New Opportunities For Finding Liability Insurance Coverage In Business Cases

Article

By Peter S. Selvin

Many lawyers who routinely handle cases involving business disputes fail to consider whether the client’s plain vanilla Commercial General Liability (“CGL”) policy may actually afford coverage in such cases. The key is often found in the CGL policy’s “personal injury” or “advertising injury” coverages that are set forth as part of “Coverage B” in such policies.

Among the typical “offenses” found in Coverage B is the following formulation: An oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.

Importantly, the claims for which there is coverage under Coverage B arise from purposeful and intentional conduct. See, e.g., Harrow Prods., Inc. v. Liberty International Insurance Company, 64 F.3d 1015, 1025 (6th Cir. 1995). Thus, conduct which is commonly alleged in connection with business torts may often fall within one or more coverage “offenses.”

Before exploring the contexts in which courts have applied the concept of disparagement there are several overarching principles that aid the policyholder in seeking coverage.

First, disparagement need not be overt, express or direct to trigger coverage. Thus, several recent cases have found that disparagement may be implied for insurance coverage purposes where, for example, a vendor claims that it was the “only producer” of a certain software product (E.piphany, Inc. vs. St. Paul Fire & Marine Ins. Co., 590 F.Supp.2d 1244 (N.D.Cal. 2008)) or where it claims that its products are “more effective” or “superior” to those made by others (Knoll Pharmaceutical Co. vs. Automobile Ins. Co. of Hartford, 152 F.Supp.2d 1026, 1036 (N.D.Ill. 2001)). Thus, disparagement sufficient for insurance coverage purposes may be found even where the insured’s competitor is not mentioned or identified by name.

Second, the particular causes of action asserted in the plaintiff’s complaint do not control whether coverage will be found. Thus, even where the specific causes of action asserted in a complaint trigger exclusions in a liability policy, coverage may nonetheless be found. The duty to defend may be triggered where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could be fairly amended to state a covered liability. Scottsdale Ins. Co. vs. MV Transp., 36 Cal.4th 643, 654 (2005).

Third, at least in California a liability insurer is obligated to defend all claims asserted against its insured, including claims that are uncovered, where the underlying complaint sets forth at least one claim that is potentially covered. Buss vs. Superior Court, 16 Cal.4th 35 (1977). This means that a carrier may be required to furnish a defense to its insured as to an entire lawsuit even where only one cause of action asserts a claim that is potentially covered. This principle highlights the point that finding coverage for at least one claim may translate into the liability carrier having to defend the entire action.

With these principles in mind, the following cases illustrate several instances in which courts have found coverage for business or commercial cases under CGL policies:

Product Disparagent. The insured under a CGL policy (Charlotte Russe) was the exclusive retailer for a manufacturer of a brand of apparel (Versatile). Versatile sued Russe for marketing Versatile’s products in a manner that denigrated the premium grade and quality of those products. Thus, in its complaint Versatile claimed that Russe had promised to provide the investment and support necessary to promote the sale of Versatile’s products in a premium and high-end manner. Versatile further alleged that Russe had marketed Versatile’s products in a “fire sale” manner and at “close-out” prices. Although the trial court rejected Russe’s claim of coverage under its CGL policy, the Court of Appeal reversed. Travelers Property Casualty Company of America vs. Charlotte Russe Holdings, 207 Cal.App.4th 969 (2012).

Trade dress infringement. Another retailer was sued by its former supplier for trade dress infringement. The former supplier alleged that the retailer had improperly offered for sale “cheap synthetic knock-offs” of the supplier’s wicker furniture products. The supplier alleged damage to its reputation that would be caused when consumers encountered the alleged knock-offs and believed them to be products manufactured by the supplier. In the retailer’s suit against its CGL carrier, the Court found that because the trade dress claim raised the possibility of a disparagement claim, the duty to defend was triggered. Michael Taylor Designs, Inc. vs. Travelers Prop. Cas. Co. of Am., 761 F.Supp.2d 904 (N.D.Cal. 2011). Unfair competition and trademark infringement. A piano manufacturer sued another for holding itself out as the rightful owner of one of plaintiff’s trademarks. The gravamen of the underling complaint was the defendant held itself out to a third-party licensee (Samick) and the world as the rightful owner of a trademark owned by plaintiff. Plaintiff further alleged that defendant was contributorily liable for Samick’s acts of trademark infringement and unfair competition arising out of Samick’s use of plaintiff’s mark. Notwithstanding an express exclusion in defendant’s CGL policy for trademark infringement, the Court held that coverage would be found because the complaint could be amended to state a claim for disparagement. Burgett, Inc. vs. American Zurich Insurance Company, 2011 US Dist LEXIS 135449 (E.D.Cal. 2011)

Misappropriation of Trade Secrets. A company (General Atomics) sued a former employee who started a competing business for misappropriation of trade secrets. The former employee tendered the case to its CGL carrier who declined the tender. While the trial court declined to find coverage, the Court of Appeal reversed. It held that the CGL carrier (St. Paul) could not conclusively eliminate the possibility that the insured’s former employer (General Atomics) suffered harm from the misappropriation and use of its advertising material, an allegation that would trigger coverage under the policy. While General Atomics’ crosscomplaint only alleged that the insured and its new enterprise misused proprietary General Atomics materials, the Court of Appeal noted that it was possible that General Atomics had itself used the same materials to attract the attention of customers or increase its business. Because the use of the same materials by the insured would potentially constitute advertising injury, the Court found the cross-complaint alleged a claim against the insured and its new enterprise might have been covered. The Court of Appeal therefore reversed the trial court’s judgment. Tetra Vue, Inc. v. St. Paul Fire & Marine Ins. Co., 2013 Cal. App. Unpub. LEXIS 5074 (2013).

False Advertising. As noted above, the “offense” of “disparagement” has been found to embrace advertising claims which either expressly or by implication denigrate a competitor. E.piphany, supra, and Knoll Pharmaceutical, supra. These cases therefore support coverage in instances where a business is sued by a competitor for making claims about its products or services that are either not supported or which expressly or by implication disparage those of a competitor. The bottom line is that lawyers involved in business torts cases need to be attentive to opportunities for securing liability insurance for their clients. Indeed, these opportunities grow larger as the law in jurisdictions such as California becomes increasingly policyholder friendly.

Peter S. Selvin is a partner with Los Angeles-based TroyGould, where he specializes in the civil litigation and insurance coverage and recovery. Since 2007 he has been listed in Best Lawyers in America® for both Commercial Litigation and Insurance Law.

April 2014 New York Federal Court Awards Excess Insurer Full Policy Limits in Bad Faith Claim Against Primary Insurer

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By Kevin T. Merriman and William R. Leinen

In a March 31, 2014 decision, the Northern District of New York found a primary insurer liable to an excess insurer for bad faith settlement practices in the defense of its insured in an underlying motor vehicle lawsuit. After a bench trial in Quincy Mutual Fire Insurance Co. v. New York Central Mutual Fire Insurance Co., Civil Action No. 3:12-CV-1041, the Court found that New York Central, as the primary insurer, acted in bad faith and grossly disregarded the interests of Quincy, the excess carrier, by: (1) refusing to increase its settlement offer for almost four years; (2) refusing to tender its policy limits until three weeks before trial where the damages were indisputably in excess of the primary limits several years earlier; and (3) failing to conduct or obtain an analysis and valuation of the underlying litigation’s potential jury verdict value until mere weeks before the scheduled damages-only trial. The Court found that New York Central’s conduct caused it to lose two opportunities to settle the case at times in which liability against its insured was clear and Quincy’s excess exposure would have been none or significantly less than the full amount of its policy limits. Importantly, the Court recognized that Quincy, as the excess insurer, had no duty to undertake a defense in the underlying litigation, and therefore rejected New York Central’s argument that Quincy’s conduct in monitoring the litigation contributed to its damages. As a result, the Court awarded Quincy the full amount of its policy limits in damages, plus prejudgment interest.

Quincy’s bad faith claim against New York Central was based on New York Central’s defense of its insured in an underlying motor vehicle accident case. In November 2000, New York Central’s insured failed to yield the right of way at a stop sign and caused an accident with the underlying plaintiff. At the time of the accident, New York Central provided $500,000 of primary insurance and Quincy provided $1M excess through a homeowner’s policy. When the insured was sued by the underlying plaintiff in October 2001, New York Central accepted coverage and assumed control of the defense. After protracted litigation, both New York Central and Quincy tendered the limits of their policies in September and October 2009, respectively.

Quincy brought suit against New York Central in June 2012, alleging that New York Central’s handling of the underlying litigation was in gross disregard of Quincy’s interests. In particular, Quincy argued New York Central’s conduct amounted to bad faith because New York Central refused to engage in realistic settlement negotiations, even though liability against the insured was established early in the underlying litigation and the plaintiff’s damages far exceeded New York Central’s limits at that time. Quincy argued New York Central squandered several opportunities to settle the underlying litigation for significantly less than the combined policy limits, and by failing to do so, exposed Quincy to additional indemnity.

The Northern District of New York found that New York Central’s conduct amounted to bad faith and grossly disregarded Quincy’s interests. The Court found, based upon the testimony of the underlying plaintiff’s attorney and the insured’s personal attorney, that New York Central’s actions caused it to lose an opportunity to settle the underlying litigation on two distinct occasions in 2005 and 2007. Had New York Central availed itself of these opportunities to settle, reasoned the Court, Quincy would not have been exposed to any indemnity, or would have contributed only $250,000, significantly less than the $1M it ultimately tendered.

The Court next found that when New York Central lost these opportunities to settle the litigation, liability had been firmly established against its insured. The evidence adduced at trial proved that New York Central knew, as early as March 2001 (approximately seven months prior to the commencement of the underlying litigation), that its insured was negligent for failing to yield the right of way at a stop sign. Liability was established as a matter of law in May 2005, when the trial court granted the underlying plaintiff’s motion for summary judgment on liability and serious injury. Although New York Central was advised that an appeal of the decision had little chance of success, it proceeded with an appeal and in August 2006, the appeal was denied. The appellate court found the primary argument on appeal “meritless.”

The Court also found that when New York Central lost its opportunities to settle the underlying litigation, it had knowledge that the plaintiff’s likely damages far exceeded the limits of its policy. In particular, the Court noted that by 2005, when the first opportunity to settle was lost, New York Central was aware that the underlying plaintiff had undergone four surgeries, had not returned to work, was presenting a large lost wage claim and was experiencing PTSD and depression, all as a consequence of the subject accident. Additionally, New York Central was aware that interest, at nine percent per year, had begun to accrue upon the entry of the summary judgment order in May 2005. Moreover, the plaintiff’s expert disclosures, served in January 2007, estimated life care costs in the range of $2.4M – $4.4M. The underlying plaintiff would go on to have two additional surgeries in 2007 and 2008 related to the subject accident, and did not return to work in any capacity during the pendency of the underlying litigation. Thus, according to the Court, in 2005 and 2007, when the underlying litigation could have been settled, New York Central should have known that plaintiff’s damages far exceeded the limits of New York Central’s policy.

The Court also found that in spite of the established liability and high amount of damages, New York Central maintained a settlement offer of only $75,000 from December 2005 through September 2009. This offer, however, was not premised on any valuation or potential jury verdict analysis conducted by New York Central. Instead, the Court found that New York Central did not conduct any such analysis until September 2009. New York Central argued that Quincy’s actions or inactions during New York Central’s control of the defense contributed to Quincy’s damages. In particular,

New York Central argued that Quincy should have settled any potential excess exposure prior to the time New York Central tendered its policy limits. The Court rejected this argument, holding that it was without any legal basis. Although the Court noted that Quincy’s conduct may have had some relevance, it also noted that there is “no legal obligation on an excess carrier in Quincy Mutual’s position to negotiate a claim unless and until primary coverage is exhausted.” Imposing such an obligation, the Court noted, would place an excess insurer in a de facto primary insurer role.

Finally, the Court held that New York Central’s bad faith was further evidenced by the fact that despite tendering its $500,000 policy limit in the underlying litigation, it actually paid only $132,479 after receiving payments from its reinsurance carrier. Thus, the Court noted that during New York Central’s steadfast refusal to offer more than $75,000, New York Central was exposed to an additional $57,479 above that offer, while Quincy was exposed to the full $1M of its excess policy. This, according to the Court, “epitomize[d] bad faith negotiations, suggesting gross disregard for the interests of Quincy Mutual . . . and placing those of New York Central above them.”

March 2014 Excess Insurance and Umbrella Coverage: When Is the Defense Duty Triggered?

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By Diane Polscer

Pure Excess and Umbrella liability insurance are often confused for the same thing, and the terms routinely are used interchangeably.  In fact, umbrella coverage is often just a type of excess insurance that provides coverage different than pure excess insurance. Usually, an umbrella policy may provide pure excess insurance under one coverage form and drop-down umbrella coverage under a separate coverage form.  Under pure excess coverage, a defense obligation may be triggered only when the underlying insurance is exhausted by payment of settlements or judgments.  By contrast, under umbrella coverage,a defense obligation under the latter may be triggered on a primary basis due to gaps in coverage.

This distinction has been addressed by the Washington Court of Appeals in a series of cases.  In Christal v. Farmers Ins. Co. of Washington, 133 Wn. App. 186, 135 P.3d 479 (2006), the Court stated: “whereas excess policies provide coverage over and above that available through an underlying policy, an umbrella policy may provide primary coverage in areas not otherwise covered.” As the Court explained in Diaz v. Nat’l Car Rental Sys., Inc., 143 Wn.2d 57, 64, 17 P.3d 603 (2001),“[t]he name given the policy however is not the controlling factor as to whether the policy is excess, primary or umbrellas.”For the insurer, the difference between a pure excess policy and an umbrella policy can mean the difference between owing a duty to defend the insured and not.  Two recent cases illustrate this distinction.

In a recent decision, the Washington State Court of Appeals confirmed that an excess insurer has no obligation to defend or indemnify until after underlying insurance coverage is exhausted. QuellosGrp. LLC v. Fed.Ins. Co., 312 P.3d 734, 2013 WL 5989370 (Wash. Ct. App. Nov. 12, 2013) (published).TheQuellosdecision involved an insured that purchased several tiers of excess insurance totaling approximately $30 million in excess coverage.  The underlying insurer carried a $10 million policy and paid approximately $5 million of the $10 million to settle certain claims on behalf of the insured, Quellos. Quellos then paid the remaining $5 million out of its own pocket in an attempt to trigger the $30 million in excess tiers.   The Court, however, found that the excess insurance was only triggered by exhaustion of the underlying insurance through payments by the underlying insurer.  The Court relied on the plain language of the excess policies in rejecting the insured’s attempt to self-exhaust the underlying limits. Notably, the Court also rejected the insured’s argument that the exhaustion of the underlying limits was a “condition” of the excess policy for which the insurer must show prejudice, finding that the use of the terms “only after” “reflects the distinguishing characteristic and function of an excess insurance policy” and was not a condition of the policy. Quellos,2013 WL 5989370 at *16.

Conversely, in National Fire & Marine Ins. Co. v. Certain Underwriters at Lloyd’s London, 169 Wn. App. 1016, Not Reported in P.3d (2012), the Washington Court of Appeals held that under an umbrella policy an insurer is required to defend against claims that trigger a gap in underlying policy coverage.  The Court found that an “umbrella policy provided coverage for amounts exceeding the limits of the underlying or primary policy and protects against gaps in that underlying policy” and “umbrella insurers typically agree to provide not only excess coverage on claims within the ambit of the insured’s primary policy, but also primary coverage for those claims not included in the insured’s basic primary coverage.”  The Court deemed this umbrella coverage to apply on a primary basis as “gap-filling” coverage.

As a result, the Court in National Fire held that “when gaps in a primary policy’s coverage trigger the gap-filling provisions in an umbrella policy, Washington courts treat the umbrella policy as a primary policy for purposes of duty to defend and duty to indemnify analysis.”  Thus, an umbrella insurer may have a duty to defend even though there is a primary insurer that has already picked up the defense.  In National Fire,the Court found that the umbrella policy provided gap-filling coverage in at least four different ways:(1) the underlying policy’s “your product” exclusion contained no real estate exception like the umbrella policy;(2) while the underlying policy had a fiduciary exclusion provision, the umbrella policy did not, and the complaint contained allegations of breach of fiduciary duty;(3) the umbrella policy contained no alienated premises exclusion similar to the underlying policy; and (4) the umbrella policy was issued over different years than the primary policy and therefore provided gaps in policy years.

The National Fire Court ultimately determined that the umbrella insurer owed a defense obligation despite the fact that other primary insurers had picked up the defense. The Court also provided some guidance on how to determine whether the policy provides drop down or pure excess defense obligation, stating that, had the umbrella insurer intended to bind itself to defend only if no other insurer had a duty to defend, it should have used that language.  Even though the umbrella policy in National Fire provided a defense only where the underlying policy did not provide “coverage,” the Court observed that “coverage” is different than “defense.”

These two cases highlight an important distinction in pure excess and gap-filling umbrella coverage when it comes to an insurer’s obligation to defend. Thus, it is important to recognize the differences in the policies and not assume that there is no defense obligation simply because there is an excess policy issued, especially in Washington, where a wrongful denial of a defense obligation can have dire consequences, including waiver of coverage defenses and policy limits. Safeco v. Butler, 118 Wn.2d 383, 823 P.2d 499 (1992).The Quellosand National Fire decisions illustrate how important it is to look at the language actually used in the policy in determining what type of coverage is afforded and not simply relying on the name of the policy or general description in the declaration page.

ILIA Member Diane Polscer to be admitted to the United States Supreme Court

Achievements

Diane Polscer, Founding Member and Managing Partner of Gordon & Polscer, LLC, with offices in Portland, Oregon and Seattle, Washington, will be inducted by Group Admission to the Bar of the United States Supreme Court at the Annual International Network of Boutique Law Firms Black Tie dinner October 9-14, 2014. The admission ceremony will be held in the Great Hall of United States Supreme Court and will be hosted by Justice Samuel Alito.

In addition to being a founder of the LCA Insurance Litigation Institute of America, Ms. Polscer serves as the Oregon Chapter President of the International Network of Boutique Law Firms, is a member of the National Association of Minority and Women Owned Law Firms, and a member of the Federation of Defense and Corporate Counsel. Ms. Polscer has been a 5.0 AV Preeminent Rated Lawyer with Martindale-Hubbell for almost 20 years.

Mississippi Fellow Edward J. Currie, Jr. Named Founding Board Member of the American College of Coverage and Extracontractual Counsel

Achievements

Edward J. “Ned” Currie, Jr., a shareholder at Currie Johnson Griffin Gaines & Myers, PA, was selected to be a founding member of the Board of Regents of the American College of Coverage and Extracontractual Counsel. Mr. Currie also serves as Secretary/Treasurer of the newly formed organization, which was created by leading lawyers in the United States and Canada to improve the quality of the practice of insurance law.

The College focuses on the creative, ethical, and efficient adjudication of disputes between policyholders and insurers over insurance coverage as well as extracontractual damages, which are a form of punitive damages awarded against an insurer in claims alleging bad faith or unfair claims-handling practices. Its members represent the interests of both insurers and policyholders.

The College’s mission includes educating all sectors involved in insurance disputes — including the judiciary, legal and insurance professionals, and businesses— on critical topics such as best practices in policy formation and claims handling, developing trends in insurance law, and bad faith. Another important component is the drive to increase civility and professionalism in the field. The College believes improved relations between insurer and policyholder counsel will result in better representation for all clients. It will engage in a wide variety of activities, including seminars and the sharing of scholarship, in order to promote these goals.

“The time seemed right to bring together the finest lawyers from the United States and Canada, who represent some of the best minds practicing in a wide range of legal and insurance disciplines,” said Thomas F. Segalla, president of the College. “While our goals include providing education for the bench and bar as well as the insurance industry, we believe it’s the dialogue among our diverse members that will lead to creative resolutions and improved representation for all parties in a dispute.”

Mr. Currie has practiced law in Jackson, Mississippi for thirty-six years. He is a member of the Board of Directors of the Federation of Defense and Corporate Counsel and was selected 2012 Lawyer of the Year for Insurance Law by Best Lawyers.

Currie, Johnson, Griffin, Gaines and Myers specializes in litigating civil matters for defendants throughout the state of Mississippi. The firm maintains offices in Jackson and Biloxi.

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