Insurance Law Alert“The ‘truly
innovative andfearless’ practice stands‘head and shoulders’above many other law firms
specializing in insurance
coverage.”–Legal 500 US

December 2014

This Alert discusses recent decisions relating to the stacking of insurance
policies, the appropriate trigger for determining coverage under generalliability and first-party property policies, and interpretation of the phrase“direct physical loss.” In addition, we discuss rulings addressing insurance
coverage for claims seeking restitution and for emotional distress, andan insurer’s right to seek reimbursement of settlement payments from a
policyholder. Finally, we report on rulings relating to the interpretation ofreinsurance certificates, the assignability of statutory bad faith claims, and thescope of the common-interest doctrine. Happy Holidays!
Two New York Courts Reject Policyholder Attempts to Stack Consecutive
Policy Limits for Lead Paint Claims
The New York Court of Appeals and a New York federal district court both rejected attempts
to stack insurance policies, holding that an insurer was responsible for only one policy limit inconnection with lead exposure claims that spanned multiple policy periods. Nesmith v. AllstateIns. Co., 2014 WL 6633553 (N.Y. Nov. 25, 2014); Hanover Ins. Co. v. Vermont Mut. Ins. Co.,2014 WL 6387061 (N.D.N.Y. Nov. 14, 2014). (click here for full article)

Pennsylvania Supreme Court Rules That First Manifestation Trigger
Governs Progressive Property Damage Claims
The Pennsylvania Supreme Court ruled that general liability coverage for ongoing property
damage claims is determined by a “first manifestation” trigger rather than multiple triggers,
such that only the insurer on the risk during the time the damage became reasonably apparent
is liable. Pa. Nat’l Mut. Cas. Ins. Co. v. St. John, 2014 WL 7088712 (Pa. Dec. 15, 2014).
(click here for full article)

Seventh Circuit Applies Continuous Trigger to First-Party Property
Damage Claims
Applying Wisconsin law, the Seventh Circuit ruled that a continuous trigger governed coverage
under a property policy, and therefore, an insurer was liable for ongoing water damage thatwas not discovered until years after the policy period had ended. Strauss v. Chubb Indem. Ins.
Co., 771 F.3d 1026 (7th Cir. 2014). (click here for full article)

New Jersey Court Rules That Ammonia Release Constitutes “Direct
Physical Loss”
A New Jersey federal district court ruled that under New Jersey and Georgia law, the release ofammonia inside a packaging plant constituted “direct physical loss of or damage to” property
under a property insurance policy. Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am.,
2014 WL 6675934 (D.N.J. Nov. 25, 2014). (click here for full article)

Simpson Thacher & Bartlett LLP

1

Second Circuit Finds Reinsurance Certificate Ambiguous As to Whether
Limits Apply to Expenses
The Second Circuit ruled that a reinsurance certificate was ambiguous as to whether expenses
were excluded from the reinsurance limits of liability. Utica Mut. Ins. Co. v. Munich Reins.
Am., Inc., 2014 WL 6804553 (2d Cir. Dec. 4, 2014). (click here for full article)

Minnesota Court Rules That Bank’s “Restitution” Payments Are Not
Excluded by Liability Policy
Applying Delaware law, a Minnesota federal district court ruled that a liability insurer was
required to indemnify a settlement payment, even assuming that payment constituted
restitution, which is generally deemed uninsurable. U.S. Bank Nat’l Assoc. v. Indian Harbor
Ins. Co., 2014 WL 7183851 (D. Minn. Dec. 16, 2014). (click here for full article)

Ohio Appellate Court Rules That Emotional Distress Does Not Constitute
Personal Injury
An Ohio appellate court ruled that allegations of emotional distress do not constitute “personal
injury” under a personal and advertising injury provision. G&K Mgmt. Servs., Inc. v. Owners
Ins. Co., 2014 WL 7014723 (Ohio Ct. App. Dec. 11, 2014). (click here for full article)

Minnesota Court Rejects Insurer’s Equitable Reimbursement Claim
Against Insured
A Minnesota federal district court ruled that an insurer was not entitled to equitablereimbursement of settlement funds from a policyholder. Select Comfort Corp. v. Arrowood
Indem. Co., 2014 WL 7073093 (D. Minn. Dec. 12, 2014). (click here for full article)

Pennsylvania Supreme Court Rules That Statutory Bad Faith Claims Are
Assignable
The Pennsylvania Supreme Court ruled that an insured may assign the right to recoverstatutory bad faith damages from an insurer. Allstate Prop. & Cas. Co. v. Wolfe, 2014 WL
7088147 (Pa. Dec. 15, 2014). (click here for full article)

New York Appellate Court Endorses Broad View of Common-Interest
Doctrine
A New York appellate court ruled that the common-interest doctrine does not require pendingor threatened litigation. Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 2014 WL
6803006 (N.Y. App. Div. Dec. 4, 2014). (click here for full article)2

Occurrence Limits
Alert:
Two New York Courts Reject
Policyholder Attempts to Stack
Consecutive Policy Limits for Lead
Paint Claims

In Nesmith v. Allstate Insurance Co., 2014
WL 6633553 (N.Y. Nov. 25, 2014), the New
York Court of Appeals ruled that Allstate
Insurance Company was responsible for
only one policy limit in connection with lead
exposure claims asserted by two tenants wholeased the subject apartment during different
policy periods.
Allstate insured the property owner underconsecutive one-year policies, each with a$500,000 per occurrence limit. During one
policy period, children were exposed to leadpaint in the owner’s apartment. During thesubsequent policy period, different children
were exposed to lead in the same apartment.
Years later, both families brought suitclaiming damages from the lead exposure.
Allstate settled the first action for $350,000
and paid $150,000 toward a settlement of
the second action, arguing that its liability
for all lead exposures in the apartment waslimited to a single policy limit of $500,000.
The plaintiffs in the second action, who had
reserved their rights to dispute the applicablepolicy limit, sued Allstate seeking torecover $350,000, the balance of a separate$500,000 policy limit. A trial court ruled thatthe plaintiffs were entitled to a full second
policy limit. As reported in our March 2013
Alert, an appellate court reversed, rulingthat there was only one occurrence because
the injuries were caused by exposure to “thesame general conditions” and that a noncumulation clause limited Allstate’s liability
to one per occurrence limit. Last month, the
New York Court of Appeals affirmed.
The non-cumulation clause provided that“[r]egardless of the number of insured
persons, injured persons, claims, claimants
or policies involved, our total liability …
for damages resulting from one accidental
loss will not exceed the limit shown on the
declarations page.” The court ruled that
under New York precedent, this language
unambiguously limited Allstate’s liability forboth actions to one policy limit. The court
noted that although two sets of children

were exposed to lead during different policy
periods, the same “general conditions”
continued to exist because the same lead painthazard was present during both exposures.
A New York federal district court, facedwith similar policy language, reached thesame conclusion in Hanover Insurance Co.
v. Vermont Mutual Insurance Co., 2014
WL 6387061 (N.D.N.Y. Nov. 14, 2014). In
Hanover, a child residing in an apartment
was exposed to lead over a period covered bythree consecutive policies issued by Vermont
Mutual. Each policy had a $300,000 limit.
Hanover provided excess coverage. Following
a settlement with the policyholder, theinsurers disputed whether the policies could
be “stacked” to compel Vermont Mutual
to provide $900,000 in coverage before
Hanover was required to provide coverage
under its excess policies. Hanover argued thatstacking was permitted because, although the
non-cumulation clause here limited coverageto the limits of a single policy “regardlessof the number of insureds, claims made or
persons injured,” it did not refer specificallyto the number of “policies involved” (unlike
the clause in Allstate). The court rejected thisargument, finding that notwithstanding this
distinction, the clause in Vermont Mutual’s
policy was sufficient to exclude the stackingof multiple policies. As such, Vermont
Mutual was obligated only to contribute$300,000 plus prejudgment interest towards
the settlement.
3

Trigger Alerts:

Pennsylvania Supreme Court Rules
That First Manifestation Trigger
Governs Progressive Property
Damage Claims
The Pennsylvania Supreme Court ruled thatgeneral liability coverage for ongoing property
damage claims is determined by a “firstmanifestation” trigger rather than multiple
triggers, such that only the insurer on the risk
during the time the damage became apparent
is liable. Pennsylvania Nat’l Mut. Cas. Ins.
Co. v. St. John, 2014 WL 7088712 (Pa. Dec.
15, 2014).
Dairy farm owners sought general liability
coverage from Pennsylvania National fordamages to their cow herd caused by acontaminated water supply. Penn National
provided consecutive one-year liability
policies to the plumbing company that had
installed the defective piping that led to thecontamination. Penn National argued that
it was liable only under the policy in effectfrom 2003 to 2004, when the cows’ healthproblems first manifested. The farm owners
countered that the two policies in effect from2005 to 2006 (a general liability policy andan umbrella policy) covered the loss becausethat was when the water contamination, thesource of the cows’ health problems, was first
discovered. Alternatively, the farm owners
argued that four consecutive policies were
triggered pursuant to a multiple trigger
theory. A Pennsylvania trial court disagreed
with both of these contentions and ruled that
under a manifestation trigger, only the 20032004 policy was implicated. An appellate
court and the Pennsylvania Supreme Court
both affirmed.

The Pennsylvania Supreme Court rejected
application of the multiple trigger theory
adopted in J.H. France Refractories Co. v.
Allstate Insurance Co., 626 A.2d 502 (Pa.
1993), in the context of asbestos bodily injury
claims. The court reasoned that application of
the multiple trigger theory in J.H. France waspredicated primarily on the unique “etiology
and pathogenesis of asbestos-related disease.”
In declining to apply a multiple trigger
theory to “continuous, progressive property
damage over successive policy periods,” thecourt noted that, in Pennsylvania, “the firstmanifestation rule has served as the test for
determining coverage under commercial
general liability policies, with the lone
exception of asbestos bodily injury claims.”
With respect to application of the firstmanifestation trigger theory, the court ruledthat a policy is triggered when damage first
becomes reasonably apparent, not when the
injured party is able to reasonably ascertain
the source of damage. The court explainedthat “[w]hile knowledge of the cause of
injury is pertinent to determining the dateon which the statute of limitations begins torun, it has no special relevance to determining
the date an insurance policy is triggered,unless specifically required by the languageof the applicable policy of insurance.” Here,the policy language did not support thecontention that coverage is triggered whenboth injury and its cause are reasonably
ascertainable. Therefore, the court affirmedthat the only policy triggered under the firstmanifestation theory was the policy in effectat the time the injuries to the dairy herd
became “reasonably apparent,” even though
the cause of those injuries was not known
until a later time.

4The ruling in Pennsylvania National serves
as an important reminder that “J.H. France
remains an exception to the general rule
under Pennsylvania jurisprudence that thefirst manifestation rule governs a triggerof coverage analysis for policies containing
standard CGL language.”

Seventh Circuit Applies Continuous
Trigger to First-Party Property
Damage Claims
Applying Wisconsin law, the Seventh Circuit
ruled that a continuous trigger governed
coverage under a property policy, andtherefore, an insurer was liable for ongoingwater damage that was not discovered until
years after the policy period had ended.
Strauss v. Chubb Indem. Ins. Co., 771 F.3d
1026 (7th Cir. 2014).
The dispute arose out of water damage to ahome. Water had been infiltrating the homesince its completion in 1994, but was notdiscovered until 2010. The homeowners
sought coverage under various Chubb policies
in effect from 1994 to 2005. Chubb refusedcoverage, arguing that the “manifestation”
trigger applies to all first-party property
insurance and that because damage did not
manifest until 2010 (after all of its policies
had expired), it was not liable. Chubb also
argued that the claim was barred by theapplicable statute of limitations, Wis. Stat.
§ 631.83(1)(a). A Wisconsin federal district
court ruled in favor of the policyholders,finding that the policy language required

application of a “continuous” trigger, underwhich all policies in effect from the time theloss began until manifestation of the damage
owed coverage. The district court also heldthat the claims were not time-barred. The
Seventh Circuit affirmed.
The Seventh Circuit ruled that under
Wisconsin law, the choice of trigger inany coverage dispute is solely governed byapplicable policy language and that Chubb’s
policies mandated application of a continuous
trigger. In particular, the court reasoned thatthe definition of “occurrence” as “continuousor repeated exposure” unambiguously
contemplated a “long-lasting occurrence”
that could cause damage “over an extended
period of time.” The policy further provided
that once such an occurrence took place, thepolicy protected against “all risk of physicalloss.” The court concluded that under theseprovisions, the latent water infiltration
constituted an occurrence during Chubb’s
policy periods.
The court also ruled that the coverage claims
were not time-barred under state statutory
law or applicable policy language. The court
held that a policy provision requiring claims
to be filed “within one year after a loss occurs”
operated to extend the minimum limitation
period established by Wis. Stat. § 631.83(1)(a),which provides that an action on a property
policy must be commenced “within 12 months
after the inception of the loss.” The court
explained that the phrase “inception of theloss” in the statute arguably started the clock
running from the beginning of the water
infiltration, whereas the policy phrase “aftera loss occurs” is ambiguous as to progressive
loss and can be reasonably interpreted tomean after a loss completes.
Strauss illustrates the importance ofpolicy language in trigger analysis under
Wisconsin law. The court expressly refused
to adopt a bright-line rule “requiring useof the manifestation trigger theory in all
first-party property insurance disputes”
and reiterated its previous rejection of “thisvery same invitation to limit the continuous
trigger to third-party coverage cases.” Thecourt emphasized that its application of acontinuous trigger in this case was driven
solely by policy language, suggestingthat differing property policy language
might warrant application of a different
trigger theory.
5

Property Insurance Reinsurance Alert:
Second Circuit Finds Reinsurance
Alert:
Certificate Ambiguous As to
New Jersey Court Rules That
Ammonia Release Constitutes“Direct Physical Loss”

A New Jersey federal district court ruledthat under New Jersey and Georgia law, therelease of ammonia inside a packaging plant
constituted “direct physical loss of or damage
to” property under a property insurance
policy. Gregory Packaging, Inc. v. Travelers
Prop. Cas. Co. of Am., 2014 WL 6675934(D.N.J. Nov. 25, 2014).
Gregory Packaging sought coverage from
Travelers for losses sustained in connection
with a factory evacuation and shutdown
caused by an accidental ammonia release.
Travelers denied coverage, arguing that
there was no direct physical loss to theproperty. The court disagreed. Applying New
Jersey and Georgia law, the court held thatthe term “physical loss” (undefined in thepolicy) does not require a structural changeor alteration to property. Rather, the court
held that a “temporary and non-structuralloss of function is recognized as direct
physical loss or damage under New Jerseylaw” and that the ammonia release satisfied
this requirement because it “physicallytransformed the air within Gregory
Packaging’s facility so that it contained
an unsafe amount of ammonia or that theheightened ammonia levels rendered thefacility unfit for occupancy until the ammonia
could be dissipated.” The court reached
the same conclusion under Georgia law,reasoning that the ammonia discharge caused
physical loss because it “physically changed
the facility’s condition to an unsatisfactory
state needing repair.” Decisions in otherjurisdictions are mixed as to whether andunder what circumstances non-structuralproperty damage claims based on the releaseof odors, gases, or other molecular levelchanges allege direct physical loss. See, e.g.,
Universal Image Prods., Inc. v. Fed. Ins. Co.,2012 WL 1181541 (6th Cir. Apr. 10, 2012)(presence of mold spores and bacteria inbuilding do not constitute “direct physicalloss”) (discussed in our May 2012 Alert).

Whether Limits Apply to Expenses

Our November 2014 Alert reported on two
decisions holding that reinsurance limits cap
both indemnity and expenses. This month,
the Second Circuit addressed the same issue,
but reached a different conclusion, findingthat a reinsurance certificate was ambiguous
as to whether expenses were excluded fromthe reinsurance limits of liability. Utica Mut.
Ins. Co. v. Munich Reins. Am., Inc., 2014 WL
6804553 (2d Cir. Dec. 4, 2014).
The reinsurance certificate provided that
Munich would indemnify Utica “against losses
or damages … subject to the reinsurance
limits shown in the Declarations.” The Second
Circuit deemed this language ambiguous.
The Second Circuit agreed with Utica that
it was reasonable to conclude that expenses
were excluded from the reinsurance limit
because the certificate was silent as towhether expenses were “subject to” thelimits of liability. However, the court also
reasoned that the absence of specific “subject
to” verbiage as to expenses might not imply
that expenses are exempt from policy limits
because other provisions in the certificate(such as that relating to indemnification of
settlements) did not include “subject to”
language, but were nonetheless clearly subject
to the reinsurance limits. Therefore, the court
vacated the district court’s ruling in favor of
the reinsurer and remanded the matter to the
district court for consideration of extrinsic
evidence as to whether expenses should be
subject to policy limits.
This decision is significant in its analysis
of New York precedent in this context.
The district court had relied upon a trio oflandmark cases in ruling that the limits ofliability in facultative reinsurance certificatesare presumptively expense-inclusive. See
Unigard Sec. Ins. Co. v. North River Ins.
Co., 4 F.3d 1049 (2d Cir. 1993); Bellefonte
Reins. Co. v. Aetna Cas. & Sur. Co., 903
F.2d 910 (2d Cir. 1990); Excess Ins. Co. v.
Factory Mut. Ins. Co., 822 N.E.2d 768 (N.Y.
2004). However, the Second Circuit deemed
Unigard and Bellefonte distinguishable
because they presented policy language that
expressly made the reinsurers’ obligations“subject to” the limit of liability. With respect
6

to Excess Insurance, the Second Circuit
acknowledged that it arguably suggested thata limit of liability is presumptively inclusiveof expenses, but held that the language at
issue here might be sufficient to rebut any
such presumption, stating “we do not read
Excess as holding that any presumption of
expense-inclusiveness can be rebutted only
through express language or a separate limit
for expenses.”
Utica Mutual is represented by Simpson
Thacher partner Mary Kay Vyskocil.

Coverage Alerts:

Minnesota Court Rules That Bank’s“Restitution” Payments Are Not
Excluded by Liability Policy
Applying Delaware law, a Minnesota federal
district court ruled that a professional
liability insurer was required to indemnify
a bank’s $30 million settlement payment,even assuming that payment constituted
restitution, which is generally deemeduninsurable. U.S. Bank Nat’l Ass’n v. Indian
Harbor Ins. Co., 2014 WL 7183851 (D. Minn.
Dec. 16, 2014).
Several class actions were filed against U.S.
Bank alleging overcharging of overdraft feesto customers. Those actions were resolved
by a $55 million settlement, in which U.S.
Bank did not admit liability and which did
not characterize the payment as restitution.
Indian Harbor and ACE American, twoof U.S. Bank’s insurers, consented to thesettlement but reserved their right tochallenge coverage. The insurers later
denied coverage, arguing that because thesettlement required U.S. Bank to return

unlawfully assessed fees to its customers,
the payment constituted restitution, which isuninsurable under Delaware law. The court
disagreed and granted U.S. Bank’s summary
judgment motion.
The court concluded that it was unclear
whether restitution is uninsurable under
Delaware law. However, the court declined
to decide this issue, and instead held thateven assuming that Delaware law precludes
insurance coverage for restitution as amatter of public policy, the insurance
policies required a final adjudication as
to restitution, rather than a settlementthat resolved claims that allege ill-gotten
gains and seek disgorgement of thosegains. The court explained that although
an Uninsurable Provision in the policies
omitted restitution payments from coverage,
the Ill-Gotten Gains exclusion required “afinal adjudication in the underlying action.”
The court reasoned that “to interpret thetwo policy provisions consistently, theCourt must read the Uninsurable Provision
to bar coverage for a payment that a final
adjudication in the underlying action
determined is restitution.” The court further
explained that because a settlement is nota final adjudication, it is not excluded fromcoverage even if it resolves claims seeking
restitution. The court distinguished decisions
that deemed restitution uninsurable on thebasis that they did not involve policies that
included a final-adjudication requirement.
In addition, the court emphasized that its
ruling did not authorize parties to contract
to insure an uninsurable payment (such as
restitution), but rather it held that “parties
may agree to ensure that a payment truly
fits within a category of matters that arelegally uninsurable.”7

Ohio Appellate Court Rules That
Emotional Distress Does Not
Constitute Personal Injury
Courts across jurisdictions are split as towhether allegations of emotional distress,
without accompanying physical injury,
constitute “bodily injury” for purposes ofgeneral liability coverage. See July/August
2011 Alert. In a decision issued this month,an Ohio appellate court addressed whether
allegations of emotional distress constitute“personal injury” under a personal andadvertising injury provision. The court
held that they do not, granting an insurer’ssummary judgment motion as to the duty to
defend. G&K Mgmt. Servs., Inc. v. Owners
Ins. Co., 2014 WL 7014723 (Ohio Ct. App.
Dec. 11, 2014).

discrimination, humiliation or sexual
harassment.” The policyholder argued that
under Ohio precedent, the term “humiliation”
in a personal and advertising injury provisionencompasses claims of emotional distress.
See Granger v. Auto Owners Ins., 991 N.E.2d1254 (Ohio Ct. App. 2013) (holding that
allegations of emotional distress stemmingfrom housing discrimination are within scopeof “personal injury” coverage because they
allege “humiliation”), appeal granted, 999
N.E.2d 695. However, the court distinguished
Granger based on differences in applicablepolicy language. The court explained that thepolicy here defined personal injury as “theoffense of discrimination, humiliation, sexual
harassment and any violation of civil rights
caused by such discrimination, humiliationor sexual harassment.” Therefore, allegationsof humiliation as a resulting harm (as was thecase here), rather than as an offense itself,
were not within the scope of personal injury.

Minnesota Court Rejects Insurer’s
Equitable Reimbursement Claim
Against Insured
A Minnesota federal district court ruledthat an insurer was not entitled to equitablereimbursement of settlement funds from a
policyholder, finding that any such right toreimbursement derives only from contract
terms. Select Comfort Corp. v. Arrowood
Indem. Co., 2014 WL 7073093 (D. Minn. Dec.
12, 2014).

A lawsuit against a dance studio alleged
numerous common law and statutory
claims, including intentional and negligent
infliction of emotional distress. The studio’s
general liability insurer denied coverage andrefused to defend. In ensuing litigation, an
Ohio trial court ruled that the insurer had
no duty to defend because the claims wereoutside the scope of coverage. The appellate
court affirmed.
The personal and advertising injury provision
defined “personal injury” as “injury other than‘bodily injury,’ arising out of one or more of
the following offenses: … (f) Discrimination,
humiliation, sexual harassment and any
violation of civil rights caused by such

The coverage dispute arose out of a putativeclass action suit against Select Comfort
alleging personal injury caused by mold.
Select Comfort tendered defense of the suit
to several general liability insurers, including
Arrowood. Arrowood agreed to defend undera reservation of rights, but Select Comfort
argued that the reservation of rights createda conflict of interest and therefore retained
its own counsel. The class action suit was
ultimately settled, with Arrowood agreeing
to pay 33% of the total amount. Thereafter,
Select Comfort sued Arrowood seeking
to recover certain unpaid defense costs.
In turn, Arrowood asserted an “equitablereimbursement” counterclaim on the basisthat it overpaid in the settlement. The
court dismissed Arrowood’s counterclaim,
finding that Minnesota does not recognize
an insurer’s equitable reimbursement claim
against a policyholder.

8

The court held that the relationship between
an insurer and its insured is a matter ofcontract. The court explained that because
Arrowood’s policy “contain[ed] no provision,and contemplate[d] no ground, on which
an amount paid by Arrowood in fulfillmentof [its] obligations could later be extracted
from Select Comfort and returned to
Arrowood,” there was no basis for Arrowood’s
reimbursement claim. In so ruling, the court
rejected the argument that Arrowood’s
reservation of rights, which explicitly
included the “right to seek reimbursement ofany defense costs or indemnity payments,”
constituted an enforceable contract
between the parties. The court explainedthat Select Comfort did not agree to theterms of the reservation of rights and thata right to reimbursement is not created “byunilateral declaration.”
Although Select Comfort rejects equity-based
reimbursement claims against a policyholder,
the ruling is limited in several respects.
First, the decision explicitly recognizes
that Minnesota law allows equitablereimbursement claims between insurers
based on co-insurers’ “common liability” toan insured. Second, the court emphasizedthat where contractual language provides
for a right of reimbursement against a
policyholder, such provisions are enforceable
under Minnesota law.

Bad Faith Alert:

Pennsylvania Supreme Court Rules
That Statutory Bad Faith Claims Are
Assignable
Answering a question certified by the Third
Circuit Court of Appeals, the Pennsylvania
Supreme Court ruled that an insured may
assign the right to recover statutory bad faithdamages from an insurer. Allstate Prop. &Cas. Co. v. Wolfe, 2014 WL 7088147 (Pa. Dec.
15, 2014).
Pennsylvania statutory law supplements theremedies available to a policyholder in a bad
faith action against an insurer by authorizing
punitive damages. 42 Pa. Cons. Stat. § 8371.
Decisions have been mixed as to whether
claims pursuant to Section 8371 may be
assigned to a third party. Some courts havedisallowed such an assignment, finding thatthe statute creates a form of an unliquidated
tort claim, which is not subject to assignment
under Pennsylvania law. In contrast, othercourts have allowed the assignment of Section
8371 claims, citing to the lack of any explicit
prohibition against assignment and public
policy interests. In Allstate, the court sided
with the latter view, finding that allowing
an assignment comports with the legislative
intent of Section 8371 and furthers various
public policies, including good faith conduct,
deterrence, and equity. In particular, thecourt noted that assignments of common law
bad faith claims have long been permissible
under Pennsylvania law and, had thelegislature intended to curtail this right, “itwould have so indicated in the statute itself.”9

Privilege Alert:

New York Appellate Court Endorses
Broad View of Common-Interest
Doctrine
Recent Alerts have reported on decisions
interpreting the scope of the commoninterest doctrine, an exception to the waiverof privilege where the privileged materials
are shared “for the purpose of furtheringa nearly identical legal interest.” See May
and September 2014 Alerts; March 2011
Alert. In a decision issued this month, a New
York appellate court, addressing a matterof first impression, ruled that the commoninterest doctrine does not require pending or
threatened litigation. Ambac Assurance Corp.
v. Countrywide Home Loans, Inc., 2014 WL
6803006 (N.Y. App. Div. Dec. 4, 2014).
The discovery dispute arose from a lawsuitbrought by Ambac Assurance against
Countrywide, alleging fraudulent inducement
as to insurance transactions. Ambac also
asserted claims against Bank of America,
Countrywide’s successor-in-interest, andsought the production of certain pre-merger
communications between Countrywide andBank of America. The defendants refused
to produce the materials on the basis ofprivilege. They argued that all of the sharedcommunications contained legal advice
relating to compliance with various mergerrelated issues. A referee supervising discovery
in the matter granted Ambac’s motion tocompel the production of the challenged
communications, holding that the commoninterest doctrine does not apply unless thecommon legal interest “impacts potential
litigation involving all parties.” A New York
motion court refused to vacate the order,
holding that New York law requires “pendingor reasonably anticipated litigation in orderfor the common-interest doctrine to apply.”
The appellate court reversed.
The appellate court ruled that “in today’s
business environment, pending or reasonably
anticipated litigation is not a necessary
element of the common-interest privilege.”
Although the court noted that this conclusion
holds “particularly true” in this case, involving
merger-related communications, the court
did not limit its holding in this respect.
Instead, the court explained that privilege
should not be tied to litigation because legal
advice is frequently provided “precisely to
avoid litigation, or facilitate compliance withthe law, or simply to guide a client’s course of
conduct.” Therefore, so long as the “primaryor predominant purpose” of the sharedcommunications is to obtain legal advice orfurther a common legal interest, the commoninterest doctrine applies.
The court expressly rejected prior New
York cases that have imposed a litigation
requirement for the common-interest
protection to apply. Delaware law similarly
allows invocation of the common-interest
doctrine absent litigation.

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.
Barry R. Ostrager+1-212-455-2655
bostrager@stblaw.com

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

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

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

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

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

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

Linda H. Martin+1-212-455-7722
lmartin@stblaw.com

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

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

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

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cwaldman@stblaw.com

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

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

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afrankel@stblaw.com

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mgarvey@stblaw.com

This edition of the
Insurance Law Alert was
prepared by Chet Kronenberg(ckronenberg@stblaw.com/+1-310407-7557) and Deborah Stein(dstein@stblaw.com/+1-310-4077525) with contributions
by Karen Cestari(kcestari@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.
11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

Houston2 Houston Center
909 Fannin Street
Houston, TX 77010+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.
1155 F Street, N.W.
Washington, D.C. 20004+1-202-636-5500

ASIA

Beijing3919 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
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
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