C L A I M D E N I E D January 2006 A publication of the Lowenstein - - PDF document

C L A I M

D E N I E D

January 2006

A publication of the Lowenstein Sandler Insurance Law Practice Group

H

istorically, patent infringement is not an offense covered by standard advertising injury provisions. However, as the Western District of Washington held recently in Amazon.com v. Atlantic Mutual Insurance Company, 2:05-cv-00719- RSM (W .D. Wash. July 21, 2005), patent infringement may constitute advertising injury when the advertising technique itself is patented. The three underlying lawsuits at issue in Amazon.com alleged patent infringement based on the insured’s use of patented technology for electronic catalog systems, customized electronic identification, and virtual shopping carts on its website. The policies in effect at the time defined “advertisement” as “a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers

• r supporters.” The insurer refused to

defend the claims, arguing that there was no causal connection between the patent infringements and the insured’s advertising activities. The Court disagreed, finding that the insured’s website was itself advertising because it existed for the purpose of promoting products for sale to the

• public. The insured’s use of patented

technology on its website was therefore misappropriation of advertising ideas as defined in the policies, and it was the insured’s advertising activities which caused the injuries alleged by the patent holders. Because the patent holders’ complaints alleged facts sufficient to trigger the policies, the Court held that the insurer had a duty to defend the claims. The insurance industry has been cutting back on advertising injury coverage for several years, both by defining advertising more narrowly and by including specific website and Internet restrictions. Therefore, many policies no longer have the broad language at issue in Amazon .com. Some insurers have gone even farther, adding partial or

This document is published by Lowenstein Sandler PC to keep clients informed about current issues. It is intended to provide general information only.

A L D

Patent Infringement as Advertising Injury: Amazon.com v. Atlantic Mutual

By Julia M. Clinton, Esq.

Inside

DEFENSE COSTS - WILL YOU HAVE TO PAY BACK YOUR INSURER? N.J.M. INS. CO. V . DELTA PLASTICS CORP., INSURANCE COVERAGE FOR WORKERS COMPENSATION CLAIMS NEW JERSEY SUPREME COURT RESTRICTS SCOPE OF ABSOLUTE POLLUTION EXCLUSION TO TRADITIONAL ENVIRONMENTAL POLLUTION SCENARIOS

absolute exclusions for intellectual property torts to new policies. Policyholders must carefully review their policies to make certain that they have the broadest possible coverage in this area.

DEFENSE COSTS - WILL YOU HAVE TO PAY BACK YOUR INSURER?

by Cindy R. Tzvi, Esq. Policyholder lawyers have long waged war against insurer denials with the familiar battle cry that the “duty to defend is broader than the duty to indemnify” and that if there is any possibility that the allegations in the complaint, however frivolous, would come within the insurance policy’s coverage grant, then the insurer must provide a defense to the insured. Insurers have reluctantly responded by providing a defense when there is ambiguity as to coverage, while reserving their rights to withdraw the defense and/or receive reimbursement if it is ultimately shown that there is no coverage. T wo recent decisions may have insurers smiling and policyholders checking their reserves. These cases may indicate a trend towards courts enforcing the right of an insurer to recoup defense costs after a litigation ends, where a court determines that there was in fact no coverage under the policy for the claims at issue. This is a chilling proposition for insureds, who rely upon their insurance policies to fund the increasingly common and

• ften devastating costs of defending

against lawsuits. In St. Paul Fire and Marine Ins. Co. v. Compaq Computer Corp., Civ. No. 03- 6485 (July 13, 2005), the District Court

• f Minnesota, applying T

exas law, held that St. Paul was entitled to recoup the money it spent to defend its insured against a class action lawsuit alleging that Compaq had distributed computers with certain defective parts. Compaq was insured under a package policy issued by St. Paul. Upon tender

• f the claim, St. Paul accepted the

defense of the suit, generally reserving its rights. A couple of months later, the insurer issued a second reservation of rights letter, specifically reserving its right to withdraw from the defense and seek recovery of fees and expenses incurred in defense if it is later determined there is no coverage or duty to defend. After paying in excess

• f $650,000 in defense costs, St. Paul

withdrew from the defense, and sought to recoup the expenses previously paid

• n the insured’s behalf.

An insurer’s right to reimbursement of defense costs was an issue of first impression in T exas, and the District Court had to predict what a T exas court would decide. While there was precedent indicating that an insurer may not unilaterally alter the insurance contract through a reservation of rights letter, there was nothing in the St. Paul policy that was inconsistent with the insurer’s claimed right of reimbursement. Thus, where a policy was silent on reimbursement, the court held that it would be permissible for the insurer to create a quasi-contractual right

• f

reimbursement by proffering a defense

• n that condition. The court granted

summary judgment to the insurer,

• rdering Compaq to reimburse the

insurer for all $650,000+ in defense costs. Similarly, in Scottsdale Ins. Co. v. MV T ransportation et al., Case No. S123766 (July 25, 2005), the Supreme Court of California held that a commercial general liability insurer could obtain reimbursement of defense costs when it is ultimately determined that the policy never afforded potential for

• coverage. In that case, the third party

action involved allegations by a competitor in the transportation industry that the insured had misappropriated trade secrets to compete unfairly in bidding for new busing contracts. Scottsdale issued two CGL policies to the insured, which provided for “advertising injury” coverage. Scottsdale agreed to provide a defense, but reserved its right to obtain reimbursement should it be determined that the allegations did not fall within the scope of advertising injury liability coverage of the policies.

The third party action ultimately settled, and Scottsdale sought reimbursement, contending that the allegations in the third party complaint didn’t trigger coverage. Scottsdale argued that the term “advertising,” as used in standard CGL policies covering advertising injury, was limited to “widespread promotional activities directed to the public at large,” which was different from the bidding process for tailor-made services. The Supreme Court agreed, and held that the costs advanced by the insurer should be reimbursed, citing its prior decision in Buss v. Superior Court, 16 Cal. 4th 35 (1997): [T]he insurer may unilaterally condition its proffer

• f a defense upon its reservation
• f a right later to seek

reimbursement

• f

costs advanced to defend claims that are not, and never were, potentially covered by the relevant policy. Such an announcement by the insurer permits the insured to decide whether to accept the insurer’s terms for providing a defense, or instead to assume and control its own defense. The court went even further, stating that later-decided caselaw could establish that in hindsight, the duty to defend never existed, and that in those circumstances as well, the insurer would be entitled to seek

• reimbursement. The insurer would

also be entitled to recoup costs expended in the defense of uncovered claims that are part of a “mixed action.” The court reasoned that allowing a permissive standard for reimbursement would prevent an insurer from denying uncertain claims

• utright, thereby risking a bad faith

action by the insured. Unfortunately, the option enunciated in Buss for an insured to reject an offer

• f defense costs is not realistic. Faced

with mounting defense costs in a third party liability case, it usually makes sense for the insured to accept the terms of a reservation of rights letter in

• rder to ease the immediate financial

pressure of defending against the third party complaint.

N.J.M. INS. CO. v. DELTA PLASTICS CORP ., INSURANCE COVERAGE FOR WORKERS COMPENSATION CLAIMS

by Cindy R. Tzvi, Esq. In this recent decision, the New Jersey Appellate Division issued an opinion fortifying policyholders against insurer denials based upon the “intentional acts” exclusion in Workers Compensation/Employer Liability Policies, N.J.M. Ins. Co. v. Delta Plastics Corp., 2005 N.J. Super. LEXIS 286 (App. Div. Sept. 30, 2005). The Appellate Division held that the intentional acts exclusion in a T wo Part Policy issued to insured employers is interpreted differently than the intentional wrong exception to the workers’ compensation bar, and that unlike the statutory exception for intentional acts, the policy exclusion would only apply in the narrow set of circumstances in which there was a subjective intent to injure. This case, which arose from an insurer’s denial of an insured’s claim for defense costs, is a stellar example of why insureds should not accept insurer knee-jerk denials of coverage based on the “intentional injury” standard. The facts of the underlying dispute involved a bodily injury suffered by an employee of Delta Plastics while working on certain equipment. The employee sued his employer, alleging that Delta had acted in an intentional manner by altering the equipment and requiring plaintiff to work on the equipment, and that it was a substantial certainty that plaintiff would sustain injury as a result. Thus, while the employee never alleged that Delta intended to cause him injury, he sought to avoid the workers’ compensation bar and pursue a private cause of action against his employer by alleging “intentional” conduct on the part of Delta and a “substantial certainty” of injury. See Laidlow v. Hariton Mach. Co., Inc. 170 N.J. 602 (2002); Millison v. E.I. du Pont de Nemours & Co., 101 N.J. 161 (1985).

NJM had issued a Workers Compensation and Employers Liability Insurance Policy to Delta, providing coverage for bodily injury arising out of the course of an injured employee’s employment, subject to various exclusions, including an exclusion for “bodily injury intentionally caused or aggravated by [the insured].” NJM denied Delta’s request for a defense to the complaint, and filed a Declaratory Judgment action claiming that the intentional acts exclusion relieved it of any obligation to indemnify Delta for damages and therefore, relieved it of responsibility for Delta’s defense. The underlying complaint against Delta by the employee was voluntarily dismissed, and the trial judge granted NJM’s motion for summary judgment on the issue of a defense obligation. Delta appealed that decision. On appeal, the court considered whether the policy exclusion for intentional acts would apply in those circumstances where the injury resulted from employer conduct that was substantially certain to result in injury. The court held that it did not, and that therefore, the insurer was required to provide coverage under those

• circumstances. The court explained that

while the statutory exception for intentional wrongs encompasses intentional acts that are substantially certain to result in injury, the policy exclusion would apply only to the narrow set of circumstances in which there was in fact an intent to injure. See NJM at *11. The court looked to several rules of construction and public policy considerations to support its

• conclusion. First, policy exclusions are

to be construed narrowly in favor of

• coverage. Second, to the extent the

exclusion is ambiguous, it must be construed against the carrier. Finally, even if the language is deemed unambiguous, the court must consider the reasonable expectations of the

• insured. In that regard, the court

reasoned that if the exclusion was held to be coterminous with the statutory exception, this would eviscerate the insured’s reasonable expectations as to the coverage it was receiving in a 2- Part Workers’ Compensation/Employer Liability Policy: The policy exclusion [injury intentionally caused] applies only to injuries subjectively intended by the employer or its agent, a result consonant with the public policy against providing insurance coverage for criminal (specific intent) acts….W ere it otherwise… the exclusion would come very close to eliminating meaningful Part T wo coverage….The essence

• f the two-part policy, Part One

covering workers’ compensation defense and indemnification and Part T wo covering defense and indemnification in other employer liability situations, is seamless coverage. See id. at *13-15 (emphasis added). In the vast majority of cases, the injured employee will attempt to dodge the statutory bar by bringing allegations of intentional conduct against its employer in the context of a bodily injury lawsuit. This case provides ample ammunition for policyholders to argue that they are entitled to coverage for such lawsuits since the policy exclusion for intentional acts is decidedly only applicable to the narrow subset of cases in which there is a subjective intent to injure.

NEW JERSEY SUPREME COURT RESTRICTS SCOPE OF ABSOLUTE POLLUTION EXCLUSION TO TRADITIONAL ENVIRONMENTAL POLLUTION SCENARIOS

by Phillip M. Kaczor, Esq. In a recent opinion, the New Jersey Supreme Court delineated the scope of the absolute pollution exclusion under New Jersey law, thus silencing a debate that had raged since the exclusion was first incorporated into comprehensive general liability (“CGL ”) policies in about 1985. In a triumph for policyholders, the Court restricted the exclusion to traditional environmental pollution claims and rejected the insurance industry’s arguments that the exclusion should be afforded a much broader scope.

In Nav-Its, Inc. v. Selective Ins. Co. of America, 183 N.J. 110 (2005), a physician suffered various physical injuries after being exposed to fumes that were released during nearby floor sealing work. The physician sued the contractor and the case settled. Following the resolution of the underlying personal injury action, the contractor initiated a declaratory judgment action against its CGL insurer, which had earlier invoked the absolute pollution exclusion to deny coverage. The policyholder argued that the exclusion should be limited to traditional environmental claims and also that its reasonable expectations warranted a finding of coverage, since the claim arose from its normal business activities. The insurer, conversely, argued that the pollution exclusion was unambiguous and by its plain terms applied to claims other than traditional environmental pollution, including the underlying claim. The New Jersey Supreme Court began its analysis by reviewing the canons of insurance policy interpretation. The Court noted that policy terms are to be given their plain, ordinary meaning and construed narrowly in favor of coverage. Because insurance companies typically draft the complex wording of policies, insureds are at a comparative disadvantage and courts must do their best to ensure that policies are fair and comply with principles of public policy. As a result, courts place special emphasis on the objectively reasonable expectations of policyholders and will, in certain circumstances, elevate such expectations above unambiguous policy language to find coverage. Based in part

• n these principles, the Court held that

the exclusion’s use of environmental law terms of art such as “discharge,” “dispersal,” “release,” and “escape” would cause a policyholder to reasonably believe that the exclusion

• nly

applied to traditional environmental pollution claims. The Court also examined the exclusion’s history. Like previous material alterations to the standard CGL policy form, the absolute pollution exclusion was meant to curtail the insurance industry’s mounting environmental pollution

• liabilities. Thus, the Nav-Its Court

concluded that the exclusion’s purpose, as communicated by the insurance industry to state regulators, “was to have a broad exclusion for traditional environmentally related damages.” Nav-Its, 183 N.J. at 123. The Court therefore restricted the absolute pollution exclusion to traditional environmental pollution scenarios, noting that the highest courts

• f

California, Illinois, Massachusetts, Ohio, New York, and Washington had come to the same

• conclusion. The Court concluded its
• pinion with a biting rebuke of the

insurance industry: “[w]e emphasize that industry-wide determinations to restrict coverage of risks, particularly those that affect the public interest, such as the risk of damage from pollution, environmental or otherwise, must be fully and unambiguously disclosed to regulators and the public.” Nav-Its, 183 N.J. at 127.

STATES DIFFER ON NUMBER OF OCCURRENCES

by Carlyne B. Turner-Beverly, Esq. The ‘number of occurrences’ issue has been at the forefront of insurance jurisprudence recently, most poignantly in the World Trade Center coverage litigation. Most companies encounter this issue in the realm of toxic torts. Assume that a company has received 10,000 asbestos claims, and settles each claim for $5,000. Further assume that the insurance policy has a per occurrence deductible

• f $5,000. If each asbestos claim is a

separate occurrence, the insured can never access its coverage. If all claims constitute one occurrence, the insured pays a single deductible and then has access to its entire insurance program. Courts across the country are split in their interpretation of the number of

• ccurrences in such instances.

Pennsylvania courts consistently employ a “cause of loss” test in order to determine what events comprise an

• ccurrence for liability insurance
• purposes. This approach treats multiple

incidents as a single occurrence in cases where “there was but one proximate, uninterrupted, and continuing cause which resulted in all

• f

the injuries and damage”. Appalachian Ins. Co. v. Liberty Mutual

• Ins. Co., 676 F

.2d 56, 61 (3d Cir. 1982). In Appalachian Ins. Co. v. Liberty Mutual Ins. Co., the Third Circuit applied Massachusetts law to evaluate an employer’s right to recover from its liability insurer for damages arising from a slew of sex discrimination suits filed by employees. The court required the insurer to consider the suits as one

• ccurrence because the underlying

claims all stemmed from the same cause, namely, the employer’s discriminatory employment practices. In Liberty Mutual Ins. Co. v. T reesdale, Inc., 2005 WL 1939794 (3d Cir. Pa. 2005), the Third Circuit held that thousands of asbestos exposure claims levied against a steel mill should be regarded as a single occurrence under an umbrella excess liability policy. Citing Appalachian as authority, the T reesdale court stated that single

• ccurrence treatment was necessary

since all of the claims arose from the manufacture and sale of products that contained asbestos. Id. at *4. The court also noted that its holding comported with the policy language, which defined an occurrence as “all personal injury and property damage arising out of continuous or repeated exposure to substantially the same general conditions.” Id. at *5. There was a similar holding by the Eastern District of Pennsylvania in Sunoco Inc. v. Illinois National Ins. Co., 2005 U.S. Dist. Lexis 18407 (E.D. Pa. 2005). There, confronted with policy language substantially identical to that involved in T reesdale, the district judge held that seventy-plus groundwater contamination claims all constituted a single

• ccurrence

because they collectively arose as a result of the manufacture and distribution of a toxic gasoline additive. The “cause of loss” approach has not been endorsed in other jurisdictions. In New York, for example, only a few courts embrace the notion of treating multiple events that stem from a common cause as a single occurrence. This notion was embraced by the New York Court of Appeals in Hartford Accident & Indemnity Co. v. Wesolowski, 33 N.Y.2d 169 (1973), where two separate car collisions both attributable to the wild spin out of a single car were regarded as one

• ccurrence under a liability insurance
• policy. The “cause of loss” approach

was also adopted by the Southern District of New York in Champion International v. Liberty Mutual Insurance Company, 701 F . Supp. 409 (S.D.N.Y. 1988). Champion involved complaints brought by several different homeowners whose homes had been damaged by a manufacturer’s supply of defective building materials. Liberally interpreting a clause in the manufacturer’s liability insurance policy stating that singular occurrence treatment was warranted for “all property damage” stemming from product defects, the Champion court ruled that aggregate damage to all the homes should be viewed as one

• ccurrence. Id. at 411.

Other New York courts have found that all complaints traceable to deliveries of a particular product should be treated as a single

• ccurrence. See Uniroyal, Inc. v.

Home Ins. Co., 707 F . Supp. 1368, 1383 (E.D.N.Y. 1988) (where multiple claims based on exposure to the contaminant Agent Orange were considered to be a single occurrence because they were all causally related to a manufacturer’s continuous and routinized delivery of Agent Orange to the military). See also Champion

• Int. Corp. v. Continental Casualty Co.,

546 F .2d 502 (2d Cir. 1976) (where a thousand-plus claims all traceable to a wholesaler’s delivery of defective car panels were regarded as one

• ccurrence).

A recent line of New York decisions analyzing asbestos exposure claims has not adopted this approach. In Appalachian Ins. Co. v. General Electric Co., 796 N.Y.S.2d 609, 610- 611 (1st dep’t 2005), multiple asbestos exposure claims were held to be separate occurrences under an excess liability policy that defined an

• ccurrence as “an accident, event,

happening or continuous or repeated

exposure to conditions … which results in personal injury, sickness, disease or death”. The court refused to look backwards in the causal chain to the remote point when the injury- causing asbestos was manufactured and/or distributed. Instead, the court held that an occurrence is deemed to have taken place at the point when a claimant is exposed to the asbestos.

• Id. Because the individual claimants

were exposed to asbestos at different times, the court held that the claims could not be treated as a single

• ccurrence. Similarly, in In re

Prudential Lines, Inc. v. American Steamship Owners Mutual Protection and Indemnity Association, Inc., 158 F .3d 65 (2d Cir. (NY) 1998), the Second Circuit held that thousands

• f asbestos exposure claims brought

by seamen against their employer were separate occurrences. Other Second Circuit, Third Circuit and Sixth Circuit court opinions have rejected the “cause of loss” approach to find that multiple claims give rise to multiple, separate

• ccurrences. In Uniroyal, Inc. v.

American Re-Insurance Co., Superior Court of New Jersey Appellate Division Docket No. A-6718-02T1 (2005), the New Jersey Appellate Division, applying New York law, held that multiple asbestos claims each constituted a separate

• ccurrence under an excess liability

policy that defined an occurrence as “an accident or happening or event

• r a continuous or repeated exposure

to conditions … [arising from] substantially the same general conditions existing at or emanating from one premises location …” For each claimant, the actual exposure to asbestos was deemed to be the event constituting the

• ccurrence.

Similarly, in Metropolitan Life Ins. Co.

• v. Aetna Casualty and Surety Co., 255

Conn. 295, 303 (2001), the Connecticut Supreme Court held that in a case involving multiple asbestos exposure claims, each claimant’s exposure was an independent

• ccurrence

to be treated separately under an excess liability policy that incidentally did not define the term occurrence. The Sixth Circuit rendered an analogous decision in Babcock & Wilcox Co. v. Arkwright-Boston Manufacturing Mutual Ins. Co., 53 F.3d 762 (6th Cir. 1995), where multiple asbestos exposure suits brought by boilerworker employees were classified as separate

• ccurrences because the exposures
• ccurred at different points in time.

The relevant policy language in Babcock defined an occurrence as “any happening

• r

series

• f

happenings, arising out of or due to

• ne event …” Id. at 765.

Given these inconsistent rulings, companies seeking insurance coverage for toxic tort exposures must carefully weigh the choice of law and choice of forum issues surrounding their claim in order to

• btain favorable law on this issue.

Unfortunately, many jurisdictions have not yet reached the issue, leaving substantial uncertainty.

www.insurance-lowenstein.com

Publications

• “Managing Your Insurance

Broker: Promises and Potential Liability,” Commerce Magazine, Robert D. Chesler, Esq., July 2005.

• “D&O Insurance Now You

See It Now You Don’t,” The Metropolitan Corporate Counsel, Robert D. Chesler,

• Esq. and Cindy R. Tzvi, Esq.,

June 2005.

• “Directors and Officers

Beware: Will Your Company’s D&O Insurance Policy Be There When You Need It Most?,” The Metropolitan Corporate Counsel, Lynda A. Bennett, Esq. and William M. Uptegrove, Esq. May 2005. Upcoming Events

• NJICLE Broker Liability

Seminar, September 27, 2005, Edison, N.J. Recent Outpost Legal Highlights

• New Jersey Court Favors

PLIGA in Recent Statutory Interpretations

• Shooting Accident Held

Covered by Homeowner Policy

• Untimely Notice by a Matter
• f Hours Results in Forfeiture
• f Coverage Under a Claims

Made Policy

J

Insurance Coverage Practice Group 65 Livingston Avenue Roseland, New Jersey 07068

Presorted First Class Mail US Postage PAID Permit #73 West Caldwell, NJ