Archive for the ‘Fidelity’ Category

For Real: The Second Circuit Says No Coverage for Purveyors of Fake Goods

Thursday, June 9th, 2016

By Timothy D. Kevane, Sedgwick New York

The U.S. Court of Appeals for the Second Circuit recently held that there is no “advertising injury” coverage for claims against insureds caught selling counterfeit goods.  United States Fidelity and Guaranty Co. v. Fendi Adele S.R.L., — F.3d. —, 2016 WL 2865578 (Second Circuit, May 17, 2016).

Claims arising from the sale of counterfeit products, typically fakes of high-end brands, have at times triggered coverage under the advertising injury provisions of a general liability policy, citing provisions that extend coverage for copyright and/or trade dress infringement in the insured’s advertising.  But the scope of this coverage has its limits, and the insured in Fendi pushed the envelope (or the handbag, as it were) too far in this instance.  It sold counterfeit products that displayed Fendi trademarks and otherwise mimicked the appearance of genuine Fendi products.  That did not sit well with the Italian luxury fashion giant, which sued the insured for trademark counterfeiting, false designation of origin, trademark dilution and unfair competition.  The policy’s advertising injury coverage extended to the use of another’s advertising idea in advertising, as well as infringement of another’s copyright, trade dress or slogan “in your advertising.”  Critically, the Court found that the insured did not engage in any advertising of the counterfeit goods nor did Fendi allege any such advertising.  The Court stressed that Fendi was awarded $35 million in damages based on the sales – not advertising – of the fake goods.

The court rejected the insured’s argument that the use of the Fendi mark constituted “advertising,” which the policy defined as attracting the attention of others for the purpose of seeking customers.  Under no reasonable reading of the policy would coverage have been expected for the mere sale of counterfeit goods.  The Court opined that “common sense” draws a difference between using a counterfeit mark on the fake product versus soliciting customers through printed advertisements or other media.  Thus, the insured’s use of the Fendi logo was merely to identify the product, not an advertisement in and of itself.  Furthermore, having profited from the sale of knock-offs, the insured could not have reasonably expected any insurance for the return of its ill-gotten gains pursuant to well-settled New York law prohibiting such coverage.

The case is an important reminder that the courts will enforce a basic requirement for advertising injury coverage – that the infringing conduct must occur in the course of “advertising.”  Thus, the bare allegation of a copyright or trade dress infringement, especially in lawsuits centering on the sale of fake goods, will not suffice to trigger coverage.

California Court: Commercial Crime Policy Rescinded Due To Insured’s Material Misrepresentation Concerning Handling of Funds

Friday, April 18th, 2014

Kurtz v. Liberty Mutual Insurance Co., et al., Case No. 2:11-cv-7010 (C.D.Cal. April 14, 2014), was an insurance coverage dispute arising out of the downfall of Los Angeles businessman Ezri Namvar who has also been referred to as the “Bernie Madoff of Beverly Hills.” The Chapter 7 Bankruptcy Trustee for one of Namvar’s companies, Namco Financial Exchange Corp. (NFE), sued its primary and excess insurers seeking to recover over $35 million in client funds misappropriated from NFE.

The Commercial Crime Policy’s application asked, “Are proceeds from 1031 transactions held in bank accounts segregated from those of your operating funds?” NFE answered “Yes,” to this question, representing that it did in fact segregate its client funds from operating funds. In their motion for summary judgment, the insurers asserted that they were entitled to rescind their respective policies on the ground that NFE’s response to the segregation question constituted a material misrepresentation that the insurers relied upon in issuing the policies.

The insurers’ joint motion cited testimony from NFE’s own employees, as well as NFE’s broker and the underwriters, concerning the segregation requirement. The evidence demonstrated that, instead of segregating client funds, NFE maintained both client funds and operating funds in one comingled bank account. NFE argued that, because it accounted for each client’s funds separately in its internal ledgers, it answered the segregation question honestly. The court disagreed. It rejected the insured’s argument that differences between the policy provisions and the application questions created an ambiguity, and held that the question on the application was unambiguous and subject to only one reasonable construction – i.e. whether NFE maintained client funds and operating funds in segregated bank accounts. Because NFE misrepresented that it segregated operating funds from client funds on the application, and the evidence also established that this misrepresentation was material, the court held that rescission was proper.

The court rejected two additional arguments from the NFE Trustee. First, the court rejected the Trustee’s argument that the insurers were estopped from denying coverage for failure to comply with insurance regulations concerning timely responses to claims. The court held that even if the insurers did violate the regulations (which the insurers denied), estoppel did not apply because the Trustee had failed to present evidence of any reliance on the insurers’ conduct, and the Trustee could not demonstrate any harm as the policy was void ab initio due to the material misrepresentation on the application. Second, the court rejected the Trustee’s claim that the insurers could not raise rescission as a defense for failure to allege it as an affirmative defense or first tender the premiums earlier. The court held that the insurers had properly raised rescission as a defense in their answers, and that under California law an insurer may properly allege rescission as a defense to a suit filed by the insured without first tendering the premiums.

Accordingly the court granted judgment for the insurers. Sedgwick’s Michael R. Davisson, Susan Koehler Sullivan and Ira Steinberg represented one of the defendant insurers.

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