In This Issue:

• Second Circuit: Insurer Must Defend Where Factual Allegations Create a Possibility of Coverage
• Claim Made and Reported During Policy Period – But Failed to Satisfy Notice Provision
• Prior Publication Exclusion Bars Coverage for Trademark Infringement Suit
• Sixth Circuit Rules That “Obsolescence” in Property Does Not Include Depreciation in Market Value

Second Circuit: Insurer Must Defend Where Factual Allegations Create a Possibility of Coverage

Why it matters
In a recent pro-policyholder decision, the Second Circuit, applying New York law, reminded insurance companies that the duty to defend is “exceedingly broad.” An insurance company has the duty to defend even if there is only a possibility of coverage in light of how the underlying complaint against the policyholder has been pleaded. The court explained that under New York law, if there is potential for coverage based on factual allegations in a complaint, the insurer is obligated to defend, even if facts outside the complaint belie coverage, and even if the complaint also sets forth claims that clearly are not covered.

Detailed Discussion
Jada Scali sued her former employer, Euchner-USA, Inc., alleging that she had been sexually harassed and that after she lodged a complaint with the company she was then coerced into accepting a position as an independent contractor, resulting in the loss of various “employee” benefits. Scali later amended her complaint and added causes of action under the Employee Retirement Income Security Act (ERISA). Specifically, Scali alleged that the employer improperly and unlawfully classified her as an independent contractor. As a result, she was deprived of 401k benefits.

Hartford Insurance issued a primary commercial general liability policy and an excess policy to Euchner-USA that excluded coverage for claims involving employment-related practices. Employee benefits liability, however, was covered by an endorsement that provided Hartford would be legally obligated to pay “damages” because of applicable “employee benefits injury.” The policy also excluded coverage for liability arising out of “any dishonest, fraudulent, criminal or malicious act.”

Euchner-USA demanded coverage, which Hartford denied, contending, among other things, that coverage afforded under the policy’s employee benefits endorsement did not apply to Scali as an independent contractor. Hartford also later declined to participate in the settlement of Scali’s claim.

Euchner-USA filed suit against Hartford in the U.S. District Court for the Northern District of New York, seeking reimbursement for its defense fees and indemnification of part of the Scali settlement. The parties cross-moved for summary judgment. The court granted Hartford’s motion finding it had no duty to defend Euchner-USA because its policy excluded the intentional conduct alleged in Scali’s complaint, and granted summary judgment to Hartford.

The Second Circuit vacated and remanded. The court explained that under New York law, an insurer’s defense obligations are “exceedingly broad.” If there is potential for coverage based on factual allegations in a complaint, the insurer is obligated to defend, even if facts outside the complaint belie coverage, and even if the complaint states clearly noncovered claims in addition to potentially covered claims.

The ERISA claims raised a reasonable possibility of negligence on Euchner-USA’s part. It was alleged only that Euchner misclassified her position; it was not alleged whether this misclassification was done intentionally or negligently. The complaint contained allegations that sound of malice, but did not assert that Euchner improperly classified her with the purpose of interfering with her retirement benefits. Because the possibility of coverage was not precluded by the words of the complaint, the district court was reversed and Hartford was held responsible for defense costs.

To read the decision in Euchner-USA v. Hartford Casualty Ins. Co., click here.

Claim Made and Reported During Policy Period – But Failed to Satisfy Notice Provision

Why it matters
Policyholders beware: An intermediate New Jersey appellate court recently rejected a policyholder’s coverage claim based on late - notice even though the claim was made against the policyholder and reported to the insurer during the policy period. Under the director’s and officer’s policy at issue, not only did the claim have to be made and reported during the policy period, but notice had to be provided to the insurer “as soon as practicable.” The court held that a six-month delay by the policyholder in providing notice was not “as soon as practicable.” The court further rejected the policyholder’s argument that the insurer should be required to prove it was prejudiced by the six-month delay. As such, this is a caution to policyholders to give prompt notice.

Detailed Discussion
The period of the claims-made Directors’ & Officers’ liability policy at issue was January 1, 2006, to January 1, 2007. The policy required the policyholder to give written notice of a claim “as soon as practicable” and during the policy period.

A complaint was served on the policyholder on February 21, 2006. The policyholder did not provide written notice of the complaint to its insurer National Union until August 28, 2006, and there was no explanation for the delay.

The New Jersey Appellate Division held that the six-month delay between the policyholder’s receipt of the complaint and the written notice to the insurer was not “as soon as practicable.”

“The policy . . . clearly required that notice be provided both within the policy period and as soon as practicable,” the court explained. “Because the insureds did not meet both of the notice requirements that were unambiguously expressed in the policy, we conclude that coverage was properly denied to the insureds.”

The court also rejected the policyholder’s argument that the insurer should have been required to show that it was prejudiced by the six-month delay. The court held, instead, that because this was a claims-made policy, the “prejudice” standard that applies under “occurrence” coverage has “no application whatsoever” to claims-made coverage. Although this distinction seems to be one without a difference in this context, the court believed it was bound by New Jersey Supreme Court precedent.

To read the opinion in Templo Fuente de Vida Corp. v. National Union Fire Insurance Co., click here.

Prior Publication Exclusion Bars Coverage for Trademark Infringement Suit

Why it matters
The Ninth Circuit Court of Appeals, applying California law, recently held an insurance company may properly deny coverage under a prior publication exclusion if advertisements run during the policy period are substantially similar to advertisements published before the policy period. The insured argued that its allegedly improper ads were sufficiently different from its pre-policy ads so that the prior publication exclusion was inapplicable. The Ninth Circuit disagreed, finding that “a company that began a wrongful course of conduct, obtained insurance coverage, continued its course of conduct, then sought a defense from its insurer when the injured party sued.” Although “a liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity,” the prior publication exclusion, strictly construed, limits that broad duty.

Detailed Discussion
In 2004 the insured, Street Surfing, LLC, began selling a two-wheeled skateboard called the “Wave” to retail stores. The Wave displayed the Street Surfing logo.

Great American provided general liability insurance to Street Surfing from August 2005 to September 2007. The policy covered personal and advertising injury. “Personal and advertising injury” was defined to include the “use of another’s advertising idea in your ‘advertisement.’”

The policy contained several exclusions, including a prior publication exclusion that removed coverage for “‘[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.”

In June 2008 Rhyn Noll, the owner of the registered trademark “Streetsurfer,” sued Street Surfing asserting causes of action for trademark infringement, unfair competition and unfair trade practices under federal and California law.

Street Surfing sought coverage from Great American, which denied the request in reliance on several exclusions, including the prior publication exclusion.

After settling with Noll in 2009, Street Surfing sued Great American, seeking a ruling that the insurer violated its coverage obligations. The parties filed cross-motions for summary judgment. The district court concluded the prior publication exclusion relieved Great American of any duty to defend Street Surfing and entered judgment in Great American’s favor.

On appeal, the Ninth Circuit unanimously agreed, ruling that the prior publication exclusion applied to the Noll complaint. The court reasoned that the advertisements currently at issue were similar to prior advertisements prior to the policy period. The court explained that “if Street Surfing’s post-coverage publications were wrongful, that would be so for the same reason its pre-coverage advertisement was allegedly wrongful: they used Noll’s advertising idea in an advertisement.”

The court found immaterial that some of the subject advertisements used the term “Street Surfing” and others used the term “Street Surfer” – they both were a subordinate version of Noll’s “Streetsurfer” mark/advertising idea. The court also rejected Street Surfing’s argument that Noll’s claim asserted fresh wrongs because different products were advertised before and during the policy period. Again, the advertising idea was the same.

To read the decision in Street Surfing LLC v. Great American E&S Ins. Co., click here.

Sixth Circuit Rules That “Obsolescence” in Property Does Not Include Depreciation in Market Value

Why it matters
The U.S. Court of Appeals for the Sixth Circuit addressed the meaning of the policy term “obsolescence” in the context of determining the “actual cash value” of a fire loss. After surveying use of the term, the court determined that the insurer’s interpretation was inconsistent with common usage and that to extend the meaning as the insured suggested would render it ambiguous such that it would have to be strictly construed against the insurer.

Detailed Discussion
The insured, Whitehouse Condominium Group, owned an office condominium in Flint, Michigan, that was destroyed by a fire. The insurance company that covered the building admitted coverage. The dispute was over the extent of coverage owed.

The policy required the insurance company to pay the insured the “actual cash value,” which was defined as “replacement cost less a deduction that reflects depreciation, age, condition and obsolescence.” The insurance company argued that the undefined term “obsolescence” should be read broadly so as to permit the insurer to reduce its payment to account for a decrease in the property’s market value.

The insured countered that the plain meaning of obsolescence in this context was limited to something inherent to the building itself, not an external factor such as the real estate market.

The Sixth Circuit, affirming the district court, ruled “that the commonly understood use of the term does not account for a decline in market value.” Further, the court stated that even if “the term obsolescence is ambiguous as to whether it includes economic obsolescence, we strictly construe it against Cincinnati.”

“In light of the contract language, the insured would not likely believe, based solely on the term obsolescence, that she was purchasing insurance that included a deduction for declines in market value,” the court concluded. “This result preserves the benefit of the bargain for both parties. As other courts have noted, ‘[i]t can hardly be said that an insured reaps a windfall by obtaining payment of actual cash value determined in a fair and reasonable manner when that is precisely what the insurer has agreed to pay under its policy in advance.’”

To read the decision in Whitehouse Condominium Group v. Cincinnati Insurance Co., click here.