Covered Events Volume 32 Issue 4| Recent Cases of Interest

Fifth Circuit

D&O/"Legally Obligated to Pay" (TX)

The Fifth Circuit has ruled that a Texas District Court erred in ruling that a D&O insurer was relieved of any obligation to cover losses due to a cyber-attack because the statute of limitations for the claim had expired. Whereas the trial court had ruled that this was not a loss that the insured was "legally liable to pay", the Fifth Circuit ruled in HM International, LLC v. Twin City Fire Ins. Co., No. 20-20122 (5th Cir. Sept. 2, 2021) that this language does not require a judgment against the insured and can refer to a "contractual obligation to pay". In this case, the court ruled that the insured’s settlement of claims by a client that it negligently transferred funds to a fraudster "constitutes a Loss because it is an amount that HMI is legally liable – through contract – to pay to the Gibes as a result of the demand letter." The court ruled the fact that the Gibes had never filed their threatened lawsuit and that the limitations period had run did not change that conclusion, as the policy does not require that the party suing the insured win a judgment in order to obtain coverage. The Fifth Circuit separately rejected Twin City’s contention that any resulting coverage was excluded as involving Loss arising out of or related to "services for or on behalf of others for a fee." In this case, the court ruled that, although the insured provided wire transfers to customers as a matter of course, it did not always do so for a fee and that the insured had, therefore, presented sufficient facts to avoid summary judgment being entered in the District Court.

CGL/Data Breach (TX Law)

The Fifth Circuit handed a victory to policyholders in Landry’s Inc. v. The Insurance Company of the State of Pennsylvania, No 19-20430 (5th Cir. July 21, 2021), a coverage suit stemming from data breach losses, when it reversed the Southern District of Texas’s grant of summary judgment to a CGL insurer. The District Court had held that the carrier had no duty to defend an underlying suit by a credit card processor against the insured merchant for breaching its agreement by failing to indemnify the processor for $20 million in credit card company assessments to cover data breach losses. On appeal, the Fifth Circuit held that the District Court had erred because: 1) the suit alleged “publication” as was required to trigger a defense under “personal and advertising injury” coverage, and 2) the suit involved an injury “arising out of the violation of a person’s right of privacy.” Notably, the Fifth Circuit also rejected the insurer’s argument that the policy covered only tort damages “arising out of ... the violation of a person’s right of privacy,” not the breach-of-contract action brought by the card processors, holding that the policy “contain[ed] none of these salami-slicing distinctions.

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Sixth Circuit

D&O/ Pollution Exclusion (KY Law)

In Barber v. Arch Insurance Co., No. 20-6307 (6th Cir. July 7, 2021), the Sixth Circuit affirmed the Western District of Kentucky’s grant of summary judgment to a D&O insurer following the DOJ’s indictment of several former employees of a coal company for conspiring to submit fraudulent coal-dust samples to federal regulators. The Sixth Circuit observed that the D&O coverage seemed to apply as the policy covered defense costs resulting from a criminal proceeding premised on alleged fraudulent acts performed in the claimants’ capacity as employees. However, despite the breadth of the coverage grant, the Sixth Circuit further observed that the policy also set forth an applicable exclusion that provided the insurer “shall not pay Loss for any claim against an Insured” “arising from, based upon, or attributable to any:” a. “discharge, dispersal, release, escape, seepage, migration or disposal of Pollutants, nuclear material or nuclear waste or any threat of such discharge, dispersal, release, escape, seepage migration or disposal”; or b. “direction, request or voluntary decision to test for, abate, monitor, clean up, remove, contain, treat, detoxify or neutralize Pollutants, nuclear material or nuclear waste[.]” The Sixth Circuit rejected the claimants’ arguments that coal dust is not a “pollutant” as defined in the policy and that the criminal proceeding was not “arising from, based upon, or attributable to” any of the excluded categories of claims. In so holding, the Court held that the term “arising from” requires no “direct proximate causal connection,” but “merely requires some causal relation or a connection.”

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Seventh Circuit

Farm Policy/CGL/ “Recreational Use of Motorized Vehicles” Exclusion (IL Law)

In American Bankers Insurance Company of Florida v. Shockley, No. 20-1938 (7th Cir., Jun 28, 2021), the Seventh Circuit reversed and vacated a summary judgment decision of the Northern District of Illinois in favor of an insurer under a farm policy. The injury had occurred when an employee of the insured equestrian center ran over the underlying claimant’s leg with a golf cart while chasing a horse. The Seventh Circuit found error in the lower court’s holding that the farm owner policy provided coverage exclusively to the horse farm premises. The Court held that the policy was ambiguous with respect to whether it was a “farm” or CGL policy, and further that the policy language expressly excluding coverage for injuries arising out of the “recreational use of motorized vehicles” implied that coverage was intended for non-recreational uses, such as the use at the time of the subject accident.

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Eighth Circuit

Business Interruption/ Covid-19 (IA Law)

In what was reportedly the first federal appellate ruling on a COVID-19-related business interruption coverage dispute, the Eighth Circuit affirmed the Southern District of Iowa’s decision granting the insurer’s motion to dismiss a policyholder’s breach of contract and bad faith claims in Oral Surgeons, P.C. v. The Cincinnati Ins. Co., No. 20-3211 (8th Cir. July 2, 2021). The insured oral surgery center had stopped performing non-emergency procedures in late March, 2020, in response to an executive order by Iowa’s governor imposing restrictions on dental practices due to COVID-19. The insured submitted a claim to its insurer for lost business income and extra expenses, which the insurer denied. In its subsequent suit, the insured argued that it had suffered a “direct loss” to its property because the “policy’s disjunctive definition of ‘loss’ as ‘physical loss’ or ‘physical damage’” must be interpreted as providing coverage for both physical losses amounting to “lost operations or inability to use the business” and physical damage amounting to physical alteration to property. Both the District Court and the Eighth Circuit rejected that argument, holding that: 1) the policy required direct physical loss; 2) “physical loss” requires physical alteration of property; and 3) the insured failed to allege any physical alteration of property.

Notice of Suit Provision/ Waiver/ Estoppel (AR Law)

In Dowden v. Cornerstone National Insurance Co., No. 20-2192 (8th Cir. Aug. 30, 2021), the Eighth Circuit affirmed the District Court’s grant of summary judgment to an auto liability insurer, and against the plaintiff bankruptcy trustee, based on the insured’s breach of the policy’s notice condition. Although the insured alleged the insurer had breached its obligation to timely appear for and answer an underlying complaint against the insured, both courts held that the carrier had no duty to defend when the insured did not strictly comply with notice provisions, conditions precedent to coverage, when he failed to report that he had been sued. The subject accident occurred on March 31, 2017, and the insured reported the accident on April 1, 2017. The insured called again on May 17, 2017 advising the carrier “they are trying to sue me” and indicating that he was reading from a “report” from the attorney. Nonetheless, the insured failed to advise that he had been served with the lawsuit and never forwarded the complaint until after the entry of a default judgment and before the damages trial. Upon tender, the carrier agreed to defend the insured at the damages trial under a reservation of rights. After the trial resulted in an award of over $2.5 million, the carrier paid the $25,000 policy limit, the insured filed for bankruptcy, and the Trustee then brought suit. The Eighth Circuit affirmed that under Arkansas law policy provisions mandating that insureds promptly send insurers copies of any notices or legal papers are conditions precedent to coverage. Additionally, the court rejected the plaintiff’s argument that the insurer had waived its right to rely on the notice defense by promising that it would get a copy of the police report, and made no promise to obtain the complaint, which the insured neglected to mention. Likewise, estoppel did not apply as, despite evidence that the carrier had prior notice of suit against the insured, “no reasonable fact finder could find that [the insured] ‘had a right to believe that’” the carrier intended for the insured “to not forward the complaint and summons to [the insurer] contrary to the Policy.”

Michael Aylward
Morrison Mahoney
Boston, MA

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Tenth Circuit

Bad Faith/ Failure to Settle/ Liability for Excess Verdict (UT Law)

In Owner’s Insurance Co. v. Dockstader, No. 19-4156 (10th Cir. June 29, 2021), the court affirmed the district court’s summary judgment ruling in favor of the insurer on a homeowners’ coverage and related bad faith claim stemming from a fight at a gym. The underlying plaintiff, Brooks, suffered a traumatic brain injury and permanent disability when the insured, Dockstader, hit him in the head with a dumbbell. Following a criminal case where Dockstader pled guilty to aggravated assault, Brooks brought a civil suit for assault and battery and negligence. In response to Dockstader’s demand for coverage, the insurer tendered a defense under a reservation of rights, and then brought a declaratory judgment action as to coverage. The key issue then became the insurer’s duty to accept an offer of settlement in the underlying matter when an excess verdict against the insured was likely. The insurer offered to settle within limits that was conditioned on a later determination of coverage. The court held this was not a bad faith failure to settle. In ruling for the insurer, the Tenth Circuit observed that, under Utah law, although insurers who have a duty to defend generally have a duty to “accept settlement offers within the policy limits, the requirement to settle is not absolute. An insurer does not have to accept a settlement offer if no coverage exists—even if the insurer first tendered a defense.” The Tenth Circuit agreed with the district court that there was no “duty for an insurance company to pay out policy limits in a situation where coverage is debated and a declaratory judgment action is pending.” The case is notable for its thorough discussion of duty to settle issues (it includes a vehement dissent), including reference to the ALI’s Restatement of Liability Insurance.

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Eleventh Circuit

Property Coverage/Hurricane Damage/Expert Testimony (FL Law)

The Eleventh Circuit affirmed a district court decision in St. Louis Condominium Association, Inc. v. Rockhill Insurance Co., No. 19-12716 (11th Cir. July 20, 2021), finding both that a property insurer owed first party coverage for damages sustained by a condominium complex during Hurricane Irma and that the insured condominium association was owed only a fraction of the amount sought. As for expert testimony, the Eleventh Circuit also affirmed the district court’s decision to strike the insurer’s expert’s testimony where the insurer had failed to produce the expert for deposition prior to the expiration of discovery deadlines. It also found no error in the district court’s denial of the insurer’s motion to disqualify the insured’s experts, concluding that the testimony met Daubert’s gatekeeping standards. Notably, the Eleventh Circuit also rejected the insured Association’s cross-appeal. In this regard, the court rejected the insured’s arguments that there was insufficient evidence to supported the jury's finding of pre-existing damage and also that subject policy’s hurricane deductible was unenforceable because the insurer had failed to obtain approval from the Florida Office of Insurance Regulation under Fla. Stat. § 627.701(2).

TCPA/ Class Action/ “Invasion of Privacy” Exclusion (FL Law)

In Horn v. Liberty Insurance Underwriters, Inc., 998 F.3d 1289 (11th Cir. 2021), the Eleventh Circuit addressed whether an insurer had properly denied insurance coverage for claims alleging a violation of the Telephone Consumer Protection Act (“TCPA”). The court affirmed the district court’s holding that TCPA claims were properly excluded as “[c]laims … arising out of … an invasion of privacy.” The complaint against iCan Benefit Group, LLC alleged that in sending unauthorized text messages it had “invaded the personal privacy of Plaintiff and members of the putative Classes… [and] intentionally and repeatedly violated the TCPA;” and “caused consumers actual harm in the form of annoyance, nuisance, and invasion of privacy.” The insured tendered the claim for defense and indemnity, the insurer denied coverage under the “invasion of privacy” exclusion, and iCan then stipulated to an award of approximately $60 million, with an assignment of rights against the insurer and an agreement not to pursue judgment directly against iCan. The Eleventh Circuit construction of the phrase “arising out of” was critical to its decision to affirm. In so ruling, the majority held, “[t]he insurance policy does not cabin the invasion of privacy exclusion to claims alleging those listed tort causes of action, rather it broadly excludes ‘civil proceedings’ ‘arising out of’ an ‘invasion of privacy.’” The court thus concluded the class action fell under the policy’s “invasion of privacy exclusion” because the class action has at least “a connection with” an “invasion of privacy.”

Construction Defect/”Property Damage” (FL)

The Eleventh Circuit has ruled that a Florida district court has ruled that a subcontractor’s liability insurer did not err in refusing to pay for the cost of removing and replacing defective railings that the insured had installed in a condominium development. In light of its 2012 ruling in Amerisure v. Auchter Corp., the court held in Tricon Development of Brevard, Inc. v. Nautilus Ins. Co., No. 21-11199, 2021 U.S. App. LEXIS 27317 (11th Cir. Sep. 10, 2021) that CGL policies do not provide coverage for losses that solely involve faulty workmanship. In this case, the court found that the repair and removal of the insured’s defective work did not constitute “property damage” nor could the insured avoid Auchter by characterizing such costs as involving a “loss of use of property that is not physically injured.”

Michael Aylward
Morrison Mahoney
Boston, MA

Declaratory Relief/Jurisdiction (AL)

The Eleventh Circuit has ruled that a federal court’s decision to abstain from exercising jurisdiction under the federal Declaratory Judgment Act because of related state proceedings does not require that complete “parallelism” between the two actions. In affirming the Florida District Court’s dismissal of an insurer’s DJ in a carbon monoxide poisoning claims, the Eleventh Circuit ruled in National Trust Ins. Co. v. Southern Heating & Cooling, Inc., No. 20-11292 (11th Cir. Sept. 3, 2021) that even though the underlying tort action against Southern Heating did not completely parallel this coverage case, there was enough of a factual overlap to warrant dismissal under the nine factor test that it enunciated in its 2005 Ameritas opinion. As a result, the court ruled that while the degree of similarity between the proceedings is significant in deciding whether to allow the DJ to forward or not, “a district court may exercise its discretion and decline to adjudicate a claim under the Declaratory Judgment Act even in the absence of parallel proceedings.”

Michael Aylward
Morrison Mahoney
Boston, MA

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Connecticut

09/22/21 Precision Trenchless, LLC v. Saertex Multicom LP

United States District Court, District of Connecticut
Risk Transfer—Connecticut Style

Connecticut, it seems, could use some of that federal infrastructure money to help fix its water pipes. Here, multiple litigations were consolidated following property damage claims caused by the failure of a newly installed pipe liner that was intended to rehabilitate sewer pipes in West Hartford, Connecticut. The Metropolitan District Commission hired Ludlow, a Massachusetts company, as the general contractor for a sanitary sewer rehabilitation project. Ludlow subcontracted with Precision, a New York company specializing trenchless rehabilitation of pipes. In less than five months, the liner installed by Precision collapsed, resulting is sewer blockages and backups into area homes.

MDC demanded indemnification from Ludlow, pursuant to the Prime Contract. Ludlow requested indemnification from Precision pursuant to their subcontract. The Project Manual was incorporated into both contracts and provided in part:

“A. To the fullest extent permitted by Laws and Regulations, Contractor [i.e., Ludlow] shall defend, indemnify and hold harmless Owner [i.e., MDC] …from and against all claims, costs, losses and damages… of the Work, This indemnity shall survive the termination or expiration of this Contract and shall cover all matters arising thereunder or in connection therewith, including but not limited to the following:

[B]odily injury, sickness, disease or death or to injury to or destruction of tangible property …. and caused or allegedly caused in whole or in part by any act, omission or negligence of Contractor, any Subcontractor…”

The subcontract, separately, provided: “To the fullest extent permitted by law, the Subcontractor shall indemnify, and hold harmless, and defend the Owner, Contractor, Architect, Architect's consultants, and the agents and employees of any of them from and against all injuries, claims, damages, losses and expenses…resulting from the performance of the Work” for bodily injury and property damage. The subcontractor also agreed to defend the owner and general contractor for all claims arising from the Work.

Ludlow, the general contractor, was insured under a Commercial General Liability Policy issued by Charter Oak and a Commercial Excess Liability (Umbrella) Policy issued by TPCCA—both Travelers subsidiaries. Travelers moved for judgment against Precision, the subcontractor, for failure to indemnify Ludlow for monies paid to MDC and property owners, and for defense costs, following the collapse of the sewer liner. In Connecticut, the general rule is that an insurer's right to subrogation attaches, by operation of law, on paying an insured's loss. Charter Oak paid almost $320,000 following the sewer liner collapse, not nearly exhausting its $2 million liability limit.

The court granted Charter Oak partial summary judgment, finding that pursuant to their Subcontract, Precision owed Ludlow a duty of indemnification against claims, damages, losses, and expenses arising out of or resulting from performance of Precision's Work under the Subcontract, and as a result, Precision owed those duties to Charter Oak as Ludlow’s insurer. The court, however, denied the motion as to damages as premature and denied that TPCCA was owed a duty, as there was no proof it had made any payments.

MDC also sought summary judgment against Ludlow for failure to indemnify. MDC alleged that Ludlow agreed to indemnify it against all losses and damages arising out of Ludlow's performance of “the Work” under the Contract; that the liner installed by Ludlow's subcontractor failed and subjected MDC to damages and expenses, including the cost of remediating affected homeowners’ properties; and that Ludlow failed to respond to MDC's demands for defense and indemnification. MDC argues that it is entitled to summary judgment because the installation of the liner and its subsequent failure are unambiguously covered by “the Work” as it is used in the Contract’s indemnity provision.

In opposition, Ludlow argued that the definition of the Work was ambiguous, that the indemnity provision is unenforceable because it violates section 52-572k(a) of Connecticut General Statutes, which voids any provision in a construction contract that indemnifies a promisee against the promisee's own negligence, and that because MDC never demanded a defense.

Adopting Ludlow’s argument, the court wrote “the Contract contains multiple, differing definitions of “the Work” and that it is unclear to which definition the indemnity provision refers.” However, the court held that there is no need to decide which of three definitions of “the Work” is controlling for purposes of the indemnity provision because the undisputed facts demonstrate that the damages incurred by MDC arise] out of or relate to the performance of the Work, regardless of which definition of “the Work” applies.

The indemnity provision required Ludlow to indemnify MDC for loss “arising out of…the Work.” The court, giving the phrase its usual breadth, concluded that “it is sufficient to show only that the accident or injury was connected with, had its origins in, grew out of, flowed from, or was incident to” the particular event.” While the loss clearly arose out of the Work, the court found that the Contract’s indemnity provision violative of Connecticut law. The purpose of Conn. Gen. Stat. Ann. § 52-572k(a) is to nullify any provision in ‘construction contracts’ which grants immunity to either party for acts of negligence. “Plainly, this provision seeks to indemnify MDC against personal injury or property damage “caused in part by”, inter alia, MDC's own negligence. In so doing, it runs afoul of Section 52-572k(a).”

But did the court throw out the baby with the bathwater? No! “The court does not, however, agree with Ludlow's contention that Section 6.20 is void in its entirety as a result.” First, Section 6.20 is introduced by a savings clause that limits Ludlow's indemnity obligation “[t]o the fullest extent permitted by Laws and Regulations.” Section 6.20. This language weighs in favor of excising only the offending clause of the indemnity provision. Second, and more important, the Contract between MDC and Ludlow contains a severability clause. “Here, severance is possible because, absent the offending clause, Section 6.20 still expressly obligates Ludlow to indemnify MDC against damages “caused or allegedly caused in whole or in part by any act, omission or negligence of Contractor, any Subcontractor…”

Lee S. Siegel
Hurwitz & Fine

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Florida

“Microorganism” Exclusion

Judge Singhal ruled in Map Legacy, Inc. v. Zurich American Ins. Co., No. 20-60815 (S.D. Fla. Sept. 1, 2021) that issues remained as to whether a “microorganism” exclusion applied to the insured’s claim. Nevertheless, the court granted Zurich’s motion to dismiss without prejudice based on the absence of any allegation of “direct physical loss.”

Michael Aylward
Morrison Mahoney
Boston, MA

Property Coverage/ Water Damage Exclusion/ “Act of Nature”

In Dodge v. People’s Trust Insurance Co., 321 So.3d 831 (Fla. Dist. Ct. App. June 2, 2021), the Florida District Court of Appeal ruled that water damage caused by cast iron pipes that had deteriorated under the insured home as the result of rust or corrosion triggered the Limited Water Damage Coverage endorsement which contained a sublimit of $10,000. That endorsement covered water losses that might otherwise be excluded resulting from “human or animal forces or any act of nature.” In affirming the lower court’s decision, the appellate court concluded that the ordinary meaning of the term "act of nature" is “something that naturally occurs” and does not require some sort of “uncontrollable or unpreventable event.” The Court rejected the insured’s argument (based on a prior Circuit Court ruling in Mitchell v. People’s Trust Insurance Co., No. 19000514CA, 2020 WL 863675, at *1 (Fla. 12th Cir. Ct. Jan. 30, 2020)), that the phrase “act of nature” is synonymous with the phrase “act of God,” wherein the circuit judge cited Black’s Law Dictionary to find the two phrases synonymous.

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Illinois

BIPA/ Class Action/ Personal or Advertising Injury

The Supreme Court of Illinois ruled that a business liability insurer had a duty to defend its insured, a tanning salon, against a salon customer’s class action lawsuit alleging violations of the Biometric Information Privacy Act, unjust enrichment, and negligence arising from disclosure of fingerprint information to third-party vendor. West Bend Mutual Insurance Co. v. Krishna Schaumburg Tan, Inc., 2021 IL 125978, --- N.E.3d ---- (Ill. May 20, 2021). The court affirmed the grant of summary judgment to the insured, holding that the underlying complaint alleged a personal or advertising injury as the claim arose from “oral or written publication of material that violates a person's right of privacy.” In so holding, the court concluded that the term “publication” as used in the policy is ambiguous in that it “has at least two definitions,” as it could mean communication of information to the public at large or to a single party.

Direct Physical Loss or Damage – U.S. District Court for the Northern District of Illinois (Illinois Law)

3 Squares, LLC v. The Cincinnati Ins. Co.
No. 20-CV-2690, 2021 WL 4437817 (N.D. Ill. Sept. 23, 2021)
E. Coast Ent. of Durham, LLC v. Houston Cas. Co.
No. 20-CV-6551, 2021 WL 4437818 (N.D. Ill. Sept. 23, 2021)

In two separate actions, the U.S. District Court for the Northern District of Illinois found in favor of the insurers, ruling that the insureds did not show that they were entitled to coverage for their COVID-19 pandemic losses as they could not show they incurred a direct physical loss that would trigger coverage under the respective policies.

The insureds each submitted their claims with their respective insurers that sought coverage for business income losses and other related losses stemming from the pandemic and shut down orders. After each claim was denied, the businesses filed suit seeking coverage under their insurance policies. The insurers in both lawsuits filed dispositive motions, claiming that the insureds failed to demonstrate that they incurred a direct physical loss.

The district court agreed with the insurers, holding that the insureds were required to show a direct physical loss to trigger coverage. In its decision, the district court referenced the U.S. Court of Appeals for the Eighth Circuit opinion of Oral Surgeons, P.C. v. The Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. 2021) (Oral Surgeons). In Oral Surgeons, the appellate court held that an Iowa dental clinic could not recover from its insurer for losses due to government imposed COVID-related restrictions. Applying this decision, the district court found in favor of the insurers, observing that the businesses similarly brought general allegations of economic losses that resulted from the pandemic, and that such losses are not covered by the policies.

The district court reasoned that “[t]he vast majority of courts in Illinois and around the country to have considered the question have concluded that under a plain and ordinary meaning analysis the phrase ‘physical loss or damage to property’ does not extend coverage to purely economic losses caused by COVID-19 related business shutdown orders.” The district court further held that the businesses failed to allege “physical alteration of plaintiffs’ properties,” or that the “virus particles have physically altered their properties.” Thus, the district court granted the insurers’ motion to dismiss in each case.

Michael Hanchett
Plunkett Cooney
Bloomfield Hills, MI

Notice: Evanston Ins. Co. v. OnPoint Cas Solutions, LLC

2021 IL App (1st) 200899-U, 2021 WL 4032874 (Ct. App. Sept. 3, 2021)

The Appellate Court of Illinois, First District, upheld a lower court’s grant of summary judgment to the insureds, finding that the insurer had a duty to defend the insureds in an underlying personal injury case and that the insureds did not breach the policy’s notice provision.

Evanston Insurance Company (Evanston) issued a specified medical professions insurance policy to OnPoint Cas Solutions, LLC (OnPoint) for the policy period beginning Dec. 27, 2017, with a retroactive period dating to Dec. 27, 2012. The policy required Evanston to cover claims made within the policy’s effective period for activities occurring after the retroactive date. The policy did not apply if the insured, prior to the policy’s effective date, had “knowledge of such act, error or omission or any fact, circumstance, situation or incident which may lead a reasonable person in the Insured's position to conclude that a Claim was likely.”

OnPoint and its employee, Patrick Glavin (Glavin), were named as defendants in a suit commenced by Nathan Brinn (Brinn) arising out of a surgery that took place on Oct. 14, 2016. Brinn named the hospital as an original defendant when the suit was first filed, but not OnPoint or Glavin. Nevertheless, OnPoint notified Evanston of the lawsuit on June 7, 2018. Onpoint and Glavin were added as defendants in the amended complaint filed on Oct. 15, 2018. OnPoint sought coverage for Brinn’s lawsuit, but Evanston denied coverage on the basis that OnPoint had knowledge of Brinn’s potential claim before the policy’s effective date.

In the declaratory judgment lawsuit that followed, Evanston and the insureds filed cross-motions for summary judgment. The trial court granted the insureds’ motion, finding that there was no indication prior to the policy’s effective date that OnPoint or Glavin would have any liability for Brinn’s alleged injuries.

The appellate court agreed, finding that “there is nothing to suggest that OnPoint and Mr. Glavin had any reason to conclude that Mr. Brinn was going to file a claim against them until he filed the underlying lawsuit on Oct. 15, 2018. And it is noteworthy that although the initial complaint filed by the Brinns did not name OnPoint and Mr. Glavin, OnPoint notified Evanston of the possibility that it could yet be named.” The appellate court rejected Evanston's argument that Glavin's testimony that, during the surgery, he thought something might have been done incorrectly constituted knowledge of potential liability. The appellate court upheld the finding that Evanston had a duty to defend OnPoint and Glavin in the underlying lawsuit.

Stephanie Brochert
Plunkett Cooney
Bloomfield Hills, MI

09/23/21 Sproull v. State Farm

Supreme Court of Illinois
Affirmance of Illinois Appellate Court Ruling—Homeowner’s Insurance—Policy Is Ambiguous as to ACV Calculation—State Farm May Not Depreciate Labor Costs in Determining the ACV of a Covered Loss

The insured brought a putative class action against State Farm, issuer of the insured’s homeowner’s policy, alleging State Farm improperly depreciated labor costs in determining actual cash value (ACV) of a covered loss, and concealing practice from policyholders. The certified question of “actual cash value” of a covered loss was first ruled on by an Illinois Appellate Court which held that State Farm could not include depreciation of labor in calculating “actual cash value.” The Supreme Court of Illinois held on appeal that in a matter of first impression, when calculating “actual cash value” of covered loss, property structure and materials were subject to a reasonable deduction for depreciation, but depreciation could not be applied to the intangible labor component.

A significant difference between an “ACV” policy and a “RCV” policy is that under a typical ACV policy, an insured is paid only the actual cash value of her/his/its loss. Period. And it doesn’t matter if the insured repairs/replaces the damaged property or not. However, under a typical RCV policy, the insured initially receives an ACV payment - but can also receive full replacement costs if she/he/it makes the repairs/replacement of the damaged property within a designated time.

After analyzing how other courts, both state and federal, have considered and addressed the issue at hand, the Illinois Supreme Court ultimately concluded the following. The insured offered a reasonable interpretation of “actual cash value” and “depreciation.” State Farm also offered a perfectly reasonable interpretation of the policy. Because the Supreme Court of Illinois finds that the policy is ambiguous as to how to calculate ACV, and the insured has offered a reasonable interpretation of it, it found itself constrained and required to construe the ambiguity in the policy against State Farm, and rule that the Illinois Appellate Court had correctly concluded that “[W]here Illinois's insurance regulations provide that the ‘actual cash value’ of an insured, damaged structure is determined as ‘replacement cost of property at time of loss less depreciation, if any,’ and the policy does not itself define actual cash value, only the property structure and materials are subject to a reasonable deduction for depreciation, and depreciation may not be applied to the intangible labor component.”

Notably, a footnote of the Illinois Supreme Court’s opinion indicates that “State Farm acknowledged that it had recently amended its homeowner's policy language in Illinois to explain that all components of replacement cost, including labor, are subject to depreciation in calculating actual cash value. However, State Farm argued that this revision could not be interpreted as an admission that the language in plaintiff's policy was ambiguous.”

Eric T. Boron
Hurwitz & Fine

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Kentucky

Bad Faith/ Mediation Conduct/ Discoverability of Settlement Conduct

In Mosley v. Arch Specialty Insurance Co., 626 S.W.3d 579 (Ky. 2021), the Supreme Court of Kentucky affirmed the lower courts’ summary judgment dismissal of bad faith claims against insurers based on their alleged conduct in mediating a negligence and wrongful death claim stemming from a coal mining accident. The court held that: 1) the exclusion for injury to employees such as the plaintiff’s decedent precluded coverage under the relevant policy; 2) the insurer did not engage in bad faith settlement practices given that the insureds’ alleged liability was not beyond dispute; 3) the insurer’s settlement condition requiring full release of the insureds’ liability was not “leveraging” prohibited by Kentucky’s Unfair Claims Settlement Practices Act; and 4) the insurers’ use of one attorney to represent insurers and insureds at mediation was not outrageous or improper. The court also affirmed the trial court’s denial of the underlying plaintiff’s discovery motions and its decision to stay discovery on bad faith until pending resolution of the underlying wrongful death action. Engaging in a lengthy discussion of the admissibility of settlement conduct in bad faith cases, and guided by the court’s 2006 decision in Knotts v. Zurich Ins. Co., the court held that trial court had properly denied the discovery motion because the evidence the plaintiff sought from insurers would not be probative and thus not “admissible to prove her bad-faith claim.”

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Louisiana

UM Insurance/ Bad Faith

In Baack v. McIntosh, No. 2020-C-01054, --- So.3d --- (La. June 30, 2021) the Supreme Court of Louisiana assessed whether uninsured motorist (“UM”) coverage existed for the injuries of an insured employee and his family members where the insured’s employer failed to submit a written request to revoke its previous UM waiver. The court ruled against the insurer, holding that the “plain language of the UM statute [La. R.S. 22:1295(1)(a)(ii)] dictates that the failure to initial any of the options available on the UM form necessarily results in statutory UM coverage.” As complete compliance with the waiver form was necessary for a valid waiver of UM coverage, the “insured’s intent to waive UM coverage” was irrelevant and could not “cure a defect in the form of the waiver.” However, the court declined to award bad faith damages against Zurich. Where Zurich had relied on “prior appellate jurisprudence” in Louisiana, it had reasonable basis to dispute the insured’s claim for UM coverage.

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Massachusetts

In a case arising under Pennsylvania law, Judge Casper has ruled in Kutest Kids Early Intervention v. Ohio Security Ins. Co., No. 20-11169 (D. Mass. Sept. 20, 2021) that the insured had failed to plead that its premises suffered physical damage and that the policy’s ISO virus exclusion would eliminate coverage anyway, notwithstanding the insured’s regulatory estoppel and reasonable expectations arguments.

Michael Aylward
Morrison Mahoney
Boston, MA

Direct Physical Loss or Damage—U.S. District Court for the District of Massachusetts (Massachusetts Law)

BN Farm LLC d/b/a The Farm Bar and Grille Essex v. The Cincinnati Cas. Co.
No. 1:20-cv-10874-MBB (D. Ma. Sept. 16, 2021)

Ten restaurants (plaintiffs), with operations in Massachusetts and New Hampshire, filed a declaratory judgment action against their insurer, The Cincinnati Casualty Company (Cincinnati), seeking coverage for losses stemming from the COVID-19 pandemic and emergency orders issued by those states. The plaintiffs sought coverage under their Cincinnati commercial property insurance policy (the policy) pursuant to: (1) the building and personal property coverage form, and (2) the business income coverage form. The U.S. District Court for the District of Massachusetts denied the plaintiffs’ motion for summary judgment and ordered entry of a final judgment in favor of Cincinnati.

Under the building and personal property coverage form, the policy pays for “direct loss to Covered Property at the premises caused by or resulting from any Covered Cause of Loss.” The business income coverage form contains similar language. Additionally, both forms include a provision covering “loss” caused by civil authority. The policy defines “loss” to mean “accidental physical loss or accidental physical damage.” The plaintiffs argued that “physical loss” does not require a structural change to the property, and instead the COVID-19 virus caused physical loss because it could not be removed entirely by cleaning and involved a “peril[] which render[ed] the covered property uninhabitable, inaccessible or dangerous to use for the owners and patrons.” Conversely, Cincinnati argued that the plain meaning of “physical loss” or “physical damage,” as incorporated in the business income, the extra expense, and the civil authority coverage provisions, unambiguously requires an actual, tangible structural alteration of property.

The district court noted that the policy did not define either phrase and instead the phrases had to be interpreted based on their plain meaning. After reviewing prior Massachusetts decisions, the district court concluded that the policy language was unambiguous, and “physical loss” or “physical damage” denoted tangible damage to the actual integrity or structure of the property. In other words, intangible losses or “transient phenomena” were not covered under the policy language. Thus, the COVID-19 contamination did not cause the requisite physical loss or damage to the property “because the virus had no physical effect on the property.”

Joshua LaBar
Plunkett Cooney
Bloomfield Hills, MI

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Missouri

Direct Physical Loss or Damage – U.S. District Court for the Western District of Missouri (Missouri Law and Kansas Law)

K.C. Hopps, Ltd. v. Cincinnati Ins. Co., Inc.
--- F. Supp. 3d ---, 2021 WL 4302834 (W.D. Mo. Sept. 21, 2021)

The plaintiff K.C. Hopps Ltd. (Hopps), an owner of bars, restaurants, event spaces, and catering services throughout Kansas City, filed an action against Cincinnati Insurance Company Inc. (Cincinnati), seeking coverage under its all-risk commercial property insurance policy for business losses it sustained during the COVID-19 pandemic.

In deciding on Hopps’ and Cincinnati’s competing motions for summary judgment, the U.S. District Court for the Western District of Missouri initially noted that the parties disputed whether Missouri or Kansas law applied to the interpretation of the policy. The district court ultimately found that it did not need to decide this issue because Missouri and Kansas apply the same insurance principles, and, therefore, the outcome would be the same under either state’s laws.

Next, the district court distinguished the recent decision, Oral Surgeons, P.C. v. The Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. 2021) (Oral Surgeons), recognizing that the U.S. Court of Appeals for the Eighth Circuit did not rule that COVID-19 could never constitute “direct physical loss” or “direct physical damage.” According to the district court, the appellate court in Oral Surgeons merely held that the government mandates due to COVID-19 were not direct accidental physical loss or physical damage. The district court noted that Hopps had submitted evidence supporting its contention that COVID-19 is physical, contaminated its premises, and made its properties unsafe.

More specifically, Hopps presented testimony from a molecular epidemiologist, who opined that it was “more likely than not—indeed, it is highly likely” that the virus was present on Hopps’ properties at the time the government stay-at-home orders were in effect. Hopps’ corporate representative also testified that 50 employees were infected with COVID-19 in the summer of 2020, which further supported Hopps’ position that COVID-19 was present on its properties. Based on this evidence, the district court found that whether the virus caused physical loss or physical damage, and the extent of that damage, was a question of fact for the jury.

Further, the district court rejected Cincinnati’s argument that Hopps did not incur an “actual loss” because Hopps received more in pandemic relief than its claimed damages. The district court reasoned that the purpose of the relief was to “incentivize[] employee retention,” it did not compensate Hopps for its alleged loss of business income.

Finally, the district court ruled that Hopps was not entitled to summary judgment, noting that there was a genuine issue of material fact as to whether COVID-19 was actually present on the properties, whether Hopps’ operations were reduced to remediate the physical loss or physical damage, and whether Hopps actually incurred damages.

Tanya Murray
Plunkett Cooney
Bloomfield Hills, MI

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Nevada

Umbrella Insurance/ UM Coverage/ Disclosure

In Sciarratta v. Foremost Insurance Co., 491 P.3d 7 (Nev. July 8, 2021), the insured was injured while riding on the back of his motorcycle due to the negligence of his brother-in-law, Jonas Stoss, who was driving at the time of the accident. The court concluded that there was no coverage under an umbrella policy, because Stoss was not an insured thereunder and because the policy barred coverage for any damages “payable to an insured.” The insured argued the exclusion was invalid and unenforceable based on NRS 687B.147, which applies to “a policy of motor vehicle insurance covering a passenger car.” The court disagreed, however, holding that umbrella liability policies are not “motor vehicle insurance” under Nevada law. The court also rejected the insured’s argument that the exclusion was unenforceable because he did not receive prior written notice of the exclusion. While the court recognized “that an exclusion that is never disclosed to any insured may be unenforceable,” it concluded “that an insured who asserts such nondisclosure must offer admissible evidence supporting that assertion, such as an affidavit.” The insured failed to present an affidavit or other direct evidence that he had never received a copy of the policy and had no notice of the exclusion.

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New York

09/01/21 Axis Construction Corp. v. Travelers Indemnity Co. of Am. et al.

United States District Court, Southern District of New York
A First-Party Complaint Cannot Limit An Additional Insured’s Coverage When The A Third-Party Complaint Provides a Reasonable Possibility of Coverage to the Additional Insured

Plaintiff Axis Construction Corp. (“Axis”) brought this action against Defendants Travelers Insurance Company of America (“Travelers”) and State National Insurance Company (“SNIC” and with Travelers, “Defendants”) seeking a declaration that each Defendant owes a duty to defend and indemnify Plaintiff on a primary and noncontributory basis in an underlying personal injury action.

On November 30, 2016, Axis became the general contractor of a construction project at 3635 Express Drive North, Islandia, New York (the “Project”). Axis engaged two subcontractors for work on the project: nonparties (i) American Wood Installers (“AWI”) for millwork installation, pursuant to a December 27, 2016, contract relating only to the Project, and (ii) ABC Contracting, Inc. (“ABC”) for flooring installation, pursuant to an evergreen contract entered January 1, 2016. Each subcontract required the subcontractor to procure commercial liability insurance coverage that included Axis as an additional insured on a “primary and noncontributory” basis “for claims caused in whole or in part by the subcontractor’s negligent acts or omissions.” Each subcontract also stated, “The subcontractor shall not be held responsible for conditions caused by other contractors or subcontractors.” AWI obtained commercial general liability insurance from Defendant Travelers, effective from August 8, 2016, to August 8, 2017. The policy’s “Blanket Additional Insured (Contractors)” endorsement makes Axis an additional insured “to the extent that injury or damage is caused by acts or omissions of [AWI] in the performance of [AWI’s] work” pursuant to its subcontract with Axis. Travelers’s policy does not insure Axis “with respect to [Axis or others’] independent acts or omissions.” When any “other insurance” covers Axis for the same loss that Travelers covers Axis, Travelers’s coverage is “primary” if Axis is a named insured in the “other insurance” and “excess” if Axis is an additional insured therein. When Travelers’s insurance is excess, it has “no duty . . . to defend [Axis] against any ‘suit’ if any other insurer has a duty to defend [Axis] against that suit.” ABC obtained commercial general liability insurance from Defendant SNIC, effective January 26, 2016, to January 26, 2017, that named Axis as an additional insured.

On January 19, 2017, nonparty Peter Filippone—an AWI employee—sustained personal injuries after tripping on Masonite sheets (flooring protection) left untaped to the floor of the Project jobsite. He filed a lawsuit on March 20, 2017, in New York State Supreme Court, Suffolk County against Axis, among others and asserted that Axis, ABC, and/or others’ negligence and New York Labor Law violations created the tripping hazard that proximately caused his injuries. On June 5, 2017, Axis tendered its defense to Travelers. Travelers denied the tender on June 28, citing the absence of evidence demonstrating that the loss “arose out of [AWI’s] work” and the absence of “any finding of negligence against” AWI. Travelers in, particular, noted Filippone’s accident involved Masonite flooring, which “was not the responsibility of” AWI. Axis seeks indemnification from AWI, asserting AWI’s negligence and New York Labor Law violations created the hazard and proximately caused Filippone’s injuries. In the instant action Axis moved for summary judgment on Traveler’s duty to defend, and Travelers has cross-moved on the same issue.

The motions concerned Travelers’s duty to defend Axis in two respects: (I) whether the allegations in the Filippone Action give rise to a reasonable possibility of coverage under Travelers’s policy, or whether Travelers has knowledge of facts which potentially bring the Filippone Action within its policy coverage, and, if so, (II) whether Travelers is nevertheless relieved of its duty to defend Axis because such coverage would be excess. Axis’s potential coverage is dependent on the Travelers’s Blanket Additional Insured (Contractors) endorsement. The issue is whether Filippone’s injuries were “caused by the acts or omissions of” Travelers’s named insured, AWI, “in the performance of [AWI’s] work” pursuant to its subcontract with Axis, or, alternatively, whether Axis’s (or others’) “independent acts or omissions” caused the harm. New York courts, and those applying New York law, law interpret this endorsement to trigger coverage where the named insured’s operations are alleged to have proximately caused the bodily injury for which coverage is sought. The court here held that Axis’s verified third-party complaint against AWI asserts AWI’s “carelessness, recklessness, and/or negligence . . . was the proximate cause” of Filippone’s injuries. Axis’s verified Bill of Particulars elaborates the allegations of its third party-complaint: AWI, “by and through [its] agents, servants and/or employees caused and created the situation by placing the loose Masonite flooring panels down without securing them.”

Travelers however contended that Axis’s “self-serving third-party complaint” is insufficient to trigger Travelers’ duty to defend and confines its view of the relevant allegations to those pleaded in the Filippone first-party complaint. The court here held that the underlying complaint should not serve as a basis to narrow an insurer’s duty to defend. As Filippone was statutorily prohibited, under New York law, to name his employer AWI as a negligent party in the underlying complaint the analysis of Traveler’s duty to defend cannot be confined to the underlying first-party complaint.

Charles J. Englert III
Hurwitz & Fine

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Oklahoma

UM Coverage/ Exclusion/ Void as against Public Policy

Ruling on a certified question from the Tenth Circuit, the Oklahoma Supreme Court held, in Lane v. Progressive Northern Insurance Co., 2021 OK 40, --- P.3d --- (Okla. June 29, 2021), that an auto policy exclusion “which operate[d] to deny uninsured motorist coverage to insureds who recover at least the statutorily mandated minimum in the form of liability coverage,” was contrary to the state’s UM statute, 36 O.S. § 3636, and public policy. The court noted that Oklahoma’s UM statute requires insurers to supply UM coverage in addition to standard liability coverage. Further, “[w]here a policyholder has chosen to purchase [UM] coverage and the insurer has included it in the insurance contract in accord with section 3636,” Oklahoma’s “public policy requires protection up to the contracted-for limits.” The UM Exclusion violated “public policy because an insurer in Oklahoma cannot deprive its policyholder of uninsured-motorist coverage for which a premium has been paid through an exclusion that effectively erases its policyholder’s choice to purchase that coverage in the first place.” The exclusion was held to be void as against public policy.

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Oregon

Direct Physical Loss – U.S. District Court for the District of Oregon (Oregon Law)

Nue, LLC v. Oregon Mut. Ins. Co.
No. 3:20-CV-01449-HZ, 2021 WL 4071862 (D. Or. Sept. 4, 2021)
Nari Suda, LLC v. Oregon Mut. Ins. Co.
No. 3:20-CV-01476-HZ, 2021 WL 4067684 (D. Or. Sept. 6, 2021)
North Pacific Management v. Liberty Mut. Fire Ins. Co.
No. 3:20-CV-00404-HZ, 2021 WL 4073278 (D. Or. Sept. 7, 2021)
Hillbro LLC v. Oregon Mut. Ins. Co.
No. 3:20-CV-00382-HZ, 2021 WL 4071864 (D. Or. Sept. 7, 2021)

In four separate actions proposed to be a class action, the U.S. District Court for the District of Oregon found in favor of the insurers, ruling that four business policyholders’ properties did not suffer physical damage from government shutdown orders.

Oregon Mutual Insurance Company and Liberty Mutual Fire Insurance Company issued insurance policies to various restaurants, which filed claims with the insurers for losses resulting from government shutdown orders in response to the COVID-19 pandemic. The pandemic orders initially only allowed for carryout or delivery service, but eventually permitted limited capacity with enhanced cleaning protocols.

The four restaurants initiated proposed class actions after their respective insurers denied their claims for pandemic-related losses. The restaurants claimed coverage under the policies’ civil authority, business interruption and extra expense provisions. The insurers brought motions for summary judgment, arguing that the claims were properly denied as there was no “direct physical loss of or damage to” property to invoke coverage.

The district court agreed with the insurers, holding that each insured had to show that their properties were harmed or destroyed by the pandemic orders in order to obtain coverage. The district court further held that the policies’ failure to define the phrase “direct physical loss or damage” did not require the insurers to cover the losses. Instead, the district court found that the phrase was unambiguous and not broad enough to provide coverage. The district court further ruled that an ordinance or law exclusion in the policies also barred coverage “even if the property has not been damaged.” Therefore, the district court granted each insurer’s motion to dismiss in each individual case.

Michael Hanchett
Plunkett Cooney
Bloomfield Hills, MI

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Pennsylvania

09/10/21 Hilmer v. Esurance Property and Casualty Ins. Co.

United States District Court, E.D. Pennsylvania
A Child's Court Ordered Scheduled Pattern of Visitation at her Father's Household at the Time of the Accident Established her Residency at his Home for Purposes of SUM Coverage

Plaintiff, a sixteen-year-old, lived with her mother in Florida during the school year under a joint custody order requiring her to also live with her father in Pennsylvania on regular breaks and for extended summer weeks. Walking to her high school in Florida, the plaintiff suffered serious injuries. After the underinsured driver's insurer tendered policy limits, the plaintiff sought coverage through her father's SUM policy. The insurer denied coverage arguing it does not cover the student living with her mother in Florida at the time of the accident since she could not be considered a “resident” of her father's household. The plaintiff sued and the parties cross-moved for summary judgment. The issue is whether the parents' detailed joint custody order requiring the plaintiff to stay in her father's Pennsylvania home at scheduled certain and extended times every year, along with other facts evidencing a set obligation to live with her father, is sufficient to find she resided in her father's household and is covered by his auto insurance policy as a matter of law. The court granted the plaintiff summary judgment. The student's court ordered scheduled pattern of visitation at her father's household at the time of the accident established her residency at his home. Regular stays at fixed times of the year established her status as a member of her father's household entitling her to underinsured motorist coverage.

A child of divorced or separated parents may be regarded as a resident of the household of both parents but is not automatically rendered a resident of both her parent's households. Based upon a review of the totality of undisputed facts the court decided they confirm her residency in her father's household. But finding a child is a resident of both parent's households is "less compelling" where the child visits a parent and "occasionally" stays overnight and has not "spent significant amounts of time" at the parent's house. The court did not mandate an "equal division" of time and contrasted the situation where a child divides her time between her parents with a child visiting a parent and "occasionally" staying overnight. A state court judge ordered the plaintiff to stay with her father at certain scheduled times. Her family complied with the terms and spirit of the order. The plaintiff's parents' regular routine and use of their custody agreement as a goal in scheduling their daughter’s time, created substantial contacts between the plaintiff and her father's household despite the physical distance and time spent at her mother's household throughout the school year. The parents' routine visits and collective attempts to parent lead to an expectation of the plaintiff's periodic return to her designated bedroom in her father's household during breaks from school.

Scott D. Storm
Hurwitz & Fine

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Rhode Island

Judge Smith has entered a short text order in Procaccianti Companies Inc., et al. v. Zurich American Ins. Co., No. 20-512 (D.R.I. Sept. 2, 2021), denying Zurich’s motion to dismiss and finding that “Plaintiffs have adequately alleged plausible claims for relief, and thus declines to dismiss them at this early stage. The instant motion is therefore denied. However, resolution of the issues discussed in the papers, including whether the presence of Covid-19 constitutes "direct physical loss of or damage" to property and the effect of the Amendatory Endorsement on the original policy language, may be appropriate on a summary judgment motion following discovery.”

Michael Aylward
Morrison Mahoney
Boston, MA

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Tennessee

A federal district court in Tennessee has ruled in Creative Business, Inc. v. Covington Specialty Ins. Co., No. 20-2452 (W.D. Tenn. Sept. 9, 20/21) that a property insurer was entitled to judgment on the pleadings in light of the absence of any allegation that the insured's property had been physically damaged or destroyed by the presence of the COVID virus. Further, the court ruled that the Pathogen Exclusion in the policy would have precluded coverage since it applied to any loss that occurred directly or indirectly from pathogenic materials. The court also ruled that the restaurant operator was not entitled to Spoilage Coverage since any expired food had not resulted from a Covered Cause of Loss within the scope of this endorsement.

Michael Aylward
Morrison Mahoney
Boston, MA

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Texas

09/15/21 Great American Insurance Company v. Beyond Gravity Media, Inc.

U.S. District Court, Southern District of Texas
Numerous Exclusions Preclude Coverage for Insureds’ Bad Acts

Insured Beyond Gravity, a California company, and its principal, Matalon, entered into a contract with Code Ninjas LLC, a Texas company, which developed a unique curriculum and operated and licensed centers using the curriculum to teach “computer programming, coding, math, logic, and teamwork to children.” Code Ninjas trademarked CODE NINJAS®. The contract permitted the Insured to open franchises using Code Ninjas trademarks and trade secrets.

Subsequently, the Insured sought to avoid the franchise agreement allegedly because Code Ninjas breached California law. Code Ninja’s brought suit against the Insured alleging that it obtained Code Ninjas's confidential and proprietary information while working with Code Ninjas and misappropriated this information as well as Code Ninja’s trademark and/or logo to create and advertise a competing company called “Dojo Tech” or “CoDojo.” Code Ninja’s also alleged that the Insured breached non-compete clauses.

The two companies reached a settlement agreement. Great American filed for a declaration that it did not owe defense or indemnification coverage in regard to this dispute.

The court analyzed the Coverage B offenses of:

f. the use of another's advertising idea in your “advertisement”; or

g. infringing upon another's copyright, trade dress or slogan in your “advertisement.”

1. “Advertisement” was defined to mean a notice that is broadcast or published to the general public or specific marker segments about your goods, products, or services for the purpose of attracting customers or supporters. For the purposes of this definition:

a. notices that are published include material placed on the Internet or on similar electronic means of communication; and

b. regarding web sites, only that part of a web site that is about your good, products or services for the purposes of attracting customers or supporters is considered an advertisement.

Ninja had alleged the use of CODE NINJAS® trademark through a website, social-media pages, and a job listing on Simply Hired. Great American argued that that the misappropriation complained of and the use of them to create a competitor business was not an advertisement even though it was on the Insured’s website and social media pages. As an example, Great American noted that the Insured posted Code Ninjas's privacy policy on its website and argued that the privacy policy had no relationship to advertising because it was not used to promote a product. Great American also alleged that Code Ninjas did not allege an injury arising out of an advertisement.

To the contrary, held the court, Code Ninjas specifically alleged that the Insured attended franchise conferences in order to obtain access to Code Ninjas marketing and advertisement strategies and advertised on the Insured’s website. The court listed numerous reasons why the information obtained by the Insured was used to promote the Insureds new business.

However, held the court, policy exclusions applied. For one, the knowing violation exclusion for “‘[p]ersonal and advertising injury’ 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,” applied to defeat coverage for most of the claims asserted. It further held that the breach of contract exclusion would defeat any claims for breach of the franchise agreement(s), non-compete contracts and the like.

The court next examined the infringement exclusion, which precluded coverage for claims arising out of the infringement of “copyright, patent, trademark, trade secret or other intellectual property rights.” It contained an exception for infringing upon another's copyright, trade dress or slogan in your ‘advertisement. According to the court, the exclusion was inconsistent because it covered “the use of another's advertising idea in your ‘advertisement’” However, the inconsistencies involved infringement of copyright which were not at issue. Thus, court was comfortable with applying the exclusion for trademark infringement as it pertained to allegations that the Insured misappropriated trade secrets and trademark infringement.

The court examined the application of the unauthorized use exclusion which precludes coverage for “[p]ersonal and advertising injury” arising out of the unauthorized use of another's name or product in your e-mail address, domain name or metatag, or any other similar tactics to mislead another's potential customers.” It was clear to the court that the claims involved unauthorized use of Code Ninjas trademark, website advertisements, and the like. Consequently, this exclusion also applied.

The policy also contained a disclosure exclusion as follows:

F. “Access or Disclosure of Confidential Information” Exclusion

“[p]ersonal and advertising injury” arising out of any access to or disclosure of any person's or organization's confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information.

This exclusion also clearly applied.

Ultimately, the court granted summary judgment to Great American declaring that it had no duty to defend or indemnify the Insured based on these various policy exclusions. Query whether they were all necessary to completely defeat coverage.

Diane L. Bucci
Hurwitz & Fine

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