies
for “party appointed arbitrators in tripartite
industry arbitrations.” However, the court
cautioned that evident partiality must be
analyzed on a case-by-case basis and that a
failure to disclose a material relationship does
not constitute per se partiality.

New York Court Vacates
Reinsurance Award Based On
Arbitrator’s Evident Partiality

ICA, an insurance company that provides
workers’ compensation coverage, enteredinto reinsurance treaties with certain Lloyd’s
underwriters. When a dispute over two
claims arose, ICA demanded arbitration anddesignated Alex Campos as its arbitrator.
Before arbitration began, each panel member
made affirmative disclosures regarding
his relationships with the parties andindividuals involved in the dispute. In his
disclosure, Campos indicated that he hadno personal relationship with any party or
any business relationship with ICA. At theend of arbitration, the panel issued an award
in ICA’s favor. The Underwriters moved tovacate the award on several bases, including
Campos’s evident partiality. The court
granted the motion.
Under the Federal Arbitration Act, an award
may be vacated based on evident partiality
if the moving party establishes by clear andconvincing evidence that “a reasonable person
would have to conclude that an arbitrator
was partial to one party to the arbitration.”
The court concluded that this standard wasmet because Campos failed to disclose his
extensive business relationships with ICA
and individuals associated with ICA. In
particular, the court noted that shortly before
arbitration began, Campos hired Ricardo Rios(the Treasurer, Secretary and Director of ICA)
to serve as the CFO for Vensure Employee
Services (of which Campos was the President
and CEO). Noting that Rios was listed as apotential witness and was seated at ICA’stable throughout the course of arbitration,
the court deemed it “troubling” that therelationship between Campos and Rios was
not disclosed. Similarly, other ICA directors
were listed on the Vensure website as officers
and were revealed to have prior dealings with
Campos. Furthermore, Vensure and ICA

California Supreme Court
Rules Unenforceable Portion Of
Arbitration Clause That Waives
Right To Public Injunctive Relief
The California Supreme Court ruled thatan arbitration provision that waives theright to seek public injunctive relief in any
forum is contrary to public policy and thus
unenforceable under California law. McGill v.
Citibank, N.A., 2017 WL 1279700 (Cal. Apr.
6, 2017).
Sharon McGill filed a putative class action
against Citibank, claiming that the marketing
and administration of its “credit protector”
insurance plan violated California consumer
protection laws. She sought monetary relief,
punitive damages and injunctive relief.
Citibank moved to compel arbitration basedon an arbitration clause in the consumer
contract. A trial court granted the motion inpart, ordering arbitration of the monetaryclaims, but suspended arbitration for
the injunctive claims based on California
common law which holds that agreements
to arbitrate claims for public injunctive
relief (i.e., injunctive relief that benefits thegeneral public rather than just one individual)
under certain statutes are unenforceable.
3

An appellate court reversed, ruling that theFederal Arbitration Act preempts state law
in this context. The California Supreme
Court reversed.
Addressing a preliminary matter, the court
held that McGill’s complaint sought public
injunctive relief authorized under statestatutory law. The court then concluded thatthe arbitration provision at issue was invalid
under state law insofar as it purported towaive McGill’s statutory right to seek such
relief. Citibank argued that even if California
law precludes a waiver of the right to seek
pubic injunctive relief, state law is preemptedby the FAA. The court disagreed, finding
Citibank’s view of the FAA “overbroad.” Thecourt explained that the “saving clause” ofthe FAA permits arbitration agreements to be
declared unenforceable “upon such grounds
as exist at law or in equity for the revocationof any contract.” The saving clause applies
here, the court concluded, because California
law permits the revocation of contracts that
purport to waive, in all fora, the statutory
right to seek public injunctive relief.

In so ruling, the court distinguished
American Express Co. v. Italian Colors
Restaurant, 133 S. Ct. 2304 (2013) (discussed
in our July/August 2013 Alert) and AT&T
Mobility LLC v. Concepcion, 563 U.S. 333(2011) (discussed in our May 2011 Alert). In
both cases, the United States Supreme Court
ruled that the FAA preempts state law that
precludes class action waivers in arbitration.
The California Supreme Court reasoned
that Concepcion reaffirmed that the “saving
clause permits agreements to arbitrate to beinvalidated by ‘generally applicable contract
defenses’ under state law” and that in any
event, the procedural issue of class action
waivers is qualitatively different than waiversof substantive statutory remedies. The court
remanded the matter for a determinationof whether the remainder of the arbitration
provision remains enforceable.

Stacking Alert:

California Court Rules That NonCumulation Clause Prevents
Insured From Stacking Policy
LimitsA California federal district court ruled thata non-cumulation clause is an anti-stacking
provision and therefore that the policyholder
is entitled to recover only a single policy limit
rather than the sum of three consecutive
policy limits. Ins. Co. of the State of PA. v.
Cnty. of San Bernardino, No. CV 16-0128(C.D. Cal. Mar. 8, 2017).
The County had incurred approximately$30 million in environmental cleanup costs
and expects to incur substantially more inprojected costs. The Insurance Company of
the State of Pennsylvania (“ICSOP”) soughta declaration of its obligations under threeumbrella liability policies issued to the Countyof San Bernardino. Each policy contains a$9 million per occurrence limit, as well as a“non-cumulation” provision that states: “ifany loss covered hereunder is also covered inwhole or in part under another excess policy… the limit of liability hereon … shall be
reduced by any amounts due to the Assuredon account of such loss under such priorinsurance.” The parties disputed whether
this provision operates as an “anti-stacking
clause.” Finding the provision unambiguous,
the court held that it does.
Under California law, stacking is permissible“as a default” under standard policy language,
but insurers may include anti-stacking
provisions to limit coverage. Although thecourt noted that the ICSOP policies at issue(sold in the 1960s and 1970s) did not containthe explicit anti-stacking verbiage commonly
included in more recent policies, the court
held that the effect of the language at issue isthe same. The court explained that the only
reasonable interpretation of the provision isto reduce the limits of policies in later years
by the amounts due under earlier policies
for ongoing, continuous damage. The court
rejected various arguments asserted by theCounty, including that the clause constituted
an impermissible escape clause.

4

Number ofOccurrences
Alerts:Iowa Court Adopts Per-ClaimApproach To Number Of
Occurrences In A Defective Product
Suit
An Iowa federal district court ruled that eachclaim against a window manufacturer is aseparate occurrence for purposes of generalliability coverage. Pella Corp. v. Liberty
Mutual Ins. Co., 2017 WL 1231721 (S.D. Iowa
Mar. 31, 2017).
Numerous claims were filed against Pellabased on its allegedly defective design,
manufacture and/or installation of windows.
In addressing the number-of-occurrences
issue, the court focused on fifteen of thehighest value claims (the “Sample Claims”).
The parties agreed that Iowa law uses acause-based analysis but disagreed “regarding
the level of generality at which that concept
should be applied.” Pella argued that each
Sample Claim alleges a separate occurrence
because each claim presents uniqueunderlying circumstances. In contrast,
Liberty Mutual asserted that the Sample
Claims allege three occurrences, based on
the three general causes of damage (fallingthrough a window; improper installation;and defective design). Alternatively, Liberty
Mutual argued that largest category of claims(defective design) could be subdivided into
two separate occurrences – defective windows
and defective sealant/glazing.
Finding both interpretations of “occurrence”
to be reasonable, the court concluded thatthe term was ambiguous. Therefore, thecourt construed the policy in Pella’s favor,
holding that each Sample Claim constitutes aseparate occurrence.

Each Incident Of Abuse Is A
Separate Occurrence, Says
Minnesota Bankruptcy Court
A Minnesota bankruptcy court ruled that each
incident of abuse by an individual priest is aseparate occurrence under liability policies.
In re Diocese of Duluth, 2017 WL 1194501(Bankr. D. Minn. Mar. 30, 2017). Numerous

insurers sought declarations as to coveragefor sexual abuse claims against the Diocese of
Duluth. Liberty Mutual argued that various
acts of abuse by different priests against
multiple victims arose from one occurrence—
the Diocese’s negligent supervision of thepriests. Rejecting this argument, the court
explained that under Minnesota law, each
incident of sexual abuse caused injury andthus constituted a separate identifiableoccurrence. However, the court held that
under the deemer clause, all abuse against
one victim by the same priest is deemed one
occurrence.

Fourth Circuit Affirms That
Fireworks-Related Injuries Arise
From Single Occurrence
Applying Pennsylvania law, the Fourth
Circuit ruled that injuries caused by afireworks-related accident arose from asingle occurrence, regardless of the numberof victims or alleged negligent acts. Hollis v.
Lexington Ins. Co., 2017 WL 1076706 (4thCir. Mar. 22, 2017).
During a fireworks show, Kathryn Hollis
and her two sons sustained serious injuriescaused by the misfiring of a firework into
the crowd. Hollis sued numerous parties,
alleging negligence based on the violation ofnineteen separate duties of care. Lexington,
which insured the fireworks company, soughta declaration that its coverage obligation was
limited to a $1 million per-occurrence limit.
Lexington argued that under Pennsylvania’s
cause-based test, the underlying claims arosefrom a single occurrence—the fireworks
incident. A Virginia federal district court
agreed and granted Lexington’s summary
judgment motion. The district court rejected
Hollis’s argument that the claims arose fromnineteen occurrences, corresponding with thenumber of duties that the fireworks company
allegedly breached. The district court notedthat “[a]lthough many breaches of duty
contributed to this accident as but-for causes,
those breaches involved only one proximate
cause of injury: the negligent explosion of thefirework shell. Consequently, the Underlying
Complaint alleges only a single occurrence
under Pennsylvania law.” The district
court also rejected the argument that theexistence of multiple tortfeasors supports afinding of multiple occurrences. The Fourth
Circuit affirmed for the reasons cited by the
district court.
5Additional Insured
Alerts:Indiana Court Of Appeals Rules
That Insurer Owes No Additional
Insured Coverage Until Named
Insured Satisfies SIR

Addressing a matter of first impression under
Indiana law, the Indiana Court of Appeals
ruled that a named insured under a generalliability policy must satisfy the self insured
retention (“SIR”) before an additional insured
may seek coverage under the policy. Walsh
Constr. Co. v. Zurich American Ins. Co., 2017
WL 1151033 (Ind. Mar. 28, 2017).
Walsh, a general contractor, hired Roadsafe
as a subcontractor in the construction of atraffic exchange. Roadsafe obtained a generalliability policy and named Walsh as anadditional insured, as required by the parties’
indemnity contract. The policy included a$500,000 per-occurrence SIR endorsement.
When a claimant sued Walsh for injuries
sustained in the construction zone, Walshsought additional insured coverage under
the policy. Zurich denied coverage based on
Roadsafe’s failure to pay the SIR. A trial court
ruled in Zurich’s favor and the Indiana Courtof Appeals affirmed.
The question on appeal was whether the SIR
endorsement amends Zurich’s obligation to
defend Walsh as an additional insured. Walshand Roadsafe argued that the endorsement
amends only Zurich’s relationship toRoadsafe, whereas Zurich argued that the
SIR amount must be satisfied before Zurich
has any obligations under the contract.
The court agreed with Zurich, finding that
the SIR payment was an unambiguous
condition precedent to any coverage under
the policy. The court reasoned that the SIR
shifts the initial cost burden from Zurich
to Roadsafe for coverage costs, not just forRoadsafe’s damages and defense costs. The
court noted that if Walsh disapproved of its
subcontractors obtaining SIR endorsements
in policies under which it was an additional
insured, it could have precluded that in its
indemnity contract with Roadsafe.

New York Appellate Court Rules
That Insurer Is Estopped From
Denying Coverage Based On Failure
To Timely Disclaim Coverage To
Additional Insured
A New York appellate court ruled that aninsurer is estopped from denying coverage toan additional insured based on its failure totimely disclaim coverage. Harco Constr., LLC
v. First Mercury Ins. Co., 2017 WL 986586(N.Y. App. Div. 2d Dep’t Mar. 15, 2017).
Harco Construction hired a subcontractor,
Disano, to assist with demolition of abuilding. Pursuant to the contract, Harco
was listed as an additional insured under aliability policy that First Mercury issued to
Disano. Harco was also insured under its own
liability policy, issued by Mt. Hawley. Whenan accident occurred during demolition, Mt.
Hawley notified First Mercury and sought
confirmation that Harco and the ownerof the property were additional insureds
under the policy. In a letter response to Mt.
Hawley, First Mercury disclaimed any duty to
defend or indemnify Harco based on a policy
exclusion. First Mercury did not disclaim
coverage as to the property owner and did
not send notice of its disclaimer to Harcoor the property owner. In ensuing coveragelitigation, the parties disputed First Mercury’s
coverage obligations as to Harco and theproperty owner.
The appellate court ruled that First Mercury
was obligated to send written notice of its
disclaimer directly to Harco under N.Y.
Insurance Law § 3420(d). The court explainedthat while Mt. Hawley was “acting on
behalf of” Harco when it sent notice of theoccurrence to First Mercury, Mt. Hawley was
not Harco’s agent for the purpose of receipt ofnotice of a disclaimer. Thus, First Mercury’s
failure to provide timely notice of a disclaimer
directly to Harco resulted in a waiver of thatcoverage defense.
However, the court ruled that First Mercury
was not obligated to issue a disclaimer tothe property owner, because he was not an
additional insured under the policy. The court
explained that an insurer is not required todisclaim coverage under § 3420(d) when thedenial is based on a lack of coverage in thefirst place, rather than a policy exclusion.

6

Choice of Law
Alert:

Rejecting Site-Based Choice Of
Law Approach, Delaware Supreme
Court Rules That New York Law
Governs All Environmental Claims
Reversing a Superior Court decision, theDelaware Supreme Court ruled that New
York law governs an environmental coverage
dispute regardless of the state in which
the claims arose. Certain Underwriters at
Lloyds, London v. Chemtura Corp., 2017 WL
1090544 (Del. Mar. 23, 2017)
In this coverage dispute between a chemicalcompany and its insurers, the parties
disagreed as to which state’s law should
govern policy interpretation. Applying
Delaware’s most significant relationshipframework, a Delaware Superior Court ruledthat the policy should be interpreted under
the respective laws of the states where theunderlying environmental claims arose.
Under the Superior Court ruling, Arkansas
and Ohio law (both of which have utilized an“all sums” approach to allocation) applied,
respectively, to claims arising in those states.
The Delaware Supreme Court reversed.
The Delaware Supreme Court agreed with thelower court’s most significant relationshipapproach, but concluded that New York law(which has endorsed pro rata allocation)
should govern the entire dispute given
its contacts to the parties and contract
formation. Emphasizing the importance of“certainty, predictability and uniformity of
result,” the court stated:

This result … fulfills the need forcomprehensive insurance programs
to have a single interpretive approach
utilizing a single body of law unlessthe parties to the scheme choose
otherwise. Precisely because this is
an insurance scheme covering diverse
nationwide risks, the relationshipof the parties cannot center in arotating and ever-changing way on
where the insurer happens to besued currently, resulting in the policy
being read in fundamentally different
ways in different cases, based on
the happenstance of where, across a
broad variety of possible locations andjurisdictions, potential liability resultsin litigation.

Settlement Alert:

Ninth Circuit Rules That Insurer’s
Negligence Is Insufficient To
Establish Breach Of Implied Duty
To Settle
The Ninth Circuit ruled that a California
federal district court erroneously concluded
that an insurer’s negligence was sufficient
to constitute a breach of the implied duty tosettle. McDaniel v. Government Employees
Ins. Co., 2017 WL 892516 (9th Cir. Mar.
7, 2017).
McDaniel, as assignee of claims against
GEICO, alleged that the insurer breached its
implied duty to settle by refusing to accept
a $100,000 policy limits settlement, after
which a $3 million award was issued against
the policyholder. A California district court
agreed and granted McDaniel’s summary
judgment motion. The Ninth Circuit
reversed, holding that an insurer breaches its
implied duty to settle only when it engages
in “unreasonable conduct.” While theconduct need not rise to the level of fraud
or dishonesty, it must consist of more thannegligence, bad judgment or mistake. The
court held that GEICO’s conduct did notsatisfy the “unreasonable refusal” standard
because its failure to accept the policy limits
offer was based on negligence. In particular,
the record established that GEICO’s failure
to accept the offer within the required timeframe was due to a miscommunication
relating to the receipt of certain discovery
7

responses, and that GEICO had attempted toaccept the settlement offer (without realizingthat the time frame had expired).

Advertising
Injury Alert:

Sixth Circuit Rejects Policyholder’s
Implicit Disparagement Argument
For Advertising Injury Coverage
The Sixth Circuit ruled that an insurer had
no duty to defend or indemnify infringement
and false advertising claims because they did
not allege disparagement within the scope ofadvertising injury coverage. Vitamin Health,Inc. v. Hartford Cas. Ins. Co., 2017 WL
1325263 (6th Cir. Apr. 11, 2017).
Bausch & Lomb sued Vitamin Health alleging
patent infringement and false advertisingbased on Vitamin Health’s advertisementsfor vision-related supplements. Vitamin
Health’s insurer, Hartford, refused todefend or indemnify, arguing that theunderlying complaint did not allege productdisparagement. A Michigan federal district
court agreed and granted Hartford’s summary
judgment motion. See May 2016 Alert. This
month, the Sixth Circuit affirmed.
The Sixth Circuit ruled that the underlying
complaint could not be read to allege that
Vitamin Health disparaged Bausch & Lomb’s
products. The complaint alleged that Vitamin
Health misrepresented the content of its
own products, not its competitors’ products.
Additionally, the court rejected the notionthat Vitamin Health “implicitly disparaged”
Bausch & Lomb’s products by creating a false
comparison between the two companies’
products. The court expressed uncertainty as
to whether Michigan law recognizes claimsof disparagement by implication, but heldthat even assuming it does, Vitamin Healthfailed to allege such a claim. The underlying
complaint did not allege that Vitamin Healthmade assertions of product superiority,
thereby implying that competitors’ products
were inferior. As such, Hartford had no duty
to defend or indemnify the claims.

Statutory Alerts:

Minnesota Supreme Court Rules
That State Statute Caps Damages At
Policy Limits
The Minnesota Supreme Court ruled that astate statute that authorizes damages to an
insured when an insurer unreasonably denies
policy benefits is subject to a cap based onpolicy limits. Wilbur v. State Farm MutualAuto. Ins. Co., 2017 WL 1245282 (Minn. Apr.
5, 2017).
Minnesota statutory law provides a remedy
for first-party policyholders when an insurer
denies a claim without a reasonable basis.
Under the statute, a court may award “anamount equal to one-half the proceeds
awarded that are in excess of an amountoffered by the insurer at least ten days before
the trial begins or $250,000, whichever isless.” Minn. Stat. § 604.18. The court ruledthat the phrase “proceeds awarded” refers toan amount capped by the insurance policy
limit, explaining that the term “proceeds”
indicates a monetary amount defined by aninsurance policy. Based on this interpretation,
the policyholder’s statutory damages werelimited to $36,000 (one-half the difference
between policy limits and the insurer’s
settlement offer), rather than $114,578.30(one-half the difference between the final jury
award and the insurer’s settlement offer).

Texas Supreme Court Announces
Five Rules Of Law Governing
Policyholders’ Statutory andContractual Rights To Damages
Seeking to eliminate the “substantial
confusion” among Texas courts, the Texas
Supreme Court set forth five rules addressing
when an insured can recover policy benefits orother damages based on statutory violations,absent a breach of contract by the insurer.
USAA Texas Lloyds Co. v. Menchaca, 2017
WL 1311752 (Tex. Apr. 7, 2017).
Menchaca sought coverage under a property
policy for hurricane-related damage. USAA
denied coverage based on an adjuster’s report
indicating that the amount of damage waslower than the policy’s deductible. Menchacasued USAA for breach of contract andviolation of the Texas Insurance Code, seeking
benefits under the policy. A jury concluded
that USAA did not breach the insurance policy
8but did engage in unfair or deceptive practices
under state statutory law (i.e., refusing to
pay a claim without conducting a reasonable
investigation). Based on this finding, thejury awarded Menchaca approximately$11,000 in damages. Both parties moved forjudgment based on the verdict. USAA argued
that absent a breach of contract, Menchaca
could not recover extra-contractual damages,
whereas Menchaca claimed that the USAA’s
statutory violation justified the damages
award. The trial court ruled in Menchaca’sfavor and an appellate court affirmed. The
Texas Supreme Court reversed.
Addressing the relationship between breachof contract claims under an insurance policy
and claims under the Insurance Code, thecourt announced the following five rules:
The General Rule: An insured cannot
recover policy benefits as damages for an
insurer’s statutory violation if the policy does
not provide the insured a right to receive
those benefits.
The Entitled-to-Benefits Rule: An insured
who establishes a right to receive benefits
under a policy can recover those benefits as

actual damages under the Insurance Code if
the insurer’s statutory violation causes theloss of benefits.
The Benefits-Lost Rule: Even if the insured
cannot establish a contractual right to policy
benefits, the insured can recover benefits as
actual damages under the Insurance Code if
the insurer’s statutory violation caused theinsured to lose that contractual right.
The Independent-Injury Rule: If an insurer’s
statutory violation causes an injury that is
independent of the loss of policy benefits, theinsured may recover damages for that injury
even if the policy does not grant the insured aright to benefits.
The No-Recovery Rule: An insured cannot
recover damages based on an insurer’s
statutory violation if the insured had no rightto receive benefits under the policy and did
not sustain any injury independent of a rightto benefits.
The Texas Supreme Court remanded thematter for a new trial in the interests ofjustice.

9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 Bryce L. Friedman
bfriedman@stblaw.com /+1-212455-2235 and Deborah L. Stein
dstein@stblaw.com /+1-310-407-7525
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
attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection withthe use of this publication. Please contact your relationship partner if we can be of assistance regardingthese important developments. The names and office locations of all of our partners, as well as ourrecent memoranda, can be obtained from our website, www.simpsonthacher.com.
Please click here to subscribe to the Insurance Law Alert.
10SimpsonThacherWorldwide

UNITED STATESEUROPE

SOUTH AMERICANew York
425 Lexington Avenue
New York, NY 10017+1-212-455-2000

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

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

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

ASIA

Beijing
3901 China World Tower
1 Jian Guo Men Wai Avenue
Beijing 100004
China+86-10-5965-2999
Hong Kong
ICBC Tower
3 Garden Road, Central
Hong Kong+852-2514-7600
Seoul
25th Floor, West Tower
Mirae Asset Center 1
26 Eulji-ro 5-gil, Jung-gu
Seoul 100-210
Korea+82-2-6030-3800
Tokyo
Ark Hills Sengokuyama Mori Tower
9-10, Roppongi 1-Chome
Minato-Ku, Tokyo 106-0032
Japan+81-3-5562-6200
11