Insurance Law Alert

June 2016

In This Issue
New York District Court Rules That Excess Policies’ Exhaustion Provisions
Require Actual Payment of Underlying Limits
A New York federal bankruptcy court ruled that three excess policies unambiguously required
actual payment of underlying policy limits before liability attached. Rapid-American Corp. v.
Travelers Cas. & Sur. Co., 2016 WL 3292355 (Bankr. S.D.N.Y. June 7, 2016). (Click here forfull article)“They’re the
go-to firm for the
insurance industry forreally serious cases. Their
practice is top-notch.”–Chambers USA 2016,
quoting a client

Arizona District Court Rules That Cyber Policy Does Not CoverAssessments Imposed in Connection with Data Breach
An Arizona federal district court granted an insurer’s summary judgment motion, ruling thata cyber policy did not provide coverage for assessments imposed by a credit card associationin connection with a data breach. P.F. Chang’s China Bistro, Inc. v. Federal Ins. Co., 2016 WL
3055111 (D. Ariz. May 31, 2016). (Click here for full article)

Two Courts Reject Waiver Arguments, Finding That Insurers Properly
Reserved Rights to Deny Coverage
In two decisions issued last month, Courts of Appeals for the Tenth and Third Circuits rejected
policyholders’ waiver arguments and held that property insurers were not estopped fromdenying coverage based on policy exclusions. Gallegos v. Safeco Ins. Co. of Am., 2016 WL
2849417 (10th Cir. May 16, 2016); Nationwide Prop. & Cas. Ins. Co. v. Shearer, 2016 WL
3018764 (3d Cir. May 26, 2016). (Click here for full article)

Ninth Circuit Asks Nevada Supreme Court to Address Scope of Damages
for Insurer’s Breach of Duty to Defend
The Ninth Circuit asked the Nevada Supreme Court to decide whether an insurer that breached
its duty to defend, but did not act in bad faith, is liable for all consequential losses arising fromthat breach, including sums in excess of policy limits. Nalder v. United Auto. Ins. Co., 2016 WL
3082417 (9th Cir. June 1, 2016). (Click here for full article)

Second Circuit Rules That Insurer Must Defend Personal and Advertising
Injury Class Action Suits Notwithstanding Policy Exclusions
Reversing a New York district court decision, the Second Circuit ruled that an insurer was
obligated to defend suits alleging that the policyholder violated statutory and common law bytransferring private customer information for profit. National Fire Ins. Co. of Hartford v. E.
Mishan & Sons, Inc., 2016 WL 3079958 (2d Cir. June 1, 2016). (Click here for full article)

Simpson Thacher & Bartlett LLP

1

Ninth Circuit Rules That Business Exclusion Bars Coverage for Underlying
Credit Card Dispute
Ruling that the phrase “arising out of” in a policy exclusion required only a causal connection
rather than proximate causation, the Ninth Circuit held that a business exclusion relieved aninsurer of its duty to defend a suit based on credit card disputes that arose in connection withthe policyholder’s employment. Griggs v. Allstate Ins. Co., 2016 WL 3002302 (9th Cir. May
25, 2016). (Click here for full article)

Iowa Supreme Court Rules That Faulty Workmanship May Constitute an“Occurrence” Under Excess Liability Policy
The Supreme Court of Iowa ruled that defective work resulting in property damage performedby an insured’s subcontractor may constitute an occurrence under a liability policy. National
Surety Corp. v. Westlake Investments, LLC, 2016 WL 3201729 (Iowa June 10, 2016).
(Click here for full article)

California Supreme Court Rules That Post-Trial Award of Attorneys’ Fees
May Be Included in Calculation of Compensatory-Punitive Damage Ratio
The California Supreme Court ruled that a post-verdict award of attorneys’ fees in a coverage
action should be considered compensatory damages in determining whether a punitive award
is unconstitutionally excessive. Nickerson v. Stonebridge Life Ins. Co., 2016 WL 3192499 (Cal.
June 9, 2016). (Click here for full article)

Illinois Appellate Court Finds Conflict Between Illinois and Indiana Law
As to Notice Requirements for Policy Exclusions
An Illinois appellate court ruled that Indiana and Illinois law differed regarding the noticerequired when an exclusion is added to an insurance policy at the time of renewal, holding thatthe law of Indiana governed the dispute. Cincinnati Ins. Co. v. Chapman, 2016 WL 2986193(Ill. App. 1st Div. May 23, 2016). (Click here for full article)

New York Court of Appeals Declines to Expand Common Interest
Exception to Waiver of Privilege
The New York Court of Appeals ruled that to maintain privilege under the common interest
doctrine, it is not enough that the parties share a common legal interest; rather, thecommunication at issue must also relate to pending or anticipated litigation. Ambac Assurance
Corp. v. Countrywide Home Loans, Inc., 2016 WL 3188989 (N.Y. June 9, 2016). (Click here
for full article)

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Excess Coverage
Alert:New York District Court Rules
That Excess Policies’ Exhaustion
Provisions Require Actual Paymentof Underlying Limits
A New York federal bankruptcy court ruledthat three excess policies unambiguously
required actual payment of underlying
policy limits before liability attached. RapidAmerican Corp. v. Travelers Cas. & Sur. Co.,2016 WL 3292355 (Bankr. S.D.N.Y. June
7, 2016).
Rapid-American, the successor to a
manufacturer of asbestos-containing
products, was sued in thousands of personal
injury actions. Rapid-American settled manyclaims, but ultimately declared bankruptcy.
Several of Rapid-American’s insurers also
became insolvent and were unable to pay thelimits of their policies. Rapid-American filed adeclaratory judgment action seeking a rulingas to coverage for certain excess policies.
The excess insurers argued, among otherthings, that no coverage under their policies
was available because Rapid-American had
not exhausted underlying insurance. The
court agreed and granted the insurers’ partial
summary judgment motion.
The court held that the language in eachexcess policy required actual payment of
the underlying limits. A policy issued by St.
Paul provided that excess coverage does not
attach “until the amount of the applicable
underlying limit has been paid by or on behalfof the Insured.” A National Union policy(1977) conditioned payment on exhaustionof underlying limits “by reason of losses
paid thereunder.” Another National Union
policy (1984) did not unambiguously require
exhaustion, but Rapid-American conceded
at oral argument that the policy required
exhaustion of underlying limits. Therefore,
the court held that, even assuming that
Rapid-American had accrued liabilities
that reached excess levels, excess coverage
was unavailable because actual payment ofunderlying limits had not been made.
The court rejected several arguments
frequently asserted by policyholders inthis context. First, the court held that Zeig
v. Mass. Bonding & Ins. Co., 23 F.2d 665(2d Cir. 1928), a case commonly cited forthe proposition that exhaustion does not
require actual payment, was distinguishable
because it involved a first-party property
policy. The court further noted that Zeig’s“continuing vitality is open to question” inthe wake of recent decisions to the contrary.
See Ali v. Fed. Ins. Co., 719 F.3d 83 (2d Cir.
2013) (discussed in June 2013 Alert); Forest
Labs., Inc. v. Arch Ins. Co., 953 N.Y.S.2d 460(N.Y. Sup. Ct. 2012), aff’d, 984 N.Y.S.2d 361(N.Y. App. Div. 2014) (discussed in October
2012 Alert).

Second, the court rejected Rapid-American’sargument that a Bankruptcy Clause andcorresponding New York statutory law
precluded the insurers from relying on theexhaustion requirement. The court explainedthat the Bankruptcy Clause precludes insurers
from refusing to pay claims on policies of
insolvent policyholders but does not excuse
compliance with conditions precedent (suchas exhaustion) imposed by excess policies.
The court distinguished cases that haveexcused a policyholder’s payment of a selfinsured retention in the case of bankruptcy.
The court explained that in those cases,bankruptcy prevented the policyholder
from satisfying the SIR, whereas here theexhaustion requirement could have beensatisfied by payment of underlying limits by aparty other than Rapid-American.
Finally, the court rejected the contention
that a Maintenance Clause precluded theexcess insurers from requiring exhaustion
or, alternatively, created ambiguity as to theexhaustion requirement. The court held that
the Maintenance Clause, which states thatcoverage will not “drop down” in the eventthat the policyholder fails to maintain alower level policy, was inapplicable because
a “settlement with an underlying insurer
does not constitute a failure to maintainthe underlying policy, and does not excuse
the condition precedent imposed by an
exhaustion requirement.”3

Data Breach Alert:
Arizona District Court Rules
That Cyber Policy Does Not
Cover Assessments Imposed inConnection with Data Breach

An Arizona federal district court granted aninsurer’s summary judgment motion, rulingthat a cyber policy did not provide coverage
for assessments imposed by a credit card
association in connection with a data breach.
P.F. Chang’s China Bistro, Inc. v. Federal Ins.
Co., 2016 WL 3055111 (D. Ariz. May 31, 2016).
Federal Insurance Company issued acyber-security policy to P.F. Chang’s parent
company. When computer hackers obtained
credit card numbers belonging to P.F.
Chang’s customers, the restaurant notified
Federal. Federal reimbursed P.F. Chang’s
more than $1.7 million pursuant to thepolicy but P.F. Chang’s also sought coveragefor nearly $2 million in assessments that it
paid to Bank of America Merchant Services(“BAMS”) pursuant to an indemnificationagreement. The agreement, known as a
Master Service Agreement (“MSA”), allowed
BAMS to processes P.F. Chang’s credit cardtransactions and provided that P.F. Chang’s
would pay for any fines, penalties or fees
imposed on BAMS by credit card associations.
Federal denied coverage for the assessments,
arguing that the policy did not cover such
expenses, and, alternatively, that exclusions
barred coverage for such payments. The
court agreed.
The court held that a policy provision
covering loss arising out claims madeagainst P.F. Chang’s for “Privacy Injury”
did not cover the assessment charges. The
court reasoned that BAMS, as a third-party
credit card processing vendor, did not havea valid claim for Privacy Injury against P.F.
Chang’s because its own records were notbreached. Rather, the records of the banks
that issued the credit cards were breached.
The court reached a different conclusion withrespect to a policy provision covering Privacy
Notification Expenses and Extra Expenses,
finding that those clauses provided coveragefor certain assessments. However, the court
held that policy exclusions relating to liability
assumed by contract or agreement barred
coverage because P.F. Chang’s liability for theassessments arose directly out of the MSA
with BAMS. In so ruling, the court rejected

P.F. Chang’s argument that the contractual
liability exclusion did not apply because it
would have been liable under negligenceor equitable doctrines for the assessments
imposed against BAMS even without the
MSA. Finally, the court rejected P.F. Chang’s
reasonable expectations argument, findingthat it failed to establish that its expectation ofcoverage for the assessments was “objectively
reasonable.”

Waiver Alert:

Two Courts Reject WaiverArguments, Finding That Insurers
Properly Reserved Rights to Deny
Coverage
In two decisions issued last month, Courtsof Appeals for the Tenth and Third Circuits
rejected policyholders’ waiver arguments
and held that property insurers were notestopped from denying coverage based onpolicy exclusions.
In Gallegos v. Safeco Insurance Co. of
America, 2016 WL 2849417 (10th Cir.
May 16, 2016), the Tenth Circuit rejecteda homeowner’s argument that a property
insurer waived its right to rely on certain
exclusions in denying coverage because
it failed to specify those exclusions in its
reservation of rights letter.
Homeowners sought coverage from Safeco forroof and ceiling damage following a storm.
Safeco denied coverage on the basis that thedamage was caused by poor construction andother events pre-dating coverage, rather than
the snow storm. In its reservation of rights,
Safeco identified several exclusions relevant
to its denial. The homeowners filed suit.
During the course of litigation, Safeco paid
the homeowners approximately $10,000 in
repair costs. Thereafter, a Colorado district
court granted Safeco’s summary judgment
motion, finding that improper construction
and maintenance of the roof contributed
to the damage, and that under the policy’s
anti-concurrent causation clause, Safeco was
not liable for damage caused in part by an
excluded peril.
On appeal, the homeowners argued that
Safeco had waived reliance on the relevant
exclusions by failing to specifically identify
4them in the reservation of rights and/or bypaying the costs of the roof repair during thelitigation. The Tenth Circuit rejected theseassertions and affirmed the district court. The
Tenth Circuit concluded that the coveragedenial sufficiently raised each exclusion relied
upon by Safeco during litigation. The court
further held that even if the reservation ofrights had not properly preserved the relevant
exclusions by name, that failure would not
estop Safeco from denying coverage. The
court explained that under Colorado law, aninsurer can waive a defense that constitutes a“forfeiture of a policy,” but that “coverage andexclusion issues are not subject to waiver.”Finally, the court ruled that Safeco’s voluntary
payment of the repair costs during litigation
did not constitute an admission of liability
or operate to waive Safeco’s right to denycoverage, explaining that waiver cannot be
invoked to create coverage where none existed
under the policy.
The Third Circuit rejected a different waiver/estoppel argument in Nationwide Property &Casualty Insurance Co. v. Shearer, 2016 WL
3018764 (3d Cir. May 26, 2016). There, thepolicyholders were sued for trespass, nuisanceand violations of environmental statutes
based on sewage leaks onto neighboring
property. Nationwide defended the suit undera reservation of rights that expressly statedthat pollution or other exclusions might
apply. In a supplemental reservation letter,
Nationwide cautioned that it reserved its
right to deny coverage and withdraw fromthe defense if valid bases for doing so arose.
More than two years after the underlying suit
began, Nationwide sought a declaration that it
had no duty to defend based on the pollution
and biological deterioration exclusions. The
policyholders did not dispute application of
the exclusions but argued that Nationwide
was estopped from withdrawing a defense
because “such an untimely withdrawal would
prove prejudicial.” The court disagreed andgranted Nationwide’s summary judgment
motion. The Third Circuit affirmed.
The Third Circuit ruled that the policyholders
failed to establish equitable estoppel underPennsylvania law. In particular, the court
held that the policyholder did not establish“inducement” by virtue of the fact that
Nationwide provided a defense for more than
two years. The court explained that any claimof inducement was defeated by Nationwide’s
express reservation of rights, notwithstanding

its long-term defense of the underlying suit.
The court also ruled that the policyholders
could not establish the requisite prejudice,
explaining that although the policyholders“were understandably disappointed by
Nationwide’s decision to withdraw its defense,
the fact that it was entitled to do so under theterms of the insurance contracts means thatthe defense it did tender was a temporary
benefit” to the policyholders.

Defense Alerts:

Ninth Circuit Asks Nevada Supreme
Court to Address Scope of Damages
for Insurer’s Breach of Duty to
DefendThe Ninth Circuit asked the Nevada Supreme
Court to decide whether an insurer thatbreached its duty to defend, but did not act in
bad faith, is liable for all consequential losses
arising from that breach, including sums
in excess of policy limits, or whether suchliability is capped at policy limits plus defense
costs. Nalder v. United Auto. Ins. Co., 2016
WL 3082417 (9th Cir. June 1, 2016).
The coverage dispute arose from an
automobile accident in which Lewis ran overa minor. The minor’s father contacted United
Auto, Lewis’s insurer, and offered to settle for
the $15,000 policy limit. United Auto refused,based on its position that Lewis was notcovered at the time of the accident because
he had failed to timely renew his policy.
United Auto did not inform Lewis of the offer.
Thereafter, the victim sued Lewis. Lewis did
not defend the suit and a $3.5 million default
judgment was entered against him. The victim
and Lewis then sued United Auto for breachof contract and bad faith, among other claims.
A Nevada district court judge initially ruled in
United Auto’s favor, but on remand from theNinth Circuit held that the renewal provision
was ambiguous and that Lewis was covered
under the policy at the time of the accident.
The court ordered United Auto to pay the$15,000 policy limit but held that it was notliable for consequential damages because
Lewis chose not to defend himself in theunderlying suit and did not incur any defense
costs.
On appeal, the parties disputed whether
United Auto was liable for the $3.5 million
5default judgment as consequential damages
stemming from its failure to defend. Noting
the absence of binding Nevada precedentin this context, and conflicting lower
court decisions, the Ninth Circuit certified
the following question to the Nevada
Supreme Court:
Whether, under Nevada law, theliability of an insurer that has breached
its duty to defend, but has not acted inbad faith, is capped at the policy limit
plus any costs incurred by the insured
in mounting a defense, or is the insurer
liable for all losses consequential to theinsurer’s breach?
We will keep you apprised of further
developments in this matter.

Second Circuit Rules That Insurer
Must Defend Personal andAdvertising Injury Class Action
Suits Notwithstanding Policy
Exclusions
Reversing a New York district court decision,
the Second Circuit ruled that an insurer
was obligated to defend suits alleging thatthe policyholder violated statutory andcommon law by transferring private customer
information for profit. National Fire Ins. Co.
of Hartford v. E. Mishan & Sons, Inc., 2016
WL 3079958 (2d Cir. June 1, 2016).
Emerson was sued in two class actions suits
alleging fraud, breach of contract, unjust
enrichment and various statutory violations
based on its participation in the transfer ofprivate consumer credit card information.
Emerson’s general liability insurers refused
to defend on the basis of a policy exclusion
barring coverage for personal and advertising
injury “caused by or at the direction of theinsured with the knowledge that the act would
violate the rights of another.” A New Yorkfederal district court agreed, finding that allof the allegations in the underlying suits fellwithin the scope of the knowing violation
exclusion. The Second Circuit reversed.
The Second Circuit ruled that the knowing
violation exclusion did not apply becausesome of the underlying causes of action did
not require knowing or intentional conduct as
an element. The court explained that although
the class actions suits generally alleged
intentional conduct, the factual allegations

did not rule out the possibility of a findingthat Emerson acted without intent to harm.
In particular, the court noted that claims forunjust enrichment and breach of contract do
not require a showing of intentional conduct.
Therefore, Emerson could be found liable in
the underlying suits even absent evidence
that it knowingly violated its customers’ rightto privacy. Having found that at least someclaims were potentially within the scope ofcoverage, the court ruled that the insurers
were required to defend the actions intheir entirety.

Ninth Circuit Rules That BusinessExclusion Bars Coverage for
Underlying Credit Card Dispute
The Ninth Circuit ruled that the phrase“arising out of” in a policy exclusion required
only a causal connection rather thanproximate causation and, therefore, that abusiness exclusion relieved an insurer of its
duty to defend a suit based on credit card
disputes that arose in connection with thepolicyholder’s employment. Griggs v. AllstateIns. Co., 2016 WL 3002302 (9th Cir. May
25, 2016).
Bryan Griggs was employed by HDMC, acompany that purchases hotel rooms inbulk for resale to convention attendees. In
order to reserve the rooms, HDMC used its
corporate credit cards. However, on certain
occasions, Griggs gave HDMC permission
to use his personal credit card to reserverooms. At one point, Griggs had reason tobelieve that HDMC was using his credit cardwithout his authorization and thus withdrew
permission for use of his card. Several months
later, HDMC fired Griggs and then sued him,
alleging that he wrongfully disputed charges
that he had authorized and for which he had
been reimbursed. Griggs tendered defenseof the action to Allstate pursuant to a renterspolicy. The policy covered losses arising outof the unauthorized use of a credit card, but
excluded coverage for “any loss arising fromany business of an insured person.” Allstatedenied coverage and refused to defend basedon the exclusion. In ensuing litigation, an
Oregon federal district court granted Allstate’ssummary judgment motion, concluding thatthe business exclusion applied. The Ninth
Circuit affirmed.
The Ninth Circuit ruled that the credit card
losses at issue arose from Griggs’s business6(i.e., his employment with HDMC). The court
explained that under Oregon law, the phrase“arising out of” indicates a causal connection
rather than proximate causation. Findingthat the exclusion squarely applied, thecourt stated, “[a]ny losses Griggs sustained
from HDMC’s unauthorized use of Griggs’s
credit card arose from—that is, were causallyconnected to—his full-time, paid employment
at HDMC.”

Construction
Defect Alert:

Iowa Supreme Court Rules
That Faulty Workmanship May
Constitute an “Occurrence” Under
Excess Liability Policy
The Supreme Court of Iowa ruled that
defective work resulting in property damage
performed by an insured’s subcontractor may
constitute an occurrence under a liability
policy. National Surety Corp. v. Westlake
Investments, LLC, 2016 WL 3201729 (Iowa
June 10, 2016).
National Surety sought a declaration that itwas not liable to the assignee of an excess
liability policy for damages awarded inunderlying construction defect litigation.
National Surety argued that property damage
caused by defective workmanship could
not constitute a covered occurrence underIowa law. Both parties moved for summary
judgment, and the district court ruled in favorof Westlake, the policyholder’s assignee. A
jury later ruled in favor of Westlake, awarding
it approximately $12.5 million plus interest.
National Surety appealed on numerous
grounds, and an intermediate appellate court
affirmed in relevant part. The Iowa Supreme
Court exercised discretion to consider one
issue: whether the district court erroneously
instructed the jury as to what constitutes an
occurrence under National Surety’s policy.
The district court had instructed the jury thatthe term “accident” means “an unplanned,
sudden, and unexpected event . . . determinedfrom the viewpoint of the insureds and what
they intended or should reasonably haveexpected.” The district court had further
instructed that “[d]efective construction work
performed by an insured is not covered by

the policy; however, defective construction
work performed by subcontractors may
be an ‘occurrence’ under the policy.” The
Iowa Supreme Court ruled that the district
court did not err in directing the jury toconsider the subjective viewpoint of theinsured in determining whether there was an“accident.” In addition, the Iowa Supreme
Court ruled that the district court did not err
in stating that defective work performed byan insured’s subcontractor may constitute an
occurrence. The court reasoned that certain
exclusions in the policy (such as a “yourwork” exclusion) supported its interpretation,
explaining that it “would be illogical for an
insurance policy to contain an exclusion
negating coverage its insuring agreement
did not actually provide or an exception toan exclusion restoring it.” Notably, the court
distinguished cases in which courts haveruled that faulty workmanship does notconstitute an occurrence because the insured
was the general contractor and the property
damage was limited to the insured’s own
work product.

Punitive Damages
Alert:
California Supreme Court
Rules That Post-Trial Award of
Attorneys’ Fees May Be Included
in Calculation of CompensatoryPunitive Damage Ratio

The California Supreme Court ruledthat a post-verdict award of attorneys’
fees in a coverage action should beconsidered compensatory damages indetermining whether a punitive award isunconstitutionally excessive. Nickerson v.
Stonebridge Life Ins. Co., 2016 WL 3192499(Cal. June 9, 2016).
A policyholder sued his health insurer forbreach of contract and bad faith basedon its failure to pay full benefits for an
extended hospital stay. Before trial, theparties stipulated that if the policyholder
succeeded, the trial court would determine
the amount of attorneys’ fees to which he
was entitled under California precedent. See
Brandt v. Superior Court, 37 Cal. 3d 813(Cal. 1985) (when an insurer refuses to pay
7policy benefits in bad faith, attorneys’ fees
reasonably incurred in obtaining benefits arerecoverable as an element of compensatory
damages). Following trial, the court issued adirected verdict on the policyholder’s breachof contract claim, awarding him $31,500.
With respect to the bad faith claim, thejury awarded the policyholder $35,000 for
emotional distress and $19 million in punitive
damages. After the jury rendered its verdict,the court awarded the policyholder $12,500 in
Brandt fees.
The trial court ruled that the punitive
damages award was unconstitutionallyexcessive. In calculating a permissible award,
the court considered only the $35,000
compensatory damage award, and not the$12,500 in Brandt fees. An intermediateappellate court affirmed. The appellate
court acknowledged that Brandt fees areproperly considered compensatory damages
for purposes of evaluating a punitivecompensatory damage ratio, but held thatsuch fees could not be included in thecalculation where, as here, they are awarded
after the jury issues a punitive damage award.
The California Supreme Court reversed.
Finding “no apparent reason” why a court
applying the constitutional guidelines may
not consider a post-verdict compensatory
damage award in its calculus, the court statedthat “to exclude the fees from consideration
would mean overlooking a substantial andmutually acknowledged component of theinsured’s harm.”

Choice of Law
Alert:

Illinois Appellate Court Finds
Conflict Between Illinois andIndiana Law As to Notice
Requirements for Policy Exclusions
An Illinois appellate court ruled that Indiana
and Illinois law differed regarding the noticerequired when an exclusion is added to an
insurance policy at the time of renewal, andthat the law of Indiana governed the dispute.
Cincinnati Ins. Co. v. Chapman, 2016 WL
2986193 (Ill. App. 1st Div. May 23, 2016).
In 2008, Chapman filed a class action suitagainst C.T. Phoenix alleging violations of
the Telephone Consumer Protection Act.
Cincinnati, Phoenix’s general liability insurer,
denied coverage based on an exclusion
barring coverage for TCPA violations. The
exclusion had been added to the policy when
it was renewed in 2006. In ensuing litigation,
the parties disputed whether Indiana or
Illinois law should govern the dispute. An
Illinois trial court determined that the law of
the forum state (Illinois) applied after findingthat there was no conflict between the twostates’ laws. Under Illinois law, an insurer
must provide 30 days advance notice of a new
exclusion in a renewal policy. Because such
notice was not provided here, the court ruledthat the TCPA exclusion was not valid. The
appellate court reversed.
The appellate court ruled that an actual
conflict existed between Illinois and Indiana
as to an insurer’s duty to provide notice of8

a new exclusion in a renewal policy. Illinois
law requires an insurer to provide 30 days
advance notice, whereas Indiana does not.
Although there was no Indiana statutory law
relating to such notice requirements in effectin 2006 (an applicable law became effective
several months after the policy was renewed),
the court ruled the existence of an Indiana
appellate decision, which did not require
advance notice, was sufficient to establish
an actual conflict. Having concluded that a
conflict of law existed, the court addressedwhich state’s law should govern the dispute.
Noting that the policyholder was an Indiana
corporation and that the only connection
to Illinois was that a fax was allegedly sent
to an Illinois resident, the court ruled thatIndiana law governed the insurance dispute.
Consequently, because no advance notice was
required under Indiana law, the court ruledthat Cincinnati’s TCPA exclusion was valid.

because the parties shared a common
legal interest.
A Special Referee concluded that the common
interest exception to privilege waiver applied
only if the parties shared a common legal
interest in pending or reasonably anticipatedlitigation. Bank of America moved to vacate
the Referee’s decision on the basis that
pending or anticipated litigation was not

Privilege Alert:

New York Court of Appeals Declines
to Expand Common Interest
Exception to Waiver of Privilege
The New York Court of Appeals ruled thatto maintain privilege under the common
interest doctrine, it is not enough that theparties share a common legal interest; rather,
the communication at issue must also relate
to pending or anticipated litigation. Ambac
Assurance Corp. v. Countrywide Home
Loans, Inc., 2016 WL 3188989 (N.Y. June
9, 2016).
Ambac Assurance sued Countrywide Home
Loans, alleging breach of contract andfraudulent misrepresentation based on the
failure of mortgage-backed securities. Ambac
named Bank of America as a defendant
based on its merger with Countrywide.
During litigation, Ambac challenged Bankof America’s withholding of several hundredcommunications between Bank of America
and Countrywide that took place after
the merger plan was signed, but before
the transaction closed. Bank of America
claimed that the documents were protectedby attorney-client privilege because they
contained legal advice relating to themerger. Bank of America further argued
that, although the documents were sharedwith Countrywide, privilege was not waived

required under the common interest doctrine.
A New York trial court denied the motion. An
intermediate appellate court reversed, rulingthat pending or anticipated litigation was nolonger a necessary element of the common
interest exception under New York law. The
New York Court of Appeals reversed.
In declining to expand the common interest
doctrine to protect shared communications infurtherance of any common legal interest, the
New York Court of Appeals stated that:
we do not perceive a need to extend
the common interest doctrine tocommunications made in the absenceof pending or anticipated litigation,
and any benefits that may attend
such an expansion of the doctrine areoutweighed by the substantial lossof relevant evidence, as well as thepotential for abuse.
The court acknowledged that otherjurisdictions have employed a less stringent
standard for application of the common
interest doctrine, but concluded that thepolicy reasons for maintaining a litigation
limitation on the doctrine outweighed any
purported justification for eliminating it.

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 /+1-212-4552235 and Deborah L. Stein
dstein@stblaw.com /+1-310-407-7525
with contributions
by Karen Cestarikcestari@stblaw.com.

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