Category Archives: Coverage

Theft of Human Hair Weaves Legal Analysis

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Recently, in an unpublished opinion, a New Jersey appellate court in the case of Beauty Plus Trading Co. Inc. v. National Union Fire Insurance Co. of Pittsburgh, considered whether an insurance policy’s “loading and unloading” provision precluded coverage to an insured for damages arising out of a theft of a shipment of human hair weaves.

The insured received its goods on a Friday evening, but decided not to unload the container of goods until the following Monday.  Instead of unloading, the insured’s staff Beauty Plus Trading Co. Inc. v. National Union Fire Insurance Co. of Pittsburgh cut the container’s seal and left it on the loading bay outside of the warehouse.  The following night, an individual stole the container housing over $283,000 worth of human hair weaves.

The policy contained a “loading and unloading” section which provided coverage for the insured’s goods for 24-hours after the company received a shipment.  In this case, the insured received a shipment at 5:00 p.m. on a Friday evening and the theft took place at 9:00 p.m. the following Saturday night.  According to the policy, the goods were insured until 5:00 p.m. on Saturday.

The insured tried to argue that coverage under the loading and unloading provision should have been extended through the following Monday under the so-called “business day” rule. This rule states that where a party’s time to perform its obligations under an insurance policy expires on a weekend or holiday, it is entitled to push the deadline to fulfill those obligations to the next business day.  Here, the policyholder argued that the rule should have applied because it did not receive the goods for unloading until the end of the day on Friday.  The judge, however, found that the rule was inapplicable. The loading and unloading provision did not require the insured to unload the goods or perform any obligation during the 24-hours of coverage and the insured could leave the goods in the container as it chose to do. The court found that the plain terms of the policy precluded coverage for this loss.

Thanks to Chelsea Rendelman for her contribution to this post

New Jersey Insurer May Be Off the Hook for Defense Obligation Due to Anti-Concurrent Language in Exclusion

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In Wear v. Woodbury Medical Center Associates, LLP, plaintiff, a nurse, alleged she suffered injuries due to exposure to mold and other fragments from the HVAC system at Woodbury Medical Center.

Woodbury tendered its defense to Selective Insurance Company who disclaimed coverage on the basis of the “fungi or bacteria” exclusion in their policy issued to Woodbury.  That clause excluded coverage for bodily injury resulting from the presence of fungi or bacteria.  The exclusion also contained anti-concurrent and anti-sequential language that stated the exclusion applied “regardless of whether any other cause, event, material or product contributed concurrently or in sequence to any such injury or damage.”  Woodbury then filed a declaratory judgment action against Selective, seeking a defense and indemnification in the Wear lawsuit.  The trial judge ruled Selective had to immediately fund the defense and reimburse Woodbury for amounts already spent.

On appeal, the Appellate Division ultimately held  the anti-concurrent and anti-sequential language in the exclusion was not ambiguous, and barred coverage.  While noting that New Jersey law construes exclusions narrowly, the court accepted Selective’s argument that there was no coverage because the complaint did not allege   Plaintiff suffered divisible injuries or that the exposure to mold was the principal cause of her symptoms. Under New Jersey law, where an insurer did not undertake the defense at the inception of the litigation, the duty to defend may be converted into a duty to reimburse pending the outcome of the coverage litigation.  Therefore, the court held that Selective may have to ultimately pay for the defense, but that that decision was on hold until the coverage litigation was completed.

Selective took a firm position with respect to coverage early on the litigation and may be ultimately rewarded as a result.  Many exclusions in insurance policies contain similar anti-concurrent and anti-sequential language in exclusions and insurers would be wise to consider their application where the controlling complaint does not allege divisible injuries.

Thanks to Doug Giombarrese for his contribution to this post.

 

 

 

Caveat Employer—Coverage Triggered for Failure to Supervise

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Although intentional acts are typically excluded from coverage under a commercial general or professional liability policy, an employer is still entitled to coverage in a claim for failure to supervise according to the Second Circuit Court of Appeals in Pacific Employers Insurance Co. v. Saint Frances Care Inc.

For thirty years, from 1963 until 1993 when he retired in a cloud of suspicion, Dr. George Reardon sexually abused children in his care as an endocrinologist at St. Francis Hospital.  The details and scale of his horrific actions came to light when, following his death in 1998, his home was purchased and the new home owners found a secret room housing pornographic materials and logs of his actions.  Approximately 160 individuals sued the hospital for, among other things, corporate negligence, breach of fiduciary or confidential relationship, and breach of the special duty of care owed to children.  The excess insurer of the hospital argued sexual assault falls outside the purview of coverage, and also raised concurrency and priority issues.

The District of Connecticut rejected the excess insurer’s arguments, and the Second Circuit affirmed in a summary order.  With respect to coverage for the sexual assault, the Second Circuit stated coverage is triggered under either the commercial general or professional liability at the primary level of coverage for the claims of failure to supervise.

In reviewing claims, it can be difficult to separate the character of an action from the specific nature of a claim.  In New York, the duty to defend arises when at least one claim fails within the scope of coverage.  Here, it is incumbent to assess the nature of the claims against the actual insured, the hospital, to determine coverage.  This matter sounds in negligent supervision, and negligence is typically covered.  An important exception is when the character of an intentional act cannot be separated from the alleged negligence.  We see this in cases where an assailant may not have intended injury, so the victim sues under an intentional tort and negligence (e.g., reckless disregard).  As both causes of action pertain to the intentional act of an assault, coverage would be excluded even for the negligence action.  By contrast, here, the intentional act is separate and apart from the hospital’s alleged negligence in failing to supervise the doctor.  Thus, when analyzing claims arising from an intentional act, it is important to focus on two things:  the character of the act itself, and whether the claim itself is removed from the act.

Thanks to Christopher Soverow for his contribution to this post.

Asbestos Insurers Beware: New Jersey Decision Aims to “Maximize Insurance Resources”

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In Continental Insurance Company v. Honeywell International, the New Jersey Supreme Court held that Honeywell was not required to contribute to damages related to brake and clutch pads containing asbestos, even though the company continued to make those products for more than a decade after 1987, when it could no longer obtain insurance coverage.  Specifically, the Court held “an insured is not forced to assume responsibility in that allocation during the insurance coverage block for years in which insurance coverage is not reasonably available for purchase.”

Asbestos coverage disputes are unique in that, because asbestos-related diseases generally do not emerge until decades after exposure, many years of coverage are implicated, and determining what policies will pay has proven to be a complicated task.  Under New Jersey law, each insurer pays based on the degree of risk assumed, and the amount of time each policy was on the risk.  Normally, if the policyholder did not purchase insurance for a particular period, they would be on the hook for that portion of liability.  However, the Honeywell court affirmed prior New Jersey precedent that, if no insurance was available, then the unavailability exception applies and the policyholder will not be required to contribute.  This is the case even though asbestos exclusions became ubiquitous in 1987 and Honeywell continued to manufacture asbestos products.  To that end, the court focused on the goals of “maximizing insurance resources” and spreading risk across the insurance industry.

In dissent, Justice Albin noted the negative impact of the holding, writing, “This court compels insurance carriers that previously insured the corporation – but later refuse to do so – to remain guarantors for claims arising during the years the corporation continues to manufacture its dangerous products.”  This underscores the potential negative effects that could follow should other states follow the New Jersey Supreme Court.  Given the thousands of outstanding asbestos cases throughout the country, and because this issue could come up over again, asbestos insurers may be required to pay for millions in future lawsuits.

Thanks to Douglas Giombarrese for his contribution to this post.

Second Circuit Rules: A “Spoofing” Attack on Insured’s Email System Is a Covered “Computer Violation”

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The U.S. Court of Appeals for the Second Circuit struck the final blow to an insurer’s attempt to narrowly construe a policy provision insuring against computer crimes in Medidata Solutions Inc v Federal Insurance Company.

Judge Carter for the Court of Appeals recently upheld a S.D.N.Y. ruling that Federal Insurance owed coverage to its insured, Medidata Soultions, Inc., under its policy Computer Fraud Insuring Clause.  In so holding, the Second Circuit, like the District Court before it, refused to countenance Federal’s argument that the policy definition for “Computer Violation” covered instances of hacking only, and not spoofing.

Medidata’s policy with Federal insured it against any “direct loss… resulting from Computer Fraud committed by a Third Party.”  A Computer Fraud was defined to result from a “Computer Violation,” which, in turn, was defined as the fraudulent entry, change or deletion of data from a computer system.

In 2014, Medidata fell victim to a sophisticated spoofing attack in which unknown (and never apprehended) criminals manipulated computer code so that apparently genuine emails from a Medidata executive were sent to other Medidata employees.  The recipients of the emails, believing that they were following the instructions of their boss with respect to Medidata’s acquisition of another company, transferred $4.7 million into the fraudster’s account.

Federal insurance denied coverage for the loss, claiming that spoofed emails do not fall within the policy definition of a “Computer Violation,” because a spoofing attack is not a covered “hacking.” The S.D.N.Y. disagreed, finding that the unambiguous policy language plainly covered the spoofing attack at issue, because the fraudsters manipulated and changed the company email system with the spoofing code used to create the emails.  Medidata was awarded $5,841,767 by the district court, representing their total losses plus interest.

On appeal, Federal argued that the S.D.N.Y. decision created an overbroad precedent for computer fraud insurance coverage by allowing it “to cover all transfers that involve both a computer and fraud at some point in the transaction.”  Federal also unsuccessfully argued that Medidata’s loss was not “direct” (and therefore not covered) because Medidata employees transferred the funds themselves.    The Second Circuit affirmed the S.D.N.Y.’s reasoning that the manipulation of email coding was a clearly covered Computer Violation, and also held that the employee’s unwitting transfer of millions of dollars to the criminals was part of the spoofing attack, and not an intervening event.

This decision provides further assurance to companies in New York that their computer fraud coverage insures against many variations of computer attacks and fraud.

Thanks to Vivian Turetsky for her contribution to this post.

Third Circuit Explores Duty to Defend in Faulty Workmanship Case

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In general, a commercial general liability policy will not cover claims for faulty workmanship, which is not deemed an occurrence.  However, if the actual faulty work is attributable to a sub-contractor and not the insured, should the insured be entitled to a defense?  The Third Circuit, affirming the Eastern District of Pennsylvania, answered this question with a resounding “no.”

In Lenick Construction, Inc. v. Selective Way Insur. Co., Lenick Construction, Inc. sought a declaration that Selective Way Insur. Co. owed a duty to defend it in a property damage claim by a condominium association and various entities, referred to collectively as “Westrum.”  Westrum was the general contractor in the construction of a 92-unit development.  Westrum retained Lenick for carpentry services, including installing windows and doors that were selected and provided by the real estate developer.  Some units suffered property damage due to leaks, which were reportedly attributable to Lenick’s installation of the windows and doors.  Lenick argued they were entitled to a defense without reservation because their work product itself was not defective.  Instead, they argued, (1) they did not work on some areas that were allegedly damaged, (2) the damages arose from the work of other subcontractors, and (3) defects in the windows or doors themselves caused the damages.

However, the Third Circuit, and the Eastern District of Pennsylvania before it, disagreed.  Pennsylvania is a strict four corners state, and, as a result, the allegations in the complaint control coverage.  In analyzing the complaint, the Third Circuit recognized the complaint alleged Lenick should be liable for their own faulty work.  In other words, regardless of any liability defenses, the allegations themselves pertain solely to Lenick’s own liability for failure to perform services under the contract.  Because the complaint did not contain any allegations that would otherwise be subject to coverage, including any claim as to product defect, the Third Circuit held Lenick was not entitled to coverage.

Although the duty to defend is extremely broad, if there is no possibility of coverage for the actual claims alleged, then the duty to defend is not triggered.  We caution, however, that the results of this case may have been different in states that do not have strict four corner rules.  In New York, for instance, extrinsic evidence may be used to trigger coverage.

Thanks to Christopher Soverow for his contribution to this post.

Decision Highlights Importance of Timely Disclaimer Requirement, Even for Out-of-State Insurers

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The First Department recently avoided the opportunity to apply the Court of Appeals’ decision in Carlson v American Intl. Group, Inc., 30 N.Y.3d 288 (2017) and instead remanded to the motion court for a determination as to whether the insured had a “substantial business presence” in New York.  Nonetheless, the decision in Vista Engineering Corp. v. Everest Indemnity Ins. Co.,highlights the need for all insurers, including those located out of state, to be aware of New York Insurance Law’s disclaimer requirements.

In Vista, the underlying defendant, East Coast Painting, entered into a subcontract with Vista Engineering to perform work at the Queensboro Plaza subway station.  The agreement required East Coast to name Vista as an additional insured, which East Coast did in its policy with Everest.  In 2011, an East Coast employee sustained injuries while working at the site and Vista sought a defense from Everest.  Everest disclaimed coverage pursuant to the “Action Over” exclusion that barred coverage for injuries to employees of East Coast.  The parties did not dispute that the exclusion would bar coverage; rather, the dispute related to the timeliness of Everest’s disclaimer, which was issued almost two months after receiving notice of the claim.  New York Insurance Law section 3240(d)(2) requires that insurers provide notice of a disclaimer “as soon as is reasonable possible.”

Notably, section 3240 applies only to policies “issued or delivered” in New York.  Everest argued that, because it was a New Jersey insurer who issued a policy to East Cost, a New Jersey company, that the policy was not “issued or delivered” in New York.  While the case was pending, the Court of Appeals issued their decision in Carlson.  The Court held that the applicability of Insurance Law § 3420(d)(2) depends on (1) a policy covering risks located in New York, and (2) the insured being located in New York.  The Court further held that a company was “located in” New York if it had a “substantial business presence” there.  Therefore, under Carlson, if an out-of-state insurer issued a policy covering risks located in New York to a company with a substantial business presence in New York, the disclaimer requirements of Insurance Law § 3420(d) will apply.

The court found that the first prong of the Carlson test was present, but remanded as to the second prong “[b]ecause the Carlson Court did not set forth a specific definition of substantial business presence.”  The dissent, however, argued that the record “conclusively established” that both East Coast and Vista’s presence in New York was “substantial.”  Specifically, the court looked to the fact that the project was to be performed in New York and that Vista derived substantial income from work in New York.  As a result, the dissent took the position that a remand for this determination was unnecessary.  This was especially true in light of the legislature’s intent that a company “doing business in New York and purporting to cover risks in New York” should not be able to evade the Insurance Law.  Given the dissent’s strong language, and the majority’s hinting that the “the current record does contain some indicia that East Coast had a substantial business presence in New York,” the decision serves as a warning for all insurers, including those located out of state, to make sure their disclaimers abide by the Insurance Law’s timely disclaimer requirement.

Thanks to Doug Giombarrese for his contribution to this post.

 

No Property Damage for Negligent or Intentional Omissions in Home Sales (PA)

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In, Foglia v. Metropolitan Property and Casualty Insurance Company, the Eastern District of Pennsylvania recently ruled that an insurer did not act in bad faith or breach of contract when it refused to defend and indemnify a policyholder in an underlying lawsuit in which the policyholder was accused of concealing water damage.  The Court determined that there was no “property damage” to trigger the insurer’s duty to defend.

Initially, a lawsuit was brought by Jason and Emily Konn (“Konn”) who had previously purchased a house from Merle Foglia (“Foglia”).  Foglia signed a seller’s disclosure that indicated that there was no water leakage, accumulation, dampness, or infiltration within the house or other structures.  At no point did Foglia indicate that the home had a history of water infiltration or damage.  After a few months, Konn discovered significant water damage within the lower level of the house.  As a result, Konn sued Folgia for fraud and intentional concealments, intentional misrepresentation, negligence, and consumer protection violations.

After Foglia was served, she sought defense and indemnification from her homeowner’s insurance policy from Metropolitan Property and Casualty Insurance Company (“Metropolitan”).  Within the policy, Metropolitan would pay “all sums for bodily injury, property damage and personal injury to others for which the law holds you responsible because of an occurrence to which this coverage applies.”  Metropolitan later denied coverage because an “occurrence” had not taken place and that, even if it had, policy exclusions, such as a “failure to disclose” exclusion, were in place that precluded coverage.

As a result of the coverage denial, Foglia sued Metropolitan under claims of breach of contract and bad faith.  In response, Metropolitan countersued for declaratory judgment absolving it of any coverage obligations.  The Court granted summary judgment in favor of Metropolitan as it determined that the Konn complaint did not allege an “occurrence” or the type of “property damage” that required Metropolitan to provide coverage.       The Court found that Metropolitan had no duty to defend Foglia against the Konn lawsuit.

Although the Pennsylvania Supreme Court had not ruled on the issue, the 3rd Circuit has repeatedly held that negligent omissions in home sales does not constitute property damage.  Specifically, in a similar case, the 3rd Circuit stated that the “acts at issue in the underlying lawsuit amounted to a misrepresentation of the status of the home, whether it be intentional or negligent.  At no point did [the insured’s] acts ever inflict damage on the home that was not already in existence prior to the acts in question.  See USAA Cas. Ins. Co. v. Bateman, 2008 WL 4761718, at *1 (E.D. Pa. Oct. 30, 2008).  Additionally, the Court determined that the Konn lawsuit did not allege an “occurrence” as the policy defines an occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions during the term of the policy.”

Thanks to Zhanna Dubinsky for her contribution to this post.  Please write to Tony Pinto for more information.

Lawful Possession Not Found For Passenger in Vehicle (PA)

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In State Farm Mutual Automobile Ins. Co. v. Erin C. Dooner, Jean A. Fonte, Jeffrey J. Kowalski, Gary J. Fedorczyk, and Progressive Advanced Ins. Co., the Superior Court reaffirmed a trial court decision that determined the Appellee, State Farm Mutual Automobile Insurance Company (“State Farm”), did not owe coverage to its insured, Erin C. Dooner (“Dooner”).

In the underlying case to this declaratory judgment action, the appellant, Jean. A Fonte (“Fonte”), and Dooner were traveling in Dooner’s car when they were involved in a one-car accident.  At the time of the accident, Dooner had a motor vehicle insurance policy through State Farm.  Due to the accident, Dooner was arrested so Fonte retrieved her own vehicle to pick up Dooner at the police station.  On the way home, a fight arose at which time Dooner grabbed the bottom of the steering wheel causing Fonte’s car to swerve into oncoming traffic and collide with a police cruiser.  The police officer and his wife then sued Dooner.  Subsequently, State Farm initiated this action seeking a declaration that it had no duty to defend, indemnify, or otherwise provide liability coverage to Dooner.  The trial court agreed and granted summary judgment in favor of State Farm.

The following issue was raised for review: “Did the trial court abuse its discretion and commit error by granting [s]ummary [j]udgment on behalf of [State Farm], improperly determining that State Farm did not owe a duty of coverage to [its] insured[,] [Ms.] Dooner, and all parties who suffered injuries through [Ms.] Dooner’s negligence, thus misapplying case law and relevant precedent?

The insurance policy in question was a motor vehicle insurance policy that provided coverage for a “non-owned car” if the car was “in lawful possession of you or any resident relative.”  As the policy did not define the terms “possession” and “lawful,” Fonte argued, on appeal, that the policy was ambiguous and should have been construed in her favor.

In compliance with Pennsylvania law, the Superior Court evaluated the type of coverage afforded under the policy by analyzing the policy’s language.   To determine whether the policy language was ambiguous, the Superior Court relied on Pennsylvania’s long-standing principles regarding insurance policy interpretation.  As noted by the Superior Court, policy language is only ambiguous if it is susceptible to more than one meaning.  Policy language is not ambiguous merely because the parties disagree as to the meaning of the policy’s language.  Accordingly, policy language must be construed in its plain and ordinary sense and read to avoid any ambiguity.  Therefore, the Superior Court determined that if the policy’s language is “plain and unambiguous,” then it is bound by the policy’s language.

As the Superior Court found the policy’s language to be clear, it determined State Farm only owed liability coverage to Fonte if Fonte’s car qualified as a “non-owned car” of the insured [Donner].  Further, the policy only provided coverage if the insured [Donner] was in “lawful possession” of Fonte’s car at the time of the accident.

On appeal, Fonte argued “possession” involved an aspect of control, however, the Superior Court disagreed with Fonte’s analysis because under Pennsylvania law “control” did not necessarily equate to “possession.”  Nevertheless, since the policy in question was a motor vehicle insurance policy, the Superior Court evaluated whether the insured was in “possession” by considering who was in “control” in terms of the entire vehicle.    In doing so, the Superior Court focused on the fact that Fonte was in the driver’s seat at the time of the accident.  Even though Dooner grabbed the bottom of the steering wheel and ultimately caused the accident, the Superior Court determined that based on the totality of the circumstances the insured’s briefly grabbing the steering wheel did not amount to her taking lawful possession or control of the vehicle.

Simply, Dooner’s actions in grabbing the steering wheel merely constituted an interference with Fonte’s operation of the vehicle.  Accordingly, the Superior Court reaffirmed the trial court decision and held that because Fonte failed to establish a genuine issue of material fact, the trial court did not commit an error of law or abuse its discretion.

Thanks to Lauren Brenbaum for her contribution to this post.  Please write to Tony Pinto for more information.

No Additional Insurance Coverage Without Privity Now the NY Standard

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When determining an insurer’s obligations to provide insurance coverage to a purported additional insured, courts will scrutinize the precise language of an additional insured endorsement very closely. In insurance disputes involving construction contractors, the insurance policy and not an underlying agreement between the parties will ultimately control.

In the recent decision of Gilbane Building Co./TDX Constr. Corp. v. St. Paul Fire and Marine Ins. Co., which we discussed in Of Interest, the New York Court of Appeals held that where an additional insured endorsement requires a direct contract between the named insured and the party seeking coverage, additional insured coverage will not be afforded to any party not in direct contractual privity with the named insured. We are now seeing the first few cases interpreting Gilbane making their way through the lower courts.

In Turner Constr. Co. v Endurance Am. Specialty Ins. Co.,  the Appellate Division, First Department was faced with interpreting language very similar to the policy in Gilbane. DASNY, the owner of the project, retained Skidmore Owings & Merrill, LLP to provide architectural services. Skidmore contracted with Turner Construction Company for Turner to provide construction management services. DASNY also hired KJC Waterproofing, Inc. for the roofing and exterior waterproofing work. KJC subcontracted the installation of the garden roofing to Plant Fantasies, the underlying plaintiff’s employer. Pursuant to the DASNY-KJC contract, KJC obtained insurance coverage from Endurance along with an excess liability policy from Everest National Insurance Company. Turner and Skidmore commenced a declaratory judgment action against Endurance and Everest, seeking a declaration that Endurance was obligated to defend and indemnify them as additional insureds under the Endurance policy.

The additional insured endorsement in the Endurance policy defined insured as “any person or organization with whom you agreed, because of a written contract or written agreement or permit to provide insurance such as is afforded under this policy, but only with respect to your operations, your work or facilities owned or used by you.”

The First Department relied upon its decision in Gilbane, upheld by the Court of Appeals, in its interpretation of the Endurance additional insured endorsement. In order to obtain additional insured status, Turner and Skidmore were required to have a direct contract with Endurance’s named insured, KJC. Because neither Turner nor Skidmore had such an agreement with KJC, they could not qualify for coverage under the additional insured endorsement. Thus, Endurance was not obligated to defend or indemnify them in the underlying action.

Thanks to Jorgelina Foglietta for her contribution to this post and please write to Mike Bono with any questions.