Insurance Recovery Law -- Nov 14, 2013

by Manatt, Phelps & Phillips, LLP

In This Issue:

In A New York State Of Mind . . . For Expanded Vandalism Coverage

Why it matters: Property owners in New York with coverage for vandalism will be pleased with the Georgitsi Realty LLC v. Penn-Star Insurance Company ruling, which adopted a broad definition of the term in favor of insureds. Under the court's holding, policyholders do not have to establish that the damage to their property occurred as a result of an act directed specifically at the covered property, but rather, from malicious acts regardless of where they were directed. As pointed out in a dissenting opinion, the majority did not even specify that the malicious acts must be intended to damage the property – leaving insureds with an expanded argument for coverage.

Detailed Discussion
New York's highest court has expanded insurance policy coverage for vandalism, holding that such acts do not have to be directed specifically at the covered property.

A four-story apartment building in Park Slope, Brooklyn, experienced cracks in the walls and foundations after a construction project began next door, including excavations for an underground parking lot. The owners of the apartment building alleged that as the excavation continued, the cracks became more pronounced and the building began to settle.

Fearing collapse of the building, the property owners went to court for "stop work" orders and also filed a claim with insurer Penn-Star, alleging the property damage was the result of vandalism. A federal district court judge granted summary judgment for the insurer and the property owner appealed to the Second Circuit.

The Second Circuit then certified two questions for New York's highest court: "For the purposes of construing a property insurance policy covering acts of vandalism, may malicious damage be found to result from an act not directed specifically at the covered property?" and "If so, what state of mind is required?"

"We answer the first question yes, and answer the second by saying that the state of mind is the same that would be required to award punitive damages against the alleged vandal: such a conscious and deliberate disregard of the interests of others that the conduct in question may be called willful or wanton," the court wrote.

The meaning of "vandalism" in an insurance policy was an issue of first impression for the court. "We see no reason why the term 'vandalism' should be limited to acts 'directed specifically at the covered property.' Vandalism, as the term is ordinarily understood, need not imply a specific intent to accomplish any particular result; vandals may act simply out of a love of excitement, or an unfocused desire to do harm, or . . . (in the present case) out of a desire to enrich oneself without caring about the consequences to others," the court determined.

"Nor does it seem relevant that the alleged act of vandalism here . . . did not bring the alleged vandals in direct contact with the covered property. Where damage naturally and foreseeably results from an act of vandalism, a vandalism clause in an insurance policy should cover it."

The court acknowledged that the term "vandalism" did not intuitively fit the facts of the case and "more readily brings to mind people who smash and loot than business owners who seek their own profit in disregard of the injury they do to the property of others.

"We conclude, however, that there is no principled distinction between the two. An excavator who is paid to dig a hole, and does so in conscious disregard of likely damage to the building next door, is, for these purposes, not essentially different from an irresponsible youth who might dig a hole on the same property, with the same effect, whether in search of buried treasure or just for fun."

The required state of mind of the vandal will serve to distinguish between ordinary tortious conduct and acts of vandalism, the court said. "Conduct is 'malicious' for these purposes when it reflects 'such a conscious and deliberate disregard of the interests of others that [it] may be called willful or wanton,' " the court explained. "Insurance against vandalism should not be converted into something approaching general coverage for property damage. Insureds who want broader coverage should obtain it and pay an appropriate premium."

To read the decision in Georgitsi Realty LLC v. Penn-Star Insurance Company, click here.

Get Your Fax Straight, And You May Have Coverage For A TCPA Settlement

Why it matters: The court's analysis resulted in two significant victories for the policyholder. First, the court held that the TCPA creates a statutory right of privacy for corporations and business entities (not just individuals), bringing the claims in the underlying complaint within the scope of policy coverage. Second, the court determined that the defendant insured still had a reasonable anticipation of liability, even with respect to claims that had been dismissed in the underlying action and later included in the settlement. Accordingly, the settlement was reasonable, and the insured was entitled to coverage.

Detailed Discussion
In Maxum Indemnity Company v. Eclipse Manufacturing Co., M&M Rental Center purchased a list of names and fax numbers and sent five faxes over a four-year period to the list. Fax recipients filed a TCPA class action, alleging the faxes were sent illegally. The TCPA provides for $500 in statutory damages per illegal fax and up to $1,500 per fax for willful and intentional violations.

The judge overseeing the class action granted partial summary judgment.

On the one hand, the court held that the plaintiffs could not establish that the first three faxes constituted illegal advertisements within the meaning of the TCPA because they could not produce a copy of the faxes.

On the other hand, the court also ruled that the fourth and fifth faxes violated the statute and entered judgment for the plaintiffs in the amount of $3,862,500. Both parties filed post-judgment motions.

The parties then tried to settle the dispute, and the primary and excess insurers refused to participate. The parties reached a deal for a total of $5,817,150, which included an additional $1,954,650 over the amount of judgment. The extra money was designated for the first three faxes, albeit at a rate of 30 percent less than the statutory damages available. Because the insured would be forced to file for bankruptcy if required to pay the settlement, it also assigned its rights under the policy to the plaintiffs, who sued for coverage.

U.S. District Court Judge Joan Humphrey Lefkow found that the TCPA violations, albeit made by corporate plaintiffs, invaded their privacy within the scope of the policy's advertising injury provision. "Since the TCPA makes no distinction among individuals, corporations, and other business entities, it follows that the TCPA created by statute a right of privacy for all three: a right not to be intruded upon by unwanted faxes," she wrote.

The court also addressed the second coverage issue: that the settlement was collusive.

Under Illinois law, the insured had to demonstrate that the settlement was entered into in reasonable anticipation of liability to rebut an allegation of collusion. Anticipation of liability was certainly reasonable with regard to the $3.9 million judgment for the fourth and fifth faxes, the court in the coverage action noted. But what about for the first three faxes where one court had already determined there was no liability?

Despite summary judgment having been entered in the defendant's favor, a chance still existed that a reversal could occur, the court said. "Certainly, prevailing on the plaintiffs' post judgment motion was unlikely," Judge Lefkow wrote. "That unlikelihood aside, the court of appeals does from time to time disagree with a district judge's conclusion that no genuine issue of material fact exists meriting a trial."

Even with the unlikelihood of reversal, the "totality of the evidence" pointed "to the conclusion that the settlement as to the first three faxes was reached in reasonable anticipation of liability for those faxes," the court held. A "seasoned magistrate judge" oversaw the settlement negotiations, "a strong indication" that potential liability was fully and fairly assessed. The insurers were invited to participate but declined, showing that the negotiations were conducted in good faith, and the deeply discounted value of the first three faxes reflects that the weakness of the claim was considered, Judge Lefkow said.

To read the decision in Maxum Indemnity Company v. Eclipse Manufacturing Co., click here.

Better Late Than Never: Seventh Circuit Finds Coverage For Enfamil Maker In Competitor Suit Even When Notice Was Not Given Until After Jury Returned Verdict

Why it matters: Mead Johnson scored a significant victory in the Seventh Circuit, winning coverage for a $13.5 million jury verdict despite the fact that the company did not provide notice to its insurers about the case until after the verdict was awarded. The appellate panel ruled that neither the primary nor excess insurer was harmed by the delay. Mead used the same law firm – the same attorney, in fact – that the insurers had used to represent the company in earlier cases. As the court asked, "How could National Union, using the same lawyer, expect to have obtained an outcome almost seven times as favorable to Mead as Mead obtained? What would it have told the lawyer to do differently?"

The insured was not as successful, however, in obtaining coverage for a consumer class action, which did not allege an "advertising injury" within the scope of coverage.

Detailed Discussion
In National Union Fire Insurance Company v. Mead Johnson & Company, Mead Johnson faced underlying litigation over advertising claims made about its baby formula, Enfamil. The company ran an ad campaign which stated that store-brand baby formula lacked two key fats that promote brain and eye development, implying that babies would suffer developmentally by not taking Enfamil.

Mead was involved in three lawsuits with a competing brand over the ads; the first two settled for about $46 million. At issue in the case before the Seventh Circuit was the third lawsuit, alleging Mead engaged in false advertising, which resulted in a $13.5 million jury verdict.

Mead sought coverage from primary insurer National Union Fire Insurance Company and excess insurer Lexington Insurance Company under the "advertising injury" provision of its policies. Both insurers declined to indemnify Mead due to the company's delay in providing notice of the third lawsuit.

Although the complaint was filed against Mead in April 2009, the company failed to notify either insurer of the suit until December 2009 – after the jury had already reached its multimillion-dollar verdict. Both policies required Mead to notify the insurer "as soon as practicable" of any occurrence or claim, and both insurers contended Mead clearly violated this provision.

The Seventh Circuit agreed that the notification provisions were important and that insurers have a "vital interest" in supervising the defense of a claim. But under Indiana law, an insurer may disclaim coverage only if it was prejudiced by the late notice. Neither National Union nor Lexington suffered any harm from the late notice, the court concluded.

National Union's policy limit was set at $2 million and "we are hard-pressed to understand how, had it conducted the defense of [the underlying suit], it could have obtained a jury verdict or a settlement of less than $2 million," the court wrote. "Not only did the jury award [the competitor] damages of $13.5 million; Mead Johnson used the same law firm, and the same lawyer in that firm, to defend itself that National Union had retained to defend Mead in [the previous lawsuits with the competitor].

"How could National Union, using the same lawyer, expect to have obtained an outcome almost seven times as favorable to Mead as Mead obtained? What would it have told the lawyer to do differently? It doesn't say. Would it have found a better lawyer? It doesn't say."

While Lexington, as an excess insurer with a policy limit of $25 million, had a different perspective, it similarly failed to demonstrate what kind of a difference it would have made handling the defense, the court added.

The panel acknowledged that allowing such an indefinite extension of time to notify an insurer posed challenges for insurers. "But that is an issue for Indiana, not for us," the court said. "Indiana law…holds to the principle that if an insured inflicted no cost on his insurer by untimely notice, with the result that the insurer lost nothing by virtue of the untimeliness, then to allow the insurer to reject the insured's claim would confer a windfall on the insurer."

Although the court was "tempted" not only to reverse judgment for the insurers but to also direct the entry of judgment for Mead, it instead remanded the case for factual development on the issue of harm.

The panel then turned to the second issue of the case: indemnification for a $15 million settlement in a consumer class action, which only implicated National Union's coverage. This case did not involve a notice issue but an analysis of whether the claims in the suit triggered coverage. "Advertising injury" was defined, in part, as an "oral or written publication, in any manner, of material that . . . disparages a person's or organization's goods, products or services." Distinct from the claims made by Mead's competitor, the consumers did not sell infant formula and, therefore, none of their products were disparaged by Mead, the court explained. "In short, the class action involves no claim of product disparagement."

The panel rejected Mead's "sleight-of-hand" argument that the policy covered any tortious injury that could be traced to disparaging material, or have some causal link, even if the link was indirect. "[A] consequence is not a claim," the court wrote. "Mead is trying to shoehorn one tort – product disparagement, which the insurance policy covers – into another – fraud, which isn't covered."

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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