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.

Replacement Cost Policy Must Actually Provide Replacement Cost Coverage (PA)

In Kurach v. Truck Insurance Exchange, a Pennsylvania Court awarded summary judgment to a homeowners’ policy holder who alleged that the replacement cost coverage policy was actually not replacement cost, as the terms of the policy allowed the insurance company to reduce the reimbursement by utilizing depreciation costs.

Pennsylvania law defines replacement cost as the actual value of the property at the time of the loss, without deduction for depreciation or deterioration. But here, as the insured learned when he sought coverage for a water damage claim, the policy coverage did deduct for depreciation. The policy further excluded general contractor “overhead” in clear and unambiguous language and plaintiff also challenged the legality of this provision in a policy labeled and marketed as a“Replacement Cost Coverage” policy.

The court held that a replacement cost coverage policy may not exclude general contractor overhead or profit, as that would run contrary to the definition under Pennsylvania law. Even though this exclusion was clearly written into the policy,  the court stated that a policyholder paying a premium for replacement cost coverage cannot be reimbursed for less. The same rationale applied to the depreciation claim – because this policy was labeled as a replacement cost coverage plan the court took issue with the policy diminishing full reimbursement, regardless of the reason. Specifically, the court took issue with Truck Insurance purporting to provide a policy that provided replacement cost coverage but defined replacement cost coverage in a manner that provided far less coverage.

Thanks to Matt Care for his contribution to this post and please write to Mike Bono for more information.

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.

 

 

 

 

 

 

 

Plain Language Rule Still Governs Interpretation of Coverage Exclusion (NJ)

The appellate court interpreted an “insured vs. insured” exclusion in a directors and officers liability policy in Michael Abboud v. National Union Fire Insurance Company of Pittsburgh. Generally, such exclusions bar coverage for claims by one insured director or officer against another. Plaintiff Abboud sought indemnity and a defense in connection with counterclaims made against him by fellow officers of Monarch, a company which operates and leases PET/CT equipment. Defendant National Union Fire Insurance Company of Pittsburgh (NUFIC) denied coverage based on the “insured vs. insured” exclusion. Abboud filed a declaratory judgment action against National Union which ended in summary judgment dismissal and a subsequent appeal.

In the underlying litigation, plaintiff Abboud sued four members of the board of managers of Monarch. Abboud alleged the four member-managers tried to remove him from Monarch’s board of managers and his position as its chief executive office. Monarch and the individual defendants asserted various counterclaims against Abboud, alleging that he engaged in self-dealing and exploited Monarch’s opportunities for his personal gain or that of his other companies.

Defendants in Abboud’s underlying suit obtained an acknowledgement of partial coverage from National Union, subject to a reservation of rights, under the Employment Practices Liability (EPL) section of Monarch’s multi-coverage policy which also included a D&O liability section. By contrast, Abboud did not notify National Union of the counterclaims against him until 8 months after suit was initiated. Abboud attempted to excuse his late notice because Monarch and National Union had delayed responding to his requests for information about coverage.

Abboud subsequently filed his declaratory judgment action, expressly invoking and quoting the policy’s D&O section, Abboud sought indemnity and defense costs for the counterclaims in the underlying lawsuit.  National Union denied its policy provided indemnity or defense costs coverage for the counterclaims.  National Union filed a motion for summary judgment, contending the insured vs. insured exclusion within the D&O section precluded coverage. The trial court granted summary judgment in favor of National Union, finding that the insured vs. insured exclusion plainly barred Abboud’s claim for coverage.

The appellate court reviewed the language of the insurance policy and found that there was nothing ambiguous, convoluted, or opaque about the exclusions in the D&O section. The exclusion disallows coverage when the claim is raised by either an executive of the company or the company itself. Abboud sought to avoid the plain interpretation of this provision contending it violates his reasonable expectations and claiming that the exclusion applies only in cases of collusion between the individual insureds.

The appellate court found that insurance contracts should be construed to reflect the reasonable expectations of the insured in the face of ambiguous language and phrasing, and in exceptional circumstances when the literal meaning of the policy is plain. The appellate court found no exceptional circumstances in Abboud’s claim, stating that the record is devoid of competent evidence of Abboud’s expectations of coverage or proof that such expectations would be objectively reasonable. As such, the appellate court affirmed the trial court’s holding.  Thanks to Steve Kim for his contribution to this post.  Please email Brian Gibbons with any questions.

 

 

Permissive Operator Cannot Bestow Owner’s Permission to Another Operator (PA)

On June 26, 2017, the Superior Court of Pennsylvania affirmed an order granting summary judgment to State Farm Mutual Automobile Insurance Company (“State Farm”) in State Farm v. Fuller et al. in a declaratory judgment action it filed against Paul Fuller (“Fuller”), Mark Czyzyk, Michele Czyzyk and Rose Nealon (“Nealon”).  The underlying lawsuit was filed by Nealon against Fuller and the Czyzyks after Nealon was involved in a car accident with Fuller when she was a passenger in the car with him.  Nealon alleged that Fuller was under the influence of drugs and alcohol at the time of the accident and that the Czyzyks negligently entrusted him with their vehicle.

The trial court granted State Farm’s summary judgment motion on the basis that Fuller was driving the car without permission and that the vehicle was only insured under Michele Czyzyk.  Nealon appealed on several issues, one of them being that jurisdiction is improper because State Farm was seeking an invalid advisory opinion from the court with its declaratory judgment action.  The Superior Court, upon review, disagreed with Nealon and found that because Nealon sought indemnification and there was a possibility that State Farm would have to provide a defense in an action that its policy was applicable to the litigation and that is was not a mere advisory opinion being sought but an adjudication of a controversy.

Nealon also raised the issue that the Czyzyks knowingly entrusted the car to Fuller.  The record indicated that only Michele Czyzyk was the car’s owner and the named insured on State Farm’s policy.  She gave permission to her brother, Mark Czyzyk, to run short errands with the car.  There was no evidence that she gave her brother permission to lend the car out to other people, including Fuller.  Under the State Farm policy, Fuller would be covered if he was a permissive user of the vehicle.  Permission requires a showing on behalf of the named insured/owner that warrants a connection and consent to the use.  Here the court found that the record was devoid of an issue of fact as to whether Michele Czyzyk permitted Fuller to use the car.  It did find that she did permit her brother to use the car for errands but did not permit him to lend the car out then.  Because of this, the court affirmed the summary judgment motion in favor of State Farm.

This case demonstrates the importance of fully assessing coverage issues in tandem with conventional defense litigation.  By analyzing the consequences of coverage, one can possibly limit potential risk and exposure on a claim.  In addition, a final declaratory judgment and order from a court can provide clarity on an issue and allow a clearer analysis of a lawsuit and potential liability since now one will know the extent to which a policy will apply to the instant action.

This analysis is not unexpected.  In New York, there have been literally thousands of instances where the police would pull over a rental car, and find that the driver is not the person who actually rented the car.  Under such circumstances, the operator is “unauthorized” (by Enterprise, for example) to use the car — and is then subject to arrest.  The point is, only the owner/lessee has the ability bestow permission to an operator.  That permission does not “pass through” to additional operators.  Thanks to Peter Cardwell for his contribution to this post.  Please email Brian Gibbons with any questions.

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.