In This Issue:
New Jersey Supreme Court Rules Claimants May Be Entitled to Recover Attorneys’ Fees in Coverage Cases Even Without Establishing Liability in the Underlying Action
Why it matters: The New Jersey Supreme Court recently ruled that a successful claimant including both an insured and a third-party beneficiary in a coverage case is entitled to recover attorneys’ fees under a New Jersey fee-shifting rule even without establishing that the insured was liable in the underlying action. In general, New Jersey adheres to the “American rule” and does not permit successful parties to a lawsuit to recover their attorneys’ fees, but will award them in certain circumstances as provided by Rule 4:42-9(a). One of those circumstances is for “an action upon a liability or indemnity policy of insurance in favor of a successful claimant.” In a unanimous decision, the court ruled that because the trial court concluded that the complaint filed in the underlying action alleged claims that triggered the duty to defend the insured, or, as here, third-party beneficiary was a “successful claimant” entitled to recover counsel fees to enforce the payment of defense costs.
Detailed discussion: The insured, Keppler Mason Contractors, was sued by a business owner, Robert Occhifinto, for the allegedly faulty construction of an addition to a warehouse. Mercer Mutual Insurance Company defended Keppler under a reservation of rights. Mercer then filed a lawsuit seeking a declaration that it had no duty to provide coverage.
Mercer lost that coverage action and the court declared that Mercer was obligated to pay any adverse judgment or settlement against its insured in the underlying construction-defect case.
Occhifinto, the plaintiff in the underlying construction-defect case, stepped into the shoes of the insured, Keppler, as a third-party beneficiary to pursue the coverage claim because Keppler was, by that time, out of business.
In the underlying action, a jury found that Keppler was not liable. Although the masonry company breached its duty of care to Occhifinto, the jurors found that the breach was not a proximate cause of Occhifinto’s damages.
In the coverage action, Occhifinto then moved pursuant to New Jersey Rule 4:42-9(a)(6) to recover counsel fees incurred defending Keppler in Mercer’s declaratory judgment action. But the trial court denied the motion because the jury in the liability action found Keppler was not liable. An appellate court affirmed.
On appeal to the state’s highest court, Occhifinto argued that he was a “successful claimant” because the trial court ordered Mercer to defend—and, if necessary, indemnify—Keppler.
Emphasizing the purpose behind fee-shifting policy, the New Jersey Supreme Court sided with the policyholder.
New Jersey rules permit fee shifting in eight specific circumstances, including “an action upon a liability or indemnity policy of insurance in favor of a successful claimant.” Fee shifting “discourages insurance companies from attempting to avoid their contractual obligations and force their insureds to expend counsel fees to establish the coverage for which they have already contracted,” the court explained.
The term “successful claimant” is “broadly defined” as a party that “succeed[s] on any significant issue in litigation which achieves some benefit the parties sought in bringing suit,” and may include a third-party beneficiary of a liability insurance policy such as Occhifinto, the court stated. “We authorize trial courts to award counsel fees in favor of third-party beneficiaries of insurance contracts because ‘an insurer’s refusal to provide liability coverage may also, as a practical matter, preclude an innocent injured party from being able to recover for the injury.’”
Having established the definition of a “successful claimant,” the court determined that the issue of a duty to defend is a coverage question. Because Occhifinto alleged claims that if proven would have fallen under the policy and the trial court found a duty to defend, counsel fees were recoverable regardless of the liability determination in the underlying case, the court held.
Reversing the denial of Occhifinto’s motion, the court remanded the case for a determination of the amount of counsel fees to be awarded.
To read the opinion in Occhifinto v. Olivo Construction Company, click here.
Allegations of Willful Acts Leave Lawsuit Outside Scope of Cyber E&O Coverage
Why it matters: A Utah federal court handed down one of the first coverage decisions in the country construing a so-called “cyber” policy. Finding that the insured deliberately withheld data belonging to its client, the court held that the insurer was under no duty to defend its insureds against claims including tortious interference, conversion, and breach of contract. The cyber policy included a technology errors and omissions liability form, which stated that the insured “will pay those sums” that the insured “must pay as ‘damages’ because of loss … caused by an ‘errors and omissions wrongful act’….” The key term “errors and omissions wrongful act” was defined to include “any error, omission or negligent act.” The court found that the underlying suit did not contain any allegations of an error, omission, or negligent act by the insured, but instead alleged that the insured acted with “knowledge, willfulness, and malice” by purposely retaining the data. The court noted that “[t]o trigger [the insurer’s] duty to defend, there must be allegations in the underlying action that sound in negligence.”
Detailed discussion: Federal Recovery Acceptance, Inc. (“FRA”) provides processing, storage, transmission, and other handling of electronic data for its customers. FRA contracted with Global Fitness Holdings, a company that owns and operates fitness centers in multiple states.
Pursuant to the contract, FRA processed member accounts for Global Fitness. For security purposes, the only copy of the members’ billing information—credit card or checking or savings account data—was retained by FRA on behalf of Global Fitness. FRA withdrew or processed memberships fees and then transferred the funds to Global Fitness.
Global Fitness then entered into a purchase agreement with L.A. Fitness. As part of the deal, Global Fitness promised to transfer all of its member accounts data to L.A. Fitness. FRA produced some data but not the billing information for members. Global repeatedly requested the transfer of information in order to complete its sale with L.A. Fitness.
But according to Global Fitness’s complaint, “FRA withheld the Member Accounts Data until Global Fitness satisfied several vague demands for significant compensation.” Global Fitness alleged tortious interference, conversion, and breach of contract against FRA, claiming that the company “willfully interfered with Global Fitness’s property,” decreasing L.A. Fitness’s purchase price “dramatically.”
FRA turned to insurer Travelers Property Casualty Company of America under a cyber liability policy. The policy provided that the insurer would defend and indemnify against any lawsuits alleging a loss caused by an “errors and omissions wrongful act,” defined as “any error, omission or negligent act.” Travelers provided a defense under a reservation of rights and filed a declaratory judgment action that it had no obligation to defend FRA.
Travelers contended that it had no duty to defend FRA because Global Fitness did not allege any error, omission, or negligent act. Instead, the underlying complaint was based on willful actions.
FRA countered that Travelers’ objections were based on an assumption about the policyholder’s intent to injure and ignored the potential that FRA could be found liable for an error, omission, or negligent act because Global Fitness’s claims were broad enough to encompass a covered loss.
But the District Court ruled that FRA’s argument did not withstand scrutiny when the policy language was compared to the allegations in Global Fitness’s complaint.
“While the policy covers errors, omissions, and negligent acts, Global’s claims against [FRA] allege far different justifications for the data to be withheld,” the court ruled. “Global does not allege that [FRA] withheld the data because of an error, omission, or negligence. Global alleges that [FRA] knowingly withheld this information and refused to turn it over until Global met certain demands. [FRA] allegedly did so despite repeated requests from Global to provide the data. Instead of alleging errors, omissions, or negligence, Global alleges knowledge, willfulness, and malice.”
To read the decision in Travelers Property Casualty Co. of America v. Federal Recovery Acceptance, Inc., click here.
Supreme Court of Connecticut Upholds Decision Finding No Coverage for Data Breach Under Personal Injury Provision in Commercial General Liability Policy
Why it matters: In a recent decision the Connecticut Supreme Court unanimously affirmed a lower court ruling that there was no coverage under a CGL policy for costs incurred in connection with the loss of computer tapes containing IBM employees’ personally identifiable information. During transport the tapes fell out of a van and were retrieved by an unknown individual, but there was no evidence that the individual, or anyone else, had actually accessed the information on the tapes. Nevertheless, IBM spent more than $6 million in expenses for mitigation measures. The insured alleged that the loss of the computer tapes constituted covered “personal injury, defined to include any injury “caused by an offense ... or other publication of material that ... violates a person’s right to privacy.” The court found that because there had been no publication of the information that resulted in a violation of a person’s right to privacy, the loss of the computer tapes did not constitute a personal injury as defined in the policy. In contrast to the limitations inherent in a CGL policy, Cyber insurance policies are typically broader and tailored to this type of event. Among other things, Cyber insurance policies generally cover the cost for computer and data loss restoration, notification costs, credit monitoring, and liability to third parties from the failure to handle, manage, store, and control personally identifiable information belonging to others.
Detailed discussion: Recall Total Information Management Inc. entered into a vital records storage agreement with IBM. Recall agreed to transport and store various electronic media belonging to IBM. Recall subcontracted the transportation services to Executive Logistics (“Ex Log”), with a requirement that the subcontractor maintain a $2 million commercial general liability policy and a $5 million umbrella liability policy. Both policies—issued by Federal Insurance Company and Scottsdale Insurance Company, respectively—named Recall as an additional insured.
During the transport of computer tapes, a cart containing 130 tapes fell out of the back of the truck. The tapes contained employment-related data for about 500,000 IBM employees, including social security numbers, birthdates, and contact information. The tapes were removed from the roadside by an unknown person and never recovered.
IBM took steps to prevent harm from the dissemination of the personal information, claiming more than $6 million in expenses. IBM reached out to Recall and Ex Log, which then sought coverage from their insurers. Both parties’ insurers declined to participate in the negotiations and denied coverage.
Following negotiations, Recall and Ex Log entered into an agreement to reimburse IBM. Ex Log signed a promissory note in favor of Recall for $6.4 million and assigned all of its rights under both policies to Recall.
Recall then filed a declaratory action against the insurers in Connecticut state court.
ExLog’s CGL policy at issue states in relevant part that the insurer “will pay damages that the insured becomes legally obligated to pay ... for ... personal injury.” The policy defines the key term “personal injury” to include “injury ... caused by an offense of ... electronic, oral, written or other publication of material that ... violates a person’s right to privacy.”
Turning to whether the data loss constituted a “personal injury” under the policy, the appellate court in a decision adopted by the Connecticut Supreme Court first looked to the definition, which, in terms of a loss related to privacy, required the “electronic, oral, written or other publication of material ...” (emphasis in original). In construing this definition, the court relied heavily on the fact that there was no evidence that any of the personal information on the 130 tapes was ever accessed or used for an improper purpose.
The Connecticut Supreme Court revealed little of its legal rationale in its per curium decision. “Our examination of the record and briefs and our consideration of the arguments of the parties persuade us that the judgment of the Appellate Court should be affirmed.” “Because the Appellate Court’s well-reasoned opinion fully addresses the certified issue, it would serve no purpose for us to repeat the discussion contained therein. We therefore adopt the Appellate Court’s opinion as the proper statement of the issue and the applicable law concerning that issue.”
To read the appellate court opinion in Recall Total Information Management, Inc. v. Federal Insurance Co., click here.
To read the Connecticut Supreme Court’s opinion, click here.
Endorsement Trumps Exclusions When Evaluating Coverage
Why it matters: A Florida federal court has ruled an endorsement specifically covering crop dusting trumped an exclusion in a coverage dispute involving the accidental spraying of a neighbor’s property while crop dusting. “When an endorsement conflicts with the body of an insurance policy, the endorsement controls,” the court declared. After a crop duster mistakenly sprayed a neighboring date palm nursery while spraying sugar cane farms, the date palm farm sued. The sugar cane farm insurer refused to defend the suit based on multiple policy exclusions. Although the court found that some of the exclusions might have applied to claims in the underlying complaint, a policy endorsement for the aerial application of chemicals restored coverage for the insured sugar cane farm.
Detailed discussion: Two farms were located next to each other in Palm Beach County, Florida: sugar cane growing and processing operations owned by Florida Crystals Corporation and Sugar Farms Co-op and the Date Palm Wholesalers, Inc. commercial nursery.
The sugar cane farms contracted with Roma Air Corp. to apply herbicide at their operations. In March 2013, Roma sprayed a powerful herbicide on a large area of land. According to the subsequent lawsuit filed by Date Palms, that area included not only the sugar cane farms but the date palm nursery as well, damaging many of the trees.
Date Palm sued Roma as well as the sugar cane farms alleging negligence, strict liability, and trespass. After the sugar cane farms requested a defense from National Union Fire Insurance Company of Pittsburgh, the insurer sought a declaration that the applicable policy imposed no duty to defend.
National Union moved for summary judgment, arguing that the claims in the Date Palm complaint fell within the scope of multiple policy exclusions and failed to allege an accident that could give rise to coverage under the policy.
The court first rejected the insurer’s argument that the Date Palm complaint alleged only intentional misconduct.
The complaint contained allegations of accidental harms, the court ruled, including the claim that the spraying of Date Palm’s property arose from a failure to investigate the ownership of the property.
Having established that the complaint fell within the scope of the policy, the court next reviewed the exclusions relied upon by National Union. Endorsement 7 provided that the policy does not cover claims “directly or indirectly occasioned by, happening through or in consequence of … pollution and contamination of any kind whatsoever.” The court found that Endorsement 7 excluded the claims in the Date Palm action.
The court then considered the language of Endorsement 13. While the provision restored coverage for harms arising from the aerial application of chemicals, it also excluded “[i]njury or damage to either property or crops being treated … by aerial application of chemicals.”
However, the Date Palm complaint sought more than just compensation for injury to property or crops being chemically treated, the court noted, by requesting lost profits resulting from the spraying. “Reading the Policy in [the sugar cane farms’] favor, the exclusion from coverage for injury or damage to property or crops thus does not apply to all of the relief sought in the Date Palm Complaint,” the court ruled. “Where the complaint in an underlying action contains claims both within and without the scope of coverage, an insurer’s duty to defend is triggered with respect to the entire action.”
Because Endorsement 13 created coverage for the claims in the Date Palm complaint—and the exclusions within the endorsement did not appear to remove coverage for all of those claims—National Union was not entitled to summary judgment on the duty to defend.
To read the decision in National Union Fire Insurance Co. v. Florida Crystals Corp., click here.