Unlicensed Use of Product Trademarks is not Personal and Advertising Injury

The Fifth Circuit recently ruled that the duty to defend “personal and advertising injury” did not extend to the unlicensed use of a product and trademarks.

In Laney Chiropractic v. Nationwide, Laney sued its insurer for a declaration of coverage after Nationwide refused to defend Laney against allegations of federal trademark infringement, false advertising, deceptive business practice, breach of contract and unfair competition arising out of Laney’s use of soft tissue massage techniques.  Nationwide had determined that the lawsuit lacked an advertising, trade dress or slogan claim and refused to cover the defense.

The Fifth Circuit reached its conclusion by reasoning that “[w]hen an insured is accused of using another’s product, they are generally not using another’s ‘advertising idea … because without more, taking and then advertising another’s product is different from taking another’s ‘advertising idea’. The court also did not accept that the false-advertising allegation that Laney’s website mimicked underlying plaintiff’s style of doing business constituted a trade dress claim. The court said trade dress protection is not designed for “patent-like rights” in innovative product designs, and “protects the distinctive look of the product, not the functional product itself.”

As creative an insured can be in seeking coverage, the underlying claim governs an insurer’s duty to defend.

Thanks to Hillary Ladov for her contribution to this post.

Multiple Causes of Action Does Not Equal Multiple Claims

Though a claimant might allege multiple causes of action, where those causes arise out of the same incident it generally will be considered one claim.

In Westport Ins. Corp. v. Peter G. Mylonas, the underlying plaintiff sued Mylonas for professional malpractice.  The plaintiff alleged he retained Mylonas to form his corporation and provide related advice, but that Mylonas negligently transferred stock without shareholder consent, causing the plaintiff to lose his entire business.  The complaint contained causes of action sounding in negligence, breach of fiduciary duties, and breach of contract.

Westport Insurance Company issued a professional liability insurance policy and provided Mylonas’ defense in the underlying action.  The policy limited coverage to $500,000 per claim, and to $1,000,000 in the aggregate.  Defense costs counted towards the limits.  Westport initiated the coverage action to confirm that the underlying suit constituted a single claim.  Westport incurred defense costs of $420,000, and the verdict reached against Mylonas was $525,000.

The Court of Appeals found that where “claim” is defined as “a demand made upon any insured for loss…including, but not limited to, service of suit” and that “two or more “claims arising out of a single wrongful act …shall be a single claim,” there was no ambiguity but that the single lawsuit constituted a single claim, thus limiting Westport’s coverage obligations to $500,000.  The Court was clear that no amount of artful pleading to include multiple causes of action could create additional ‘claims,’ and also warned insureds that there would be no advantage to filing multiple suits in an effort to skirt the articulated rule because where the suits are “related” they still constitute a single claim.

This ruling is significant because it provides clarity with respect to an oft-litigated issue, and it provides a practical warning against those that would attempt to shoehorn multiple claims in search of higher coverage limits out of a single wrongful action or loss.

Thanks to Vivian Turetsky for her contribution to this post.

Email Scam Not Necessarily Covered As “Computer Fraud”

While it may seem counter-intuitive, wire fraud induced by email does not constitute a loss directly caused by the use of a computer, and for good reason.

The Eastern District of Michigan recently encountered this scenario in American Tooling Center, Inc. v. Travelers Casualty and Surety Co. of America.  The insured received what appeared to be an email requesting payment from a vendor.  To accomplish the ruse, the impostor artfully changed an “m” in the domain name of the vendor with “rn,” and further responded to requests for proof of milestones made by the insured.  After receiving such proof, the insured wired payment to the designated bank only to realize later it had been duped.

The insured submitted a claim for computer fraud to Travelers Casualty and Surety Company of America. The Travelers Policy covered “computer crime,” defined as any “direct loss of, or direct loss from damage to, Money, Securities and Other Property directly caused by Computer Fraud.”  The Travelers Policy further defined “Computer Fraud” as, in pertinent part, “[t]he use of any computer to fraudulently cause a transfer of Money….”

The Court held the email scam did not constitute a loss directly arising from the use of a computer. Instead, the Court observed the insured responded to the fraudulent emails by taking verification steps prior to authorizing the transfer of funds.  As a result, and unlike a hacking case, the transfer itself did not directly arise from the use of a computer.  In so holding, the Court emphasized “direct” in this context meant “immediate.”

Though the email was part of the scheme, the email was incidental to the occurrence of the authorized transfer of money. “To interpret the computer-fraud provision as reaching any fraudulent scheme in which an email communication was part of the process would…convert the computer-fraud provision to one for general fraud.”

Coverage often turns on a strict interpretation of causation, and it is no different when the means or mode of loss is through the internet. While an email may start the causal chain of loss, intervening acts can disrupt the chain of causation for coverage purposes.

Thanks to Chris Soverow for his contribution to this post.

 “Possession” is not Synonymous with “Mortgagee in Possession.”

In New Jersey, banks are commonly sued as a result of accidents occurring on properties subject to mortgage foreclosure actions, especially those properties that have been vacated and abandoned by the debtor-homeowner.  A bank is generally not liable for such accidents if it is not the legal owner of a property it forecloses upon.  The bank becomes the legal owner once it receives title to the property subsequent to a foreclosure sale which, in New Jersey, involves a public auction hosted by the County Sheriff.    However, New Jersey Courts have held that a “mortgagee in possession”, despite not having legal title, may be liable for premises liability actions, as well as other actions.  Much confusion has ensued as to what is and what is not a “mortgagee in possession” since the Courts have repeatedly held that it is a legal issue to be decided on a case by case basis.

In Woodlands Community Association, Inc. v. Nationstar Mortgage, LLC the court provided clarity and laid out the analytical framework relative to this issue.  Adam Mitchell purchased a condominium unit in 2007 with the proceeds from a bank.  He executed a mortgage encumbering the unit.  The mortgage was assigned to Nationstar.  Mitchel eventually defaulted and then vacated the unit.   He also owed the Association unpaid monthly assessment fees.

Subsequent to his default and abandonment, Nationstar replaced the locks on the unit and winterized it.  Nationstar had the only set of keys.   The Association sued Nationstar for unpaid monthly assessment fees.  The trial court granted summary judgment in favor of the Association, holding that Nationstar was a mortgagee in possession due to its exclusive control of the unit.

The Appellate Division reversed, counseling that use of the word “possession” in the designation “mortgagee in possession” is somewhat misleading.  Rather, dominion and control are more descriptive of a mortgagee in possession, not actual possession.  Since Nationstar was not occupying or using the unit, was not collecting rents or otherwise profiting from the unit, and was not making repairs to the unit, the Appellate Division held that it was not a mortgagee in possession.  Acts such as changing locks and winterizing the unit are “minimal efforts taken … to secure [the bank’s] interest in the mortgaged property …”.  Stated another way, the bank was merely protecting the value of its security interest by preventing break-ins, vandalism, and water loss.

While the issue is one to be decided on a case by case basis, defense attorneys who represent banks in these types of cases should keep the above analysis in mind since it may be possible to escape from liability on summary judgment.

Thanks to Michael Noblett for his contribution to this post.

 

 

 

 

Pollution Exclusion Not Overly Broad

In a recent Second Circuit decision, the court considered an insurer’s duty to defend and indemnify an insured in connection with a chemical contamination at Love Canal near Niagara Falls, New York.

In Cincinnati Insurance Company v Roys Plumbing Inc, several families sued Roy’s Plumbing, Inc. and other defendants alleging personal injury, property damage, and loss of companionship due to the wrongful dumping of toxic substances.  Cincinnati Insurance Company and disclaimed coverage to Roy’s pursuant to the policy’s pollution exclusion.  After disclaiming coverage, Cincinnati sued seeking a declaration of no coverage.  The United States District Court for the Western District of New York granted Cincinnati’s motion for summary judgment, holding that Cincinnati was not obligated to defend or indemnify Roy’s in connection with the underlying litigation.

The Cincinnati policy excluded “[b]odily injury or property damage which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release, escape or emission of pollutants at any time.”  “Pollutant” was broadly defined, covering “substances which are generally recognized in industry or government to be harmful or toxic to persons, property or the environment” and “any solid [or] liquid … irritant or contaminant, including … waste.”  Since the complaint against Roy’s alleged damages related to personal injuries and contamination of property caused by toxic chemicals, as well as sewage, the court had “no doubt” these constituted excluded pollutants.  The court also rejected Roy’s argument that the pollution exclusion was overbroad and created ambiguity because it would deny coverage for most damages due to plumbing work, as New York courts limit the reach of pollution exclusions to “those cases where the damages alleged are truly environmental in nature, or where the underlying complaint alleges damages resulting from what can accurately be described as the pollution of the environment.”  Thus, the Second Circuit upheld the District Court’s ruling on appeal finding that the allegations against Roy’s Plumbing fell within the policy’s pollution exclusion.

Though Roy’s tried to present a quasi “illusory coverage” argument, this case illustrates that an appropriately worded exclusion will be upheld.

Thanks to Rebecca Rose for her contribution to this post.

 

 

Homeowners’ Association Has No Duty to Maintain Stop Sign

In Brown v Russaw and Emerald Lakes Association, the court granted summary judgment in favor of a homeowner’s association in a motor vehicle accident case involving a missing stop sign.  Plaintiff alleged personal injuries as a result of a motor vehicle accident that occurred when she was struck by another vehicle which had entered the intersection from a roadway at which a stop sign was missing.

The issue of whether a private community association has a duty to maintain or replace a stop sign was a matter of first impression under Pennsylvania law.  The Defendant association pointed to analogous cases involving municipalities which indicated that there was no duty upon a municipality to erect, maintain, or replace a missing stop sign at an intersection.   Although the court acknowledged that the defendant community association was not a municipality, the court felt that the municipality cases were indeed analogous and noted that, if a municipality has no obligation to erect, maintain, or repair stop signs, then, for the same reasons, a private road owner likewise did not have that obligation.

Therefore, a private association that maintains its own private roads, is under no duty to erect traffic control signs, including stop signs, or to repair or replace them, even if they know they are missing.

Thanks to Hillary Ladov for her contribution to this post.

Eight Corners and Ongoing Damages Rules Prevent Disclaimer in Environmental Damages Case

The duty to defend can be triggered where there is a lack of specificity in a complaint.

In  USA Environment LP v. American Int’l Speciality Lines Ins. Co., the Southern District of Texas recently rejected an insurer’s denial of coverage to insureds that transported millions of gallons of hazardous waste materials to what was later designated a superfund site.  The “potentially responsible parties” (PRPs) identified by the EPA sued hundreds of companies involved with the Suprefund site, including the insureds who filed a separate action seeking coverage.  The insurer issued policies to the insureds from 2003 to 2014, and denied coverage under waste disposal site and auto exclusions.

The Court observed that the policies issued after 2011 had deleted the waste disposal site exclusion, and created an exception to the applicable pollution exclusion. The underlying complaint filed by the PRPs did not specify when the releases of pollutants occurred or the years the insureds’ services were performed, but did note the insureds transported different kinds of hazardous materials over the course of many years.  The complaint further alleged the release of hazardous materials was ongoing.  Accordingly, the Court held coverage was triggered because it was possible damages occurred during a policy issued after 2011.

Similarly, the Court held the allegations in the complaint were too vague to conclude all the hazardous materials were transported by the insureds in an “auto,” as defined by the policy. As a result, some of the property damage alleged may not have arisen from the use of an auto, and the Court ruled the duty to defend was triggered.

When in a four or eight corners jurisdiction, an insurer is generally beholden to the allegations in a complaint, no matter how vague. If these allegations potentially fall within coverage, under the liberal standard embraced by courts across the nation, the duty to defend is likely triggered.  As with any general rule, there are exceptions and aggressive positions can be warranted.  However, particularly in high value cases, an aggressive position should be weighed against the certainty of litigation and its potential result.

Thanks to Chris Soverow for his contribution to this post.

 

 

 

Denial of Summary Judgment Motion on Undefined Policy Term did not Preclude Litigating the Term at Trial

In Windows v. Erie Ins. Exch., homeowners claimed coverage under their policy after raw sewage entered their home.  The insurance company denied coverage based on a water damage exclusion that stated there was no coverage for damage caused by “water or sewage which backs up through the sewers and drains”.  After the denial, the homeowners commenced the instant action.

Ultimately, the insurance company filed for summary judgment seeking a declaration of no coverage based on the exclusion.  The trial court denied the insurer’s motion on the basis that “backs up” was not defined.  The insurer then filed a motion in limine seeking a ruling that the law of the case did not apply, and it should not be precluded from presenting evidence of its coverage defenses, i.e. the water damage exclusion barred coverage under the policy.  The trial court also denied this motion stating the previous summary judgment order had already concluded that the water damage exclusion could not preclude coverage for the homeowners’ instant claim.  As such, the denial of summary judgment established the law of the case.

On appeal, the Superior Court reasoned that while the policy term “backs up” was ambiguous, and the trial court had correctly denied the insurer’s motion for summary judgment, the trial court had erred nonetheless by reading into the denial of summary judgment the legal conclusion that the insurer was precluded from further litigating the water damage exclusion.  As such, the case was remanded.

Accordingly, this case stands for the proposition that a denial of a summary judgment does not mean an insurer will be precluded from continuing to litigate its position that coverage does not apply, regardless of whether its reasons for disclaimer were included in a previously denied motion for summary judgment.

Thanks to Colleen Hayes for her contribution to this post.

 

 

 

 

 

 

 

NY High Court Takes Common Sense Approach to Additional Insured Coverage

For years parties have disputed just how far “caused in whole or in part” stretches in the context of coverage afforded an additional insured for the acts or omissions of a named insured. New York’s highest court settled the dispute and decreed “caused” refers to proximate, rather than the impermissibly broad “but for,” causation.

The Court of Appeals decided Burlington Ins. Co. v. NYC Tr. Auth., on June 6, 2017, and was presented with a familiar fact pattern in the world of coverage:  a coverage dispute over the scope of additional insured coverage afforded in the scope of construction project.

Burlington insured Breaking Solutions, Inc. (“BSI”), which supplied equipment and personnel for the project. Plaintiff, a Transit Authority employee, fell from scaffolding after BSI equipment came into contact with a live electrical cable that was under concrete.  Burlington initially recognized a duty to defend the Transit Authority, subject to a reservation of rights, based on the Transit Authority’s status as an additional insured.  Burlington reserved its right to deny coverage based on the limitations of the pertinent additional insured endorsements, which afforded coverage:

…only with respect to liability for “bodily injury”, “property damage” or “personal and advertising injury cause, in whole or in part, by:

  1. Your acts or omissions; or
  2. The acts or omissions of those acting on your behalf.

Subsequent discovery revealed internal Transit Authority memos admitting they were solely at fault, and BSI neither operated the machinery improperly, nor knew of the existence of the cable. Based on these admissions, Burlington disclaimed coverage.

The Court of Appeals held the plain language of the endorsement, including the reference to “liability,” calls for proximate causation. Significantly, the Court rejected the argument that “caused by” is equivalent to “arising out of,” the latter of which signals but for causation.  In the end, the Transit Authority’s sole negligence was not covered under the Burlington policy’s additional insured endorsement.

The Court’s plain language interpretation reflects the common sense recognition that additional insured endorsements are meant to apportion loss to the party with the most control over the risk. In the real world construction context, the endorsement is meant to create a coverage chain in parallel to the contractual chain of indemnification running from the bottom rung subcontractor to the property owner at the top.  Sole acts of negligence of entities higher up the chain always break the liability and indemnification chain in New York, and coverage is no different.

Thanks to Chris Soverow for his contribution to this post.

 

 

Defense Of “Abusive Acts” Not Covered Under CGL Policy

In a recent New Jersey case regarding allegations of a board of education’s knowledge of a teacher’s inappropriate conduct involving students, the United States District Court for the District of New Jersey held that the board’s commercial general liability insurer properly disclaimed coverage as its policy excluded coverage for “abusive acts.”

In Montville Township Board of Education v Zurich American Insurance Co., Jason Fennes was a teacher at Montville Township Board from September 1998 to June 30, 2010.  Shortly after he resigned from Montville, he began working for Cedar Hill Prep.  In March 2012, while working as a teacher at Cedar Hill, Fennes was arrested for sexually abusing a Montville student in 2005.  At that time, Montville notified Zurich American Insurance Company, its commercial general liability carrier, of a potential claim, and Zurich issued a general reservation of rights.  In August 2012, a six year old student at Cedar Hill, “Child M,” and her parents sued Fennes and Cedar Hill, alleging that Fennes sexually abused her in February 2012.  In January 2015, Child M filed a third amended complaint naming Montville as a defendant, alleging that Montville knew about, or was on notice of, Fennes’ sexual abuse of students at Montville, and that it failed to report Fennes to the authorities, as required by law.  Child M also alleged that Montville entered into an agreement with Fennes in 2010 in which it agreed to limit the information it would pass along to potential employers in exchange for Fennes’ resignation.  Finally, Child M alleged that but for Montville’s failure to report and provide information about Fennes to prospective employers like Cedar Hill, Child M would not have been sexually abused by Fennes.  Cedar Hill filed a cross-claim against Montville for contribution and indemnification based on these allegations.

The Zurich policy, which was effective July 1, 2011, contained a CGL Part, which provided an exclusion for bodily injury “arising out of or relating in any way to an ‘abusive act’” or “any loss, cost or expense arising out of or relating in any way to an ‘abusive act.’”  An “abusive act” was defined as “any act or series of acts of actual or threatened abuse or molestation done to any person, including any act or series of acts of actual or threatened sexual abuse or molestation done to any person by anyone who causes or attempts to cause the person to engage in a sexual act: a. without the consent of or by threatening the person … b. if that person is incapable of appraising the nature of the conduct or us physically incapable of declining participation in or communicating unwillingness to engage in the sexual act …”.  The Zurich policy also contained an Abusive Act Coverage Part (the “AA Coverage Part”), which provided insurance for “loss because of ‘injury’ resulting from an ‘abusive act.’”  However, the AA Coverage Part excluded coverage for any “‘abusive act’ of which any insured, other than the insured actually committing the ‘abusive act’, has knowledge prior to the effective date of this Coverage Part.”  Zurich disclaimed any duty to defend or indemnify Montville under the CGL and AA Coverage Parts, as Child M’s bodily injury arose out of or related to “abusive acts” per the terms of the CGL Part and its exclusion, and as Child M alleged that Montville knew about Fennes’ abusive acts but failed to report them, bringing the allegations within the exclusion of the AA Coverage Part.  Montville filed an insurance coverage action against Zurich following Zurich’s disclaimer of coverage.

After Montville and Zurich filed cross-motions for summary judgment, the United States Court for the District of New Jersey granted Zurich’s motion and denied Montville’s motion, holding that the CGL Part’s “abusive acts” exclusion was not only clear and unambiguous, but that it was broad and expansive, as it excluded coverage for bodily injury “arising out of or relating in any way to an ‘abusive act’” and therefore barred coverage under the CGL Part.  It did not matter that the abuse to Child M occurred after Fennes’ employment by Montville to a child who was not a Montville student, as the definition of “abusive act” broadly included “any act or series of acts of actual or threatened sexual abuse or molestation done to any person by anyone.”  While the Court did not go into a detailed analysis of the AA Coverage Part, it did outline the substantial evidence to support the allegations that Montville knew about Fennes’ abusive acts, and found that Montville “virtually knew” that Fennes would continue to abuse students at other schools when it agreed not to disclose his past abusive acts to potential employers in exchange for his resignation.

This case serves as a useful reminder that insurance carriers can protect themselves from certain claims when their policies of insurance are clear, unambiguous, and broad reaching.

Thanks to Rebecca Rose for her contribution to this post.