Blogs

Posted: July 31, 2019

“Knowing Acts” Exclusion Did Not Excuse Duty to Defend Where Insured’s Liability Could Be Established Without a Finding of Intentional Wrongdoing

On May 29, 2019, Justice Crane of the New York County Supreme Court issued a decision in Continental Cas. Co. v KB Ins. Co., Ltd., 2019 NY Slip Op 31513(U), holding that an exclusion for “Knowing Acts” did not excuse a CGL carrier’s duty to defend Lanham Act claims against the insured. 

In the underlying litigation, the insured, Value Wholesale, Inc. (Value), was sued by the patent holder for FreeStyle blood glucose test strips for allegedly selling imported test strips not authorized for sale in the United States and selling them in FreeStyle product boxes.  The action asserted claims for “trademark and trade dress infringement, fraud, racketeering, unfair competition, and other illegal and wrongful acts.”  One of Value’s CGL carriers (Continental) agreed to defend the case under the coverage for “personal and advertising injury.”  Continental then commenced a coverage action seeking contribution from another CGL carrier (KBIC), which had disclaimed defense coverage under an exclusion that applies if Value acted “with knowledge that the act would violate the rights of another,” or published material “with knowledge of its falsity.” 

Justice Crane held that the exclusion did not excuse KBIC’s duty to defend, explaining:   

KBIC has not satisfied its heavy burden. The underlying complaint alleges that all the defendants participated in a deliberate scheme to substitute unapproved test strips in place of the approved strips. However, Abbott can establish Value’s liability even without a finding that Value knew that its conduct would violate Abbott’s rights and inflict the advertising injury at issue. . . .

Neither the parties nor the court has found a controlling First Department case with parallel facts. However, the Fourth Department has addressed the issue. In Cosser v One Beacon Ins. Group (15 AD3d 871, 873 [4th Dept 2005]), the plaintiffs sought a declaration that the defendant insurer owed them a defense in a Lanham Act action. The Court concluded that a duty existed because the plaintiffs “may be liable … in the underlying action without a showing of intentional or knowing conduct on [their] part”.  A few decisions from justices in this county have utilized similar reasoning to rule that the insurer had a duty to defend (see, e.g., The Andy Warhol Found. For Visual Arts, Inc. v Phi/a. Indem. Ins. Co., 37 Misc 3d 1229 [A], 2012 NY Slip Op 52228 [U], *6 [Sup Ct, NY County 2012] [Sherwood, J.]; Sarin v CAN Fin. Corp., 21 Misc 3d 1101 [A], 2008 NY Slip Op 51909 [U] [Sup Ct, NY County 2008] [Fried, J.]).  The duty to defend exists whenever the complaint alleges any facts or grounds which bring the action within the protection purchased.

(Some citations omitted). 

This decision illustrates both the breadth of the duty to defend and the narrow construction courts apply to policy exclusions.

View posts