Author Archives: Cheryl D. Fuchs

Dismantling The Designated Ongoing Operations Exclusion

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In Tuscarora Wayne Ins. Co. v. Hebron, Inc., the Pennsylvania Superior Court analyzed when a policy’s Designated Ongoing Operations Exclusion may be triggered.  In brief, a fire occurred at the insured’s property, when a driver was pumping gas into a vehicle at the insured’s location.  The fire caused damage to the insured’s property, and the surrounding neighbors’ property as well.  The insured’s policy excluded coverage under its Designated Ongoing Operations Endorsement for ongoing operations including “vehicle dismantling”.  On the basis of this exclusion, the insurer commenced a declaratory judgment action seeking a declaration that the policy did not provide coverage for the claimed damages.  On summary judgment, the trial court ruled in favor of the insurer.

On appeal, the insured argued the trial court erred in finding that refueling a vehicle fell within the policy’s language of “vehicle dismantling”.  The Superior Court agreed with the insured.  As the phrase “vehicle dismantling” was not defined by the policy, the court looked to the ordinary meaning of the phrase, which generally involved stripping vehicles of their parts.  Thus, since the only connection the claimed damages had with “vehicle dismantling” was the fact that the fuel, which started the fire, was being pumped into vehicles that had been dismantled, the Superior Court believed this connection was insufficient to trigger the policy endorsement.

Accordingly, this case reveals, Pennsylvania courts will look to the actual operations being performed to determine whether there is a close enough link, as to trigger a policy’s Designated Ongoing Operations Exclusion.

Thanks to Colleen Hayes for her contribution to this post.

PA- Policyholder Not Entitled to Uninsured or Underinsured Motorist Coverage When Injured    in Work Vehicle.  

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In Erie Insurance Grp. v. Catania, in August 2009, Jack Catania was driving a delivery truck for work when he swerved to avoid another vehicle.  In doing so, he lost control of his truck and suffered injuries.  The other vehicle fled the scene.  Catania had a personal policy with Erie at the time.  Because the other driver fled, the other vehicle was considered an uninsured motor vehicle, and Catania made a claim for uninsured motorist coverage with Erie.

Erie filed a declaratory judgment action to determine it was not obligated to provide uninsured or underinsured motorist coverage for an employee who was injured while driving a work vehicle and subsequently made a claim under his personal insurance policy.  The court held Erie did not have to provide coverage because the work vehicle fit the “regularly used non-owned vehicle” exclusion contained in that policy.   While Catania regularly used the truck, he did not own it.  As a result, it was excluded under Catania’s personal policy with Erie.

Thanks to Robert Turchick for his contribution to this post.

 

NY-First Department Holds $286 Million SEC Disgorgement Is Not Covered

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In J.P. Morgan Sec., Inc. v Vigilant Ins. Co., the First Department held that the insurers of Bear Stearns were not required to pay for the $140 million disgorgement fine, and additional $146 million in statutory interest, resulting from the bank’s settlement with the SEC for improper profits acquired by third-party hedge fund customers.  The ruling represents the latest chapter in the costly, decade-old litigation between J.P. Morgan (into which Bear Stearns in 2008) and Bear Stearns’ insurers.

As background, in 2006, Bear Stearns paid out almost $215 million to the SEC as part of a settlement after the SEC brought proceedings for various trading violations.  Of the $215 million, $160 million was labeled a “disgorgement” and $90 million was labeled a “penalty.”  Bear Stearns’s insurance policies, which covered a “Loss,” provided that “Loss shall not include … fines or penalties imposed by law.”  When Bear Stearns sought reimbursement for $140 million of the $160 disgorgement from its insurers, the insurers disclaimed coverage on the basis that the $160 million payment was labeled “disgorgement”, and thus it did not represent a covered loss under the insurance policies.  In 2013, the New York Court of Appeals held that Bear Stearns was entitled to coverage, as the public policy rule against insuring “ill-gotten gains” “should apply only where the insured requests coverage for the disgorgement of its own illicit gains,” and that “the documentary evidence does not decisively repudiate Bear Stearns’ allegation that the SEC disgorgement payment amount was calculated in large measure on the profits of others. 21 N.Y.3d 324, 336.  Thus, because the disgorgement represented the gains of others, the public policy rationale was inapplicable.  On remand, the trial court granted summary judgment for J.P. Morgan, which included over $146 million of statutory interest, bringing the total amount to approximately $286 million.

In the present case, the First Department reversed the trial court in light of the United States Supreme Court’s 2017 decision in Kokesh v. Securities and Exchange Commission, 137 S.Ct. 1635 (2017).  Kokesh involved the application of a federal statute of limitations to any action for the “enforcement of any civil fine, penalty, or forfeiture.”  The Supreme Court held that SEC disgorgement was explicitly a penalty, and therefore the statute of limitations did not apply.  The First Department held that the Supreme Court’s “rationale at the nature of disgorgement … applies with equal force to the issue of whether the disgorgement … even if representing third-party gains, was a ‘Loss’ within the meaning of the policy.”  Because Kokesh established that disgorgement “punishes a public wrong, and its purpose is deterrence,” it was a penalty and not covered under the policy.

Given the amount at stake and significance of the claim, it is likely that the Court of Appeals will have a second crack this case.  On appeal, however, the argument will not focus on public policy rationales, as it had previously.  Rather, J.P. Morgan will attempt to argue that the Supreme Court’s holding in Kokesh is limited to its application to statutes of limitation, and should not be expanded to encompass language in an insurance policy.

Thanks to Douglas Giombarrese for his contribution to this post.

NY-  Third Circuit Untangles Coverage Web of Direct Versus Vicarious Liability

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Upstream litigants and their insurers often to push liability to the downstream contractors or insureds, but the policy terms of an upstream insurer, even an excess insurer, can frustrate expectations.

In United Financial Casualty Company v Princeton Excess and Surplus Lines Insurance., Princeton appealed the ruling by the Eastern District of New York that held it had a primary duty to provide coverage in a bodily injury claim for the direct liability of their named insured, Prestige Delivery Services, and Staples, Inc.  Prestige was hired to deliver goods by Staples.  Joseph Nice, who worked for Prestige, had to stop the delivery van for repairs.  In the process of repairs, the repairman, Plaintiff Ken Dunbar, was trapped and dragged under the vehicle, sustaining severe personal injuries.  Dunbar sued Nice for negligence, and asserted claims of vicarious liability (respondeat superior) and negligent hiring, supervision, and retention against Prestige and Staples.

United, which insured Nice, assumed the defense of all parties, settled all claims, and then sued Princeton for (1) contribution on the vicariously liability claims, and (2) a declaratory judgment establishing Princeton had primary coverage duties with respect to the direct liability claims against Prestige and Staples.  The Eastern District of Pennsylvania ruled for United on both accounts, and Princeton appealed only from the latter.

The Third Circuit, however, rejected Princeton’s appeal on two grounds.  First, the Court held the United policy only insured Nice for claims arising directly from his conduct, and the direct liability at issue pertained to negligent hiring and supervision.  As the Court observed, Nice cannot supervise himself.  Second, although an excess form policy, the Princeton policy’s terms provided for primary level coverage for liability assumed in an “insured contract.”  Because Prestige agreed to hold harmless and indemnify Staples for any negligence attributable to Prestige, the Third Circuit affirmed the district court’s ruling.

Such cases are cautionary tales regarding resting on standard assumptions.  Often in such delivery or construction claims, liability flows down to the tortfeasor, who is contractually bound to indemnify those above and whose insurance is obligated to answer on a primary basis.  Excess policies rarely are obligated to assume primary level responsibilities, but most such policies have conditions and terms that would trigger primary coverage.  The details of the policy will trump standard business expectations every time, and the minutiae of the policy should be scrutinized at the outset of every claim as a result.

Thanks to Christopher Soverow for his contribution to this post.

 

PA-No Extrinsic Evidence For You

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In Lupa v. Loan City, LLC, the Third Circuit Court of Appeals confirmed the standard upon which an insurer’s defense obligations are triggered under Pennsylvania law.

In Lupa, the insured sought coverage from its insurer for various claims asserted against it.  In response to the insured’s request for defense, the insurer denied the insured’s claim, contending the complaint against the insured did not trigger coverage under the policy.  On appeal, the insured contended that the four corners rule should not be applied to determine coverage under a policy.  The Court of Appeals disagreed.  The court held that, under Pennsylvania law, an insurer’s duty to defend could only be triggered by allegations within the four corners of the complaint.  The court continued that there were no exceptions to this rule, which would require an insurer to rely on facts introduced outside of the complaint, i.e. extrinsic evidence.

Accordingly, this case confirms that courts applying Pennsylvania law will apply the four corners test to determine whether an insurer’s obligation to defend has been triggered.

Thanks to Colleen Hayes for her contribution to this post.

 

NJ – Don’t Drink and Operate a Private Water Craft

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The Appellate Division recently held that the Dram Shop Act does not apply to a tavern hosting a small party where the guests, who were employees of the tavern, brought their own alcohol to the party.  The Dram Shop Act was designed to protect the rights of persons who suffer loss as a result of the negligent service of alcohol by a licensed alcoholic beverage server.

In Votor-Jones v. Delly, plaintiff was one of seven employees and patrons of Kelly’s Tavern invited on a social trip organized by the tavern’s owner.  The guests brought with them four or five coolers of alcohol on two boats.  One guest, Michelle, started drinking before they got on the boat.  Michelle continued to drink alcohol after the boats departed for the ocean.  Other guests described Michelle as “loud”, “boisterous” and “excited,” but they conceded that they did not know whether she was intoxicated.

After stopping the boats, Michelle was allowed to operate Kelly’s boat.  Michelle sped away, but turned back toward the other boat at a speed of 40mph.  Michelle then struck plaintiff who was swimming in the ocean.

To prevail on a Dram Shop Act Claim, a party must present evidence that an establishment served alcohol to a visibly intoxicated person.  The Appellate Division rejected as “too attenuated” plaintiff’s contention that the circumstances fell within the scope of the Dram Shop Act because neither Kelly’s Tavern nor Kelly individually were acting as a “licensed alcoholic beverage server” or “server” completed by the statute.  Moreover, Michelle was not a “customer” of Kelly’s Tavern or Kelly.  The Court summarized the outing as an informal, small-scale get together that required attendees to bring their own food and alcohol.

Although there are many instances where an individual is “served” alcohol, not every instance will give rise to liability if that person injures another after imbibing alcohol.  Small get-togethers hosted by a tavern where guests bring their own alcohol will not subject a tavern to liability, but the Court acknowledged that a more large scale party for employees where alcohol is provided to them would result in liability to the tavern.

Thanks to Michael Noblett for his contribution to this post.

 

 

Coming up Short – Second Circuit Appellate Court Requires Significant Elevation Difference for Labor Law §240(1)

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In Simmons v. City of New York, Plaintiff was injured while working as a plumber on a project for the City of New York. Plaintiff was using a pallet jack to move an air compressor weighing over 600 pounds. The compressor was lifted six inches off the ground and was only secured by two pieces of scrap wood wedged around the sides of the compressor. Plaintiff was pushing the compressor from behind when the pallet jack ran over concrete debris and stopped short causing the compressor to roll off onto plaintiff’s ankle.

The lower court granted summary judgment dismissing the Labor Law §240, §241(6), and §200 claims.  On appeal, the Second Department affirmed dismissal of the Labor Law §240 claim holding that it was not enough that the injury was caused by the application of gravity, there must be a significant elevation difference. A plaintiff must show that “at the time the object fell, it was being hoisted or secured, or that the falling object required securing for the purposes of the undertaking” and the object fell because the absence of a safety device.”

Notwithstanding the Labor Law §240 dismissal, the Second Department reinstated the §241(6), and §200 claims against the general contractor.

The Appellate Court’s decision with regards to Labor Law §240(1) could be impactful with how we analyze the “elevation related risks” required by the statute. When an object falls from a short height or tips over from the same level as the plaintiff, courts often look at the weight of the object to determine how much force it was able to generate during its fall. Here, the court did not analyze the weight or the force created by the object, but focused solely on the height it fell from and whether it was the type of activity which required a safety device as enumerate in Labor Law §240.

Thanks for Jesse Sussmane for his contribution to this post.

Workers Compensation Exclusion Unambiguous (NJ)

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In DaSilva v. JDDM Enterprises LLC et. al., the Appellate Division for the Superior Court of New Jersey recently considered the interplay between worker’s compensation statutes and the common Workers’ Compensation Exclusion often present in contractor’s insurance policies.

The coverage action arose out of Utica Insurance Company’s disclaimer of coverage to JDDM, a general contractor insured by a Utica Contractor’s Special insurance policy.  Plaintiff DaSilva, an employee of a JDDM subcontractor, sued JDDM for injuries he incurred on the construction site.  His employer, the subcontractor, failed to obtain Worker’s Compensation insurance coverage, as it was required to do pursuant to the N.J. statute.  JDDM tendered to Utica, and Utica disclaimed all coverage pursuant to the policy’s Workers’ Compensation Exclusion, which excluded coverage for all bodily injury if “benefits are provided or required to be provided by the insured under a workers’ compensation law.”

JDDM argued that the exclusion was ambiguous, and should be construed in favor of coverage given the unequal bargaining power between JDDM and Utica.  The Court disagreed, holding the Workers’ Compensation Exclusion was unambiguous and Utica’s disclaimer was proper.

The Court found N.J. Statute 34:15-79(a) dispositive.  This statute required any contractor who places work with a subcontractor, to obtain workers’ compensation coverage “in the event of the subcontractor’s failing to carry workers’ compensation insurance as required by this article.”  Thus, the New Jersey regulation explicitly makes contractors liable for the workers’ compensation coverage that would otherwise be carried by their subcontractors, thus providing a powerful incentive for contractors to hire insured subs.  Given this rule, the Court found that JDDM, as Utica’s insured, was plainly required by law to provide workers’ compensation, and thus the plain language of the Exclusion barred coverage.

The DaSilva case is a reminder to contractors in New Jersey to be mindful of workers’ compensation coverage to all subcontractors hired, given the ubiquity of the Workers’ Compensation Exclusion in insurance policies.

Thanks to Vivian Turetsky for her contribution to this post.

Pennsylvania Court Rescinds Policy Based On Insured’s Fraudulent Acts

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The U.S. Eastern District Court for Pennsylvania recently rescinded an insurance policy based on the insured’s fraudulent misrepresentations.

In Pallante v. Those Certain Underwriters At Lloyd’s, a fire occurred at an insured’s property while the insured was away.  After the fire, during an inspection of the property with the insurer’s adjuster, the insured represented that there were also several personal items missing from the property and advised that a theft had also occurred.  Subsequently, the insured sent photographs of the items that were allegedly stolen from the property.  The insurer had the photographs analyzed and it was revealed that the photographs were all taken after the fire and theft were alleged to have occurred.  Consequently, the insurer denied the claim based on concealment and misrepresentation.

The insured subsequently commenced a declaratory judgment action asserting breach of contract and bad faith claims against the insurer.  The insurer moved for summary judgment.  In determining whether to grant the motion, the court reasoned that there was no dispute that the insured made material false misrepresentations regarding her claim.  Thus, looking to the policy language, the court concluded that since the policy did not provide coverage if the insured concealed or misrepresented facts, the insurer was entitled to rescind the policy on that basis.

Accordingly, this case shows that, under certain factual circumstances, Pennsylvania Courts will support a policy’s rescission, and it appears to be viable basis for insurers to contest coverage in Pennsylvania.

Thanks to Colleen Hayes for her contribution to this post.

Court Finds Spoofing Attack is Hacking Covered Under Cyber Coverage (NY)

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The Second Circuit recently declined to reconsider its July summary order that required an insurer to pay more than $4.8 million to its insured, a cloud-based services firm, lost as a result of “spoof” emails.  The case, Medidata Solutions Inc. v. Federal Insurance Company, provides insight into the burgeoning world of cyber insurance coverage, and how courts may handle the various policy provisions invoked by insureds seeking coverage

In June 2014, an employee at  Medidata Solutions received an email purporting to be from the company’s president instructing her to wire money to an outside bank account, which the firm eventually did.  Medidata sought coverage under its commercial crime policy.  The policy covered losses stemming from “entry of Data into” or “change to Data elements or program logic of” a computer system.  When the insurer denied coverage, Medidata sued. The insurer argued that the spoofing attack was not covered because the policy applied to hacking-type intrusions.  Medidata argued that the fraudsters entered data when they changed the “From” entry in “spoof” emails to make it seem like they were actual Medidata executives.

In unanimously affirming the district court, the Second Circuit held that “[w]hile Medidata concedes that no hacking occurred, the fraudsters nonetheless crafted a computer-based attack that manipulated Medidata’s email system.”  Moreover, because the spoofing code enabled the fraudsters to send messages which seemingly came from high-ranking members of the firm, the court held that “the attack represented a fraudulent entry of data into the computer system.”  Therefore, the court held the insurer was on the hook for the $4.8 million.

In declining to rehear this case, the Second Circuit let stand a major decision for policyholders.  In an era when claims for cyber attacks is at an all-time high, policyholders will welcome holdings in which courts find coverage for cyber attacks in non-cyber specific policies.  The holding could also put the Second Circuit at odds with a similar case currently pending before the Sixth Circuit. American Tooling Center Inc. v. Travelers Casualty & Surety Co. of America, No. 16-12108, 2017 WL 3263356 (E.D. Mich. Aug. 1, 2017).  There, the district court found no coverage under a crime policy where the Michigan firm wired $800,000 in funds to a fraudster’s account by finding the loss was not a “direct loss” caused by the “use of a computer.”  Insureds and insurers alike are keeping tabs on these and other decisions invoking cyber coverage in light of the magnitude of cyber cases in recent years.

Thanks to Douglas Giombarrese for his contribution to this post.