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Commercial General Liability Dispatch (Volume 7, Issue 4, April 2016)

Top Stories...

TRESSLER WIN: Illinois Appellate Court Slams Junk Fax Litigation "Charade;" Holds Insurer Owes no Coverage for TCPA Settlement

By: James A. Pinderski, Partner in the Chicago Office and Michael DiSantis, Associate in the Chicago Office

In First Mercury Ins. Co. v. CE Design, Ltd., 2016 IL App (1st) 143924-U (March 30, 2016), an Illinois appellate court held an insurer owed no coverage for a class settlement consisting of TCPA statutory damages falling within a $500 per claim deductible, TCPA treble damages falling within a policy exclusion for punitive or multiple damages and interest on uncovered amounts. The court harshly criticized TCPA class settlements, which it found have "everything to do with compensating the lawyers of the class," and suggested trial courts base class action attorneys’ recovery on the actual amounts paid to class members, not on "disingenuous" estimates of an insured’s actual exposure.

The case arose out of a TCPA class action lawsuit filed by CE Design against Nationwide, which sought coverage under a commercial general liability insurance policy issued by First Mercury Insurance Company (FMIC). FMIC defended Nationwide under a reservation of rights and filed a separate declaratory judgment action. While the declaratory judgment action was pending, CE Design and Nationwide settled the case for more than $4 million ($1,000 per fax plus interest) and Nationwide assigned its rights to CE Design in exchange for a covenant not to execute.

The trial court held FMIC owed no coverage for the settlement based on the FMIC policy’s deductible liability provision and an exclusion that applied to punitive damages, penalties and multiple damages. The appellate court affirmed. Before doing so, the appellate court rejected CE Design’s argument that FMIC committed bad faith by refusing to settle the action. The court noted a claimant must plead a cause of action for bad faith failure to settle, and rejected CE Design’s attempt to pursue this unpled argument at the summary judgment. The court also rejected CE Design’s argument that FMIC was estopped from denying coverage and/or had breached the insurance contract, where FMIC defended its insured fully pursuant to a reservation of rights.

Turning to the coverage issues, the court found the settlement clearly consisted of $500 in TCPA statutory damages for each class member, $500 per fax in TCPA treble damages for each class member and prejudgment interest. While CE Design sought property damage coverage and advertising injury coverage, the FMIC policy provided a $500 "per claim" property damage deductible and a $500 "per claim" advertising injury deductible.

The court rejected CE Design’s argument that the phrase "per claim" was inherently ambiguous or was ambiguous in the context of a class action lawsuit. "Claim" clearly meant "a demand for money or legal remedy by a third party against the insured for damages caused by the insured’s conduct." Moreover, a class action was not one claim, but many claims of many class members.

The court also noted the FMIC policy’s deductible endorsement explained that "per claim" meant a separate deductible applied for "each injured person or organization." Each class member’s right to recovery was a separate claim, a separate deductible applied for each class member and the total deductible was therefore $1,835,500.

The court rejected CE Design’s argument that the settlement potentially triggered both advertising injury and property damage coverage. Based on the underlying factual record, the court concluded that the insured expected or intended the injury resulting from the fax. Noting that the deductible reduced the advertising injury limit and the amount of the deductible ($1,835,500) exceeded the applicable advertising injury limit ($1,000,000), the court held FMIC owed no coverage.

The court concluded that, even if it set aside the issue of the policy’s limits, there would still be no coverage. The FMIC policy included an exclusion for "punitive or exemplary damages, fines or penalties imposed by law, restitution or any damages which are a multiple of, or in addition to, compensatory damages…." The court noted that the Illinois Supreme Court in Standard Mutual Ins. Co. v. Lay suggested that TCPA treble damages were "a punitive measure." The court further found TCPA treble damages (punitive or not) clearly fell within the exclusion in the FMIC policy because they constituted multiple damages. Therefore, the court held the exclusion barred coverage for the $1,835,500 in TCPA treble damages, the deductible applied to the $1,835,500 in TCPA treble damages, and the prejudgment interest was not covered.

While the court did not find it necessary to address FMIC’s argument that the settlement was unreasonable, it noted CE Design "made contradictory arguments, factual assertions that lack record support, and in general fails to provide explanation for why it raises certain points in argument."

The court also expressed concern with the proliferation of TCPA class actions, which are "not about how the insureds face ruinous liability…or compensating members of the class. Rather, they have everything to do with compensating the lawyers of the class." Echoing the same court’s sentiments in Central Mutual Ins. Co. v. Tracy’s Treasures, the court found the attorneys’ calculation of damages (the number of faxes times $500 or $1,500 per fax), was disingenuous because it did not take into account the low response rate from class members, which "can also perhaps be attributed to the method of reaching these class members which is yet another unsolicited fax or mailing which they will in all likelihood disregard as ‘junk.’"

The court described this process as a "charade," directing trial courts to "insist that class attorneys fulfill their obligations to absent class members by going forward with the claims process, with the caveat that allowed claims will only be satisfied from the proceeds of insurance, if and when such proceeds are available." After the claims process, a trial court could then "more realistically address the fee to which class counsel is entitled."

NOTE: James A. Pinderski and Michael DiSantis represented First Mercury Insurance Company in this case.

 

TRESSLER WIN: Florida Court of Appeal Affirms no Coverage for Consumer Claims Over False "Organic" Labels

By: Linda Tai Hoshide and David Simantob, Partners in the Los Angeles Office and Kimberly Sou, Associate in the Los Angeles Office

On April 6, 2016, the Florida Second District Court of Appeal in Vogue International, LLC v. Hartford Casualty Insurance Company, Case No. 2D15-3131, affirmed the trial court’s ruling on summary judgment in favor of Hartford Casualty Insurance Company (Hartford), finding no duty to defend an underlying class action complaint in Golloher, et al. v. Todd Christopher Int’l, Inc. dba Vogue Int’l., Case No. 3:12-cv-06002-RS (N.D. Cal.) (Class Action) under general liability policies (the Policies) that Hartford issued to Todd Christopher International dba Vogue International (TCI).

The Class Action alleged consumer fraud in relation to TCI’s use of the terms "organic" and "Organix" with its hair products. Specifically, the Class Action alleged that TCI’s use of these terms falsely represented the quality of TCI’s hair product as "organic" when the products were allegedly not made of organic ingredients.

Plaintiff Vogue International, LLC dba Vogue International (Vogue), as successor in interest to TCI, argued that the Class Action was covered under the "personal and advertising injury" enumerated offense of "[o]ral, written or electronic publication of material that...disparages a person’s or organization’s goods, products or services" (Disparagement Offense). However, the trial court found that "[c]learly Vogue made no disparaging statement related to the Plaintiffs [i.e., class members] or competitors" who brought the Class Action. As such, the trial court held there were no allegations of "disparagement" sufficient to require coverage under the Policies.

Additionally, the District Court affirmed the trial court’s ruling that the Quality of Goods exclusion, barring coverage for "personal and advertising injury arising out of the failure of goods, products or services to conform with any statement of quality or performance made in your ‘advertisement’ or on ‘your web site’," applied to eliminate coverage of the Class Action. In this case, since the Class Action related to the quality and makeup of the subject Organix products, coverage was barred under the Quality of Goods exclusion.

The District Court’s decision is in line with numerous other jurisdictions that have denied coverage for consumer class action claims under the "personal and advertising injury" enumerated offense for disparagement. The clear and explicit language of the disparagement offense requires a disparaging remark of "a person’s or organization’s goods, products or services." Here, the consumers did not sell the "Organix" products and so no product sold by any member of the class could be disparaged. Rather, the Class Action was a claim for false advertising and/or consumer fraud, which did not and could not fall under the disparagement offense.

NOTE: Tressler attorneys David Simantob, Linda Tai Hoshide, and Kimberly Sou handled this matter on behalf of Hartford in the appellate and trial level of the Florida State Courts with David Simantob presenting oral argument to the Florida Second District Court of Appeal.

 

As the Old Saying Goes, if You Really Want Something, "Get It In Writing": Owner & General Contractor Lose Their Own Coverage as Well as Additional Insured Coverage From Subcontractor's Insurer Because the AI Coverage Was Not Required in Writing

By: Mark R. Vespole, Partner in the New Jersey Office

In Hermitage Ins. Co. v. Skyview & Construction Corp., et al., 137 A. D. 3d 712 (1st Dept. 2016), the New York appellate court again reaffirmed the numerous pitfalls that attend the process of trying to obtain additional insured coverage for construction and renovation projects in New York. This case involves all of the usual suspects, a property owner, a general contractor, a subcontractor and one or more provisions of the ubiquitous New York Labor Law, Section 200 et seq.

The plaintiff was an employee of a framing subcontractor who was injured "outside the premises when a steel metal rolling gate fell on him." Unfortunately, there were no written agreements between or among the parties that required the subcontractor, the plaintiff’s employer, to provide additional insured coverage to the owner and general contractor. This shortcoming had a domino effect on the insurance issues.

First, the commercial general liability (CGL) insurer for the owner and general contractor successfully disclaimed coverage because of an exclusion "for injuries arising from the work of independent contractors or subcontractors on the premises unless the contractors or subcontractors specifically agreed to make [them] additional insureds on their own policies." Without an agreement from the subcontractor to provide additional insured coverage, the disclaimer of coverage by the CGL insurer for the owner and general contractor was upheld. To make matters worse, the general contractor’s policy limited its coverage to specific types of interior work, presumably under some kind of classification limitation endorsement. Because the accident occurred outside, that was another basis for disclaimer.

The subcontractor’s CGL policy, on the other hand, provided additional insured coverage, but only to the extent that the subcontractor agreed in writing to provide additional insured coverage. Again, the absence of a written agreement to provide additional insured coverage precluded the owner and general contractor from obtaining coverage under the subcontractor’s policy. Just for good measure, the court also held, without explanation, that disclaimers by the insurers for late notice were also valid. As a consequence of the court’s decision, both the owner and the general contractor were essentially naked with regard to the plaintiff’s labor law claims.

Tressler Comments

New York continues to be the only state in the country that imposes strict liability, without actual fault, on owners of property for injuries sustained by employees of independent contractors arising out of the various hazards specific to the work the independent contractor was hired to perform. As this case aptly demonstrates, this strict liability scenario is confounded by the sometimes unfathomable obstacles to owners trying to transfer the risk of liability for injuries to workers who are employed by the contractors they hire.

Whether based on the failure to obtain additional insured coverage from a subcontractor, a classification limitation endorsement, or an exclusion for injuries to an employee of any contractor or subcontractor, New York courts almost uniformly uphold disclaimers. It is certainly good news that New York courts interpret policy language in accordance with its plain meaning. At the same time, it is ironic that a state that imposes the singular kind of strict liability without fault on blameless property owners inherent in the labor law, makes it so difficult for owners to transfer the risk of liability for construction-related accidents to the responsible parties.

Amended Pleadings in Underlying Case May Trigger Duty to Defend From Time of Amendment, if Potentially Covered

By: Katherine E. Tammaro, Partner in the New Jersey Office

On previous motions for summary judgment filed by the insured, the Federal District Court for the Southern District of Texas, Houston Division, found that Scottsdale Insurance Company (Scottsdale) had no duty to defend the underlying complaint filed against its insured, Awards Depot, LLC, and denied Awards Depot’s motion for partial summary judgment and motion for reconsideration. Thereafter, Scottsdale filed its own motion for summary judgment on all of the claims asserted by the insured in its lawsuit.

In Awards Depot, LLC v. Scottsdale Ins. Co., No. CV H-15-3201, 2016 WL 1162187, * 2 (S.D. Tex. Mar. 23, 2016), the court reiterated that it had found the claims in the underlying lawsuit based on infringement of Trophy Depot’s trade dress all involve allegations that Awards Depot acted with knowledge that it was violating Trophy Depot’s trade dress rights and that it would inflict personal and advertising injury on Trophy Depot.

As a result, coverage under the policy is excluded by the "Knowing Violation of Rights of Another" exclusion, and Scottsdale does not owe Awards Depot a duty to defend in the underlying lawsuit. The court found that the duty to defend is an essential element of each of the insured’s three claims in its lawsuit, and absent the duty to defend, Scottsdale is entitled to summary judgment.

However, the court agreed that if the underlying complaint, which was still pending, were to be amended, the duty to defend would be determined based on the new pleading and could potentially arise at the time the amended pleading is tendered to Scottsdale for a defense under the policy. The court clarified that its summary judgment ruling in favor of Scottsdale on the duty to defend issue is based only on the "live complaint" at the time of the judgment in this case.

Tressler Comments

When insurance coverage litigation involves an underlying complaint that is subject to amendment, the duty to defend issue presented to the court must be based on the current complaint. A present duty to defend cannot be considered based on any potential amendment to a complaint, only on the pleadings before it. However, should an underlying complaint be amended, it may be resubmitted for a renewed consideration of coverage based on the amended pleadings. Whether or not the amended pleadings trigger a defense obligation will be based on an independent evaluation of the new allegations and the policy at issue. As the District Court correctly noted in Awards Depot, any duty to defend triggered by the amended pleadings will commence with the tender of the amended pleadings, and will not date back to the original underlying complaint.

Pipe Down! Lack of Third-Party Property Damage From Insured’s Allegedly Defective Pipe Fittings Sinks Suit for Coverage and Alleged Bad Faith

By: Katherine K. Liner, Partner in the Orange County Office

The underlying complaint in Sharp Plumbing v. National Fire & Marine Ins. Co. 2016 WL 860415 (March 7, 2016 9th Cir.) sought damages due to leaks, restricted water flow and pipe breakage caused by dezincification of water that flowed through the insured’s plumbing fittings. The insurer denied coverage for class action claims against the insured based on the business risk exclusion and subsequently prevailed on summary judgment.

While the insured agreed that third-party property damage was required to trigger coverage under the general liability insurance policy, the insured claimed that water was "damaged" due to zinc contamination. In reviewing the order granting summary judgment in favor of the insured, the 9th U.S. Circuit Court of Appeals found there were no allegations, or evidence, that the water was somehow "adulterated" as a result of zinc in the water. Further, there were no allegations of damage caused by the leaking pipes. Thus, the ruling by the U.S. District Court in Nevada that the policy unambiguously excluded coverage was affirmed on appeal.

Further, the 9th Circuit rejected the insured’s claims for bad faith and violation of Nevada’s Unfair Claims Practices Act. The court found that the insured failed to comply with statutory "proof of loss" requirements and there was no breach of the duty to settle a claim within policy limits. First, the claim was not covered. Second, the insurer ultimately settled the class action within policy limits. The court noted that the insured could not point to any Nevada law to support a claim for bad faith refusal to settle in the absence of coverage, much less where there is a settlement within limits.

Tressler Comments

Claims involving allegedly defective pipes often result in coverage disputes where evidence, or at least allegations, of third-party property damage are lacking. In this case, an expert affidavit regarding "dezincification" was insufficient to trigger coverage because there was no evidence that zinc passing through the pipes was harmful. Whether coverage is triggered in a particular case can depend on the plaintiff attorney’s skill in pleading facts and damages because of damage to property other than the insured’s allegedly defective work or product.


This newsletter is for general information only and is not intended to provide and should not be relied upon for legal advice in any particular circumstance or fact situation. The reader is advised to consult with an attorney to address any particular circumstance or fact situation. The opinions expressed in this newsletter are those of the author and not necessarily those of Tressler LLP or its clients. This bulletin or some of its content may be considered advertising under the applicable rules of the Supreme Court of Illinois, the courts in New York and those in certain other states. For purposes of compliance with New York State Bar rules, our headquarters are Tressler LLP, 233 S Wacker Drive, 22nd Floor, Chicago, IL 60606, 312.627.4000. Prior results described herein do not guarantee a similar outcome. The information contained in this newsletter may or may not reflect the most current legal developments. The articles are not updated subsequent to their inclusion in the newsletter when published. | Copyright © 2016