Insurance Law Alert

December 2023

In This Issue
Illinois Supreme Court Addresses Scope Of General Liability Coverage For
Construction Defect Claims
The Illinois Supreme Court ruled that allegations in a construction defect suit fell within theinitial grant of coverage in a general liability policy for purposes of triggering the insurer’s duty
to defend, but remanded the matter for a determination of whether policy exclusions barred
coverage. Acuity v. M/I Homes of Chicago, LLC, 2023 Ill. LEXIS 1019 (Ill. Nov. 30, 2023).
(Click here for full article)“[Simpson Thacher’s]
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2023

Arbitration Panel, Not Court, Must Determine Preclusive Effect Of Prior
Arbitration Award On A Subsequent Arbitration, Says Illinois Court
An Illinois district court granted a motion to compel arbitration, ruling that the question ofwhether a prior arbitration award has preclusive effect on a subsequent arbitration is a matterfor the arbitration panel to decide, not a court. National Cas. Co. v. Cont’l Ins. Co., 2023 U.S.
Dist. LEXIS 204528 (N.D. Ill. Nov. 15, 2023). (Click here for full article)

Hawaii Supreme Court Rules That Insurer May Not Recover Defense Costs
From Insured Absent Express Policy Provision
The Hawaii Supreme Court ruled that an insurer that has defended an insured may not
subsequently seek equitable reimbursement of defense costs unless an express policy provisionaffords that right. St. Paul Fire & Marine Ins. Co. v. Bodell Construction Co., 2023 Haw. LEXIS
194 (Haw. Nov. 14, 2023). (Click here for full article)

Illinois Appellate Court Rejects Seventh Circuit’s Reasoning And Holds
That Coverage For BIPA Claims Is Barred By Policy Exclusion
An Illinois appellate court ruled that general liability insurers were not obligated to defend asuit alleging violations of the Biometric Information Privacy Act, expressly rejecting a recent
Seventh Circuit ruling that reached the opposite conclusion. National Fire Ins. Co. of Hartford
v. Visual Pak Co., Inc., 2023 Ill. App. LEXIS 482 (Ill. App. Dec. 19, 2023). (Click here forfull article)

Montana Court Rules That Carbon Monoxide Claims Allege A Single
Occurrence Under Cause-Based Test
A Montana federal district court ruled that underlying claims stemming from carbon monoxide
poisoning alleged only one occurrence as a matter of law. Western National Mutual Ins. Co.
v. Rainbow Ranch Holdings, LLC, 2023 U.S. Dist. LEXIS 207868 (D. Mont. Nov. 17, 2023).
(Click here for full article)
Simpson Thacher & Bartlett LLP

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Illinois Supreme Court Addresses Scope Of General
Liability Coverage For Construction Defect Claims
HOLDINGThe Illinois Supreme Court ruled that allegations in a construction defect suit fell within
the initial grant of coverage in a general liability policy for purposes of triggering theinsurer’s duty to defend, but remanded the matter for a determination of whether policy
exclusions barred coverage. Acuity v. M/I Homes of Chicago, LLC, 2023 Ill. LEXIS 1019
(Ill. Nov. 30, 2023).

BACKGROUND

A townhome owners’ association sued M/I Homes, the general contractor and developerand seller of the homes. The suit alleged that M/I Homes’s subcontractors performed faulty
workmanship and used defective materials, resulting in property damage. M/I Homes
sought a defense from Acuity under a general liability policy issued to one of thesubcontractors and under which M/I Homes was an additional insured. Acuity denied
coverage and filed a declaratory judgment action, arguing that the underlying complaint
did not allege “property damage” caused by an “occurrence,” as required by the policy.
Ruling on the parties’ cross-motions for summary judgment, the trial court held that Acuity
had no duty to defend. The trial court reasoned that property damage resulting from faulty
workmanship was not an “occurrence” because it was a natural and ordinary consequenceof negligent work, rather than an accident. The trial court also held that there was no“property damage” because only the townhomes themselves were damaged, and that“property damage” requires damage to property aside from the project itself. The appellate
court reversed, ruling that a liberal construction of the allegations in the complaint alleged“property damage” caused by an “occurrence,” and that Acuity therefore had a duty
to defend.

DECISION

The Illinois Supreme Court reversed in part and affirmed in part. With respect to whether
the policy’s initial grant of coverage encompassed the underlying allegations so as to giverise to a duty to defend, the Illinois Supreme Court affirmed the appellate court’s decision.
In particular, the Illinois Supreme Court held that allegations of water damage due to leaks
arising from faulty construction and/or defective materials constituted “property damage.”
The court expressly rejected the notion that property damage requires damage to property
beyond the townhome construction project itself, noting that such reasoning is not
grounded in policy language.
Additionally, the court held that the claims alleged an “occurrence,” defined as “anaccident, including continuous or repeated exposure to substantially the same general
harmful conditions.” Emphasizing that an accident is generally understood to mean“an unforeseen occurrence” or “an undesigned, sudden, or unexpected event,” the court
concluded that “accident” reasonably encompasses the unintended and unexpected damage
caused by negligent construction.
However, the Illinois Supreme Court reversed the appellate court’s decision insofar as it
granted summary judgment in favor of M/I Homes. The Illinois Supreme Court noted thatpolicy exclusions relating to “Expected or Intended Injury” and “Business Risks Including
Damage to Property and Damage to Your Work” might operate to bar coverage, andremanded the matter for resolution of those issues.

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COMMENTS

Ruling on this matter of first impression under Illinois law, the court acknowledged thelack of consistency on rulings in this context, both within Illinois and across jurisdictions.
As the court noted, courts have considered a variety of factors in determining whether
construction defect suits give rise to general liability coverage,—some of which are notderived from governing policy language—including whether the damage was to property
other than the defective work itself and whether the insured was a contractor or
subcontractor. With respect to Illinois appellate court decisions holding that “property
damage” requires damage to property other than the construction project itself, the court
expressly rejected those decisions, stating that such cases “should no longer be relied on.”Arbitration Panel, Not Court, Must Determine Preclusive
Effect Of Prior Arbitration Award On A Subsequent
Arbitration, Says Illinois Court
HOLDINGAn Illinois district court granted a motion to compel arbitration, ruling that the question ofwhether a prior arbitration award has preclusive effect on a subsequent arbitration is amatter for the arbitration panel to decide, not a court. National Cas. Co. v. Cont’l Ins. Co.,
2023 U.S. Dist. LEXIS 204528 (N.D. Ill. Nov. 15, 2023).

BACKGROUND

Continental entered into three reinsurance agreements with National Casualty andNationwide. When a dispute relating to the reinsurers’ billing arose in 2017, Continental
initiated arbitration proceedings against each reinsurer pursuant to an arbitration clause in
the agreements. Both arbitration proceedings resulted in final awards that were confirmed
by Illinois district courts.
The current dispute arose out of the same provision in the reinsurance agreements.
Once again, Continental initiated arbitration against the reinsurers who, in turn, filed
suit seeking to preclude Continental from re-arbitrating the final decisions of the 2017
arbitrations. The reinsurers asked the court to stay arbitration in order to allow the parties
to litigate the preclusive effect of the prior arbitration. In response, Continental moved tocompel arbitration and to dismiss the case. The court granted Continental’s motion anddenied the reinsurers’ motion.

DECISIONAs the court noted, while broad arbitration provisions, such as the one at issue here,require the parties to resolve any dispute relating to the agreement in an arbitration
proceeding, a narrow exception exists for a “question of arbitrability.” However, thisexception is narrow in scope, limited to “gateway matters,” such as whether non-signatories

3may be bound by an arbitration clause. The court rejected the reinsurers’ assertion that the
preclusive effect of a prior judgment constituted one such “threshold question” ofarbitrability. The court explained that a determination of the preclusive effect of the 2017
awards would require an assessment of the merits of the claims and the substantive
prerequisites for collateral estoppel and was therefore not a “threshold question ofarbitrability” that was subject to judicial ruling.
The court also rejected the reinsurers’ contention that Section 13 of the Federal Arbitration
Act (which states that an arbitration award “shall have the same force and effect, in all
respects, as, and be subject to all the provisions of law relating to, a judgment in an action;and it may be enforced as if it had been rendered in an action in the court in which it isentered”) required the court to adjudicate the preclusive effect of an arbitration award thathas been confirmed by a court. The court noted the lack of Seventh Circuit support for thisassertion, as well as the First and Ninth Circuits’ rejection of this argument.
COMMENTS

The decision reinforces the well-established principles that “disputes are presumed
arbitrable” where a contract includes a broad arbitration clause and that exceptions to thisrule are limited in scope. Courts across jurisdictions have held that various procedural
defenses—including issues of waiver, delay, notice and laches, among other things—are not“gateway” matters subject to the narrow exception, but rather are matters to be decided byan arbitration panel.
In contrast, questions relating to whether a non-signatory may be bound by an arbitration
clause have been deemed gateway matters appropriate for resolution by a court. In adecision issued this month, the Second Circuit denied a motion to compel arbitration,
ruling that a non-signatory to a reinsurance agreement was not obligated to arbitrate undera “direct benefits estoppel” theory, which precludes a non-signatory from obtaining benefits
from a contract while avoiding an arbitration provision in that same contract. Travelers
Indem. Co. v. Grapeland Independent School Dist., 2023 U.S. App. LEXIS 32631 (2d Cir.
Dec. 11, 2023).

Hawaii Supreme Court Rules That Insurer May Not
Recover Defense Costs From Insured Absent Express
Policy Provision
HOLDING

The Hawaii Supreme Court ruled that an insurer that has defended an insured may not
subsequently seek equitable reimbursement of defense costs unless an express policy
provision affords that right. St. Paul Fire & Marine Ins. Co. v. Bodell Construction Co.,
2023 Haw. LEXIS 194 (Haw. Nov. 14, 2023).

BACKGROUNDThis dispute arose from the allegedly negligent construction of a residential development,
which resulted in a lawsuit against a subcontractor involved in the project. The
subcontractor tendered defense of the suit to several primary and excess policies underwhich it was listed as an additional insured. The insurers agreed to defend under areservation of rights, which included a statement reserving the insurers right to seek
reimbursement for fees and costs related to claims not potentially covered under
the policies.

4The underlying suit was stayed pending two arbitrations. An arbitration between thesubcontractor and the claimant resulted in a settlement agreement, and an arbitration
between the subcontractor and general contractor resulted in an arbitration award against
the general contractor. The award was confirmed by a Hawaii court and a judgment wasissued in favor of the subcontractor.
Thereafter, the insurers filed suit, seeking reimbursement of costs incurred in defending
the underlying suit. The district court certified the following question to the Hawaii
Supreme Court:
Under Hawaii law, may an insurer seek equitable reimbursement from aninsured for defense fees and costs when the applicable insurance policy
contains no express provision for such reimbursement, but the insurer
agrees to defend the insured subject to a reservation of rights, including
reimbursement of defense fees and costs?
The Hawaii Supreme Court answered this question in the negative.
DECISION

The court provided three main rationales for its decision. First, the court emphasized that
contractual language unequivocally governs the parties’ rights and obligations, and that thepolicy was silent as to a right to reimbursement of defense costs. The court rejected thenotion that a reservation of rights alters those rights, stating: “Insurers may reserve
contractual rights, not create new ones.” Second, the court reasoned that reimbursement
would erode the broad duty to defend. The court noted that an insurer’s duty to defend isdetermined at the outset, based on allegations in the complaint, and that allowing
reimbursement at a later date “would effectively require that insurers only defend to thesame extent that they must ultimately indemnify.” (Citations omitted). Finally, the court
ruled that an insured is not unjustly enriched by receiving a defense for claims outside thescope of coverage. The court explained that by providing a defense, the insurer retains thebenefit of strategic control over the litigation and that allowing reimbursement would
unjustly enrich the insurer.

COMMENTS

Courts in other jurisdictions are split on this issue. While some jurisdictions, such as
California, allow insurers to recoup defense costs under certain circumstances, others,
such as Pennsylvania, do not. Courts that have allowed reimbursement have employedvarious reasoning, including that the reservation of rights creates an implied contractual
right to such reimbursement and/or that denying reimbursement would result in unjust
enrichment to the insured.

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Illinois Appellate Court Rejects Seventh Circuit’s
Reasoning And Holds That Coverage For BIPA Claims Is
Barred By Policy Exclusion
HOLDINGAn Illinois appellate court ruled that general liability insurers were not obligated to defend
a suit alleging violations of the Biometric Information Privacy Act (“BIPA”), expressly
rejecting a recent Seventh Circuit ruling that reached the opposite conclusion. National
Fire Ins. Co. of Hartford v. Visual Pak Co., Inc., 2023 Ill. App. LEXIS 482 (Ill. App. Dec.
19, 2023).

BACKGROUND

The underlying BIPA suit arose out of a company policy that involved the collection of
employees’ fingerprints to monitor daily working hours. The company tendered defense of
the suit to its general liability and umbrella insurers, who denied coverage and sought adeclaration that they had no duty to defend or indemnify the BIPA claims. The trial court
initially ruled that questions of fact existed as to whether the company was entitled tocoverage, but upon reconsideration, granted the insurers’ motion for judgment on thepleadings. The appellate court affirmed.

DECISION

The appellate court held (and the insurers did not contest) that the BIPA claims fell within
the policies’ initial grant of “personal and advertising injury” coverage, which encompassed
injuries arising out of “[o]ral or written publication, in any manner, of material that violatesa person’s right of privacy.” The controversy centered on whether a policy exclusion barred
coverage for the claims. The exclusion, titled “Recording And Distribution Of Material Or
Information In Violation Of Law,” stated that coverage did not apply to:
Personal and advertising injury arising directly or indirectly out of any
action or omission that violates or is alleged to violate:(1) The Telephone Consumer Protection Act (TCPA), including any
amendment of or addition to such law; or(2) The CAN-SPAM Act of 2003, including any amendment of or addition
to such law;(3) The Fair Credit Reporting Act (FCRA), and any amendment ofor addition to such law, including the Fair and Accurate Credit
Transactions Act (FATCA); or(4) Any federal, state, or local statute, ordinance or regulation, other than
the TCPA, CAN-SPAM Act of 2003 or FCRA and their amendments
and additions, that addresses, prohibits, or limits the printing,dissemination, disposal, collecting, recording, sending, transmitting,communicating or distribution of material or information.

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As the appellate court noted, decisions involving the same exclusionary language as that
presented here are divided as to whether the “catch all” sub-section encompasses BIPA
claims. In a recent decision, the Seventh Circuit held that nearly identical language did notpreclude a duty to defend, abrogating several federal district court decisions that foundsimilar exclusions applicable to BIPA Claims. See Citizens Ins. Co. of Am. v. Wynndalco
Enterprises, LLC, 70 F.4th 987 (7th Cir. 2023) (discussed in our June 2023 Alert).
In Wynndalco, the Seventh Circuit acknowledged that a plain-text reading of the catch allprovision would include BIPA violations, but nonetheless concluded that the provision was
ambiguous because a liberal reading of it would exclude from coverage injuries or damage
arising from a large category of intellectual property claims that the policy by its express
terms otherwise purported to cover. The Seventh Circuit also held that the interpretative
cannon of ejusdem generis, under which broad or general contract terms are construed
according to the specific terms that precede them, did not resolve the ambiguity because
there was no “readily discernible theme” of privacy in the exclusion.
The Illinois appellate court expressly rejected the Seventh Circuit’s reasoning, noting that it“gave too little credit to the reasonable person purchasing this business liability policy” inconcluding that a theme of personal privacy among the statutes listed in the exclusion was
not readily apparent. The court expressly disagreed with the Seventh Circuit’s reasoning
and holding as to ambiguity, deeming it inconsistent with Illinois law. In particular, while
the Illinois appellate court agreed with the Seventh Circuit’s proposition that an insurer’s
interpretation of an exclusion will not be adopted if it would altogether eliminate coverage,
the court deemed that principle inapplicable here, where “the exclusion at issue does notcome close to wholly erasing the insured’s coverage.” The court also took issue with Seventh
Circuit’s invocation of other contract provisions that were not implicated in the coverage
dispute (such as those relating to coverage for copyright and trade dress claims) in order todeem the exclusion ambiguous. The Illinois appellate court stated:[T]he Seventh Circuit’s point establishes, at most, that the catch all
exclusion might irreconcilably conflict with a few provisions of the“personal and advertising injury” coverage. That may be so, but theseprovisions are not at issue in this case. . . . We are aware of no authority in
Illinois law, nor did the Seventh Circuit cite any, for the proposition thata hypothetical conflict in language that was not at issue before the court
could permit the court to essentially nullify an entire coverage exclusion
as illusory, even though there is no such conflict between the coverage andexclusion provisions at issue in the case before the court.
As such, the court deemed Wynndalco wrongly decided and ruled that the insurers owed
no duty to defend the underlying BIPA claims in the present case.

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COMMENTS

The court also distinguished West Bend Mutual Ins. Co. v. Krishna Schaumburg Tan, Inc.,
2021 Ill. LEXIS 430 (Ill. May 20, 2021) in which the Illinois Supreme Court ruled that asimilar exclusion did not bar coverage for BIPA claims. As the court noted, the exclusion inWest Bend differs from that in the present case in several important respects. Most notably,
the catch all provision in the West Bend exclusion references only “sending, transmitting,communicating or distribution” of material, whereas the catch all provision in this caseincludes those terms, as well as “disposal, collecting [and] recording.” The court explainedthat inclusion of these additional terms “undoubtedly broaden[s]” the scope of the
exclusion at issue here. Further, the court noted the title of the exclusion in West Bend(“Violation of Statutes That Govern E-Mails, Fax, Phone Calls or Other Methods of Sending
Material or Information”) speaks exclusively to modes of communication, whereas the
exclusion title in this case (“Recording And Distribution Of Material Or Information In
Violation Of Law”) suggests a more expansive scope by virtue of the word “Recording,”
which contemplates the collecting and retaining of information for future use. Finally, thecourt noted that the inclusion of only the TCPA and the CAN-SPAM Act of 2003 in theWest Bend exclusion indicates an intent to limit application of the catch all provision to
statutes that likewise govern unsolicited communication. In contrast, the exclusion here
also lists the FCTA and FACTA, statutes that relate more generally to the privacy of
personal information.
The decision also highlights the limits of a policyholder’s estoppel argument. Here, thepolicyholder had also argued that the insurers were estopped from denying coverageby virtue of an alleged delay in denying coverage. The court explained that under thedoctrine of estoppel, if an insurer fails to issue a reservation of rights or alternatively seeka declaration that it has no duty to defend, it may subsequently be estopped from asserting
defenses to coverage. However, estoppel has no application where, as here, a court hasdetermined there is no duty to duty to defend in the first place. As the court noted, to holdotherwise “would be to give estoppel the power to magically rewrite a policy from one that
does not obligate the insurer to defend into one that does.”Montana Court Rules That Carbon Monoxide Claims
Allege A Single Occurrence Under Cause-Based Test
HOLDINGA Montana federal district court ruled that underlying claims stemming from carbon
monoxide poisoning alleged only one occurrence as a matter of law. Western National
Mutual Ins. Co. v. Rainbow Ranch Holdings, LLC, 2023 U.S. Dist. LEXIS 207868 (D.
Mont. Nov. 17, 2023).

BACKGROUND

The underlying claimants were exposed to carbon monoxide while staying at a Montana
hotel, resulting in injuries to one individual and the death of another. The hotel was
insured under a general liability policy and an umbrella policy, both issued by Western
National. The general liability policy had a $1 million per-occurrence limit with a medical
expense limit of $10,000 per person and the umbrella policy had a $5 million limit.
Western National tendered the policy limits of $6,020,000 and sought a declaration thatthe underlying suit alleged only one occurrence.

DECISION

The court ruled in Western National’s favor, finding that the underlying claims alleged asingle occurrence under Montana’s cause-based test for determining the number ofoccurrences. The court acknowledged that the underlying complaint alleged several distinct
8

negligent acts, including the failure to warn, the failure to maintain and faulty constructionof the hotel room, but nonetheless concluded that “the sole cause” for the claimants’
injuries and death was the carbon monoxide poisoning. As the court noted, courts in otherjurisdictions have similarly ruled that injuries stemming from carbon monoxide exposure,even if the result of several contributing factors, stem from a single occurrence.
COMMENTS

Aside from the number-of-occurrences ruling, the court also addressed an argument
relating to whether the case presented a justiciable controversy. The hotel argued that the
court should dismiss the suit as unripe or stay the matter pending resolution of theunderlying litigation. The hotel claimed that “considering whether policy limits exceed $6
million involves a hypothetical and academic practice because it remains unknown whether
a jury would reach a verdict over $6 million.” Rejecting this argument, the court explainedthat the number-of-occurrences question determines whether Western National owes
additional coverage (i.e., additional per-occurrence payments based on multiple
occurrences), which affect its good faith obligations. Notably, the court distinguished thecase from decisions holding that an insurer’s declaratory judgment action relating to its
duty to indemnify is not ripe for adjudication until the question of underlying liability
against the insured is resolved.

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This edition of the
Insurance Law Alert was prepared byBryce L. Friedman / +1-212-455-2235
bfriedman@stblaw.com
Joshua Polster / +1-212-455-2266
joshua.polster@stblaw.com andKaren Cestarikcestari@stblaw.com.

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