In Charter Oak Insurance Company v. Maglio Fresh Foods, No. 14-4094, 2015 U.S. App. LEXIS 19268 (3d Cir. Nov. 4, 2015), the Third Circuit held that because the underlying lawsuit did not present a covered “advertising injury” claim, and there was no exhaustion of the primary policy, the insured’s excess carrier could not have acted in bad faith.

South Philadelphia is well-known for its Italian specialties, including Stromboli and sausages. Leonetti’s, a prominent supplier of Stromboli, brought a lawsuit against competitor Maglio Fresh Foods, arguably best known its sausages. The lawsuit alleged that after Maglio found a new manufacturer and terminated its private label manufacturing agreement with Leonetti’s, Maglio continued to use boxes reflecting product information about the Stromboli made by Leonetti’s. The lawsuit further alleged that Maglio was selling Stromboli under the “Forte” brand name, although Leonetti’s had purchased and obtained exclusive rights to distribute Forte products.

Maglio was defended by its primary insurer, Charter Oak Fire Insurance Company, pursuant to a reservation of rights letter. The Charter Oak policy had a limit of $1 million.  American Guarantee & Liability Insurance Company, Maglio’s excess and umbrella insurer, acknowledged the claim.

Following a jury trial, the jury returned a verdict in favor of Leonetti’s on the Maglio brand claim. (There was a mistrial as to the Forte brand claim, which was later re-tried and resulted in the jury finding in favor of Leonetti.) The jury awarded $2 million in compensatory damages and $555,000 in punitive damages. Upon learning of the verdict, American Guarantee informed Maglio that it had no duty to provide a defense or indemnity since Charter Oak was providing a defense and because the Maglio brand claim was not covered.

Following unsuccessful settlement discussions, Maglio entered into a settlement agreement and assignment of rights with Leonetti’s, awarding $4.5 million to Leonetti’s and assigning to Leonetti’s its claims against the insurers. In response to Maglio’s settlement, Charter Oak informed Maglio that it breached the policy’s cooperation clause and filed a declaratory judgment seeking a ruling that the claims in the underlying lawsuit were not covered under the policy. American Guarantee, a defendant in the declaratory judgment action, filed a cross-claim seeking a similar declaratory judgment. Maglio responded with allegations of breach of contract and bad faith.

The district court granted the insurers’ motions for summary judgment, concluding that neither policy covered either claim.  Specifically, the Maglio brand claim did not constitute an “advertising injury,” and the verdict for the Forte brand claim did not exhaust the limits of the underlying insurance policy. The counterclaims and cross-claims brought by Maglio, however, proceeded to trial. Charter Oak settled with Maglio immediately prior to trial.

Following a bench trial, the district court concluded that American Guarantee did not act in bad faith. Further, it held that Charter Oak’s tender of its policy limits did not affect American Guarantee’s obligation to defend Maglio since Charter Oak continued its defense, and the policy limits were not exhausted by the claim. Further, there was no bad faith because American Guarantee acted properly with respect to the Forte brand claim by hiring coverage counsel and monitoring the underlying action. Maglio appealed.

The Third Circuit upheld the lower court’s decision since the American Guarantee policy clearly did not apply to either the Maglio brand claim or the Forte brand claim. The court reasoned that even if the Maglio brand claim fit within the definition of “advertising injury,” the District Court properly determined that coverage was excluded under the “knowledge of falsity” exclusion. “It is undisputed that Taubman, Maglio’s broker and sales manager, testified that he knew the Maglio brand boxes contained false statements and did not accurately represent the product contained within them.” In addition, the Third Circuit stated that Maglio’s bad faith claim must fail since it was difficult to conceive how American Guarantee acted in bad faith when it owed no duty to indemnify.  Further, the Third Court found significant that American Guarantee’s defense provision was never triggered by the Forte brand claim since the Charter Oak policy was never exhausted. Therefore, the Third Circuit affirmed the district court.  Thanks to Hillary Ladov for her contribution to this post.  Please email Brian Gibbons with any questions.