Insurance Coverage Blog

Commentary on Insurance Coverage Litigation in New York
Posted: October 10, 2019

Product Cannot Serve As Its Own Advertisement for Purposes of “Advertising Injury” Coverage

Posted by Bradley J. Nash, Litigation Partner

On September 26, 2019, Judge Abrams of the SDNY issued a decision in Jovani Fashion, Ltd. v. Fed. Ins. Co., Case No. 17-CV-4518, holding that a complaint alleging that a fashion designer’s garment infringed the plaintiff’s copyrighted lace textile design did not trigger “advertising injury” coverage under the designer’s general and excess liability policies.

The insured (Jovani Fashion) argued that “the Subject Design” constituted an “advertisement” under the “the advertising model in the fabric making industry or other industries that use sample swatches or photographs as advertisements.”  Judge Abrams disagreed and granted summary judgment to the insurers, explaining:

Plaintiff’s argument that a product can serve as an advertisement for itself fails in light of the policy’s unambiguous language. Under the policy, an “advertisement” is a “notice, about goods, products, or services, designed for the specific purpose of attracting the general public or a specific market segment to use such goods, products or services.” This language creates a clear distinction between a product and an advertisement for that product. Because the Subject Design was designed, according to Malibu, for “purposes of textile printing”—and not for advertising—samples of the Subject Design or displays of it in a showroom cannot constitute advertisements of that design under the policy’s terms. To allow otherwise would render meaningless the policy’s express distinction between a product and an advertisement of that product.

Moreover, by arguing that the Subject Design is itself an “advertisement,” as that term is defined, Plaintiff asks the Court to employ an understanding of the term that defies “common speech.” In Ecko Group, Inc. v. Travelers Indemnity Company of Illinois, for instance, the First Circuit rejected an insurer’s similar attempt to argue that displaying a product (there, a teapot) served as an ‘advertisement” for itself. 273 F.3d 409, 413 (1st Cir. 2001) (reviewing a policy that defined an “advertising injury” as including a “(m]isappropriation of advertising ideas”). Among the reasons why the insured’s argument failed, the court explained that “[t]o call a real teapot intended for sale as a kitchen utensil an ‘advertising idea’ is not a natural usage.” Id. The “most common” understanding of an advertisement, the court said, is one “where the advertisement is an activity or item distinct from the product being advertised.” Id.

Judge Abrams cited other SDNY decisions that reached a similar conclusion. See, e.g., Accessories Biz, Inc. v. Linda & Jay Keane, Inc., 533 F. Supp. 2d 381, 383 (S.D.N.Y. 2008) (“New York courts have routinely held that the phrase ‘advertising idea’ does not include the product itself.”); Hosel & Anderson, Inc. v. ZV II, Inc., 2001 WL 392229, at *2 (S.D.N.Y. Mar. 21, 2001) (“The product itself is not an advertisement within the meaning of the policy.”). On the other hand, a Fifth Circuit decision, which Judge Abrams found “less persuasive,” supported the insured’s argument.  Mid-Continent Cas. Co. v. Kipp Flores Architects, LLC, 602 F. App’x 985, 994 (5th Cir. 2015) (holding that a home can serve as an advertisement because the “primary means of marketing” is showing the home to prospective buyers).

Notably, under New York law, policy language is not examined in isolation. Rather, “the plain meaning of a clause in an insurance contract is determined according to . . . the understanding of someone engaged in the insured’s line of business.”  K. Bell & Assocs., Inc. v. Lloyd’s Underwriters, 97 F.3d 632, 639 (2d Cir. 1996) (emphasis added). The insurance policy at issue in Jovani Fashion was likely a standard form. However, as the Second Circuit ruled in a decision covered on this blog last year, “[t]he parties are not required to tailor language for every policy in order for terms to have industry-specific meanings.” Beazley Ins. Co., Inc. v. ACE Am. Ins. Co., 880 F.3d 64, 70 (2d Cir. 2018). Thus, the meaning of “advertisement” as used in fashion industry is relevant to the analysis. It will be interesting to see if the insured pursues an appeal here.

Posted: October 7, 2019

Liability Insurers Ordered to Share in Defense Costs; Facts to Be Determining In Underlying Litigation Would Determine Which Insurer Has Duty to Indemnify

On September 23, 2019, Justice Rodriguez of the New York County Supreme Court issued a decision in Wesco Ins. Co. v. Hellas Glass Works Corp., 2019 NY Slip Op 32848(U), holding that two liability insurers were required to share in paying defense costs where facts to be determined in the underlying personal injury lawsuit could trigger indemnity coverage under one of the policies.

The coverage issue in Hellas Glass turned on a fact to be resolved in the underlying personal injury litigation – namely, whether the injury occurred in the course of “loading” or “unloading” glass from a vehicle. If this question was answered in the affirmative, then Plaintiff Wesco Insurance Company’s policy would be triggered; a negative answer would trigger coverage under a policy issued by defendant Massachusetts Bay Insurance Company (“MBIC”).

Justice Rodriguez ordered Wesco and MBIC to share equally in the insured’s defense costs in the underlying action, explaining:

[T]he touchstones of duty to defend analysis are the operative complaint in which allegations against the insured are made. . . .

The third-party complaint and plaintiff Shiryayev’s complaint are utterly silent as to the involvement of an “auto” in the alleged occurrence. Similarly, the two pleadings do not explicitly describe any process of “loading” or “unloading”. Rather, the third-party complaint alleges that defendant Hellas “performed construction work and/or services” at the accident location and that defendant Hellas is liable to defendants/third-party plaintiffs . . . by virtue of contractually assumed indemnification.

Although the operative pleadings do not allege that the accident occurred during a process of loading or unloading an auto, the record also contains plaintiff’s [hearing testimony in a proceeding against the City of New York] and deposition testimony in which plaintiff describes the occurrence. Moreover, plaintiff Wesco’s claims administrator, Am Trust North America, Inc., noted its knowledge of the facts surrounding the claim in its letter dated March 30, 2016, specifically that “Aleksandr Shiryayev, your employee, alleges he sustained injuries on October 10, 2014 when a panel of glass he was unloading from your 2006 GMC Savana fell onto him at 1050 2nd Avenue, New York, New York.” Consequently, the court finds that facts derived from outside the four comers of the operative complaints, specifically, that the accident occurred close in time to the process of unloading and close in proximity to a covered auto, indicate that the claim “arguably arise[s] from covered events” under plaintiff Wesco’s auto policy. . . .

[T]his court finds that, due to the lack of fact finding in the underlying litigation . . . defendant MBIC has failed to carry its heavy burden of establishing that, as a matter of law, there is no possible factual or legal basis on which [the insurer] might eventually be held to be obligated to indemnify the insured under any provision of the insurance policy. It remains possible, given that discovery is ongoing in the underlying action, that the occurrence did not arise out of the act of loading or unloading, but rather was caused entirely by other means.

(Citations omitted).

This decision illustrates two important aspects of the insurer’s duty to defend under New York law. First, the duty is broadly construed and attaches unless there is “no possible factual or legal basis” on which the insured may be obligated to indemnify the insured. Second, although the insurer (with very limited exceptions) cannot rely on facts outside the complaint to avoid its duty to defend, such external facts can trigger a duty to defend, even if, as was the case here with respect to the Wesco policy, the allegations in the complaint, standing alone, would not.

Posted: October 3, 2019

Insurer Fails to Establish Non-Cooperation Defense

On September 23, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Those Interested Underwriters at Lloyd’s, London v. AU Trading LLC, 2019 NY Slip Op 32803(U), denying an insurer’s motion for summary judgment on a coverage defense based on claim of noncooperation by the insured in the investigation of the claim.

The insured, AU Trading, was “engaged in the business of trading and storing various precious metals for nonparty customers.”  Following a burglary at a safe deposit vault, AU Trading made a claim to its insurer (Lloyds) for $2.53 million in stolen gold.  The claims investigation was complicated, in part, by Swiss privacy laws, which impacted AU Trading’s ability to disclosure certain information concerning its customers.  Lloyds eventually commenced a coverage action, arguing that the insured breached its duty to cooperate and the coverage was therefore void.

Justice Scarpulla found that Lloyds had failed to establish this coverage defense on summary judgment, explaining:

Underwriters seek a declaration that Defendants materially breached their obligations under the Policy to cooperate with Underwriter’s investigation of the claim, thereby voiding coverage under the Policy. In order to establish breach of a cooperation clause, the insurer must show that the insured engaged in an unreasonable and willful pattern of refusing to answer material and relevant questions or to supply material and relevant documents. The insurer must make this showing by a preponderance of the evidence.

The duty of an insured to cooperate with the insurer is satisfied by substantial compliance, and where a delay in compliance is neither lengthy nor willful, and is accompanied by a satisfactory explanation, preclusion of a claim is inappropriate.

Although the [policy] obligates Defendants to provide Underwriters with “all information they require for an evaluation of the loss,” Underwriters have failed to establish as a matter of law that much of the specific information they sought is material and relevant and required to evaluate the loss, or that Defendants have unreasonably refused to produce such information. . . .

Review of the record submitted, including the substantial and extensive correspondence between parties, shows that questions of fact exist as to whether Defendants’ conduct constitutes an “unreasonable and willful pattern” of noncooperation. The record reflects numerous communications and meetings between the parties and that Defendants produced numerous records; Defendants also maintain that they intended to cooperate and provide all information that was reasonably required for the Investigation and that they hired [attorneys] in an attempt to cooperate with Underwriters and comply with their demands. In any event, the record suggests that Underwriters and [the insurer’s claims adjuster] are also at least partially responsible for delaying the Investigation.

(Citation omitted).

To get paid for a covered loss, insureds have to satisfy certain conditions, such giving notice of the claim and cooperating with the insurer’s claims investigation.  As this decision illustrates, these obligations are not boundless.  Insurers cannot manufacture roadblocks to coverage by making unreasonable demands for information, and then invoking the policy’s “cooperation” provision as a basis to deny coverage.

Posted: September 23, 2019

Issues of Fact Preclude Summary Judgment on Insured’s Breach of Duty to Cooperate

On September 13, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Colony Ins. Co. v. International Contr. Servs., LLC, 2019 NY Slip Op 32717(U), holding that issues of fact precluded summary judgment on a liability insurer’s disclaimer based on the insured’s failure to cooperate with the defense.

In the underlying personal injury litigation at issue in this case, the defendant ICS had its answer stricken based on its failure to cooperate in discovery (including failing to present a witness for a court-ordered deposition and to provide an affidavit supporting a claim that it had no responsive documents to produce).  The resulting default judgment was a pyrrhic victory for the plaintiff because ICS’ liability insurer promptly disclaimed coverage based on the insured’s failure to comply with its duty to cooperate in the defense.  The insurer (Colony) commenced a declaratory judgment action, seeking to establish, inter alia, that it properly disclaimed coverage and that the injured party could not seek a payment from Colony with regard to any “settlement, award, verdict, or judgment rendered in the Underlying Action.”

Although the insured’s conduct in discovery appears to have been pretty egregious here, Justice Borrok held that issues of fact as to the insurer’s diligence in seeking the insured’s cooperation precluded summary judgment, explaining:

In Thrasher [v. United States Liab. Ins. Co., 19 N.Y.2d 159, 168 (1967)], the New York Court of Appeals held that an insurer bears a heavy burden of proving lack of cooperation by its insured and that the insurer must demonstrate that it (1) acted diligently in seeking to bring about the insured’s cooperation, (2) that the efforts employed by the insurer were reasonably calculated to obtain the insurer’s cooperation, and (3) that the attitude of the insured was one of willful and avowed obstruction. . . . In light of the affidavit evidence adduced by Colony, there remain material issues of fact concerning whether Colony acted diligently in seeking ICS’s cooperation in the period of time preceding the denial of coverage issued to ICS.

The Court also found that issues of fact precluded summary judgment on a counter-argument based on the insurer’s delay in disclaiming coverage.  As previously noted on this blog, Insurance Law § 3420(d)(2) requires liability insurers to “give written notice as soon as is reasonably possible” of a denial of coverage based on a policy exclusion, or, as in this case, the insured’s failure to satisfy a policy condition, such as the duty to cooperate.  Failure to do so can result in a waiver of the exclusion or condition.  The statute cannot create coverage where there is none – for example, if there is no policy in place for the relevant time period.  Moreover, this statutory timely-disclaimer requirement only applies to policies “issued or delivered” in New York.  The Court of Appeals has held that this encompasses policies issued to insureds that have a “substantial business presence and create risks in New York.”  Carlson v. American Int’l Group, Inc., 20 N.Y.3d 288, 306 (2017).  Here, Justice Borrok held the summary judgment record contained insufficient “evidence to establish that ICS had substantial business presence in New York.”  Therefore, it remained uncertain whether “Insurance Law § 3240(d)(2) and its timeliness requirements apply to the Policy that was issued to ICS.”

Posted: September 20, 2019

Claim for Bad Faith Claims Handling Dismissed As Duplicative of Breach of Contract Claim

On September 17, 2019, Judge Hurd of the NDNY issued a decision in Lohnes v. Liberty Mut. Ins. Co., Case No. 19-cv-00068, dismissing a claim for bad faith claims handling for failure to plead “specific conduct” by the insurer distinct from the underlying breach of the policy.

As previously discussed on this blog (see here, here, and here), New York law does not recognize a separate tort claim for bad faith claims handling.  However, the courts—beginning with a pair of Court of Appeals decisions, Bi-Economy Market, Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187 (2008) and Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200 (2008)—have permitted insureds to recover consequential damages (above the policy limits) on a theory that the insurer’s bad faith conduct violates the implied covenant of good faith and fair dealing.  (An example would be a property insurer that stalls the claims handling process following a house fire, as a result of which the house collapses, compounding the insured’s damages.)

In Lohnes, the Court concluded that the complaint failed to plead such a claim, explaining:

Under New York law, there is a covenant of good faith and fair dealing implied in all contracts.  This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.  Generally, under New York law, parties to an express contract are bound by an implied duty of good faith, but breach of that duty is merely a breach of the underlying contract.  To successfully plead a breach of contract under a theory of breach of the implied covenant of good faith and fair dealing, a plaintiff must allege that defendant, in bad faith, engaged in behavior that effectually destroyed or injured the plaintiff’s right to receive the fruits of the contract.  Further, plaintiffs are required to plead specific factual allegations of a party’s bad faith, as conclusory allegations of a party’s failure to act in good faith are insufficient.

Because a breach of this duty is merely a breach of the underlying contract, New York law does not recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract claim, based upon the same facts, is also pled. A breaching party’s bad faith in connection with a breach of contract does not provide an independent basis for recovery.  Thus, a claim premised on a breach of the implied covenant should be dismissed as duplicative if it is based upon the same facts underpinning an express breach of contract claim.

Here, as Plaintiff represents in her memorandum of law, the facts underpinning the bad faith claim are the same as those underpinning her express breach of contract claim. Namely, that Liberty refused to defend and indemnify Mr. Terrance. While Plaintiff asserts that this refusal to comply with the terms of the Policy constituted breaches of Liberty’s duties under the contract and amounted to “bad faith insurance practices,” she has not plead specific conduct by Liberty that is different from that underpinning the breach of contract claim. Further, Plaintiff’s assessment in her memorandum of law that this conduct was deliberate and reckless, and amounted to a gross disregard for the interests of Mr. Terrance, does not make out a claim different from the breach of contract claim.  Accordingly, Liberty’s motion is granted to the extent it seeks to dismiss the bad faith claim asserted in the Amended Complaint.

(Citations omitted).

Pleading rules are a procedural matter, and thus may differ in certain respects in state and federal court.  Notably, however, the First Department ruled earlier this year (in a decision covered on this blog) that an insured need not satisfy a “heightened pleading standard” in alleging consequential damages arising from an insurer’s bad faith claims handling.

Posted: September 18, 2019

Declaratory Judgment Premature Where Duty to Indemnify Depends on Issues to Be Determined in Underlying Lawsuit Against The Insured

On August 27, 2019, Judge Pauley of the SDNY issued a decision in Gemini Ins. Co. v. Titan Construction Servs., Case No. 17-cv-8963, dismissing a declaratory judgment claim as premature because the lability insurer’s duty to indemnify would depend on facts to be developed in the underlying lawsuit against the insured.

Judge Pauley explained:

It has long been well-established that a liability insurer may bring an action for a declaratory judgment against the parties in an underlying lawsuit involving its insured without waiting for the underlying action to proceed to judgment. However, when the duty to indemnify necessarily depends on the resolution of one or more issues to be determined in the action, a declaratory judgment on that duty is premature.

What caused Mejia’s accident and who was responsible have not yet been established in the State Action. And without any such finding, this Court cannot declare whether Gemini will ultimately be obligated to indemnify Titan or Hudson View.

Accordingly, this Court dismisses all parties’ claims for declaratory judgments on the duty to indemnify as premature.

(Citations omitted).

The same principle applies to the duty to advance defense costs.  In a case previously discussed on this blog (in which I represented the insureds), Justice Sherwood of the New York County Commercial Division granted a preliminary injunction, directing three excess D&O insurers to advance defense costs for a criminal matter, and stayed discovery pending the resolution of the underlying prosecution.  Justice Sherwood held that a “declaratory judgment action cannot be used to conduct discovery regarding the very facts at issue in the EDNY Indictment and the SEC Complaint.” 

Posted: September 16, 2019

California Supreme Court Rules that New York’s “No-Prejudice” Rule Is Contrary to “Fundamental Public Policy” of California

On August 29, 2019, the California Supreme Court issued a decision in Pitzer College v. Indian Harbor Ins. Co., Case No. S239510, ruling (in response to a certified question from the Ninth Circuit) that New York’s no-prejudice rule—under which a first-party insurer can avoid coverage based on delayed notice without showing prejudice—is contrary to a “fundamental public policy” of California.

Unlike the majority of states, New York common law does not require an insurer to demonstrate prejudice to disclaim coverage based on late notice by the insured.  As previously discussed on this blog, for liability policies “issued or delivered” in New York, after January 17, 2009, a statute (Insurance Law § 3420(a)(5)) imposes a “notice prejudice” rule.  However the common law no-prejudice rule still applies with regard to first-party insurance coverage.

Pitzer College involved an insurance policy issued to a California college, which had a New York choice of law provision.  As the policy was not “issued or delivered” in New York, the statutory “notice prejudice” rule did not apply.  The insured filed a declaratory judgment action for declaratory relief and breach of contract.  Following removal to federal court, the district court granted summary judgment to Indian Harbor on a late notice defense, ruling that the insured failed to establish that California’s notice prejudice rule was a “fundamental policy” that could override a contractual choice of law provision. 

Addressing a certified question from the Ninth Circuit, the California Supreme Court held that the district court was incorrect, explaining:   

[W]e conclude that California’s notice-prejudice rule is a fundamental public policy of California. The rule is based on the rationale that the essential part of the contract is insurance coverage, not the procedure for determining liability, and that the notice requirement serves to protect insurers from prejudice, not  to shield them from their contractual obligations through a technical escape-hatch.  Prejudice is a question of fact on which the insurer has the burden of proof.  The insured’s delay does not itself satisfy the burden of proof.  The insurer establishes actual and substantial prejudice by proving more than delayed or late notice. It must show a substantial likelihood that, with timely notice, and notwithstanding a denial of coverage or reservation of rights, it would have settled the claim for less or taken steps that would have reduced or eliminated the insured’s liability.  In the context of third party coverage, for example, the insurer must show that timely notice would have enabled it to achieve a better result in the underlying third party action.

(Citations omitted).

This decision underscores the importance of notice requirements under New York insurance law.  It goes without saying that you can’t get coverage if you don’t ask for it. Although a statutory notice-prejudice requirement now applies in some cases, delayed notice can still present traps for the unwary.    

Posted: September 13, 2019

Duty to Defend Did Not Obligate Insurance Company to Monitor Fees Charged By Defense Counsel to Prevent Exhaustion of Policy Limits Before Criminal Trial

On September 10, 2019, Judge Reiss of the WDNY issued a decision in Korn v. Federal Ins. Co., Case No. 1:17-cv-00188, ruling that an insurance carrier providing a defense to the insured in a criminal prosecution had no obligation to “monitor” the fees incurred by defense counsel to ensure that the coverage was not exhausted prior to trial.

In Korn, an insured brought breach of fiduciary duty and breach of contract claims against a liability insurer, alleging that the insurance company failed “to monitor his criminal defense attorneys, audit the legal fees they incurred, and replace counsel when Plaintiff made Defendant aware that the firm was wasting the finances available for coverage,” such that the policy limits were reached with an extensive amount of work left to be done to prepare for trial.

Judge Reiss granted summary judgment to the insurance company on the breach of fiduciary duty claim, explaining:

Generally speaking, a liability insurer may not be held vicariously liable for the lapses of retained counsel exercising independent judgment on behalf of the insured.”  The reasons for this exception are twofold:

First, the duty to defend an insured is by its very nature delegable, as all the parties must know from the outset, for in New York an insurance company is in fact prohibited from the practice of law (Judiciary Law § 495).  Accordingly, the insurer necessarily must rely on independent counsel to conduct the litigation. Second, the paramount interest independent counsel represents is that of the insured, not the insurer. The insurer is precluded from interference with counsel’s independent professional judgments in the conduct of the litigation on behalf of its client.  Vicarious liability thus produces an untenable situation here: on the one hand an insurer is prohibited from itself conducting the litigation or controlling the decisions of the insured’s lawyer, yet on the other hand it is charged with responsibility for the lawyer’s day-to-day independent professional judgments in the “nuts and bolts” of representing its client.

Despite the general rule that an insurer owes no fiduciary duty to the insured, there are instances where a fiduciary relationship springs into existence under circumstances where there is a special relationship of trust and confidence between the parties.  But those instances are the exception rather than the rule.  In general, a contract of insurance does not otherwise create a fiduciary relationship between the parties.  Such a relationship exists and a fiduciary duty is created [only] when the insurer undertakes the responsibility of representing the insured in the context of litigation.  The basis for the fiduciary obligation is quite clear in the litigation context, for the insurer is undertaking to represent the insured’s interests.

To the extent Plaintiff seeks to hold Defendant liable for the alleged shortcomings of his defense counsel in the Criminal Action or their day-to-day independent professional judgments, given the insurer’s inability to provide or control the legal services in issue, and the existence of a remedy for incompetence against counsel the imposition of vicarious liability in the circumstances is unwarranted.  Because it is undisputed that Defendant did not represent Plaintiff in the Criminal Action, there is neither a factual nor legal basis for concluding that Defendant assumed responsibility for Plaintiffs defense.  Even if Defendant brokered the attorney-client relationship as Plaintiff contends, this is not one of those rare cases in which a fiduciary duty may be found. Defendant’s motion for summary judgment on Plaintiffs claim for breach of fiduciary duty/vicarious liability is therefore GRANTED.

(Citations omitted).

The Court also rejected the insured’s breach of contract claim, finding that (1) the policy did not require the insurer “to ensure the Criminal Action reached a final resolution before the Policy limits were exhausted”; (2) the insurer had no duty to enforce its own billing guidelines for the benefit of the insured; and (3) the insurer did not add attorneys to the defense team without the insured’s knowledge and consent.

Posted: September 11, 2019

Insurer’s Claims-Handling Documents Not Privileged Even If Prepared By Attorneys

On August 30, 2019, Justice Masley of the New York County Commercial Division issued a decision in Otsuka Am., Inc. v. Crum & Forster Specialty Ins. Co., Index No. 650463/2019, ruling that coverage opinions prepared by outside counsel for an insurer are discoverable, explaining:  

In the context of insurance, the payment or rejection of claims is a part of the regular business of an insurance company.  Consequently, documents prepared in the ordinary course of an insurance company’s investigation to determine whether to accept or reject coverage and to evaluate the extent of a claimant’s loss are not privileged, and, therefore, discoverable.  Thus, these documents do not become privileged merely because the investigation was conducted by an attorney.  Where an attorney acts as a claims investigator, and not as an attorney, the communications are not privileged.  Additionally, reports prepared by insurance investigators, adjusters, or attorneys before the decision is made to pay or reject a claim are not privileged and discoverable, even when those reports are mixed/multi-purpose reports, motivated in part by the potential for litigation. 

The common thread [in the cases finding that documents prepared by an insurer’s attorneys are not privileged] is that the insurance companies retained counsel to provide a coverage opinion, i.e. an opinion as to whether the insurance companies should pay or deny the claims. Stated otherwise, counsel were primarily engaged in claims handling.

(Citations omitted).

Posted: September 9, 2019

Court Enforces CGL Policy Exclusion that Circumvents “Entire Action” Rule

On August 26, 2019, Judge Caproni of the SDNY issued a decision in Spandex House, Inc. v. Hartford Fire Ins. Co., Case No. 18-CV-8367 (VEC), enforcing an IP exclusion in a CGL policy that circumvented the “entire action” rule by precluding both defense and indemnity coverage for an otherwise-covered “advertising injury” claim if that claim was joined with any IP claim unconnected to advertising.

As Judge Caproni explains, under a duty to defend policy, “if a lawsuit contains a mix of allegations covered by an insurance policy and other allegations falling outside the scope of the policy,” New York law requires an insurer “to defend the policyholder against the entire lawsuit, including both the covered and the non-covered allegations.”  This well-established rule is variously known as the “entire action” rule, the “complete defense” rule, or the “in for one, in for all rule.”

The policy at issue in Spandex House effectively circumvented this rule.  The “advertising injury” coverage was subject to an IP Exclusion that barred coverage for “any injury or damage alleged in any claim or ‘suit’ that also alleges an infringement or violation of any intellectual property right . . . regardless of whether this insurance would otherwise apply.”  That exclusion was limited by an Advertising Exception, which provided that the IP Exclusion does not apply if “the only allegation in the ‘claim’ or suit is limited to” an IP infringement in the insured’s advertisement.

Spandex House argued that the IP Exclusion contravened the “entire action” rule, since it effectively allowed the insurer to avoid its duty to defend an action involving covered and non-covered claims.

Judge Caproni disagreed and granted summary judgment to the insurer, explaining: 

Spandex House argues that Hartford’s policy “aim[s] to circumvent” the entire-action rule.  In some sense, Spandex House is correct. The language of the Advertising Exception mirrors the policy’s definition of advertising injury (contained within the definition of “personal and advertising injury”).  Pursuant to the General Coverage Provision, advertising injury is, ordinarily, covered by Hartford’s policy. But when the IP Exclusion applies, advertising injury is covered only if it is “the only allegation” in a case.  Put differently, when the IP Exclusion applies, Hartford has no duty to defend otherwise-covered allegations of advertising injury if they are joined with allegations of other, unrelated sorts of injury.  This arrangement is unusual: ordinarily, insurers agree to defend against suits alleging a mix of covered and non-covered injuries, consistent with the entire-action rule. But, by expressly conditioning coverage on a particular injury being “the only allegation” in a lawsuit, Hartford has essentially contracted around the entire-action rule.

Second, the policy language is clear and unambiguous. While New York applies the entire-action rule, New York law also requires unambiguous insurance contracts to “be enforced as written.”  Because “[f]reedom of contract” is a “deeply rooted” tradition under New York law, this Court is not free to substitute Spandex House’s notions of fairness and propriety for the express provisions of the parties’ agreement; rather, “parties to an insurance arrangement may generally contract as they wish and the courts will enforce their agreements without passing on the substance of them.”  That Hartford’s policy may “aim to circumvent” traditional insurance arrangements affords no basis for this Court to strike or modify it.

Third, the IP Exclusion and Advertising Exception, although unusual, comport with the broad purposes underlying the entire-action rule. The rationale behind the rule is that an insurer can provide its insured with a meaningful defense only if it provides a complete defense. . . .  Put simply, the entire-action rule makes the duty to defend a binary proposition: either the insurer has a duty to defend, in which case it must defend the entire lawsuit, or the insurer has no duty to defend the lawsuit at all. What the insurer cannot do is provide a defense for some claims in a lawsuit but not others.

Hartford’s policy does not violate these principles, as nothing in the policy would require Hartford to provide Spandex House with this sort of partial defense. The IP Exclusion and the Advertising Exception determine when Hartford has an obligation to defend an action at all, not which claims within an action Hartford must defend. When the second paragraph of the IP Exclusion applies, Hartford has no duty to cover “[a]ny injury or damage” alleged in the applicable suit.  And in order for the Advertising Exception to apply, “the only allegation[s]” in the suit must be covered forms of “personal and advertising injury,” making Hartford indisputably obligated to defend the entire action. Id. (emphasis added). In short, Hartford’s policy does not alter the rule that if an insurer has a duty to defend, it must defend the entire action; instead, it simply narrows the range of cases in which the duty to defend exists in the first instance.

Fourth, and finally, the IP Exclusion and Advertising Exception are analogous to other insurance-policy provisions that have been upheld under New York law. Several courts have upheld provisions that exclude from coverage “damage caused by an excluded peril even when covered perils also contribute to the damage” (known as “anti-concurrent” clauses). . . .  Similar to the provisions at issue in these cases, Hartford’s policy excludes entire actions from coverage unless a particular injury is the only loss alleged in the case.

(Citations omitted).

This decision illustrates the importance of examining policy exclusions carefully.  The advertising injury coverage under this policy was quite narrow:  there was no coverage unless the only claims involved infringement in an advertisement; any allegations involving distribution, sales etc. of infringing products would preclude both indemnity and defense coverage, even for advertising-related claims.  By contrast, the policy at issue in another “advertising injury” case covered on this blogHigh Point Design, LLC v. LM Ins. Corp. (2d Cir. 2019), Docket No. 16-1446-cv—had an exclusion for IP claims that did not bar coverage for otherwise-covered claims if those claims were joined with non-advertising related claims.