Covered Events Volume 32 Issue 3 | Recent Cases of Interest

Tenth Circuit

Construction/Habitational New Construction Exclusion (CO)

HT Servs., LLC v. Western Heritage Ins. Co., No. 20-1275 (10th Cir. June 1, 2021)

U.S. Court of Appeals Finds Construction of Retaining Wall Arose Out of the Construction of a Residential Structure, Thus Triggering Policy’s Habitational New Construction Exclusion

This declaratory-judgment action arises out of an underlying construction defect action related to the construction of a residential community. The plaintiff, HT Services, LLC, is a land developer. Beginning in 2011, HT Services developed a residential community known as Willow Creek. HT Services was involved in the design and construction of the improvements at Willow Creek and was insured under consecutive commercial general liability policies issued by the defendant, Western Heritage Insurance Company (“Western”).

When the Willow Creek homeowner’s association (“HOA”) sued HT Services for negligent design and construction of a retaining wall in 2016, HT Services asked Western to defend and indemnify it. Western denied coverage and refused to defend HT Services in the underlying lawsuit.

After settling with the HOA, HT Services sued Western in state court asserting claims for declaratory judgment, breach of contract, and bad faith. Western removed the case to federal court, which granted summary judgment in Western's favor.

In its motion for summary judgment, HT Services argued that the underlying complaint triggered a duty to defend. The Court of Appeals applied Colorado law in examining the coverage dispute and found no duty to defend due to applicable policy exclusions.

The Western policies contained a "Habitational New Construction" exclusion, which excludes coverage for losses “arising out of, relating to, or in any way connected with ‘your operations,’ ‘your work’ or ‘your product’ involving the development, construction, conversion and/or demolition of:

1. ‘mixed-use’ structures;
2. condominiums;
3. town homes; or
4. any other type of residential structure including ‘multiple unit’ residential structures: whether by any insured, an entity to which any insured owes an indemnity obligation, or any other entity.”

Although HT Services argued that a retaining wall is not a "residential structure," the Court noted that the terms of the foregoing exclusion are broad, applying to lawsuits "arising out of, relating to or in any way connected with" the construction of residential structures. As the retaining wall was constructed as part of the development of the Willow Creek residential community, the Court found that the alleged defects in the retaining wall fall within the "Habitational New Construction" exclusion.

The Western polices also excluded coverage for "faulty workmanship" under Exclusion j.(6), which states that "[t]his insurance does not apply to . . . ‘[p]roperty damage’ to . . . [t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it." The Court determined that the HOA’s allegations that it suffered damages resulting from HT Services’ “defectively … constructed retaining walls,” fell squarely within this exclusion.

Finding that both of the above exclusions applied to the loss, the Court affirmed the holding of the district court that Western had no duty to defend. Accordingly, the Court also dismissed HT Services’ claims of breach of contract and bad faith.

Diane L. Bucci
Hurwitz & Fine, PC
Buffalo, NY

Back to Top

Eleventh Circuit

Maritime/Captain or Crew Warranties (FL)

Travelers Property Casualty Company of America v. Ocean Reef Charters LLC, No. 19-13690 (11th Cir. May 6, 2021)

Since There is No Entrenched Maritime Rule Governing Captain or Crew Warranties, Florida Law Applies to Determine the Effect of Ocean Reef’s Breaches Under the Travelers Policy

Ocean Reef Charters, LLC (“Ocean Reef”) is the owner of a 92-foot yacht named M/Y My Lady that was primarily moored in Key Largo, Florida. Ocean Reef insured the yacht with Travelers. The policy at issue in this case concerns the renewal policy with effective coverage dates of October 2016 to October 2017 (the “policy”). The policy contained two express warranties—the “captain warranty,” which required Ocean Reef to employ a full-time, professional captain approved by Travelers, and the “crew warranty,” which required Ocean Reef to have one full- or part-time professional crew member onboard.

Ocean Reef purchased the policy through its insurance agent, Keen Battle Mead & Company (“Keen”) located in Homestead, Florida. Travelers negotiated and issued the policy through its producing agent, Hull & Company (“Hull”), based in Fort Lauderdale, Florida. The policy listed Ocean Reef as the insured with a New York address, but listed Key Largo, Florida, as the yacht’s primary mooring location.

In early September 2017, Hurricane Irma was heading toward Florida. Unfortunately, Ocean Reef had failed to employ a professional captain or any professional crew. Mr. Richard Gollel, the named operator of the yacht sought permission to move the yacht to a safer location, but Hull (Traveler’s agent) told Keen (Ocean Reef’s agent) that the yacht should not be moved. Mr. Gollel did his best to secure the yacht, but due to the fierce impact of Hurricane Irma, the yacht ended up hitting a sea wall and sinking. The damage resulted in a total constructive loss under the policy.

Travelers filed this lawsuit against Ocean Reef and denied coverage six weeks later, asserting that Ocean Reef had breached the captain and crew warranties in the policy. Following discovery, the parties filed cross-motions for summary judgement. Travelers argued that federal maritime law requires strict compliance with express warranties in marine insurance contracts, and that a breach bars coverage even if it is unrelated to the loss. Ocean Reef countered that Florida’s “anti-technical statute” should apply and that under that statute, breaches did not preclude coverage because they were unrelated to the loss.

The district court granted Travelers’ motion for summary judgment concluding that “the Eleventh Circuit has fashioned an entrenched rule of admiralty: express warranties in maritime insurance contracts must be strictly construed in the absence of some limiting provision in the contract.” Ocean Reef appealed.

The Court of Appeals reasoned that because this case lies in admiralty, federal maritime conflict of laws control, citing the case of Cooper v. Meridian Yachts, Ltd., 575 F.3d 1151, 1161 (11th Cir. 2009). The Court also looked to the controlling (yet controversial) case on this issue, which is Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310 (1955). The Wilburn case, according to the 11th Circuit’s interpretation, instructs a court to “look to see if the specific warranty at issue is (or should be) the subject of a uniform or entrenched federal admiralty rule.” (Note: The Ocean Reef decision involves quite a lot of criticism of SCOTUS’ decision in the Wilburn case and how the reasoning set forth in that case is based on a flawed premise. Nevertheless, the 11th Circuit in Ocean Reef attempts to make sense of the Wilburn decision and acknowledges that it is the controlling case on this matter).

Ultimately, the court reasoned that the precise question to consider here is whether there exists an entrenched federal maritime rule(s) governing captain or crew warranties. The court answered that question in the negative. The Court concluded: “[I]t may be that Wilburn Boat was a bad (or at least badly written) decision…[B]ut we are stuck with it, and finding no established maritime rule governing captain and crew warranties, we hold that Florida law governs.” The 11th Circuit reversed the lower court’s order granting summary judgment to Travelers and remanded for further proceedings.

Patricia A. Rauh
Hurwitz & Fine, PC
Buffalo, NY

Late Notice/Conflicts of Law (GA)

The 11th Circuit has declared in an unpublished opinion that Georgia courts should only apply the law of a foreign jurisdiction where Georgia common law is in conflict with the statute of another state, and not where there is a conflict between the common law of two jurisdictions. Although the policies in question were issued to the insured's parent company in California, the Eleventh Circuit interpreted Georgia’s rule of lex loci contractus as requiring that Georgia law controls unless it conflicts with the statute of another jurisdiction. The court ruled that “where a foreign state has adopted the English common law and there is no statute from that state to govern a contractual dispute, the outcome of the dispute can then only be determined by that state's common law.” In light of the fact that Georgia does not require proof of prejudice in late notice cases, the court ruled in Mt. Hawley Ins. Co. v. East Perimeter Pointe Apartments, No. 19-13824 (11th Cir. May 27, 2021) that the insured’s two-year delay in notifying its liability insurers of two lawsuits arising out of an assault and murder at its apartment complex was untimely as a matter of Georgia common law. Although the insured gave immediate written notice of the suits when they were filed, it had failed to give notice of the original incident two years earlier.

Michael Aylward
Morrison Mahoney
Boston, MA

Back to Top

California

Excess Insurance/Exhaustion/Equitable Contribution

Judge Wright has ruled in Vizio, Inc. v. Navigators Ins. Co., No. 20-06864 (C.D. Cal. May 4, 2021) that Arch Insurance has no obligation to participate in the defense of underlying lawsuits that numerous consumers brought against Vizio pertaining to its Smart TV products. Despite Vizio's argument that the $17 million that was paid to settle the suits exceeded the primary limits underlying the Arch policy, the district court dismissed the case due to the absence of any allegation that the underlying insurer’s contribution to this settlement had exhausted its limits. The court declined to find that any payments by Chubb were relevant inasmuch as Chubb was not the primary insurer underlying the Arch policy. The court also rejected any suggestion that Vizio was entitled to bring an equitable contribution claim against Arch by standing in Chubb’s shoes, because California law only allows equitable contribution claims between insurers that share the same level of obligation and, therefore, do not apply to disputes between primary and excess insurers.

Michael Aylward
Morrison Mahoney
Boston, MA

Back to Top

Connecticut

Animal Liability Exclusion/Dog Bite

Williams v. MESA Underwriters Specialty Insurance Co., No. 3:19-CV001772 (D. Conn. May 8, 2021)

Dog Bite Exclusion Takes a Bite out of Coverage Action

On cross-summary judgment motions, MESA won a finding of no coverage for a $250,000 stipulated judgment on the strength of its animal liability exclusion. Williams, a minor, was attacked by a pit bull when visiting MESA’s insured’s apartment complex. Williams alleged that the apartment complex was negligent in allowing a precluded dog breed on the premises.

MESA denied coverage, relying on the animal liability exclusion. The second and third amended complaints were not provided to MESA. Significantly, the third amended complaint added factual allegations regarding the insured’s policies regarding dogs and its awareness of the dog's presence on the property. The tort parties entered into a stipulated judgment with the insured assigning its rights against MESA to Williams. Suit was commenced in state court and removed by MESA. Approximately one month later, the parties cross-moved for summary judgment.

MESA’s exclusion provided: “This exclusion applies to all liability claims relating to or arising from animals, including the failure to train, supervise, or control animal(s).” Pretty cut and dry it seems. Williams argued that the underlying lawsuit was not a liability claim, and that the exclusion is inapplicable because a “suit” is not a “liability claim.”

However, the plaintiff conceded, and the court held that in determining MESA’s duty to defend, only the initial complaint was relevant. The court then properly stated Connecticut law on the duty to defend and the standard of contract review, accurately summarizing the issue: “[T]he question here is whether Plaintiff's underlying lawsuit might have been covered by the MUSIC Policy given the language of the animal liability exclusion.”

While the court noted that the terms claim and liability claim were not defined, it refused to “torture words to import ambiguity where the ordinary meaning leaves no room for ambiguity.” Citing Hammer v. Lumberman's Mut. Cas. Co., 214 Conn. 573, 584 (1990). The court concluded that “a ‘liability claim’ is a demand for money due under the law. Such is the precise nature of the underlying lawsuit … Therefore, the underlying lawsuit was a ‘liability claim’ as set forth in the animal liability exclusion.” The court went on to write that, “[d]espite the policy's use of the terms ‘claim’ and ‘suit’ and the unremarkable observation that different policy language could have been used to draft the exclusion, there is no reasonable definition of ‘liability claims’ not inclusive of suits.”

Plaintiff’s next argument is one we see in many contexts in an effort to separate the underlying negligence from the immediate injury-causing act. Here, Williams argued that the insured’s liability did not arise from the dog bite, but rather from the insured’s negligent failure to maintain the property. The court again disagreed. Noting that Connecticut, like most jurisdictions, gives broad scope to the terms “relating to” and “arising from,” it considered that MESA need only show that the liability was connected with or incidental to the dog bite. Finding that the complaint “repeatedly alleges that the Plaintiff’s injuries were the result of an animal attack,” the court stated that “[i]t would therefore strain reason to the breaking point to conclude that the lawsuit did not ‘arise from’ or ‘relate to’ animals given the broad reading of such language in the courts.”

Lee S. Siegel
Hurwitz & Fine, PC
Buffalo, NY

Back to Top

Florida

Tripartite/Standing to Sue/Subrogation

In a tripartite case that had been pending before it for nearly two years, the Florida Supreme Court has ruled in Arch Ins. Co. v. Kubicki Draper, LLC, No. SC-673 (Fla. June 3, 2021) that a professional liability insurer could bring a malpractice claim against appointed defense counsel based on the subrogation clause in its policy.

As had the courts below, the Supreme Court ruled that the insurer was not in privity with the law firm, nor was it an intended third-party beneficiary of the relationship between the law firm and the insured. However, whereas the lower courts had therefore ruled that the insurer lacked standing to pursue a malpractice claim against the firm, the Supreme Court declared that Arch could bring an action based upon the subrogation clause in its professional liability insurance policy.

Inasmuch as Arch was contractually subrogated to the rights of its insured’s law firm, which included claims for legal malpractice against counsel retained by defendant, the Supreme Court held that the insurer was likewise entitled to bring such an action. Whereas the law firm had argued that the Supreme Court had generally prohibited assignment of legal malpractices claims on the grounds of public policy, the Supreme Court declared that there are exceptions when public policy is inapplicable including this one and that Florida public policy does not support shielding a law firm from accountability for its professional malpractice.

The court observed that subrogation exists to hold the premium rates down by allowing insurers to recover indemnification payments from the tortfeasor who caused the injury and that allowing an insurer to recoup payments from a law firm who created a liability by missing a statute of limitations defense to the detriment of the insured was actually consistent with Florida public policy.

Michael Aylward
Morrison Mahoney
Boston, MA

Back to Top

Illinois

Coverage B/ Negligence

First Mercury Insurance Company v. Triple Location LLC d/b/a Club O, No. 19 C 2395 (N.D. Ill. Apr. 29, 2021)

Can This Be Negligence?

Triple Location was sued by Emily Sears, Lina Posada, and Lucy Pinder (“Plaintiffs”). Each are professional models who alleged that Triple Location published their images without their consent in order to promote its strip club, Club O, through postings on Club O's Facebook and Instagram pages. The Plaintiffs alleged that Club O's postings “create[d] the false impression that [they] ha[d] consented or agreed to promote, advertise, market, and/or endorse Club O,” which caused them to “sustain[ ] injury to their images, brands, and marketability by [their] shear affiliation with … a strip club.” The Plaintiffs further alleged that Triple Location “totally and completely destroyed” any “copyright” that existed in their photos by “morphing, editing, or otherwise altering the original photographs.”

Plaintiffs’ alleged claims under (1) the Lanham Act, 15 U.S.C. § 1125(a), for false advertising and false endorsement; (2) the Illinois Right of Publicity Act (“IRPA”), 765 ILCS 1075/10 et seq., for violation of their right to publicity and for being placed in a false light; and (3) state law negligence.

The question for the court was whether First Mercury had a duty to defend under Coverage B. The court easily held that at least one of the personal and advertising offenses was satisfied, most likely “personal and advertising injury” arising out of the publication of material that “slanders or libels” a person, “violates a person's right of privacy,” or “[i]nfring[es] upon another's copyright.”

First Mercury alleged that three “exclusions” applied. Exclusion (a) excludes “personal and advertising injury” that is “caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury.’” Exclusion (b) excludes “personal and advertising injury” that “arise[s] out of oral or written publication of material, if done by or at the direction of the insured with knowledge of its falsity.” Exclusion (p) excludes “personal and advertising injury” that “aris[es] directly or indirectly out of any action or omission that violates or is alleged to violate” the Telephone Consumer Protection Act (“TCPA”), the CAN-SPAM Act of 2003, or any other “statute, ordinance[,] or regulation … that prohibits or limits the sending, transmitting, communicating, or distribution of material or information.” First Mercury also sought to rely on an endorsement, “Field of Entertainment—Limitation of Coverage,” which stated in pertinent part:

This insurance does not apply to … “personal and advertising injury” … actually or allegedly arising out of, related to, caused by, or attributed to by any of the following, but only as each applies to the “Business of The Insured in The Field of Entertainment.”

• Invasion of the right to privacy;
• Infringement of copyright, whether under statutory or common law; libel, slander or other forms of defamation; . . .

“Business of The Insured in The Field of Entertainment” is defined to include “[t]he ownership, licensing, operation maintenance or use of merchandising programs, advertising or publicity material or paraphernalia, characters or ideas, whether or not on premises of the insured or in possession of the insured at the time of the alleged offense or ‘occurrence.’”

According to the court, the Plaintiffs alleged negligent acts against Triple Location, to which none of First Mercury’s defense applied. First Mercury asked the court to look behind the labels because Plaintiffs’ claims concerned Triple Location's “alleged knowing, intentional, and/or fraudulent misrepresentation that the Plaintiffs were affiliated with Club O.” First Mercury argued that despite claims of negligence, the allegations were only the sort of knowing or intentional misconduct that Exclusions (a) and (b) except from coverage.

The court disagreed. It noted that the claim alleged First Mercury was negligent in “its failure to promulgate policies and procedures concerning the misappropriation of the [i]mage[s] of [the] models that were used on the Club O Website and social media accounts.” The complaint alternatively alleged that if First Mercury had such policies, it “negligently failed to enforce th[em], communicate them to employees, and/or [screen, train, and] supervise its employees in order to ensure that these policies, along with [f]ederal and Illinois law, were not violated,” and further that Triple Location published the Plaintiffs’ images without their authorization as a proximate result of its “negligence.”

The court acknowledged that the Plaintiffs also alleged intentional conduct but clarified that there was no law suggesting that alternative pleadings were impermissible and thus, when a complaint alleges negligent and intentional conduct, the issue is resolved for the insured and the insurer had a duty to defend. According to the court, exclusions (a) and (b) required knowledge on behalf of the insured which, according to the court, was not required for the negligence claims.

Also, the court, considering Exclusion (p) (even though it held that First Mercury waived it argument under this Exclusion), relied on W. Bend Mut. Ins. Co. v. Krishna Schaumburg Tan, Inc., 2020 IL App (1st) 1330494, at ¶ 6, 42 (Ill. App. March 20, 2020). There, the court held that Exclusion (p) did not preclude coverage because its catch all provision, “[a]ny statute, ordinance or regulation, other than the TCPA or CAN-SPAM Act of 2003.” was “meant to encompass any [s]tate or local statutes, rules, or ordinances that, like the TCPA and the CAN-SPAM Act, regulate specific methods of communication such as e-mail and phone calls and bars coverage for the violation of a very limited type of statute.” Id. at ¶ 43.

The court in G.M. Sign, Inc. v. State Farm Fire & Casualty Co., 18 N.E.3d 70 (Ill. App. 2014) interpreted a substantially similar exclusion to encompass common law claims arising from the same conduct as a statutory claim brought in the same suit. The court ultimately held that Exclusion (p)’s catch-all did not encompass the underlying complaint's Lanham Act and IRPA claims. Both statutes, said the court, address, prohibit, or limit the dissemination or distribution of material or information without limit to a particular method of communication.

Turning to the Field of Business Limitation, the court agreed with Triple Location that the policies cover “personal and advertising injury” caused by negligence associated with privacy right or copyright infringement in “[the insured's] ‘advertisement[s]’” or with “[t]he use of another's advertising idea in [the insured's] ‘advertisement[s],’” while the Limitation would exclude the very same injury if it arises out of the insured's “advertising.” Given the stark incompatibility of these dueling provisions, the court held the Endorsement created an inconsistency that, at least for purposes of the duty to defend, had to be resolved in Triple Location's favor.

Diane L. Bucci
Hurwitz & Fine, PC
Buffalo, NY

Duty to Defend/“Right to Privacy”/“Publication”

West Bend Mut. Ins. Co. v. Krishna Schaumburg Tan, Inc., No. 125978, 2021 IL 125978 (Ill. May 20, 2021)

The Illinois Supreme Court held that West Bend Mutual Insurance Co. (West Bend) must defend salon Krishna Schaumburg Tan, Inc. (Krishna), against a plaintiff’s claims that Krishna disclosed the plaintiff’s fingerprint data to a third-party vendor in violation of the Illinois Biometric Information Privacy Act (Act). The Supreme Court held that the plaintiff’s claim triggered a policy provision that covers personal injury stemming from advertising by the business when there is an alleged violation of the right to privacy.

Krishna’s policy with West Bend defined an advertising injury as one occurring from the “oral or written publication of material that violates a person’s right of privacy.” West Bend argued that “publication,” which was not defined in the policy, occurred only when private information was disclosed to the general public. The Supreme Court disagreed and defined the term as a disclosure to one or more individuals. The Supreme Court relied upon several dictionary definitions, the common law, and other legal authorities in arriving at this definition. The Supreme Court considered the language to be ambiguous and, thus, construed the language against West Bend.

West Bend further argued that it did not have a duty to defend the tanning salon because the policy excluded coverage for personal injuries that arise from the violation of a statute that prohibits sending, transmitting, communicating or distributing data. The Supreme Court disagreed, reasoning that the exclusion only applied to faxes and emails. Such communications are fundamentally different from the Act, which regulates the collection, use, safeguarding, handling, storing, sharing and destruction of individuals’ biometric information.

Finally, while the West Bend Policy did not define the phrase “right of privacy,” the Supreme Court held that the plaintiff’s underlying suit sufficiently alleged that she has such a right under the Act. The Supreme Court reasoned that the Act protects individuals’ rights to keep their biometric information secret. Therefore, the plaintiff’s claim that her fingerprint data was shared with a third-party without her permission sufficiently alleged a potential privacy violation under the policy. Accordingly, the Supreme Court held that West Bend had a duty to defend.

Michael D. Hanchett
Plunkett Cooney
Bloomfield Hills, MI

Back to Top

Kentucky

Opioid Claims/"Because of Bodily Injury"

A federal district court has ruled in Motorists Mutual Insurance Company (Mut. Ins. Co. v. Quest Pharmaceuticals, Inc., No. 19-187 (W.D. Ky. May 5, 2021) that a pharmaceutical distributor was not entitled to coverage for dozens of lawsuits in which governmental entities are seeking to recover costs due to the opioid epidemic that are attributable in part to the insured's distribution of drugs. The court distinguished the Seventh Circuit's opinion in H.D. Smith as being based on Illinois principles of contract interpretation that are not followed in Kentucky. Citing a 2000 Kentucky Supreme Court opinion that had found "because the bodily injury" to be synonymous with "for bodily injury,” the district court ruled that there was no coverage in this case because none of the underlying claimants had themselves suffered bodily injury for which they were seeking damages.

Michael Aylward
Morrison Mahoney
Boston, MA

Unfair Claims Settlement Practices Act/Liability “Beyond Dispute”

Crystal Lee Mosley v. Arch Specialty and National Union Fire, 2018-SC-0586-DG (Kentucky Supreme Court, June 17, 2021)

The Kentucky Supreme Court affirmed the dismissal of third-party bad faith claims against Arch Specialty and National Union Fire Insurance Company. It clarified that an insured's liability is "reasonably clear" for purposes of Kentucky’s Unfair Claims Settlement Practices Act (UCSPA) when the insured's liability is "beyond dispute." Until the insured's liability is beyond dispute, the insurer has the right to contest liability, and no bad faith claim can succeed as a matter of law. The Court also held that an insurer’s settlement conduct during mediation of an underlying claim against an insured may be discoverable and admissible in a third-party bad faith action under limited circumstances. For example, if an insurer improperly leverages claims during the negotiation process at mediation (i.e., fails to settle claims where liability is reasonably clear under one portion of the insurance policy coverage in order to influence settlement under other portions of the policy coverage), such would be an example of conduct that would be discoverable and potentially admissible as improper settlement behavior.

Stephen C. Keller
Schiller Barnes Maloney PLLC
Louisville, KY

Unfair Claims Settlement Practices Act/Statute of Limitations

United States Liability Insurance Company v. Jaci Watson, 2019-SC-0475-DG (June 17, 2021)

Watson filed a dram shop action against Pure Country, USLI’s insured. After settling that claim but before the action was dismissed, Watson attempted to amend his pleadings to assert a claim against USLI under Kentucky’s Unfair Claims Settlement Practices Act (UCSPA). The trial court denied his motion because it concluded that the settlement—which had occurred more than five years prior to the proposed amendment—rendered the extracontractual claims untimely under the circumstances. On appeal, the Kentucky Supreme Court affirmed. It held that when the parties to an underlying claim have reached a settlement, the five-year limitations period for UCSPA claims against an insurer begins to run from the date of the settlement. It further held that an enforceable settlement exists when the fundamental elements of a valid contract are present (offer, acceptance, full and complete terms, and consideration). 

Stephen C. Keller
Schiller Barnes Maloney PLLC
Louisville, KY

Direct Physical Loss

Lexfit LLC v. West Bend Mutual, No. 5:20-413, 2021 WL 2382519 (E.D. Kentucky, June 10, 2021)

Lexfit, a fitness center, filed a declaratory judgment action, including extracontractual claims, against West Bend arguing that its business owners’ insurance policy covered its financial losses during the COVID-19 pandemic. Specifically, Lexfit argued that its income losses following closures mandated by state government were non-excluded “direct physical losses” as defined by West Bend’s policy. The Eastern District of Kentucky held that this interpretation conflicted with the language of the policy, which required a “direct physical loss of or damage to property at the premises.” It also held that mere loss of business income is not a tangible alteration of property necessary to constitute a “direct physical loss.” The Court granted West Bend’s motion for a judgment on the pleadings and dismissed the action.  

Stephen C. Keller
Schiller Barnes Maloney PLLC
Louisville, KY

Back to Top

Michigan

Hidden Surveillance Cameras/Sexual/Physical Abuse Liability

Atain Ins. Co. v. Katalyst Fitness, LLC, No. 354005 (Mich. Ct. App. May 20, 2021)

Do Not Intentionally Place Cameras to Watch People Undress. No Coverage under the Sexual/Physical Abuse Liability Coverage Endorsement

“Matthew,” one of the owners of Katalyst Fitness (the “gym”), allegedly installed hidden surveillance cameras in the gym’s restrooms and changing facilities to secretly record persons in various stages of undress. The court first addressed the Physical Sexual Abuse Exclusion, which provides that the policy “does not apply to any ‘occurrence,’ [sic] suit, liability, claim, demand or causes of action arising out of or that in any way involves the physical abuse; sexual abuse; or licentious, or immoral or sexual behavior.”

The gym argued that the exclusion was ambiguous in that the second provision of the exclusion stated that the insurance did not apply to bodily injury, property damage, and personal and advertising injury. The first provision, however, did not have this limiting language so, argued the gym, it covered any injuries, rendering the Exclusion ambiguous. According to the gym, if the entire Exclusion was meant to apply only to bodily injury, property damage, and personal and advertising injury, there was no reason to put the bodily injury, property damage, and personal and advertising injury language in only the second paragraph.

The court held that the specificity in the second provision did not render the exclusion ambiguous because the second provision refers to the type of damages while the first provision addresses conduct regardless of the resulting damages.

The gym also argued that the “physical-sexual abuse” exclusion's use of “licentious, or immoral or sexual behavior” was ambiguous because “coverage would depend not on the act, but on the mens rea of the person engaged in the act and/or happenstance. The gym used the example that the act of installing a camera in a bedroom to eavesdrop on someone would not be excluded unless while attempting to eavesdrop, the camera recorded someone in a state of undress. The court characterized this argument properly by holding that there was no ambiguity in this case in part because Matthew’s actions clearly constituted sexual abuse or licentious, or immoral or sexual behavior.

Although courts generally first analyze whether there is coverage before determining whether an exclusion applies, here the court next addressed what coverage was available under the policy’s “Liability Coverage Form,” which included “Sexual and/or Physical Abuse” (“SPAL”), which provided:

We will pay on your behalf all sums which you shall become legally obligated to pay as DAMAGES because of injury to any person arising out of SEXUAL AND/OR PHYSICAL ABUSE, caused by one or your EMPLOYEES, or arising out or your failure to properly supervise. We shall have the right and duty to defend any suit against you seeking such DAMAGES, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and such settlement of any claim or suit as we deem expedient, but we shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of our liability has been exhausted.

“Sexual and/or physical abuse” was defined under the SPAL as “sexual or physical injury or abuse, including assault and battery, negligent or deliberate touching.”

The gym argued that Matthew's conduct amounted to “sexual injury” within the meaning of the SPAL coverage. The court agreed that in this context, “sexual or physical injury or abuse” had to involve physical contact or the imminent threat of same. The court relied on “the doctrine of noscitur a sociis.” The doctrine stands for the proposition that when several words have a certain meaning suggesting that they have something in common, they should be assigned a permissible meaning that makes them similar. Since all of the other language in the SPAL coverage involved physical contact, the court concluded that the SPAL did not provide coverage because Matthew’s actions did not involve actual touching.

At the trial court level, the court concluded that coverage was excluded because Matthew was not an insured, but the court did not need to reach this issue having decided there was no coverage and an exclusion applied.

Diane L. Bucci
Hurwitz & Fine, PC
Buffalo, NY

Back to Top

Minnesota

Faulty Construction/”Your Work”

King’s Cove Marina, LLC v. Lambert Commercial Construction LLC, No. A19-0078 (Minn. Apr. 14, 2021)

CGL Policy – No Coverage for Insured Contractor’s Defective Work

King’s Cove Marina, LLC (the “Marina”) sued Lambert Commercial Construction LLC (the “Contractor”) alleging breach of contract and negligence concerning construction the Marina hired the Contractor to do. The Marina alleged faulty construction work by the Contractor and defective building products were used by the Contractor on the construction project. The Contractor sought coverage from its insurer, United Fire & Casualty Company (the “CGL Insurer”). The CGL policy contained a general aggregate limit of $2 million, a products-completed operations aggregate limit of $2 million, and an each-occurrence limit of $1 million. An umbrella policy contained a general aggregate limit of $1 million. The CGL Insurer denied coverage for the claims but defended Lambert under a reservation of rights.

Among other things, the Supreme Court of Minnesota was asked in this case to determine whether a commercial general liability insurance policy that includes coverage for the “products-completed operations hazard” covers property damage to the insured's own completed work, notwithstanding an express exclusion set forth in the policy for property damage arising out of the insured's work. The Minnesota Supreme Court held that a commercial general liability insurance policy does not cover property damage to an insured's own completed work under the plain language of a “your work” exclusion, which applies to work included in the “products-completed operations hazard.” The Supreme Court held that the plain language of the “your work” exclusion of property damage arising out of the insured’s own work bars coverage for the claimed property damage to Lambert's own work, notwithstanding the products-completed operations hazard limit set forth in the policy’s Declarations Page. That limit was merely a different potentially applicable limit of coverage, but nonetheless subject to exclusions in the policy.

The Minnesota Supreme Court noted that a majority of courts across the country have found no ambiguity between an exclusion for “property damage” to “your work” arising out of it or any part of it and the products-completed operations hazard because insureds “are not entitled to coverage for their own faulty work.” The argument of the Marina that the products-completed operations hazard is a distinct category of coverage was rejected by the Minnesota Supreme Court. The Declarations Page merely shows that the products-completed operations hazard has “a different applicable limit”—not that it is “a separate form of coverage.” The policy was never intended to be “a performance bond” covering the insured contractor’s work.

The Supreme Court also considered whether a so-called “Miller-Shugart” settlement agreement entered into in this case that failed to allocate between claims that are covered and not covered by the insurance policy was per se unreasonable and unenforceable against the insurer. This is an issue unique to Minnesota common law. The Supreme Court’s Opinion held that the failure to allocate between covered and uncovered claims does not make the Miller-Shugart settlement agreement per se unreasonable. In addition, the Supreme Court rejected a per se rule that invalidates unallocated Miller-Shugart settlement agreements in cases involving a single defendant, instead adopting a flexible approach that allows a district court to consider all relevant facts and circumstances in determining the overall reasonableness of the settlement and allocating the settlement between covered and uncovered claims. The Supreme Court remanded the case down to the court of appeals to resolve the remaining issues in light of the coverage determination and allocation standard announced in the Supreme Court’s Opinion.

Eric T. Boron
Hurwitz & Fine, PC
Buffalo, NY

Back to Top

New York

Construction/Exclusion – Exterior Work Over Two Stories

Damon G. Douglas Co. v. Mt. Hawley Insurance Co., No. 2020-00609 (N.Y. App. Div. 1st Dep’t Apr. 27, 2021)

Exclusion for “Exterior Work Over Two Stories” Inapplicable to Accident that Occurred in Construction of Three-Story Building, where Accident Occurred on First Floor

Adelphi University (“Adelphi”) retained Damon G. Douglas Company (“DGDC”) as a general contractor on a construction job, the erection of a three-story building. DGDC retained Pravco, Inc. to act as the structural steel and iron work subcontractor. Pravco, Inc. then hired defendant Island Structures Inc. (“Island”) as the subcontractor for a portion of its work. Island subcontracted a portion of its work to defendant Iron Inc. (“Iron”).

So the order is:

• Adelphi – Owner
• DGDC – GC
• Pravco – Structural Steel Subcontractor
• Island – Pravco’s sub
• Iron – Island’s sub and plaintiff’s employer

Giattino was hurt and sued Adephi and DGDC. The injured plaintiff in the underlying action, an employee of Iron, Frank Giattino, alleged that he was seriously injured when he was performing metal work and fell from the first floor to the ground level. The height from where he fell was about 15 feet. Adelphi and DGDC filed third-party actions against Island for indemnification, contribution, and breach of contract. In turn, Island filed a third-party action against Iron for negligence, indemnification, contribution, and breach of contract.

Labor Law liability was established by motion, Adelphi and DGDC secured indemnity from Island, and Island secured indemnity from Iron.

Mt. Hawley issued an excess liability policy to defendant Iron, the employer of the injured plaintiff in the underlying action. National Union's named insured, Island, is an additional insured under the policy issued by Mt. Hawley. The policy excluded coverage for certain activities, including "[a]ny exterior work over [two] stories, any ground up construction over [two] stories while the insured is operating in the capacity of a general contractor, or any project that involves adding stories to an existing structure, whether done by an insured or by subcontractors on an insured’s behalf."

Mt. Hawley denied coverage on the basis of the "exterior work over [two] stories" exclusion.

To begin, National Union has standing to seek a declaration concerning the coverage owed by a coinsurer. Here, the language in the exclusion provision, which is unambiguous, states that the policy at issue does not apply to bodily injury arising out of ongoing operations concerning the "exterior work over [two] stories." Although the construction of the building contemplated multiple floors, at the time of the accident, the injury did not arise out of exterior work over two stories. Since, at the time of the accident, the injured plaintiff was not working over two stories, but on the first floor, Mt. Hawley’s exclusion does not apply.

Dan Kohane
Hurwitz & Fine, PC
Buffalo, NY

Error and Omissions/ Professional Malpractice

Error and Omissions/ Professional Malpractice

Napoli Shkolnik, PLLC v. Greenwich Insurance Company, No. 2020-04201 (N.Y. App. Div. 1st Dep’t Apr. 27, 2021)

While There were “Shotgun Allegations” of Professional Malpractice, Requests for Relief Did No Seek Recovery Under those Claims, so No Obligation of Error and Omissions Carrier to Defend.

Plaintiff claims that under the terms of its professional liability insurance policies, defendants were required to defend and indemnify it in a federal action brought against it and related law firms and attorneys by Keyes. Keyes asserted causes of action for an accounting, declaratory judgment, breach of contract, unjust enrichment, a constructive trust, and negligence, seeking to recover contingency fees withheld in violation of fee-sharing joint representation agreements between Keyes and plaintiff's predecessor firm, Napoli Bern Ripka Shkolnik, LLP (NBRS).

Keyes’ negligence cause of action was premised on alleged false representations made by Napoli, Bern, and NBRS to Keyes.

Review of the complaints in the Keyes action and the relevant policies reveals that there was no possible factual or legal basis on which Greenwich Insurance Company and Hudson Excess Insurance Company could have eventually been obligated to indemnify plaintiff in the Keyes action. The Keyes action was premised on actions taken by plaintiff as a business, not in its professional capacity as a law firm.

To the extent that the first and second amended complaints alleged that plaintiff committed malpractice or fraud in its handling of clients' cases, those "shotgun" allegations were insufficient as no cause of action was premised on those facts. Although the first and second amended complaint asserted a negligence cause of action, that theory of recovery was not based on the allegations relating to malpractice or fraud. Because the declaratory action was resolved on the merits, the proper course was to declare in favor of defendants, not discuss.

Dan Kohane
Hurwitz & Fine, PC
Buffalo, NY

Jeweler’s Block/Dishonest Character Exclusion

Crown Jewels Estate Jewelry, Inc. v. Certain Underwriters, No. 20-04312 (N.Y. App. Div. 1st Dep’t May 13, 2021)

Real Jewels but Fake Customer Triggers Dishonest Character Exclusion

In our “coming to a theatre near you” segment, we bring you this curious case. Plaintiff was contacted by an individual purporting to be Paul Castellana, an executive with Sony Pictures International. Mr. Castellana indicated that he was shooting a video with Jennifer Lopez in South Florida and wished to “borrow” certain jewelry for the production. Negotiations resulted in plaintiff providing “JLo” with five different pieces of jewelry which were valued at $2.09 million.

To certify the legitimacy of the request, Mr. Castellana produced a certificate of insurance suggesting the items were covered. He also provided plaintiff with a contact at the insurance producer’s office who further verified the identity and legitimacy of Mr. Castellana.

All went off without a problem, except JLo wasn’t involved, and Paul Castellana was actually James Sabatino. Mr. Sabatino is a member of the Gambino Crime family and was residing at the federal prison in Florida when he was supposedly running the JLo set. Eventually, Mr. Sabatino was caught with a number of cell phones and forged Sony Pictures email addresses. Mr. Sabatino pleaded guilty to a RICO violation and was sentenced to further confinement with the United States Government.

Plaintiff, in turn, turned to his insurance company who promptly told him … “fuhgeddaboudit!” The policy included an exclusion which removed coverage for theft occasioned by the act of a dishonest character to whom the jewelry was entrusted. On that basis, the trial court found the exclusion applied and the First Department affirmed.

Steven E. Peiper
Hurwitz & Fine, PC
Buffalo, NY

Back to Top

Oklahoma

Back to Top