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.

Business Interruption Insurance: Clearing up the Confusion

September 16th, 2014

By Alex J. Potts, Sedgwick Bermuda

In Eurokey Recycling Ltd v Giles Insurance Brokers Ltd [2014] EWHC 2989 (Comm), the English Commercial Court has confirmed the nature of an insurance broker’s duties to its clients when obtaining Business Interruption Insurance (BII) cover.

This case arose out of a broker’s negligence claim, brought by a waste recycling company that had suffered significant losses following a fire. The court dismissed the claim on the basis that the broker had satisfied its duty of care, and it was the company’s own acts or omissions that had resulted in it being under-insured.

The court summarized the broker’s obligations as follows:

  • A broker is not expected to calculate the BII sum insured or choose an indemnity period (which are matters for the commercial client).
  • A broker must, however, explain to the client the method of calculating the sum insured, technical policy terms such as “estimated gross profits” and “maximum indemnity period,” and relevant considerations when choosing a maximum indemnity period.
  • A broker will need to take reasonable steps to ascertain the nature of the client’s business and its insurance needs, but not necessarily by way of detailed investigation. The nature and scope of a broker’s obligation to assess a commercial client’s BII needs will depend upon the circumstances, including the client’s sophistication, and the number of times the broker has met the client in the past.
  • Although BII is for commercial clients, the level of client sophistication will vary enormously. It cannot be assumed that a small or medium-sized enterprise (an SME) will have any understanding of the nature of BII cover.
  • If a client who appears to be well informed about his business provides a broker with information, the broker is not expected to verify that information unless he has reason to believe that it is not accurate.
  • Having satisfied these obligations, a broker must exercise reasonable care to adhere to express instructions as to the BII cover to be obtained.

Although the outcome of the case turned on its own facts, the legal principles are important to the way in which insurance brokers conduct themselves when placing BII risk in the London market, and they should be of interest to brokers’ professional indemnity insurers.

The court made two observations of relevance to the London market collectively. The court noted that, notwithstanding the contract certainty initiative in the London market, there were certain aspects of standard BII policy wordings, such as the definition of gross profit and the calculation of indemnity periods, which still remained unclear for clients, brokers, loss adjusters, and even some insurers. The court also noted that the insurance industry, unlike other parts of the financial services industry, did not yet have standard procedures in place for the identification and recording of sophisticated clients.

It remains to be seen whether the same standard of care is imposed on brokers in the Bermuda insurance and reinsurance market, given certain differences in market practice in London and Bermuda, and the sophisticated nature of many Bermuda (re)insureds.

New Jersey Court Turns the Screws on the Insured, Holding That “Your Product” Exclusion Bars Coverage For Defective Product Claim

September 11th, 2014

By Julie Kim, Sedgwick New York

In Titanium Industries, Inc. v. Federal Ins. Co., No. A-1922-12T1, 2014 WL 4428324 (N.J. Super. Ct. App. Div. Sept. 10, 2014), the court held that the commercial general liability policy issued by defendant Federal Insurance Company (“Federal”) to Titanium Industries, Inc. (“TII”) did not provide coverage for TII’s claim based on the policy’s “Your Product” exclusion.

TII manufactured and supplied titanium products, and sold titanium bars to Biomet Manufacturing Corp. (“Biomet”), pursuant to the parties’ long-term supply agreement. Biomet, a manufacturer of orthopedic implants and devices, used TII’s product to manufacture screws that were incorporated into its products. Biomet’s screws were composed entirely of TII’s titanium. After Biomet alerted TII to defects in its titanium bars which undermined the strength of the products manufactured using the screws, Biomed recalled certain affected products. TII and Biomed settled Biomed’s claim, and TII sought defense and indemnification from Federal.

On motions for summary judgment, the trial court ruled in favor of Federal on its motion, and against TII on its motion. The Appellate Division affirmed that ruling, relying on prior decisions by New Jersey state courts. The court noted that an insured bears the risk of its own faulty work, which is a matter of warranty and not insurance coverage. The court determined that the policy would not provide coverage for the claimed loss, which was based solely upon the defective titanium supplied by the insured in contravention of the express warranties made in the parties’ long-term supply agreement. The insured’s titanium was fashioned into screws, as contemplated by the parties’ long-term supply agreement, and the titanium was otherwise unaltered and not appended to other property that was damaged. Thus, the court concluded that Biomet’s claims were for TII’s breach of its warranties regarding the intended use of its product, and the risk of replacement or repair of its faulty goods was the cost of doing business, and was not a risk passed on to Federal. The court further noted that even if the claim fell within the policy’s insuring agreement, coverage was precluded by the policy’s “your product” exclusion, which excluded coverage for “property damage to your product arising out of it or any part of it,” where “your product” was defined to include “goods or products . . . manufactured, sold, handled, distributed or disposed by” the insured, and included “representations or warranties made at any time with respect to the durability, fitness, performance, quality or use of” the insured’s titanium.

 

First Circuit Confirms No Fiduciary Breach in Use of a Retained Asset Account

September 10th, 2014

By Erin Cornell, Sedgwick San Francisco

For the second time this summer, the First Circuit Court of Appeals addressed whether an ERISA fiduciary’s use of a retained asset account (“RAA”) to pay death benefits is a breach of fiduciary duty.  In Merrimon v. Unum Life Ins. Co., 758 F.3d 46 (1st Cir. 2014), the First Circuit held that an insurer acting as a plan administrator properly discharges its duties under ERISA when it pays a death benefit through a RAA, provided that the method of payment is set forth in the plan document.  Eight weeks later, in Vander Luitgaren v. Sun Life Assur. Co. of Canada, Case No. 13-2090, 2014 WL 4197947 (1st Cir. Aug. 26, 2014), the First Circuit again addressed an administrator’s use of a RAA to pay death benefits pursuant to the terms of an ERISA plan.  The court found that Vander Luitgaren could be decided on the basis of its opinion in Merrimon, but it wrote separately to address additional issues not present in Merrimon. 

In Vander Luitgaren, the appellant was a beneficiary of an ERISA-governed life insurance plan.  The insurer, Sun Life, paid the beneficiary the full amount of benefits owed, and placed the entirety of the funds ($151,000) into a RAA, which earned interest for the beneficiary at 2% per year.  The beneficiary had the right to withdraw all or any part of the funds at any time, provided that no withdrawal could be for less than $250.  Sun Life would close the RAA if the balance fell below $250, in which event the beneficiary would receive the balance.  Within a matter of days, the beneficiary withdrew the entire $151,000.  Sun Life then closed the account and mailed him a check for $74.48 in interest. 

The beneficiary then sued Sun Life, contending that its use of the RAA breached its fiduciary duties.  The district court granted Sun Life’s motion for summary judgment, and the beneficiary appealed.  Sun Life challenged his statutory standing, an issue not raised in Merrimon, arguing that because he received the full amount of the death benefit when the sum was credited to the RAA, he was no longer entitled to a benefit under the plan and therefore lacked standing to sue under ERISA.  The court declined to decide this issue and instead resolved the dispute on the merits.  Unlike Merrimon, the plan applicable in Vander Luitgaren did not expressly provide that benefits would be paid via a RAA.  Rather, the plan provided, “[t]he Death Benefit may be payable by a method other than a lump sum.  The available methods of payment will be based on the benefit options offered by Sun Life at the time of election.”  Nevertheless, the court found that this was a distinction without a difference – Sun Life did not breach its fiduciary duties because establishment of a RAA was among the payment options offered by Sun Life, the beneficiary had immediate and unrestricted access to the entire death benefit, and ERISA gives plan sponsors considerable latitude to set the terms of a plan.  The First Circuit thus affirmed the district court’s judgment in favor of Sun Life.

 

In California, Looks Really Do Matter: Visual Appearance and Internal Consistency of Policy Language Supports Application of Exclusion

September 5th, 2014

By Kimberly K. Jackanich, Sedgwick San Francisco

In Yu v. Landmark American Ins. Co., 2014 WL 4162365 (Cal. Ct. App. Aug. 22, 2014)*, the California Court of Appeals relied on the visual appearance and internal consistency of an endorsement entitled “EXCLUSION – YOUR PRIOR WORK” to find that the endorsement precluded coverage for construction defect claims asserted against a subcontractor for work performed over a year before the policy’s inception.

Yu, a developer, entered into a contract with a general contractor for the construction of a hotel.  The general contractor then entered into a subcontract with C&A Framing Company (“C&A”), but fired C&A before it had completed all of the work required by the subcontract. After May 2003, C&A never returned to the construction site.

Landmark American Insurance Company (“Landmark”) issued C&A a commercial general liability policy for the period of September 18, 2004 to September 18, 2005.  The policy contained an endorsement entitled “EXCLUSION – YOUR PRIOR WORK,” which provided that the insurance did not apply to bodily injury, property damage, or personal and advertising injury arising out of C&A’s work prior to 9/18/04.

In 2004, the developer sued C&A for alleged construction defects, and C&A tendered its defense to Landmark.  The insurer declined the tender on the basis of the Your Prior Work Exclusion and the Policy requirement that the outset of damage occur during the policy period.  Although C&A did not dispute the declination, the developer brought suit against Landmark and other insurers, alleging that C&A had assigned to her all rights against any insurer.  The developer argued that Landmark could not rely on the prior work exclusion because it was ambiguous and should be construed in favor of coverage.  The developer also argued that Landmark had failed to consider certain facts when denying coverage.  Specifically, the developer argued that the language of the prior work exclusion could be construed to modify the term “property damage,” such that property damage rather than prior work was excluded.

Rejecting the developer’s arguments, the court found that the heading of the endorsement, set out in all caps and boldface type, was prominent, clear, explicit and did not require any technical interpretations.  Finding that the developer’s interpretation was not objectively reasonable, the court also relied on the exclusion for pre-existing damage or injury to conclude that the plaintiff’s interpretation would be “wholly redundant and constitute surplusage” if the prior work exclusion was interpreted to preclude prior property damage.  Based on the clear application of the prior work exclusion, the court also rejected all of the developer’s arguments regarding Landmark’s failure to properly investigate or defend the matter.

The court’s holding in Yu is an important reminder for insurers regarding the visual appearance and internal consistency of their policies.  The court’s reliance on the caps and boldface type as well as the title of the “YOUR PRIOR WORK” exclusion illustrates the significance of carefully crafted and visually clear policy headings.  Further, the court’s secondary support in the policy’s pre-existing damage exclusion reinforces that courts will interpret the policy as a whole.  Thus, when limiting and exclusionary language is internally consistent, insureds will face an uphill battle in their efforts to broadly construe policy language for purposes unintended by the insurers.

 

*The opinion is unpublished

District Courts Reviewing ERISA Cases Under the Arbitrary and Capricious Review Standard Serve Only in an Appellate Role

August 27th, 2014

By Matthew P. Mazzola, Sedgwick New York

In McCorkle v. Metro. Life Ins. Co., 13-30745, 2014 WL 2983360 (5th Cir. 2014), the Fifth Circuit reversed the district court’s holding that MetLife’s adverse determination regarding the plaintiff’s claim for benefits due to the death of her husband (the “decedent”) under his employer’s Accidental Death and Dismemberment Plan (the “Plan”) was arbitrary and capricious. MetLife funded benefits and administered claims under the Plan pursuant to a full grant of discretionary authority. In her motion for summary judgment, the plaintiff challenged MetLife’s finding that the decedent’s death was both not “accidental” and subject to the Plan’s exclusions for self-inflicted injuries and suicide. The district court granted plaintiff summary judgment finding that her explanation of the decedent’s death was “more reasonable” than MetLife’s final determination that his death was the result of suicide.

The Fifth Circuit criticized the district court’s application of the arbitrary and capricious review standard, holding that in reviewing denied claims for benefits under this deferential standard, district courts:

are not sitting, as they usually are, as courts of first impression. Rather, they are serving in an appellate role.  And, their latitude in that capacity is very narrowly restricted by ERISA and its regulations, as interpreted by the courts of appeals and the Supreme Court, including the oft-repeated admonition to affirm the determination of the plan administrator unless it is “arbitrary” or is not supported by at least “substantial evidence”—even if that determination is not supported by a preponderance.

The Fifth Circuit also held that MetLife was only required to base its determination on substantial evidence, which means “more than a scintilla, less than preponderance, and such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.” Based on its review of the plaintiff’s claim under the appropriate standard of review, the Fifth Circuit reversed the district court’s decision finding that MetLife’s determination was, in fact, based on substantial evidence. In addition, the Fifth Circuit held that the district court erred in holding that plaintiff’s explanation of the decedent’s death  was “more reasonable” because this type of analysis improperly “constitutes finding the “‘preponderance,’ which has no place in this ERISA review.” Lastly, the Fifth Circuit held that the district court erred in disregarding MetLife’s deference by improperly substituting its own narrow interpretation of the term “suicide” for MetLife’s reasonable interpretation of that term.

 

You May Have Stolen the Advertising Database, But You Still Have No Advertising Idea

August 21st, 2014

By Daniel Pickett, Sedgwick New York

In Liberty Corporate Capital Ltd. v. Security Safe Outlet, 2014 WL 3973726 (6th Cir. August 15, 2014), the Sixth Circuit Court of Appeals held that where a stolen customer database is used as the basis of an advertising campaign, a claim arising from the misappropriation of that database does not constitute an advertising injury.

The case arose from an action brought by BudsGunShop.com, LLC (“BGS”) against a competitor, Security Safe Outlet, Inc. (“SSO”), and its former employee Matthew Denninghoff. While still a BGS employee, Denninghoff conspired with his sister, who was SSO’s Vice President, to open an internet firearms sales operation for SSO, in competition with BGS.  When Denninghoff left BGS, he secretly took a number of backup copies of BGS’s customer database with him. These were used by SSO to send mass promotional emails to BGS’s Kentucky customers. Although BGS directed SSO to desist in its use of the customer information, SSO refused to do so. BGS then sued SSO.

SSO sought a defense from its insurer, Liberty Corporate Capital Limited (“Liberty”), under a series of commercial general liability policies. SSO argued that coverage for BGS’s misappropriation of trade secrets claim fell within the policies’ adverting injury coverage, because the mass promotional emails were “advertisements,” and BGS’s claim constituted an allegation that SSO improperly used BGS’s “advertising idea” in its advertisements.  Liberty denied coverage arguing that, although the emails may have been “advertisements,” BGS’s misappropriation claim was not covered because BGS did not allege that SSO or Denninghoff used any of its “advertising ideas” in the emails, and the customer database itself was not an “advertising idea.”

The Sixth Circuit agreed with Liberty.  BGS’s allegations regarding misappropriation and use of the customer database did not involve the use of an “advertising idea,”  which was “reasonably understood to encompass a company’s plan, scheme, or design for calling its products or services to the attention of the public.”   BGS had not alleged that SSO used any of its advertising plans, schemes, or designs in the emails, only that customer information was used as a basis for the advertising campaign.

The Sixth Circuit affirmed the district’s court’s holding that Liberty had no duty to defend or indemnify SSO.

Insured Not Justified in Ignoring Claims-Made-and-Reporting Requirements

August 8th, 2014

By Beth Yoffie, Sedgwick Los Angeles

An insured’s attempt to circumvent the claims-made-and-reporting requirements of its professional liabilty policy, by arguing that the doctrine of promissory estoppel applied, was thwarted when a court ordered summary judgment in favor of the insurer on grounds that there was no clear and unambiguous promise by the insurer, and no justifiable reliance by the insured.  Hamman-Miller-Beauchamp-Deeble, Inc. v. Liberty Mutual Agency Corp., United States District Court, C.D. California, No. CV 13-07129-RGK (VBKx) (July 7, 2014).

Plaintiff Hamman-Miller-Beauchamp-Deeble, Inc. (HMBD), an insurance broker, received two letters in 2010 from an attorney claiming that his client had sustained damages as a result of HMBD’s negligence.  The attorney asserted that HMBD improperly advised the client that a health insurance policy it sold her would cover treatment from a non-contracted provider.  HMBD waited until it was served with a lawsuit two years later to provide notice of the claim to its Insurance Professionals Errors and Omissions Liability insurer.  General Insurance Company of America (General) denied coverage on the basis that (1) HMBD was aware of the accusation of negligent services prior to the inception of the policy; and (2) the claim was not both made against and reported by HMBD while the policy was in effect. HMBD sued General for breach of contract, bad faith and promissory estoppel.

In opposing General’s summary judgment motion, HMBD argued that the demand letters did not constitute a “Claim” triggering its duty to report.  The Court disagreed. First, the letter informed HMBD that it was “legally responsible for … damages” and thus contained a demand for damages. It also informed HMBD that the damages were the result of “negligence” and, therefore, alleged a wrongful act arising out of HMBD’s services.  The Court further found that, even if the letters were not “Claims,” the Policy would not provide coverage because HMBD knew of the wrongful act giving rise to the lawsuit and/or had a basis to reasonably anticipate that the lawsuit would be filed before the policy incepted. 

In its promissory estoppel claim, HMBD asserted that, in handling a different HMBD claim in 2008,  General’s claim representative told HMBD’s president that “he probably didn’t have to put General on notice of the Temple matter unless and until a lawsuit was filed.”   The Court found the alleged statement did not constitute a clear and unambiguous promise supporting promissory estoppel.  It also found that HMBD’s reliance on the alleged statement was unjustified as a matter of law when the parties entered a new insurance contract with contrary terms.

Sandy in the Courts

July 29th, 2014

Estimates of insured losses from Superstorm Sandy have approached $30 billion. Since late 2013, the courts have been handling numerous insurance cases arising out of the storm.  In this article, Sedgwick’s Michael Topp and Kara DiBiasio review how the federal court in New York (Eastern District) is coordinating the many cases filed in connection with homeowners’ claims.  They also summarize the written opinions that have been issued to date concerning coverage issues raised by Sandy under commercial policies.  The article is available for download here.

The Insurance Law Blog has been updating readers on key Sandy decisions, and we expect many more substantive cov­erage decisions from the courts through­out this year. Concurrent causation, “Named Storm,” and business interrup­tion issues are likely to be heavily con­tested, and Sedgwick and the Insurance Law Blog will continue to monitor the Sandy-related opinions impacting both homeowners and commercial insurers.

Prior Publication Precludes Coverage for Advertising Injury

July 23rd, 2014

By Daniel Bryer, Sedgwick New York

In Street Surfing, LLC v. Great American E&S Ins. Co., 752 F.3d 853 (9th Cir. 2014), the court held that the prior publication exclusion precluded coverage to Street Surfing, LLC (“Street Surfing”) for an underlying lawsuit alleging Street Surfing improperly used a third party’s advertising idea.

Great American E&S Insurance Company (“Great American”) issued two consecutive general liability policies to Street Surfing covering personal and advertising injury liability.  The policies specifically excluded (i) prior publication, (ii) copyright and trademark infringement (the “IP Exclusion”) and (iii) advertising injury arising out of any actual or alleged infringement of intellectual property rights (the “AI Exclusion”).

In June 2008, Street Surfer was sued by Ryn Noll (“Noll”), who owned the registered trademark “Streetsurfer,” claiming trademark infringement, unfair competition and unfair trade practices under federal and California law.  Street Surfer submitted a claim for coverage to Great American and tendered Noll’s complaint.  Great American denied coverage, citing the IP Exclusion and the AI Exclusion.

Street Surfer brought a declaratory judgment against Great American seeking defense and indemnification for the Noll action.  Affirming the district court, the Ninth Circuit held that the prior publication exclusion relieved Great American of its duty to defend Street Surfing in the Noll action because the extrinsic evidence available to Great American at the time of tender conclusively established: (1) that Street Surfing published at least one advertisement using Noll’s advertising idea before coverage began; and (2) that the new advertisements Street Surfing published during the coverage period were substantially similar to that pre-coverage advertisement.

The policies’ prior publication exclusion exempted from coverage “‘[p]ersonal and advertising injury’ arising out of oral or written publication of material whose first publication took place before the beginning of the policy period.”  The straightforward purpose of this exclusion, the court ruled, was to “bar coverage” when the “wrongful behavior . . . beg[a]n prior to the effective date of the insurance policy.”

In the context of advertising injury coverage, an allegedly wrongful advertisement published before the coverage period triggers application of the prior publication exclusion, barring coverage of injuries arising out of re-publication of that advertisement, or any substantially similar advertisement, during the policy period, because such later publications are part of a single, continuing wrong that began before the insurance policy went into effect.

The test, then, is whether reuse “of substantially the same material” occurred.  In making this determination, the court focused on the relationship between the alleged wrongful acts “manifested by those publications,” holding that a “post-coverage publication is ‘substantially similar’ to a pre-coverage publication if both publications carry out the same alleged wrong.”  Focusing on the alleged wrongful acts fulfills the prior publication exclusion’s purpose of barring coverage when “the wrongful behavior had begun prior to the effective date of the insurance policy.”

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