Coverage

Third Circuit Finds Broad Duty To Defend In Trademark Suit (PA)

In Vitamin Energy, LLC v. Evanston Insurance Company, the United States Court of Appeals for The Third Circuit held the defendant insurer had a duty to defend its insured from a trademark suit. It broadly interpreted Pennsylvania law in favor of insureds.

The case stemmed from an underlying lawsuit filed by 5-hour Energy against Vitamin Energy for trademark infringement, among other claims. In addition to other wrongs allegedly committed by Vitamin Energy, 5-hour asserted that Vitamin Energy committed false and misleading advertising about the benefits of 5-hour’s products.

Vitamin Energy sought defense in the suit from its insurer, Evanston. However, Evanston did not provide a defense, claiming that there was no coverage based on an exclusion. Specifically, Evanston argued that the “incorrect description” exclusion barred coverage for any claim arising out of an incorrect description of a product. The court disagreed with Evanston. The court reasoned that an insured’s burden to establish a duty to defend is light, and that Vitamin Energy had carried it. Read liberally in favor of coverage—as is required under Pennsylvania law—there was at least a possibility that the exclusion did not apply to every element of the case. Therefore, Evanston had a duty to defend. Vitamin Energy argued that the policy exclusion Evanston relied on only pertained to incorrect descriptions of its own products—not competitors’ products. The Court found this sufficient to conclude Evanston had a duty to defend.

Thanks to John Lang for his contribution to this post.  Should you have any questions, please feel free to contact Thomas Bracken.

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Art Gallery’s Covid-Related Losses Are Not Covered By Insurance Policy

In 10012 Holdings, Inc., d/b/a Guy Hepner v. Sentinel Insurance Company, LTD., the United States Court of Appeals for the Second Circuit affirmed the District Court’s decision to dismiss plaintiff’s claim for failure to state a proper basis for relief. Guy Hepner, a New York City-based fine arts gallery displaying the works of Andy Warhol, Pablo Picasso, and many others, filed suit against its insurer Sentinel for breach of contract after Sentinel denied coverage under its policy for financial losses suffered by Guy Hepner as a result of government mandated Covid-19 restrictions.

At various times during the current Covid-19 epidemic, New York has suspended the operations of non-essential businesses in an attempt to quell the spread of the Covid-19 virus. Guy Hepner argued that the financial losses it suffered due to closing its doors should be covered under various provisions dealing with property damage. These sections generally provide coverage where the insured’s business is unable to operate due to property damage, and as a result, the insured suffers financial losses. However, the United States District Court for the Second Circuit ruled in favor of Sentinel, stating that because Guy Hepner “alleges only that it lost access to its property as a result of COVID-19 and the governmental shutdown orders, and not that it suspended operations because of physical damages to its property”, Guy Hepner’s losses were not covered by the policy.

This ruling is one of many examples in which the courts have refused to interpret insurance policy sections dealing with businesses losses caused by property damage as also encompassing business losses caused by government shutdown initiatives.

Thanks to Brian Zappala for his contribution to this post. Please contact Heather Aquino with any questions.Read More

Additional Insured Language On A Certificate Of Insurance Held Insufficient To Alter Policy Language & Create A Defense And Indemnification Obligation

In Chipotle Mexican Grill, Inc. v. RLI Ins., 2021 N.Y. Slip Op 06604 (2d Dep’t, November 24, 2021), the New York Appellate Division, Second Department, recently addressed the issue of whether additional insured language in a Certificate of Insurance created a coverage obligation on the part of an insurer. In that case, Chipotle hired Piece Management, Inc. (“PMI”) to perform rodent prevention services at one of its restaurants. PMI provided a Certificate of Insurance naming Chipotle as an additional injured under its policy.

The underlying plaintiff, an employee of PMI, was injured after falling from a ladder while performing the work. Chipotle sought defense and indemnification in the case as an additional insured under PMI’s policy, but the insurer denied coverage. Chipotle filed suit but the trial court held that PMI’s insurer was not obligated to defend and indemnify Chipotle in the underlying lawsuit.

The Second Department affirmed, holding that the insurer was not obligated to defend or indemnify Chipotle since Chipotle was not an additional insured under the PMI policy. Although the court recognized that Chipotle was named an additional insured on the Certificate of Insurance provided by PMI and the policy contained an additional insured endorsement, that endorsement required that the primary insured (PMI) “agreed in writing in a contract or agreement that such person or organization be added as an additional insured” on the policy. Since Chipotle and PMI did not have a written agreement wherein PMI agreed to name Chipotle as an additional insured under PMI’s policy, the additional insured coverage in the policy was not triggered. The court added that the Certificate of Insurance was for informational purposes only, conferred no rights upon the holder, and “did not amend, alter, or extend the coverage afforded by the policy.”

The takeaway from this case is that the understanding of the parties regarding risk transfer must be reduced to writing, particularly if an additional insured endorsement requires that to trigger coverage. PMI probably assumed that it’s insurer would cover Chipotle, but its failure to understand the policy requirements led to significant consequences for Chipotle and its insurers, and the likely loss of business by PMI.

Please e-mail John Diffley with any questions.

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Pennsylvania Federal Court Continues Trend Of Finding No Coverage For Covid-19 Business Interruption Losses

As we have reported, policyholders have largely been unsuccessful in convincing Federal courts to declare that coverage exists for business interruption claims as a result of the COVID-19 pandemic. The United States District Court for the Eastern District of Pennsylvania continued this trend in its recent decision in Delaware Valley Management, LLC, et al. v. Continental Casualty Company.

The plaintiffs in that case owned and operated a group of medical practices and sought coverage under an “all-risk” policy for economic losses suffered as a result of COVID-19 shutdowns. Plaintiffs alleged that they were required to suspend all surgeries and invasive procedures that could be delayed without risk to patient health. Plaintiffs remained in business but were allegedly forced to “considerably limit their business” as a result of the COVID-19 executive orders.

Plaintiffs’ insurance policy included Business Income Coverage and Civil Authority Coverage. In relevant part, the policy provided coverage for all lost income sustained by the insured during a “necessary suspension” of “operations” during the “period of restoration” stemming from a “direct physical loss of or damage to” covered property. The Civil Authority coverage required that an action of civil authority that was caused by “a direct physical loss of or damage to a premises other than the Covered Property”, prohibits the insured’s access to the covered property.

The insurer denied coverage and plaintiffs filed suit for breach of contract and declaratory judgment. The court ultimately granted the insurer’s motion for summary judgment, finding that plaintiffs had suffered no “physical damage to or loss of” their covered property to trigger coverage under the policy. In so holding, the court rejected plaintiffs’ interpretation of “loss” to include a partial loss of use of their facilities. The court also rejected plaintiffs’ argument that public fear of indoor establishments due to the pandemic caused a “physical loss of or damage to” the property to trigger coverage, instead holding that physical loss or damage requires a “distinct, demonstrable, physical alteration of the property” to trigger coverage. The court observed that pure economic losses were intangible and do not constitute property damage.

The court further held that since plaintiffs did not experience a “period of restoration,” the policy did not provide business interruption coverage for the claims. Finally, the court noted that the policy’s Civil Authority coverage requires that a civil action be taken in response to physical loss or physical damage. Since plaintiffs had not alleged such damage to their property or any nearby properties, the Civil Authority coverage did not apply.

The Delaware Valley Management case continues the favorable trend of courts finding no coverage for COVID-related business losses where no physical damage or loss can be shown by a policyholder. This remains an ongoing issue throughout the country and WCM will continue to monitor and report on the developments.

Thank you to Mason Bailey for his contribution to this post. Please contact Andrew Gibbs with any questions.

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Automobile Regular Use Exclusion Hits the Red Light of the Motor Vehicle Financial Responsibility Law (PA)

On October 22, 2021, in Rush v. Erie Insurance Exchange, 2021 Pa.Super 215 (2021), the Pennsylvania Superior Court held that an Erie Insurance Exchange (“Erie”) regular use exclusion was unenforceable because it modified the clear and unambiguous requirements of Pennsylvania’s Motor Vehicle Financial Responsibility Law, 75 Pa.C.S. §§ 1701-99.7 (“MVFRL”), by functionally precluding insureds from accessing uninsured motorist benefits (“UIM”) to which they would otherwise be entitled.

This precedential decision arises from a motor vehicle accident where City of Easton Police Officer Matthew Rush (“Plaintiff”) suffered serious injuries after the police vehicle he was operating was struck by uninsured motorists. The City of Easton maintained UIM coverage through Erie which included a “regular use” exclusion. This exclusion precludes coverage if an insured is injured while using a motor vehicle that the insured regularly uses but does not own. Thus, Erie denied coverage under their “regular use” exclusion because the City of Easton owned the car, not Plaintiff. Plaintiff brought the underlying declaratory judgment action claiming that such exclusions were unenforceable under the the broad scope of the MVFRL which requires UIM coverage in those situations where an insured is injured arising out of “use of a motor vehicle.” 75 Pa.C.S. 1731(c).

On appeal, the Pennsylvania Superior Court affirmed the Northampton County Court of Common Pleas who granted Plaintiff summary judgment. The Superior Court found that this exclusion was unenforceable because it limited the scope of coverage required under the MVFRL. As such, Plaintiff was entitled to summary judgement because it was undisputed that absent the otherwise unenforceable “regular use” exclusion, Plaintiff would have been entitled to coverage.

The Superior Court importantly did not address whether this exclusion expressly violates the MVFRL because Erie had waived the issue on appeal. Rather, as applied, the Rush court held the “regular use” exclusion unenforceable to the extent it conflicts with the MVFRL’s public policy initiatives which mandate UIM coverage for injuries associated with the use of all motor vehicles – not just those an insured owns as required by the “regular use” exclusion.

However, the court indicates their position had Erie raised the novel issue of express violation by pointing to the Pennsylvania Supreme Court’s reasoning in Gallagher v. GEICO Indemn. Co., 201 A.3d 131, 138 n.6 (Pa. 2019) rejecting the same public policy argument proposed by Erie in Rush. The Rush court reiterated:

“[W]e recognize that this decision may disrupt the insurance industry’s current practices; however, we are confident that the industry can and will employ its considerable resources to minimize the impact of our holding.”

Rush, 2021 Pa.Super at 223 n. 5 (2021) citing to Gallagher, 201 A.3d at 138 n.6. In this issue of first impression, the Rush court has essentially opened the door on a novel question of Pennsylvania law concerning whether a regular use exclusion classifies as an express violation of the MVFRL. However, the court’s discussion of Gallagher does not leave a promising for prospect for the success of the insurers. Insurers would be wise to account for this decision with respect to underwriting practices and premium collection for risks the insurer may be forced to cover.

Thanks to Kendal Hutchings for her contribution.  Should you have any questions, please contact Matthew Care.Read More

Claims Of Bad Faith And Vicarious Liability Fall Like Dominoes With Speculative Damages (PA)

In an action brought by the Moses Taylor Foundation (the “Foundation”) in the Middle District of Pennsylvania, it sought to recover damages for an alleged breach of contract by Coverys and its primary insurer (“Coverys”) for failure to negotiate an appropriate settlement in a previous lawsuit. Moses Taylor, additionally, uniquely asserted a claim for bad faith for almost exhausting the available limits of insurance as well as vicarious liability through the breach of contract claim.

In response, Coverys argued the breach of contract claim should be dismissed because the Foundation compiled and pled speculative damages, and therefore, the required predicate cause of action necessary to litigate a claim of bad faith––essential under 42 Pa. Con. Stat. § 8371––could not be established. Specifically, given that the insurance policy limits were not exhausted and there were no pending lawsuits utilizing the same limits, Coverys argued that the claimed damages were too speculative. Likewise, such a failure to establish the necessary cause of action disappeared the Foundation’s vicarious liability claim as well because, given the word’s syntactical underpinnings, “vicarious” implies a predicate cause-of-action.

Under Pennsylvania law, damages are speculative when uncertainty exists concerning the existence of damages, not the amount, and the Court in Moses Taylor held that the possibility of future suits against the Foundation was not concrete enough to fit the law’s corporeal requirement. Therefore, like dominoes, the claims for bad faith and vicarious liability were downed in a fashion that would have made Rube Goldberg smile.

This case represents the importance of attention to detail and provides another arrow in the litigator’s tactical quiver.

Thanks to Richard Dunne for his contribution.  Should you have any questions, please contact Matthew Care.Read More

New York Governor Signs New Law Prohibiting Insurers From Refusing To Issue Or Renew Policies Based Solely On Breed of Dog

On October 30, 2021, New York Governor Kathy Hochul signed Senate Bill 4254, preventing insurance companies from discriminating against homeowners based on the breed of dog they own. The new law provides, “with respect to homeowners’ insurance policies…no insurer shall refuse to issue or renew, cancel, charge or impose an increased premium or rate…based solely upon harboring or owning any dog of a specific breed or mixture of breeds.” The law is scheduled to take effect in January 2022 and will apply to all policies issued, renewed, modified, or altered after the effective date.

The law has received praise from members of the New York legislature and animal rights groups. Assembly member Deborah Glick commented, “For too long, people have been discriminated against by insurance companies based solely on the breed of their companion dog – forcing them to choose between stable housing and their companion animals based on the misguided belief that dog breeds determine behavior, rather than proper training and socialization.”

However, New York law still allows insurance companies to cancel, increase rates, or refuse to issue policies if a dog is declared “dangerous” based on “sound underwriting and actuarial principles reasonably related to actual or anticipated loss experience.”

Navigating these interrelated rules may pose a challenge to insurers. Companies will no longer be able to base underwriting and premium decisions on a particular dog breed and may have to evaluate the specific behavior, history, and training of homeowners’ dogs on a case-by-case basis.  To address an increased risk that may be associated with dog ownership, some insurers have included dog bite exclusions in homeowners’ policies while others offer separate Canine Liability insurance.

New York homeowners’ insurers should consider how the new law impacts their underwriting and risk assessment for homeowners’ policies and the type and extent of coverage provided to dog owners in the future.

Thank you to Alexandra Deplas for her contribution to this post. Please e-mail Andrew Gibbs with any questions.

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Federal Court In Pennsylvania Reaffirms No Coverage Without Direct Physical Loss

Policyholders have largely been unsuccessful in convincing Federal courts to declare that coverage exists for business interruption claims as a result of the COVID-19 Pandemic. Greenwood Racing Inc. operates Parx Casino, a horse racing and casino gaming complex in Bensalem, Pennsylvania and sought a declaratory judgment that would require its insurers to cover losses sustained by Greenwood and Parx as a result of the COVID-19 pandemic. Greenwood and Parx specifically fought federal jurisdiction as they apparently believed they may fare better in State Court. The insurers removed the case to federal court based on diversity, and Greenwood attempted to remand the matter back to state court. The District Court for the Eastern District of Pennsylvania sided with the insurers and held that the case would remain at the federal level.

The Eastern District’s decision was based on three key points. First, the Declaratory Judgment Act provides the federal courts with broad discretion to accept or decline declaratory judgment proceedings like Greenwood’s. Second, there was no “parallel” state proceeding that would see the controversy between Greenwood and the insurers resolved in state court. And third, there was no “novel” issue of Pennsylvania law that would require a state court, rather than a federal court, to decide. The dispute over Greenwood’s financial losses due to the COVID-19 pandemic will proceed in federal court. Insurers should be aware that some plaintiffs may attempt to find warmer waters than those of Federal Court.

Thanks to Jason Laicha for his contribution.  If you have any questions, please contact Matthew Care.Read More

Anchor Down!– First Circuit Court Of Appeals Affirms Insurer’s Rights To A Truthful And Complete Policy Application

Honesty is the best (insurance) policy. In QBE Seguros v. Morales-Vázquez, an insurer petitioned the First Circuit to uphold the doctrine of uberrimae fidei an entrenched principle of maritime law that imposes a duty of “utmost good faith” on the parties to marine insurance contracts.

The defendant, Carlos Morales-Vazquez, found himself on rough seas after he failed to disclose that he had previously grounded a boat when filing an application for an insurance policy to cover his forty-foot Riviera yacht. When Mr. Morales-Vazquez sought a separate insurance policy for his forty-eight-foot Cavileer yacht he disclosed that he had previously grounded a ship under his control eleven years prior, critical information, that he had previously excluded from his first insurance application.

In October of 2014, the Cavileer yacht sustained appreciable damage from a fire. Mr. Morales-Vazquez sought to have the damages covered, and his insurer offered a settlement offer that was declined. Negotiations between the parties continued over the next few months, and Morales rejected several other settlement offers from QBE.

The tides shifted, though, in May of 2015, when QBE became aware of Morales’s 2010 grounding. QBE exercised its right to question Morales under oath, and Morales admitted that he had not disclosed the 2010 grounding — nor had he disclosed (in his application for the Cavileer Policy) the existence of five vessels that he previously had owned and/or operated.

That examination under oath lead to the aforementioned lawsuit, in which the First Circuit examined whether the doctrine of uberrimae fidei was still good law. The Court traced the history of the doctrine from eighteenth century England to present day Puerto Rico. While the legal doctrine was initially developed in the United Kingdom, it was utilized by early Americans and case law regarding uberrimae fidei continued to develop on both sides of the Atlantic in parallel. While it was officially codified in the United Kingdom in 1906, it has never been recognized by Congress in the United States, rather it has been developed and expanded upon by federal case law.

Mr. Morales-Vazquez creatively argued that shifts in United Kingdom admiralty law ought to apply to American courts. However, the Court rejected that argument swiftly, noting that “abandoning the doctrine of uberrimae fidei in marine insurance cases would have rebarbative consequences, both upending settled law and disrupting an industry that has long been premised on insureds telling the whole truth to insurers.”

The First Circuit ultimately held that if Mr. Morales-Vazquez had been honest from the start and disclosed his previous accident to his insurer, recovery for his loss would have been smooth sailing.

Thanks to Patrick Benasillo for his contribution to this post.   Should you have any questions, please feel free to contact Thomas Bracken.Read More

COVID Chaos – New York Court Finds No Coverage for Pandemic Losses

It would be near impossible to encounter someone who has not been affected in some way by the COVID-19 pandemic. The same proves true for insurance companies and courts across the nation have begun to address the issue of insurance coverage for pandemic-related losses. In Visconti Bus Serv., LLC v. Utica Natl. Ins. Group, 2021 NY Slip Op 21027 (Feb. 12, 2021), the New York Supreme Court, Orange County issued such a decision in an action filed by a bus company against its insurer seeking coverage for losses sustained in connection with the COVID-19 pandemic. Due to New York Executive Orders enforced as part of the State’s response to the COVID-19 pandemic, the company’s commercial bus fleet operation ended, and it allegedly suffered damage in the form of lost business income.

The bus company argued that its insurer should cover the loss under the company’s “all risk” commercial property policy, which provided coverage for “direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.” The insurer denied coverage and argued that the premises did not sustain any direct physical loss or damage from a Covered Cause of Loss, and also cited certain policy exclusions, including the “virus” exclusion, and the exclusion for “delay, loss or use or loss of market.”

The court agreed with the insurer and dismissed the Complaint, finding that there was no coverage for business income/extra expense in the absence of “direct physical loss or damage to the insured’s premises,” and that mere loss of use or functionality was insufficient to trigger coverage. The court noted that the bus company admitted that the premises had not been infected with the COVID-19 virus and the company was unable to show any loss of use due to damage to the actual premises as a result of the pandemic. Accordingly, the “all-risk” coverage of the policy was not triggered by the loss of business income stemming from enforcement of the New York State Executive Orders.

The Court also ruled, as New York state and federal courts applying New York law have consistently held, that the language of the policy as it related to “direct physical loss or damage to property” was not ambiguous. It found to the contrary – that the policy unambiguously excluded coverage for the mere loss of use or functionality of the covered premises in the absence of actual, demonstrable physical harm.

The bus company appealed the decision, and the case is currently pending in the Appellate Division, Second Department. The court recently permitted several amicus parties to file briefs in the case.

Caselaw regarding coverage for COVID-related losses continues to develop but the Visconti Bus Serv. decision is favorable to insurers in respect of coverage for business losses where no physical damage or loss can be shown. The appeal should further clarify New York law on this issue as well as coverage for COVID losses.

Thank you to Tristan Montaque for his contribution to this post. Please email Andrew Gibbs with any questions.

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