No CGL Coverage for Faulty Workmanship Under Pennsylvania Law

October 24th, 2014

By Gilbert Lee, Sedgwick New York

In State Farm Fire & Casualty Co. v. McDermott, 2014 WL 5285335 (E.D. Pa. Oct. 15, 2014), a federal court recently held that an insurer has no duty to defend or indemnify its insured against an underlying construction defect lawsuit containing causes of action sounding in negligence under a commercial general liability (“CGL”) policy affording coverage for property damage caused by an “occurrence.”  Upon considering the substance of the underlying lawsuit, the court concluded that under Pennsylvania law faulty workmanship is not an “occurrence” (defined to mean an accidental or unforeseeable event) that is covered under a CGL policy and, therefore, granted the insurer’s summary judgment motion.

In McDermott, the insured contracted with a homebuilder to provide plaster, stucco and window and door installation services for nearly three hundred homes built in Pennsylvania.  The insured was later named in a negligence and breach of contract lawsuit by the builder, alleging a variety of defective construction practices that purportedly resulted in water intrusion and corresponding home damages.  The insurer agreed to defend the insured subject to a reservation of its rights to disclaim coverage under the terms of the CGL policy prior to commencing a declaratory action challenging coverage.  

Relying on Pennsylvania case law, the court determined at the outset that faulty workmanship, and any resulting damages, is not an “accident” (as it is neither unexpected nor unintentional) and therefore not an occurrence under a CGL policy.  Thus, the issue of whether coverage was triggered under the policy hinged on the possibility that liability might rest on the insured’s alleged negligent work performance.  In reaching its decision, the court looked beyond the negligence allegations to conclude that, regardless of how it was framed, the substance of the insured’s potential liability stemmed from its alleged failure to meet contractual expectations.  Because the insured had a contractual duty to perform its tasks in a satisfactory manner, its alleged failure to do so was neither an accident nor an unforeseeable event covered under a CGL policy because the insured was bound to avoid that particular outcome.

Just the Fax: Illinois Appellate Court Concerned That TCPA Settlement Between Insured and Class Action Plaintiffs May Be Collusive

October 16th, 2014

By Michael J. McNaughton, Sedgwick Chicago

An all too familiar scenario: an insurer believes there is no coverage for a claim, but has a duty to defend its insured. In these situations, an insurer often pays for the insured’s independently-selected defense counsel and seeks declaratory judgment regarding coverage. But after the insurer surrenders control of the defense, it may also surrender the right to control a subsequent settlement. What happens if the insured seeks coverage for the settlement, but the insurer considers it unreasonable?

The Illinois Appellate Court recently addressed this scenario in Central Mutual Ins. Co. v. Tracy’s Treasures, Inc., 2014 IL App (1st Dist.) 123339 (September 2014). The Court considered whether coverage existed for the Idlas Telephone Consumer Protection Act (“TCPA”) class action settlement, and if the insurer could challenge the reasonableness of the settlement negotiated by the insured’s independent counsel.

In Idlas, Tracy’s Treasures, Inc. allegedly advertized its business services through unsolicited fax advertisements to a class of plaintiffs in violation of the TCPA. Central Mutual insured Tracy’s Treasures through primary and excess liability policies which contained $14 million in available limits. Central Mutual declined coverage in Idlas but provided the insured a “courtesy” defense. Central Mutual also filed a timely declaratory judgment against the insured seeking a determination of coverage. The insured obtained its own independent counsel in Idlas in light of the conflict with Central Mutual. Central Mutual consented to the substitution of counsel and agreed to pay a reasonable fee for his services.

The insured’s independent counsel did not disclose to Central Mutual that he had started settlement negotiations in Idlas a month before identifying himself to the insurer. Shortly thereafter, the insured filed a motion for preliminary approval of a settlement agreement in Idlas on behalf of the class, and participated in the subsequent fairness hearing. The insured’s counsel did not notify Central Mutual of these events. In the proposed Idlas settlement, the insured agreed to pay $14 million, collectible only against Central Mutual. Although the Idlas complaint defined the putative class to include persons who allegedly received unsolicited faxes from March 5, 2003 through March 5, 2007, the proposed settlement defined the class for the period from September 1, 2002 through July 22, 2003. Although no class members prior to July 22, 2003 came forward, the revised class definition triggered an additional $5 million excess policy issued by Central Mutual. Only 5,561 putative class members – roughly 4% of the total class – received the class settlement notice.

The circuit court approved the $14 million Idlas settlement. Plaintiff’s counsel would receive one-third of the amount collected from Central Mutual, plus costs. Each class member who submitted a claim would receive a pro rata share of the collected amount, not to exceed $500 pursuant to the TCPA. The plaintiff (and only class representative) would receive $9,500, nineteen times more than the potential recovery of every other class member. Unclaimed funds would be given to charitable organizations approved by the Court.

On Central Mutual’s motion for summary judgment in the coverage action, the court held amounts awarded to claimants under the TCPA were punitive in nature and not insurable as a matter of public policy based on the precedent set in Standard Mutual Ins. Co. v. Lay, 2012 IL App (4th) 110527. The insured appealed when Lay was subsequently reversed by the Illinois Supreme Court, which held sums recovered by TCPA claimants were liquidated rather than punitive damages.

Central Mutual raised the following issues on appeal to the Court: (1) although it conceded the applicability of the Illinois Supreme Court’s reversal in Lay, liquidated damages were not covered as a matter of law under its policies; (2) there was no coverage for the Idlas settlement because Central Mutual and the insured had already carved out personal and advertising injury from the relevant policies as part of a settlement for a prior TCPA lawsuit against the insured; and (3) the $14 million settlement was collusive and unreasonable as a matter of law.

The Court ruled in favor of the insured on the first two issues. First, it held the insurer should have included policy language that excluded sums for statutory penalties if it had wanted to avoid coverage for liquidated damages. Next, the Court noted that the confidential carve-out agreement between Central Mutual and the insured was not included as part of the appellate record. Even if available, the Court could not determine as a matter of law that the amount paid by Central Mutual was adequate consideration for the carve-out of personal and advertising injury coverage in its policies. The Court remanded for further consideration.

The primary focus of the Central Mutual decision was the issue of whether the Idlas settlement was collusive and unreasonable. The Court first addressed whether Central Mutual could challenge the settlement. Because Central Mutual “surrendered control of the defense,” the Court determined it also surrendered the right to rely on policy provisions which required its consent to settle. The Court indicated, however, that Central Mutual could still challenge the Idlas settlement because it had filed a declaratory judgment against the insured to preserve its coverage positions and provided a defense by paying reasonable fees for the insured’s independent counsel. Moreover, the Court recognized Central Mutual had been denied the opportunity to be heard on the reasonableness of the Idlas settlement. Although the Court could not hold the settlement collusive and unreasonable as a matter of law, it agreed with the trial court that the facts and circumstances regarding the settlement were “very troubling.” It remanded for further findings on whether the insured’s decision to settle and the settlement amount were both reasonable. The Court also provided guidance on the standard of reasonableness.

To determine if the insured’s decision to settle was reasonable, the trial court must examine the totality of the circumstances and whether the decision conformed to the standards of a prudent uninsured. The Court indicated that the trial court should consider whether a prudent uninsured would have: (1) foregone the opportunity to litigate potential defenses in light of the potential cost and chance of success; (2) sought contribution or indemnification from third-parties; (3) agreed to settle on terms which allowed unclaimed funds to be donated to charity; and (4) considered whether it truly faced “staggering” liability in Idlas from a “practical perspective” in light of the limited number of people notified of the class action and the trial court’s discretion to fashion a class action reward deterring future violations without destroying the insured’s business.

To determine if the amount of the settlement was reasonable, the trial court must examine what a reasonably prudent person in the position of the insured would have settled for on the merits of Idlas’ claim. The Court also stated this test was guided by a “commonsense consideration of the total facts bearing on liability and damage aspects of the plaintiff’s claim.” The Court stated the trial court should consider many of the same factors in its analysis to determine whether the Idlas settlement was reasonable, and further consider: (1) whether the settlement was the product of arm’s length negotiations; (2) what facts were available to the insured’s independent counsel which allowed him, in relatively short time, to value the Idlas claims at over $60 million with only a single class representative; (3) how the parties arrived at a $14 million settlement figure; and (4) any evidence showing there was bad faith, collusion or fraud.

An important takeaway from Central Mutual is to be mindful that the independent counsel’s sole obligation is to the insured. In its arguments, Central Mutual criticized the insured’s independent counsel for misrepresenting plans regarding the defense and settlement of Idlas. Although the Court recognized the insured’s counsel had attempted to “short circuit” Central Mutual’s ability to learn of or challenge the settlement, it also affirmed independent counsel had no duty to the insurer. Accordingly, an insurer should consider retaining monitoring counsel to protect its own interests after providing independent counsel for the insured.

Click here for additional posts on TCPA coverage actions.

New California Law Sets the Stage for Insurance Regulation of Uber, Lyft

October 8th, 2014

By Kara DiBiasio, Sedgwick San Francisco

The emergence and success of ridesharing companies has sparked questions and debates over the gaps in insurance coverage created when private drivers offer commercial driving services.  Ridesharing companies – such as Lyft, Uber, and Sidecar – allow private drivers to login to a mobile app and pick up passengers for a fee.  This innovative structure has changed the driver-for-hire climate in cities across America, including uncertainty about who will pay when one of these drivers gets into an accident.

Most personal automobile liability policies contain exclusions for commercial driving services, so anytime a driver is available for hire or driving a passenger, they likely are not covered by their personal auto policy.  Although a ridesharing company must provide commercial liability coverage, the overlap between the driver’s policy and the commercial coverage is often murky.  Seeking to clarify these potential gaps in coverage, the California Legislature passed AB 2293, which Governor Jerry Brown recently signed into law. 

The law has two primary effects on regulation of ridesharing companies.  First, it imposes disclosure requirements on the company.  Second, it sets minimum insurance coverage requirements for all ridesharing companies operating in California. 

For the disclosure requirements, each ridesharing company is required to disclose in writing to each driver the commercial coverage and limits of liability the company provides while the driver has the app enabled.  Drivers will also have to carry proof of the company’s commercial liability coverage when they have the mobile app enabled. 

The law also sets out insurance coverage requirements for each phase of the driver’s potential liability: when the driver is using the vehicle, but the app is not enabled; when the app is enabled, but the driver is not carrying a passenger; and when the driver is carrying a passenger.  During the first phase, the driver is just an ordinary private driver on the road; the law does not set any requirements for this phase.  During the second phase, the company must provide primary coverage for death and personal injury, as well as property damage.  In addition, the company must provide excess coverage of at least $200,000 to cover any liability of the company or the driver while the app is enabled.  After the driver picks up a passenger, the law requires the company to have primary coverage of at least $1 million for death, personal injury and property damage, as well as an additional $1 million in uninsured and underinsured motorist coverage.

The law also requires the commercial liability insurer to defend and indemnify any liability claim arising out of an accident, either while the app is enabled or while the driver is carrying a passenger.  The driver’s personal auto policy is neither primary nor excess coverage while the app is on or while the driver has a passenger, unless the policy expressly states that it affords such coverage.

Most of the provisions of the new law will take effect July 1, 2015.  Pennsylvania has begun working on similar regulations for ridesharing companies, and other states will likely follow suit in the near future.  Insurers should work with coverage counsel to make sure they are ready with policies that conform to these new regulatory requirements, in advance of the laws taking effect.

Cannonball! CGL Policy Does Not Cover Pool Contractor for Subcontractor’s Negligence

October 7th, 2014

By Jeffrey Dillon, Sedgwick New York

In Standard Contractors, Inc. v. National Trust Ins. Co., Civil Action No.:7:14-cv-66-HL, the U.S. District Court for the Middle District of Georgia recently granted a commercial general liability insurer’s motion to dismiss a contractor’s coverage action on the ground that the policy’s “Contractors Errors and Omissions” coverage applied only to property damage to the contractors’ work arising from the contractor’s own negligence, not that of its subcontractor.

The contractor sought coverage for the costs it incurred to repair damage to a pool facility it was hired to renovate. The contractor alleged that the damage to the pool and surrounding areas arose from the faulty workmanship of its subcontractor, which allegedly deviated from the design plan by failing to include essential parts and installing an improperly sized component.

In relevant part, the subject policy’s Contractors Errors and Omissions coverage applied to “property damage” to the contractor’s work “due to faulty workmanship, material or design….”  However, in order for coverage to apply, the damages must have resulted from the contractor’s negligent act, error or omission while acting in its “business capacity as a contractor or subcontractor.”  The policy specifically exempted from this coverage “[a]ny liability for ‘property damage’ to ‘your work’ if the damaged work or the work of which the damages arises was performed on your behalf by a subcontractor.”

The court ruled that the exemption prohibited the contractor’s claim for coverage, which the court found to arise solely from the negligent work of its subcontractor.  The court rejected the contractor’s argument that an exception to a policy exclusion, which appeared to extend coverage to damages arising out of work performed on the contractor’s behalf by a subcontractor, demonstrated that coverage attached.  The court found that the more specific and limited language of the coverage grant prevailed over the more broadly inclusive language of the exception to the policy exclusion.

 

 

Is it a Car or A Street Legal Robot: Insurance Issues for Autonomous Vehicles

October 6th, 2014

In mid-September, Mercedes-Benz became the latest car company to get a license to test self-driving vehicles in California.  Earlier in the month, GM announced that they will offer a hands-free Cadillac with new cruise control technology to adjust speed, braking and steering.  Since 2005, Google has been test-driving their autonomous vehicles (AVs) on public roads, and last summer unveiled the first test prototype for a vehicle with no steering wheel or brake pedal.     

These autonomous or self-driving vehicles will pose new challenges for the insurance industry, as will the semi-autonomous vehicles that already are entering the market.  Hilary Rowen addressed some of the issues in an article entitled, “Expect tort potholes for self-driving cars,” published in the San Francisco Daily Journal on September 26.  The article can be downloaded here.

Lost Cargo is Dead Weight: Insurer Avoids Coverage Due to Breach of “Deadweight Warranty” in Marine Policy

October 3rd, 2014

By Alex J. Potts, Sedgwick Bermuda

In Hua Tyan Development Ltd v Zurich Insurance Co Ltd [2014] HKCFA 72, the Hong Kong Court of Final Appeal dismissed a marine insurance claim on grounds of breach of warranty by an insured.

The parties entered into an insurance contract with respect to a shipment of a cargo of logs from Malaysia to the People’s Republic of China.   The contract contained a clause warranting the vessels’ deadweight capacity to be no less than 10,000 tons (the “Deadweight Warranty”).

In mid-January 2008, the vessel sank and the cargo was lost.  The insurers rejected the insured’s claim in connection with the loss on the basis that the Deadweight Warranty had been breached, as the vessel only had a deadweight capacity of about 8,960 tons.

The court held that insurers are entitled to rely on the Deadweight Warranty, despite the insured’s various arguments based on estoppel, waiver and rectification. The court found no inconsistency in the insurance contract with respect to the identification of the vessel by name and the existence of the Deadweight Warranty.

The judgment provides considerable certainty and clarification to insurers operating in the Hong Kong marine insurance market, to the effect that insurance contracts will be enforced in accordance with their terms. Although a Hong Kong court decision, the judgment should be of interest to London and Bermuda insurers and P&I clubs for a number of reasons:

  1. Hong Kong’s Marine Insurance Ordinance of 1961 largely follows the UK’s Marine Insurance Act 1906, which was in turn a codification of the common law. As in England and Bermuda, breach of a marine insurance warranty discharges an insurer’s liability automatically as of the date of breach.
  2. This is a topical area of law which is the subject of review, and likely statutory reform, in the UK.
  3. The dismissal of the appeal means that the insured’s brokers have been found liable to indemnify the insured with respect to the vessel’s insured value. The precise circumstances giving rise to the broker’s liability were not fully explored in the judgment; however, the case demonstrates the liabilities that brokers face in practice, when cover is successfully denied by insurers.

British Columbia Supreme Court: Property Policy’s Pollution Exclusion Not Subject to Proximate Cause Analysis

September 29th, 2014

By Timothy Kevane, Sedgwick New York

An insured’s argument to broadly apply an exception to a pollution exclusion was recently rejected by the British Columbia Supreme Court in Whitworth Holdings Ltd. v. AXA Pacific Insurance Co., 2014 CarswellBC 2648, 2014 BCSC 1696 (Sept. 9, 2014).  There, the court was called on to resolve the application of the exclusion to a sequence of events involving excluded pollution and a non-excluded fire peril.

The insured’s commercial building was damaged in a fire.  As a result of the fire, chemicals escaped from one of the tenants’ fertilizer, herbicide and pesticide wholesale operation, causing pollution damage.  The building was insured by an all-risk property insurance policy.  Among other things, the policy excluded coverage for damage or expense arising from the clean-up due to any release of pollutants, but exempted any loss to the property “caused directly by an insured peril … not otherwise excluded elsewhere in the Policy.”  The insurer argued that the exception ensures coverage exists for fire damage, but not for clean-up of pollutants contaminating property not damaged by fire.  In that case, the cause of the damage was the escape of the pollutants, not the fire.

The insured argued that the exception requires a proximate cause analysis.  According to the insured, the “proximate cause” of the pollution damage was an insured peril, the fire.  That is, but for the fire, the pollutants would not have escaped.  In the insured’s view, any other interpretation would render the exception in the exclusion meaningless, as physical loss caused by fire is already covered regardless of the exception.

The court, however, agreed that the language of the exception – particularly the word “direct” – does not call for a proximate cause analysis.  Relying on the British Columbia Court of Appeal’s reasoning that “direct” describes “an event lead[ing] straight or immediately to its consequence,” the court concluded that the fire and the chemical spill were two distinct events, just as the Court of Appeal found two distinct events in a prior case involving damage to pipes by freezing and damage from the discharge of water.  Neither could be described as a semantic or specious distinction. The court thus adopted the insurer’s interpretation, rejecting the notion that it creates any redundancy in the policy.  To illustrate, the court imagined a reversal of the facts, in which an escape of pollutants subsequently caused fire damage.  The exclusion would bar coverage for the fire damage, thus necessitating the exception to reinstate coverage for the covered fire damage.  Accordingly, the court upheld the application of the exclusion to bar coverage for the pollution damage where it was not directly caused by the fire.

Please click here for a description of Sedgwick’s Canada Insurance practice.  The lawyers in the group are watching coverage decisions and news from Canada for publication on the Insurance Law Blog.

Eastern District of Pennsylvania Finds No “Link” to Bad Faith in Excess Carrier’s Conduct Towards Sausage Company Insured

September 25th, 2014

by Alice Ye, Sedgwick Chicago

This month, the Eastern District of Pennsylvania held that excess carrier American Guarantee and Liability Insurance Company (“American Guarantee”) did not engage in bad faith conduct towards insured Maglio Fresh Foods (“Maglio”), a sausage company. Charter Oak Ins. Co. v. Maglio Fresh Foods, Case Civil No. 12-3967, 2012 WL 4434715 (E.D. Pa. Sept. 9, 2014).

Maglio filed cross-claims against American Guarantee for statutory bad faith under 42 P.S.A. § 8371 and breach of the implied covenant of good faith and fair dealing. The claims were based on American Guarantee’s refusal to post a supersedeas bond for Maglio so that Maglio could appeal an adverse judgment entered in the underlying action. Maglio argued that, as the primary carrier had already tendered its policy limits to the court, the primary limits were exhausted and American Guarantee’s duty to defend, including the duty to post the appellate bond, was triggered. In contrast, American Guarantee argued that, under the terms of its “follow form” policy, it had no duty to defend until the primary carrier exhausted its limits through payment for a covered claim. American Guarantee argued that only one out of the two claims in the underlying action was covered (the “Forte brand claim”). American Guarantee previously disclaimed coverage for the other claim (the “Maglio brand claim”). As the value of the covered Forte brand claim was less than the primary policy limit, the primary carrier’s payment of that claim did not exhaust the policy. American Guarantee further contended that the primary carrier’s payment of an additional $440,000 into the court was a “voluntary payment” that did not exhaust the primary policy.

The court found in favor of American Guarantee, holding that “Maglio has failed to prove, by the applicable standard of proof, clear and convincing evidence, that American Guarantee is liable for statutory bad faith, because the evidence does not show any conduct that meets the Pennsylvania legal standard for statutory bad faith, and certainly no conduct that would warrant punitive damages, under Pennsylvania law.” The court further held that its “analysis of the common law bad faith claim, arising out of the contractual relationship … leads to the same conclusion.”

With respect to its disclaimer of coverage, the court held that “Maglio has not brought forth evidence that American Guarantee’s conduct lacked a reasonable basis.” Rather, American Guarantee’s “vigilance” (including (1) conducting a reasonable investigation, (2) justifiably relying on the primary carrier’s denial of coverage of the Maglio brand claim and the primary carrier’s commitment to continue to defend the claim, and (3) hiring coverage counsel to monitor the underlying action), coupled with the primary carrier’s continued defense of Maglio, relieved American Guarantee of having to take any action in the defense. Moreover, the court held that, even if American Guarantee incorrectly evaluated coverage for the Maglio brand claim, “the evidence fails to show that American Guarantee did so out of self-interest or ill will.” The court found that, “[a]bsent such a showing, Maglio’s bad faith claim falls short.”

The court also determined that, as the verdict for the covered Forte brand claim was only $660,000, it did not exhaust the primary policy limits, and thus concluded that the primary insurer’s payment “did not trigger American Guarantee’s duty to defend, and therefore, its duty to post an appellate bond.” As a result, “American Guarantee did not act in bad faith by refusing to post such bond.”

Nebraska Appellate Court Gets Down to Earth to Hold That Faulty Workmanship Standing Alone Is Not An “Occurrence”

September 24th, 2014

By Michael J. McNaughton, Sedgwick Chicago

The insurance and construction industries have disagreed about coverage claims involving faulty workmanship for many years.  Contractors believe their CGL insurance policies should always cover property damage caused by defects and poor workmanship, and insurance carriers resist insuring business risks that are solely within a contractors’ control.  As previously reported on Sedgwick’s Insurance Blog, jurisdictions are split on whether faulty construction work, by itself, qualifies as an “occurrence” within the meaning of CGL policies.

The Nebraska Court of Appeals recently addressed that issue in Cizek Homes, Inc. v. Columbia National Insurance Co. (Case No. A-13-585) (Sept. 9, 2014).  In that case, the insured agreed to build a home for a homeowner.  The insured sold the homeowner a parcel lot, prepared the soil on the lot, and built the home.  After the homeowner moved in, the soil beneath the house settled and caused physical damage to the residence. The homeowner and the insured reached a settlement, and the insured sought coverage from its CGL insurer.  The insurer denied coverage on the grounds that:  (1) the damages did not arise from an “occurrence” as defined in the CGL policy; and (2) even if they did, the policy’s “Impaired Property” and “Recall” exclusions precluded coverage.

The insured filed a declaratory judgment action against the insurer and prevailed on summary judgment. Specifically, although the evidence revealed that the only “property damage” was to the home itself (which was the insured’s work), the trial court nevertheless concluded the damage was the result of an “occurrence” — i.e., the insured’s negligent preparation of the soil for construction.  The Court of Appeals reversed, concluding that the damage to the house did not qualify as an “occurrence” within the policy because the damage to the home was caused by the insured’s faulty workmanship.  To support its decision, the Court of Appeals cited to Auto-Owners Ins. Co. v. Home Pride Cos., 684 N.W.2d 571 (Neb. 2004), in which the Nebraska Supreme Court held that CGL policies do not provide coverage for faulty workmanship “that damages only the resulting work product.”  Because it held there was no initial grant of coverage, the court did not address whether the “Impaired Property” or “Recall” exclusions applied to the insured’s claim.

Insurance carriers did not design CGL policies to provide coverage for claims of inferior or defective work.  Accordingly, the Cizek court correctly recognized that damages which are the natural or probable result of work conducted by the insured are not fortuitous, and therefore outside the scope of the insuring agreement. In situations where courts determine there is an occurrence, however, carriers can still look to “business risk” exclusions such as the “Impaired Property” or “Recall” exclusions as potential defenses to coverage.  Carriers also need to be mindful that the occurrence question in construction defect coverage actions can be jurisdiction-specific.

TCPA Exclusion Upheld: No Ambiguity, No Duty to Defend or Indemnify for a $10 Million Judgment

September 23rd, 2014

By Stephanie Sauvé and Carol Gerner, Sedgwick Chicago

In James River Insurance Company v. Med Waste Management LLC, et al., Case No. 1:13-cv-23608-KMM, (U.S. Dist. S. D. Fla., September 22, 2014), the U.S. District Court for the Southern District of Florida upheld a Telephone Consumer Protection Act (“TCPA”) exclusion in a commercial general liability policy (“CGL”)  when it determined that there was no duty to defend or indemnify an insured for a $10 million judgment arising out of the settlement of an underlying class action lawsuit (the “underlying lawsuit”).  Because the result would be the same under both Florida and New York law, the court concluded there was a “false conflict” regarding the interpretation of the policy and the exclusions in the case. 

 James River Insurance Company’s (“James River”) insured, Med Waste Management LLC (“Med Waste”), had contracted with another company to send a large number of unsolicited faxes advertising its services.  The recipient of one of the unsolicited fax advertisements filed a two-count complaint against Med Waste:  Count I alleged violations of  the TCPA and Count II alleged a claim for conversion.  The parties in the underlying lawsuit entered into a settlement agreement; a settlement class was certified and a judgment of $10 million was entered against Med Waste.

After receiving notice of the underlying lawsuit from Med Waste, James River denied coverage explaining that the TCPA claims and the conversion claims in the underlying lawsuit were excluded from coverage.  The CGL policy issued by James River provided coverage for “Bodily Injury and Property Damage” and “Personal and Advertising Injury Liability” but precluded coverage for “Property Damage” and “Personal and Advertising Liability” arising directly or indirectly out of any action or omission that violates or is alleged to violate the TCPA (“TCPA Exclusion”).  The policy also precluded coverage for any claim arising out of the conversion, or misappropriation, of others’ funds or property (“Conversion Exclusion”).

After James River denied coverage, it subsequently filed the declaratory judgment action seeking a ruling that it owed no duty to defend or indemnify Med Waste, as the policy’s TCPA Exclusion and Conversion Exclusion precluded coverage.  James River and Med Waste filed cross-motions for summary judgment.

After foregoing a choice of law analysis and finding no conflict between New York law and Florida law (Med Waste is a New York Company and the policy was issued in New York; the declaratory judgment action was filed in the Southern District of Florida), the court ruled that the TCPA Exclusion unambiguously excluded coverage for both the TCPA claims and the conversion claims and, therefore, James River owed no duty to defend or indemnify Med Waste for the $10 million judgment under New York law or Florida law.  The court found that, “[t]here is nothing ambiguous about the TCPA exclusion.” The court also found that, even if the conversion claims were not excluded from coverage by the TCPA Exclusion, they would be excluded under the “unambiguous” Conversion Exclusion. 

Click here for additional Insurance Law Blog articles related to insurance coverage for violations of the TCPA.

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