08/14/03 ATLANTIC MUT. INS. CO. v TERK TECH. CORP
New York State Supreme Court, Appellate Division, First Department
“Knowledge of Falsity” Exclusion Leads to Ruling that Carrier Has No Duty to Defend Lanham Act Case
At issue in this case was the insurer’s obligation to indemnify and defend its insured in an underlying action involving the insured’s violation of the Lanham Trademark Act. The court held that the “knowledge of falsity” exclusion barred coverage for the claim. With respect to the defense obligation, the court acknowledged that violations of the Lanham Trademark Act can be unintentional, and that the underlying complaint asserted that the insured acted with reckless disregard; however, the court could not discern any justification from the factual allegations in the complaint to impose a duty to defend the insured. The court could not envision how the insured could have unknowingly and unintentionally approached a local manufacturer to produce a cheaper, low-quality knockoff of the CD 25; market the counterfeit product in packaging indicating it was a genuine Larsen creation manufactured in Denmark, both blatantly false; and then fraudulently misled Larsen when he inquired as to poor sales, indicating that demand was low while the counterfeit product was enjoying vigorous sales. Since all of the factual allegations of the complaint were premised on intentional, “knowing” conduct, the court held they fall squarely within the “knowledge of falsity” exclusion in the policy. In dicta, the court indicated that the “duty to defend” rule is not “inflexible.”
08/11/03 AMERICAN REF-FUEL COMPANY OF HEMPSTEAD v RESOURCE RECYCLING, INC.
New York State Supreme Court, Appellate Division, Second Department
Doctrine of Subrogation Permits Insurer to Recover Reasonable Defense Costs In Its Capacity as Subrogee for Its Insureds
In an underlying personal injury action, plaintiffs were not actively negligent and were thus conditionally entitled to both common-law and contractual indemnification in the event that the injured worker obtained a judgment against them. The court found that the subrogation doctrine permitted the plaintiff’s insurer to obtain reimbursement for the defense costs incurred by plaintiffs in the underlying action from the subcontractor, whose negligence was responsible for the loss.
Bruce Celebrezze and Teresa Hu, Celebrezze & Wesley, San Francisco, CA
08/11/03 MATTER OF GEICO GEN. INS. CO. v SHERMAN
New York State Supreme Court, Appellate Division, Second Department
Failure of Uninsured Motorist Arbitrator to Follow Rules and Give Notice of Witnesses to Be Called Does Not Justify Vacating Award
The arbitrator did not exceed his authority or commit misconduct in allowing GEICO to call two individuals as witnesses, despite GEICO’s failure to provide appellants with the notice required by the rules of the American Arbitration Association. Although it may have been better if the arbitrator had not allowed these two to testify at the hearing, the failure of an arbitrator to grant an adjournment is an only an abuse of discretion constituting misconduct within the meaning of CPLR 7511(b)(1)(i) if it results in the foreclosure of the presentation of pertinent and material evidence. Appellants failed to prove by clear and convincing evidence that doing so constituted misconduct.
08/07/03 CRITCHLOW v FIRST UNUM LIFE INS. CO. OF AM.,
Second Circuit (applying New York law)
Autoerotic Asphyxiation Causes Intentionally Inflicted Injury under “Accidental Death” Policy
A decedent’s intentional act of constricting his trachea with the purpose of depriving his brain of oxygen (autoerotic asphyxiation) is an intentionally self-inflicted injury within the meaning of an insurance policy’s exclusionary clause.
Visit the HOT CASES section of the Federation of Defense and Corporate Counsel website for cases covering a broad range of legal issues from other jurisdictions.
08/14/03 MACKINNON v TRUCK INS. EXCHANGE
Absolute Pollution Exclusion Limited to Conventional Environmental Pollution
In this case, the court held that the absolute pollution exclusion did not apply to injuries arising from the residential application of pesticides. In so holding, the court limited the scope of the exclusion to injuries arising from events commonly thought of as pollution, i.e., environmental pollution. The court found this narrow interpretation of the exclusion consistent with the connotation of the terms “pollution” and “discharge, dispersal, release or escape”, and the exclusion’s historical objective—the avoidance of liability for environmental catastrophes related to intentional industrial pollution. The court also concluded that the clause so construed is consistent with the purpose of CGL policies—to provide the insured with the broadest spectrum of protection against liability for unintentional and unexpected personal injury or property damage arising out of the conduct of the insured’s business.
08/13/03 GOOCH v WESTFIELD INS. CO.
Ohio Court of Appeals, Ninth Judicial District
Insurance Policy Naming Individuals as Insureds Removes Ambiguity from Term “You” As Included In Definition of an Insured for Purposes of Entitlement to Uninsured and Underinsured Motorist Benefits
Appellant filed an action against her brother’s insurance company seeking a judgment declaring that she was insured under the policy issued to her brother’s employer and was entitled to uninsured motorist benefits for injuries allegedly sustained in a motor vehicle accident. At issue was whether appellant was not an insured under the policy pursuant to an Ohio Supreme Court case that held that when the named insured in an insurance policy is a corporation, “you” as included in the definition of an insured is ambiguous, and therefore coverage applied to the corporation’s employees. The court found that in this case, the policy named specific individuals as insured, and therefore the definition of an insured was not ambiguous and not subject to the interpretation that employees or their family members were insureds for purposes of uninsured motorist coverage.
Bruce Celebrezze and Teresa Hu, Celebrezze & Wesley, San Francisco, CA
08/11/03 SAFECO INS. CO. OF AMERICA v MARES
“Insured Location” Exception to Exclusion of Homeowners Insurance Policy Does Not Cover Accident That Occurred Away From Insured Location
The Tenth Circuit affirmed the district court’s finding that a homeowners insurance policy did not cover an action for the insured’s negligent conduct of allowing a minor to drive an all- terrain vehicle from the insured’s home and off the premises, where an accident occurred resulting in the minor’s death. The insurance policy excluded coverage of bodily injury and property damage “arising out of the ownership, maintenance, use, loading or unloading of…motorized land vehicles…owned or operated by or rented or loaned to [the] insured, but had an exception to this exclusion, covering “a motorized land vehicle designed for recreational use of public roads, not subject to motor vehicle registration, licensing or permits and…owned by [the] insured, while on an insured location.” An “insured location” was “residence premises” and “that part of any other premises, other structures and grounds, used by [the insured] as a residence.” If the motorized land vehicle was not covered under policy language, then the insurance policy excluded coverage for bodily injury and property damage “arising out of: (1) the entrustment by any insured to any person; (2) the supervision by any insured of any person; [or] (3) any act, decision or omission by any insured…with regard to [the] motorized land vehicle.” The circuit court agreed with the district court’s conclusion that whether the accident occurred on an insured location must be determined at the time of the accident, and since the accident occurred away from the insured location, coverage was excluded.
Bruce Celebrezze and Teresa Hu, Celebrezze & Wesley, San Francisco, CA
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ATLANTIC MUT. INS. CO. v TERK TECHNOLOGIES CORP.
The issue presented to us in this appeal is whether plaintiff Atlantic Mutual Insurance Company was obligated to indemnify and/or defend defendant/third-party plaintiff Terk Technologies Corp. in an underlying action involving, inter alia, defendant's violation of the Lanham Trademark Act.
Defendant/third-party plaintiff Terk Technologies Corp. (Terk) is a New York corporation in the business of producing, importing and distributing upscale consumer electronics equipment. Plaintiff Atlantic Mutual Insurance Company (Atlantic) is an insurance company licensed, inter alia, to write insurance policies in the State of New York. Third-party defendant Hiram Cohen & Son, Inc. (Cohen) is an insurance broker and agent licensed to do business in the State of New York, and is an authorized agent of Atlantic. In 1993, Atlantic, through Cohen, issued Terk an "Insurance for Electronics Industry" commercial, general liability policy for the period of June 15, 1993 to June 15, 1994. The policy, containing essentially the same terms in each policy year, was renewed on an annual basis through June 15, 1997 (to be collectively referred to herein as the Policy).
Tommy Larsen is a Danish designer of high-quality products of applied decorative art, which are intended to be useful as well as aesthetically and artistically appealing in form and appearance. Larsen's products are manufactured and distributed worldwide through his Danish corporation, Larsen ApS [FN1]. On or about June 14, 1995, Tommy Larsen and Larsen ApS (collectively to be referred to herein as Larsen) commenced an action against Terk in the United States District Court for the District of Maryland by the service and filing of a summons and complaint, asserting that Terk violated the Lanham Trademark Act (15 USC § 1051, et seq.), the Maryland Consumer Protection Act (Maryland Commercial Law § 13-201, et seq.) and the common law, in that it engaged in unfair and deceptive trade practices. The Larsen plaintiffs subsequently served an amended complaint on November 7, 1995, at the direction of the District Court, which contained the identical facts and allegations but eliminated any reference to the Maryland Consumer Protection Act.
Larsen maintained that in 1992 he designed and initiated the European distribution of a decorative compact disc (CD) holder called the "CD 25," which is manufactured from a single piece of solid steel tubing bent and curved into a sculpture-like storage unit that holds 25 CD cases. The CD 25, which is sold in a black box bearing the Tommy Larsen and Tommy Larsen ApS names and logo, is available in either a black or chrome finish, and is produced in Denmark according to Larsen's "exacting" size and material specifications.
After the product's successful debut in the European market, Larsen sought to introduce the product in the United States. In August 1993, Neil Terk, the Chief Executive Officer of Terk, approached Larsen at a trade show in Berlin, Germany and began discussions concerning Terk's possible distribution of the CD 25 in the United States. Larsen's and Terk's subsequent negotiations over the next several weeks culminated in an October 1993 agreement under which, inter alia, Larsen agreed to ship the CD 25 in bulk and allow Terk to develop and produce its own packaging in order to reduce Terk's costs. The packaging, which was subject to Larsen's approval, included the "Tommy Larsen" and "Tommy Larsen ApS" names, the Larsen logo, and identified the CD 25 as "Made in Denmark" and "Design of Denmark."
Larsen began shipping the CD 25 to Terk in November 1993 and Terk thereafter commenced distribution of the CD 25 for sale in upscale electronics, housewares and department stores, as well as through mail order catalogs featuring high-quality products and objects of applied art. The CD 25 was awarded the "Innovations 94" award at the 1994 International Summer Consumer Electronics Show in Chicago, and Terk, in its continuing marketing efforts, which included press releases, catalogs, advertising and trade show materials, identified and promoted the CD 25 as a Tommy Larsen product, a Tommy Larsen design, and as a product manufactured in Denmark.
Despite the CD 25's apparent favorable reception and commercial success in the United States market, by late 1994, Terk's orders for the CD 25 had ceased. The absence of orders for the CD 25 prompted inquiries from Larsen, to which Terk responded that the rate of sales was low and that it currently had a large inventory of the product. In reality, Terk was having the CD 25 produced by a local New York State manufacturer, and was packaging and marketing the counterfeit units in the same gift boxes originally designated for Larsen's products, which bore the Larsen name and logo and was designated as a "Design of Denmark" and "Made in Denmark."
Larsen, however, understandably had become suspicious of the CD 25's purported debacle in the American market and, as a result, had an associate purchase samples of the CD 25 at retail in the United States. At that point, it became apparent to Larsen that despite the packaging, the CD 25s had not been produced by Larsen, but were copies of vastly inferior quality.[FN2]
A two-day non-jury trial was held before Judge Peter J. Messitte on November 19 and 20, 1996 and Judge Messitte rendered a verdict in open court in Larsen's favor on November 20, 1996. In a written judgment entered on November 27, 1996, the District Court found, inter alia: that "[d]efendant has committed trademark infringement, false designation of origin, false and misleading representations and false advertising," in violation of the Lanham Act; and that Terk intentionally, willfully, knowingly, surreptitiously and fraudulently passed off counterfeit goods of inferior quality as Larsen's authentic, Danish-made goods. Judge Messitte awarded Larsen treble damages in the amount of $217,779.78 (15 USC 1117[b]), plus attorneys' fees. Terk appealed, and the United States Court of Appeals for the Fourth Circuit affirmed on July 14, 1998 (see Larsen v Terk Techs. Corp., 151 F3d 140).[FN3]
Terk maintains that immediately after being served with the summons and complaint in the underlying action, it inquired of Cohen as to whether or not that action was covered under the Policy, to which Cohen purportedly answered in the negative. Terk, claiming that it relied on Cohen's expertise, did not file a written notice of claim with Atlantic until May 30, 1997, which was after the District Court had entered judgment and Terk had filed a notice of appeal.
Atlantic subsequently denied coverage by letter dated September 22, 1997, based upon Terk's late notice of suit and the "knowledge of falsity" exclusion to the advertising injury coverage provided by the Policy. On September 23, 1997, Atlantic commenced the within declaratory judgment action seeking a declaration that it was not obligated to defend or indemnify Terk. Terk joined issue on or about January 16, 1998, and interposed four counterclaims based, primarily, on Atlantic's alleged bad faith. Terk thereafter commenced a third-party action against Cohen for, inter alia, indemnification and contribution arising out of Cohen's alleged failure to timely submit a notice of claim to Atlantic. Atlantic and Cohen subsequently moved for summary judgment and Terk cross-moved for the same relief.
The motion court, in a ruling rendered in open court on February 28, 2002, and later incorporated into a short-form order, granted Atlantic's and Cohen's motion for summary judgment and denied Terk's cross motion, holding that Atlantic had no duty to indemnify or defend Terk based upon the provisions of the Policy. The motion court concluded that, given those findings, it was unnecessary to reach the issues surrounding Terk's purported late notice to Atlantic and whether or not there was any third-party liability on the part of Cohen. Terk appeals and we now affirm.
The Relevant Policy Provisions
The Policy, under the heading "COVERAGE B. PERSONAL AND ADVERTISING LIABILITY," provides, in pertinent part:
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "personal injury" or "advertising injury" to which this insurance applies. We will have the right and duty to defend any "suit" seeking those damages. We may at our discretion investigate any "occurrence" or offense and settle any claim or "suit" that may result . . .
(2) "Advertising Injury" caused by an offense committed in the course of advertising your goods, products or services;
but only if the offense was committed in the "coverage territory" during the policy period.
This insurance does not apply to:
a. "Personal injury" or "advertising injury"
(1) Arising out of oral or written publication of material, if done by or at the direction of the insured with knowledge of its falsity . . . (emphasis added).
Section V of the Policy, under the banner "DEFINITIONS," provides:
1. "Advertising injury" means injury arising out of one or more of the following offenses:
a. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;
b. Oral or written publication of material that violates a person's right of privacy;
c. Misappropriation of advertising ideas or style of doing business; or
d. Infringement of copyright, title or slogan.
The duty to indemnify "is determined by the actual basis for the insured's liability to a third person" (Servidone Constr. Corp. v Security Ins. Co. of Hartford, 64 NY2d 419, 424; see also Frontier Insulation Contrs., Inc. v Merchants Mut. Ins. Co., 91 NY2d 169, 178; Robbins v Michigan Millers Mut. Ins. Co., 236 AD2d 769, 770-771), and does not turn on the pleadings, but rather on whether the loss, as established by the facts, is covered by the policy (New York City Hous. Auth. v Commercial Union Ins. Co., 289 AD2d 311, 313; Erdman v Eagle Ins. Co., 239 AD2d 847, 849, lv denied in part and dismissed in part 90 NY2d 926; Ingber v Home Ins. Co., 140 AD2d 750, 751).
In this matter, we harbor no doubt that Terk's conduct falls within the "knowledge of falsity" exclusion set forth in the Policy. Indeed, the facts, as determined by the District Court, are that Terk knowingly and intentionally obtained counterfeit CD 25s from Allen Machine Products; that Terk distributed the counterfeit CD 25s in packaging it developed for authentic Larsen CD 25s, which bore Larsen's name and logo and stated the product was made in Denmark; and that Terk distributed the inferior product as a genuine Larsen product. The Fourth Circuit Court of Appeals, in affirming the District Court, held that "the district court was correct in finding that Terk intentionally, willfully, knowingly, surreptitiously and fraudulently passed off counterfeit goods of inferior quality as Larsen's authentic Danish-made goods."
In view of the foregoing,
we can only conclude that Terk's actions fall
squarely within the Policy's exclusion for "advertising injuries" which arise
out of the insured's publication of material "with knowledge of its falsity."
Moreover, the issue of whether a provision in an insurance policy is ambiguous
is a question of law for the court to determine (Breed v Insurance Co. of
North Am., 46 NY2d 351, 355; Thomson v Power Auth. of State of N.Y.,
217 AD2d 495, 496), and a provision in an insurance contract is not ambiguous
merely because the parties interpret it differently (Mount Vernon Fire Ins.
Co. v Creative Housing Ltd., 88 NY2d 347, 352; Board of Managers of
Yardarm Condo. II v Federal Ins. Co.,
247 AD2d 499, 500). Here, we find no ambiguity and reject, as
without basis in the language of the Policy, Terk's
assertion that the "knowledge of falsity" exclusion applies only to oral and
written publication of material and not to the misappropriation of advertising
or marketing ideas. In any event, Terk did engage in the publication of
promotional material, and the manufacture of packaging for the CD 25 that it
knew was false. Accordingly, we agree with the motion court that Atlantic bore
no duty to indemnify Terk for the damages it sustained as a result of the
The duty of an insurer to provide a defense for its insured is distinct from, and far broader than, its duty to indemnify (Fitzpatrick v American Honda Motor Co., 78 NY2d 61, 65; Pavarini Constr. Co. v Liberty Mut. Ins. Co., 270 AD2d 98, 99; 79th Rlty. Co. v X.L.O. Concrete Corp., 247 AD2d 256, 257). The insured's right to representation, and the insurer's concomitant duty to defend a suit, no matter how groundless or fraudulent, are "in a sense 'litigation insurance' expressly provided by the insurance contract" (Servidone Constr. Corp. v Security Ins. Co. of Hartford, supra at 423-424, quoting International Paper Co. v Continental Cas. Co., 35 NY2d 322, 325-326; National Amusements, Inc. v Scottsdale Ins. Co., 253 AD2d 396). An insurer's duty to defend is triggered whenever allegations set forth in a complaint state a cause of action that gives rise to a reasonable possibility of recovery under the policy (Town of Massena v Healthcare Underwriters Mut. Ins. Co., 98 NY2d 435, 443; Technicon Elecs. Corp. v American Home Assur. Co., 74 NY2d 66, 73; Fitzpatrick v American Honda Motor Co., supra at 65; Gibbs v CNA Ins. Cos., 263 AD2d 836, 837, lv denied 94 NY2d 755).
Conversely, if the allegations interposed in the underlying complaint allow for no interpretation which brings them within the policy provisions, then no duty to defend exists (Northville Industries Corp. v National Union Fire Ins. Co. of Pittsburgh, 218 AD2d 19, 24-25, affd 89 NY2d 621; Nancie D. v New York Cent. Mut. Fire Ins. Co., 195 AD2d 535, 536). "[A]n insurer can be relieved of its duty to defend if it establishes as a matter of law that there is no possible factual or legal basis on which it might eventually be obligated to indemnify its insured under any policy provision" (Allstate Ins. Co. v Zuk, 78 NY2d 41, 45; see also Morse Diesel Intl. v Olympic Plumbing and Heating Corp., 299 AD2d 276, 277), and an insured may not "by use of a 'shot-gun' allegation, create a duty to defend beyond that which was anticipated by the parties when they entered into the policy contract" (Village of Newark v Pepco Contractors, Inc., 99 AD2d 661, 662, affd 62 NY2d 772; see also Nancie D. v New York Cent. Mut. Fire Ins. Co., supra at 536-537). Moreover, if the insurer, in denying coverage, relies upon an exclusion clause, the burden rests upon the insurance company to demonstrate that the allegations of the complaint can be interpreted only to exclude coverage (Town of Massena v Healthcare Underwriters Mut. Ins. Co., supra at 444; International Paper Co. v Continental Cas. Co., supra at 325; Northville Indus. Corp. v National Union Fire Ins. Co. of Pittsburgh, supra at 25). While the insurer's burden is a heavy one, the court should not impose a duty to defend on an insurer "through a strained, implausible reading of the complaint 'that is linguistically conceivable but tortured and unreasonable'" (Northville Indus. Corp. v National Union Fire Ins. Co. of Pittsburgh, 89 NY2d 621, 634-635, quoting State of New York v AMRO Realty Corp., 936 F2d 1420, 1428 [2nd Cir]).
Initially, Terk argues that the motion court, in reaching its determination that Atlantic bore no duty to defend Terk, did not consider the pleadings in the underlying action but, rather, improperly relied on the District Court's ultimate factual findings. In support of its argument, Terk quotes various segments, at length, from the transcript of the proceedings at which the motion court rendered its decision.
In response to Terk's protestations, we first note that the duty to defend is not an inflexible rule but, rather, one of expedience (see generally Kajima Constr. Serv. v CATI, Inc., 302 AD2d 228), which duty, as we stated earlier, expressly arises out of the insurance contract. In this matter, because the underlying action has been fully adjudicated and there can no longer be any doubt that Terk's conduct was fraudulent and, therefore, outside of the policy's coverage, no duty to defend provided by that insurance contract can possibly arise.
A review of the transcript, in any event, reveals that Justice Moskowitz embarked on a well-defined, two-prong analysis that clearly delineated the obligations of an insurer regarding its duty to indemnify vis-a-vis its duty to defend. What we find disturbing is that despite the clarity with which the motion court addressed these issues, Terk either intentionally mischaracterizes, or completely misapprehends, the motion court's ruling as it continually quotes from that branch of the decision addressing Atlantic's duty to indemnify, and not its duty to defend. In any event, we find that the motion court accurately, and clearly, articulated the proper standards in this matter.
Terk also maintains that the allegations of the Larsen complaint do not fall wholly within the "knowledge of falsity" exclusion, thereby obligating Atlantic to defend Terk in that action, because: (1) a violation of the Lanham Act does not require intent; and (2) the complaint asserts that Terk acted with "reckless disregard" of Larsen's rights. We disagree.
Terk is correct in that the Lanham Act "does not require proof of intent to deceive" (Johnson & Johnson v Carter-Wallace, Inc., 631 F2d 186, 189). As a result, some New York courts have found that allegations that an insured has violated the Lanham Act do not fall within the parameters of a "knowledge of falsity" exclusion and that, therefore, the insurer has a duty to defend (see P.G. Ins. Co. of New York v S.A. Day Mfg. Co., 251 AD2d 1065; Massachusetts Bay Ins. Co. v Penny Preville, Inc., __ F Supp __, 1996 WL 389266 [SDNY, July 10, 1996]).
This Court, however, in A.J. Sheepskin and Leather Co., Inc. v Colonia Ins. Co. (273 AD2d 107), a declaratory judgment action which, like the matter before us, arose out of a Federal action based upon section 43(a) of the Lanham Act (15 USC 1125[a]), held that:
The motion court correctly found that defendant insurer was under no duty to defend and indemnify plaintiff insured . . . in the underlying Federal action, because the allegations of the complaint in that action, setting forth claims of trademark infringement [were] . . . premised, without exception, upon conduct both knowing and intentional [and] fell wholly within the exclusion in the subject insurance policy pertaining to advertising injury 'arising out of oral or written publication of material; if done by or at the direction of the insured with knowledge of its falsity.' (Id. at 107; see also Mulberry Square Productions, Inc. v State Farm Fire and Cas. Co., 101 F3d 414, 422-423; McCarthy on Trademarks and Unfair Competition, § 33:16 [4th ed.].)
Our holding in Sheepskin finds support in other cases involving intentional conduct on the part of the insured where no duty to defend was found on the part of the insurer despite the fact that the complaint in the underlying action contained allegations of negligence (see e.g. Allstate Ins. Co. v Mugavero, 79 NY2d 153, 163 [holding that the characterization of intentional acts, such as "intentional, forceful and violent assault, sodomy and sexual abuse," as "negligently and carelessly" committed, does not remove such acts from the purview of policy exclusions for intentional acts]; Gibbs v CNA Ins. Co., 263 AD2d 836, supra [sexual molestation of a child is "intentionally caused" within the meaning of the policy exclusions despite allegations premised upon acts constituting negligence]; Bingham III v Atlantic Mut. Ins. Co., 215 AD2d 315, 316 ["[t]hat allegations of mental suffering can be based on both intentional and unintentional causes of action is not dispositive; what is material to the duty to defend is that the acts alleged in the counterclaims are all intentional. Awkward draftsmanship aside, the insurer is entitled to rely on the exclusion as a matter of contract law"]; New York Casualty Ins. Co. v Ward, 139 AD2d 922 [summary judgment granted to insurer where the insured committed assault, notwithstanding conclusory assertions of negligence]; Home Mutual Ins. Co. v Lapi, 192 AD2d 927 [no duty to defend despite allegations of carelessness and recklessness in complaint where insured, allegedly under the influence of alcohol, committed an assault]; Contracting Plumbers' Coop. Restoration Corp. v Hartford Accident & Indem. Co., 59 AD2d 921, 922, affd 46 NY2d 857 [insurer had no duty to defend where the facts pled put the occurrences outside locations covered by the policy despite general "shotgun" allegations of negligence]).
In this matter, notwithstanding the fact that a violation of the Lanham Act can be unintentional, and that the complaint in the Federal action asserts that Terk acted with "reckless disregard," we can discern no justification from the factual allegations set forth in the complaint to impose a duty to defend Terk upon Atlantic. Indeed, it is impossible to envision how Terk could have unknowingly, and unintentionally, approached a local manufacturer to produce a cheaper, low-quality knockoff of the CD 25; marketed the counterfeit product in packaging indicating it was a genuine Larsen creation manufactured in Denmark, both blatantly false; and then fraudulently misled Larsen when he inquired as to poor sales, indicating that demand was low, whereas the counterfeit product was enjoying vigorous sales. Since all of the factual allegations of the complaint are premised on intentional, "knowing" conduct, they fall squarely within the "knowledge of falsity" exclusion in the Policy and we therefore agree with the motion court that Atlantic had no duty to defend Terk.
Accordingly, the judgment of the Supreme Court, New York County (Karla Moskowitz, J.), entered June 12, 2002, which, inter alia, declared that Atlantic had no duty to defend or indemnify Terk in the underlying Federal action brought by Tommy Larsen and Tommy Larsen ApS against Terk, should be affirmed, without costs.
All concur except Andrias, J. who concurs in result only in a separate Opinion.
ANDRIAS, J. (concurring in result only)
While I agree that Atlantic had no duty to defend Terk since all of the factual allegations in the complaint are premised on intentional "knowing" conduct and fall squarely within the "knowledge of falsity" exclusion in the policy, I disagree with the majority's reliance, in what seems to be dicta, upon the outcome of the underlying Federal action as additional justification for such conclusion. The majority aptly states the well-settled principle that if the allegations in the underlying complaint allow for no interpretation which brings them within the policy provisions, then no duty to defend exists. That should be where the inquiry ends and there is no reason to go further and to decide an issue not raised by the parties. The majority's reliance upon our recent decision in Kajima Construction Services, Inc. v CAT1, Inc. (302 AD2d 228) is misplaced since there the issue was whether one insurance carrier or another would be required to afford primary or excess coverage to their insured, which determination could not be made until a determination as to liability was made in the underlying action. The only mention of the insurer's duty to defend related to the issue of defense expenses. Since the insured was already being defended by one of the carriers, there was no practical need for the other insurer to contribute to that effort given that the issue of coverage with respect to indemnity was necessarily deferred pending a determination of the underlying action, which determination would also resolve the issue of primary responsibility for defense expenses. Such decision adds nothing to the issue decided here and its citation as authority for the statement that the duty to defend "is not an inflexible rule but, rather, one of expedience" is, in the context of this case, a non sequitur and is liable to create mischief in the future.
Subsequent to the commencement of the Federal action, the corporation changed
its status under Danish law and is now referred to by the denomination "AS."
Footnote 2: Indeed, the District Court noted that the counterfeit CD 25s were inferior in quality and materials, did not have the clean, sharp lines characteristic of the Danish design, and a standard CD case did not fit in the counterfeit units unless forced. Moreover, the rubber tubing on the base was loose enough to come off, and left black marks on furniture surfaces.
Footnote 3: The Court of Appeals, in discussing the factual findings of the District Court, noted that "[a]mazingly, Terk continued to take orders for TOMMY LARSEN CD 25s, and fill those orders with counterfeit CD 25s, for at least six months after Larsen filed this lawsuit." (id. at 144).
AMERCIAN REF-FUEL CO. OF HEMPSTEAD v RESOURCE RECYCLING, INC.
In an action, inter alia, for a judgment declaring that the defendants Home Insurance Company of Illinois, Home Insurance Company, Minnesota Fire & Casualty Company, and Minnesota Mutual Insurance Company have a duty to defend and indemnify the plaintiff in an underlying personal injury action entitled Riek v American Ref-Fuel Company of Hempstead, the defendant Universal Welding & Engineering appeals, as limited by its brief, and the defendants Jack O. A. Nelsen Agency and Donald Miller separately appeal, as limited by their brief, from so much of an order of the Supreme Court, Nassau County (DeMaro, J.), dated September 13, 2001, as denied those branches of their respective motions which were to dismiss the sixth cross claim asserted by the defendants Home Insurance Company of Illinois and the Home Insurance Company, and granted the cross motion of Home Insurance Company of Illinois and Home Insurance Company for summary judgment on the sixth cross claim.
ORDERED that the order is affirmed insofar as appealed from, with one bill of costs payable by the appellants appearing separately and filing separate briefs.
On or about September 4, 1993, the plaintiff, American Ref-Fuel Company of Hempstead (hereinafter American) hired the defendant Resource Recycling, Inc. (hereinafter Resource), to design and install a new ferrous recovery system at its plant in Westbury. Shortly thereafter, Resource entered into a subcontract with the defendant Universal Welding & Engineering Company (hereinafter Universal). The subcontract required Universal to obtain a general liability insurance policy naming both Resource and American as additional insureds. The subcontract also contained an indemnification clause in which Universal agreed to "indemnify, defend and hold harmless contractor and/or owner" from and against any loss or liability arising out of the performance of the agreement. Although Universal requested its insurance broker to add American and Resource as additional insureds to its existing liability policy, it is undisputed that the broker failed to do so.
In February 1994 one of Universal's employees was injured at the worksite when he fell from a catwalk. The injured employee commenced actions, which were later consolidated, against American and Resource, alleging, inter alia, that they had violated Labor Law § 240(1). Home Insurance Company of Illinois and Home Insurance Company (hereinafter collectively Home Insurance), which had issued a general liability policy to Resource, provided Resource with a defense in the underlying personal injury action. In addition, in accordance with a prior order of this court (see American Ref-Fuel Co. of Hempstead v Resource Recycling, 248 AD2d 420), Home Insurance also assumed the cost of defending American, which had been named as an additional insured on the policy issued to Resource. After discovery in the personal injury action was completed, American and Resource moved for summary judgment on the claims they had asserted against Universal for common-law and contractual indemnification. By order dated July 20, 2000, the Supreme Court conditionally granted the motions for indemnification, finding that certain deposition testimony established that neither the owner nor the general contractor controlled Universal's work, or negligently caused or contributed to the accident. The injured worker's action was ultimately settled on February 26, 2001. This settlement was paid by the insurance carriers who provided coverage to Universal (the subcontractor) and to Universal's insurance broker, the Jack O. A. Nelson Agency, and the broker's employee Donald Miller (hereinafter collectively the Nelson Agency).
Following the settlement, Universal and the Nelson Agency separately moved, inter alia, for summary judgment dismissing the sixth cross claim of Home Insurance, which seeks recovery of the legal expenses Home Insurance incurred in providing American and Resource with a defense in the underlying action. In support of their motions, Universal and the Nelson Agency contended that since American and Resource had not been required to expend their own funds to pay for their respective defenses in the personal injury action, Home Insurance, in its capacity as subrogee, could not recover defense costs. As authority for their position, American and Resource relied upon Inchaustegui v 666 5th Ave. Ltd. Partnership (96 NY2d 111). In Inchaustegui, the Court of Appeals held that where a party who seeks damages for breach of an agreement to procure insurance has other insurance available which covers the loss, its damages are limited to the cost of obtaining and maintaining such substitute coverage. Home Insurance responded by cross-moving for summary judgment on its sixth cross claim, arguing that the indemnification provision of the subcontract entitled it, as subrogee of American and Resource, to recover reasonable defense costs. The Supreme Court denied the motions of Universal and the Nelson Agency, and granted Home Insurance's cross motion, concluding that the rationale of Inchaustegui did not apply because Home Insurance was seeking to recover legal expenses pursuant to the indemnification provision of the subcontract, rather than damages for breach of an agreement to procure insurance. We agree.
Subrogation is an equitable doctrine which allows an insurer to "'stand in the shoes' of its insured to seek indemnification from third parties whose wrongdoing has caused a loss for which the insurer is bound to reimburse" (North Star Reins. Corp. v Continental Ins. Co., 82 NY2d 281, 294; see also Pennsylvania Gen. Ins. Co. v Austin Powder Co., 68 NY2d 465, 471). The subrogation doctrine "has a dual objective. It seeks, first, to prevent the insured from recovering twice for one harm, as it might if it could recover from both the insurer and from a third person who caused the harm, and, second, to require the party who has caused the damage to reimburse the insurer for the payment the insurer has made * * * The doctrine is liberally applied for the protection of those who are its natural beneficiaries - insurers that have been compelled by contract to pay the loss caused by the negligence of another" (Winkelmann v Excelsior Ins. Co., 85 NY2d 577, 581). Here, the Supreme Court determined, in the underlying personal injury action, that neither American nor Resource was actively negligent, and that these parties were thus conditionally entitled to both common-law and contractual indemnification in the event that the injured worker obtained a judgment against them. This right to indemnification "encompasses the right to recover attorneys' fees, costs, and disbursements incurred in connection with defending the suit brought by the injured party" (Chapel v Mitchell, 84 NY2d 345, 347), and is not impaired by the fact that the personal injury action was resolved by settlement rather than judgment (see Fessenden v Marshalls Dept. Store of Pittsford, N.Y., 261 AD2d 839). Although Home Insurance paid the defense costs incurred by American and Resource in the underlying action, leaving them with no damages other than the out-of-pocket costs of obtaining and maintaining substitute insurance coverage (see Inchaustegui v 666 5th Ave. Ltd. Partnership, supra), the subrogation doctrine permits Home Insurance to obtain reimbursement for these costs from Universal, whose negligence was responsible for the loss (see Hamilton v Khalife, 289 AD2d 444; Michigan Mut. Ins. Co. v American & Foreign Ins. Co., 251 AD2d 141). Furthermore, the Supreme Court properly concluded that the rationale of the Inchaustegui decision is not controlling because in this case, Home Insurance seeks to recoup defense costs through enforcement of the indemnification rights of its insureds. In contrast, the issue presented in Inchaustegui was whether the damages caused by breach of an insurance procurement provision could be minimized where other insurance coverage was available. Accordingly, we do not find that the Inchaustegui decision bars Home Insurance from recovering its reasonable defense costs in its capacity as subrogee for its insureds, who established their right to indemnification from Universal in the underlying action.
KRAUSMAN, J.P., McGINITY, SCHMIDT and MASTRO, JJ., concur.
MATTER OF GEICO GENERAL INS. CO. v SHERMAN
In a proceeding pursuant to CPLR article 75 to confirm an arbitration award, in which Claire B. Sherman and Lowell B. Sherman cross-petitioned to vacate the award, the appeal is from a judgment of the Supreme Court, Nassau County (McCarty, J.), entered June 12, 2001, which, upon an order of the same court dated April 30, 2001, granted the petition and denied the cross petition.
ORDERED that the notice of appeal from the order dated April 30, 2001, is deemed a premature notice of appeal from the judgment (see CPLR 5520[b]); and it is further,
ORDERED that the judgment is affirmed; and it is further,
ORDERED that one bill of costs is awarded to the petitioner.
The appellant Claire B. Sherman (hereinafter Sherman) allegedly sustained personal injuries in a two-vehicle collision with nonparty Akeem Abdullah. The collision occurred when Sherman made a left-hand turn at a traffic light, and her vehicle struck the driver's side of Abdullah's vehicle near the rear wheel. Thereafter, Sherman brought a personal injury action against Abdullah and was ultimately awarded a default judgment against him. Following that action, Sherman filed a claim for underinsured motorist benefits with her insurer, the petitioner, GEICO General Insurance Company (hereinafter GEICO). When GEICO denied her claim for such benefits, Sherman and her husband demanded arbitration of the claim. One day prior to the scheduled arbitration hearing, the appellants' counsel received a letter from GEICO indicating that Abdullah and his mother, Hope Williams, would be testifying at the hearing. Over Sherman's objection, the arbitrator allowed Abdullah and Williams to testify. Following the arbitration hearing, the arbitrator denied Sherman's claim for underinsured motorist benefits, finding that her own negligence had caused the accident.
GEICO subsequently commenced the instant proceeding pursuant to CPLR article 75 to confirm the arbitrator's award. The appellants filed a cross petition to vacate the award on the ground that the arbitrator committed misconduct and exceeded his authority in considering the issue of fault and in allowing Abdullah and Williams to testify at the arbitration hearing. With respect to the latter issue, the appellants argued that GEICO had not given them timely notice, as required by the rules of the American Arbitration Association, that those witnesses would be testifying. The Supreme Court granted GEICO's petition and denied the appellants' cross petition. We affirm.
The Supreme Court properly confirmed the arbitration award in favor of GEICO and denied the appellants' cross petition to vacate the award. It is well settled that where "a party who has participated in arbitration seeks to vacate the award, vacatur may only be granted upon the grounds that 'the rights of that party were prejudiced by corruption, fraud or misconduct in procuring the award, partiality of an arbitrator, that the arbitrator exceeded his power or failed to make a final and definite award, or a procedural failure that was not waived'" (Matter of Mohiuddin v Khan, 197 AD2d 578, quoting Matter of Silverman [Benmor Coats], 61 NY2d 299, 307; see CPLR 7511[b]). Contrary to the appellants' contention, the arbitrator neither committed misconduct (see CPLR 7511 [b][i]) nor exceeded his authority (see CPLR 7511[b][iii]) when he considered the issue of liability in determining whether the appellants were entitled to underinsured motorist benefits under their policy with GEICO (see Matter of Board of Educ. of Dover Union Free School Dist. v Dover-Wingdale Teachers' Assn., 61 NY2d 913, 915; see also Roggio v Nationwide Mut. Ins. Co., 66 NY2d 260, 263).
Similarly, the arbitrator did not exceed his authority or commit misconduct in allowing GEICO to call Abdullah and Williams as witnesses, despite GEICO's failure to provide the appellants with the notice required by the rules of the American Arbitration Association (see Matter of Janis v New York State Div. of Hous. & Community Renewal, 271 AD2d 878, 879 [the failure to comply with a procedural provision of an arbitration agreement does not constitute a ground for vacating an award under CPLR 7511]). Although it may have been better if the arbitrator had not allowed Abdullah and Williams to testify at the hearing (cf. Matter of Insurance Co. of N. Am. v St. Paul Fire & Marine Ins. Co., 215 AD2d 386, 387 ["The failure of an arbitrator to grant an adjournment is an abuse of discretion constituting misconduct within the meaning of CPLR 7511 (b)(1)(i) if it results in the foreclosure of the presentation of pertinent and material evidence"]), the appellants failed to prove by clear and convincing evidence (see Matter of Janis v New York State Div. of Hous. & Community Renewal, supra at 879; Matter of Thompson [S.L.T. Ready-Mix, Div. of Torrington Indus.], 245 AD2d 911, 913; Matter of Cox [Mitchell], 188 AD2d 915, 917) that doing so constituted misconduct within the meaning of CPLR 7511(b)(1)(i). Rather, any error in admitting this testimony was harmless and did not prejudice the appellants (see Matter of S. Wiener Furniture Co. [Kingston City Schools Cons.], 90 AD2d 875; Matter of Walter, Inc. [Laborers Int. Union of North Amer., Local No. 7], 54 AD2d 1055, 1056-1057), since it is clear that the arbitrator based his decision on Sherman's testimony, not that of Abdullah or Williams (see Matter of Janis v New York State Div. of Hous. & Community Renewal, supra).
The dissent's conclusion that the testimony of Abdullah and Williams "apparently" factored in the arbitrator's determination is not supported by the record and is, in fact, contradicted by it. In his decision, the arbitrator found "that [Sherman] admitted negligence in not observing the other vehicle prior to turning left into oncoming traffic," and that there was "no evidence that [Abdullah] was negligent in the use or operation of his vehicle." He noted that the impact was to the left rear portion of Abdullah's vehicle and the front of Sherman's vehicle. He also rejected as speculation the argument that Abdullah was speeding, noting that counsel's reference to Sherman's testimony at her examination before trial "does not reflect the circumstances as [the appellant] wishes them to be."
The appellants' remaining
contentions are without merit.
S. MILLER, J.P., FRIEDMANN and RIVERA, JJ., concur.
CRANE, J., dissents and votes to reverse the judgment, vacate the order, deny the petition, grant the cross petition, and remit the matter to the American Arbitration Association for a new determination by a different arbitrator, with the following memorandum.
The appellant Claire B. Sherman was allegedly injured in a motor vehicle accident when her car collided with a motor vehicle driven by Ahkeem S. Abdullah. She and her husband, suing derivatively, commenced an action against Abdullah in the Supreme Court, Kings County. Abdullah defaulted and a judgment was entered against him on March 16, 2000.
After the appellants obtained their default judgment, they filed a demand for Supplementary Uninsured/Underinsured Motorists (hereinafter SUM) Arbitration pursuant to the rules of the American Arbitration Association (hereinafter the AAA) on the issue of damages only. The SUM arbitration clause at issue reads, in pertinent part:
"Arbitration: If any insured making a claim under this SUM coverage and we do not agree that such is legally entitled to recover damages from the owner or operator of an uninsured motor vehicle because of bodily injury sustained by the insured, or do not agree as to the amount of payment that may be owing under this SUM coverage, then, at the option and upon written demand of such insured, the matter or matters upon which such insured and we do not agree shall be settled by arbitration administered by the American Arbitration Association, pursuant to procedures prescribed or approved by the Superintendent of Insurance for this purpose."
I reject the appellants' argument that if both liability and damages are in dispute, they may, at their option, submit to the arbitrator only the issue of damages. If the insured elects to exercise his or her option to proceed to SUM arbitration, all matters in dispute must be submitted to the arbitrator (see Roggio v Nationwide Mut. Ins. Co., 66 NY2d 260, 263). I part from the majority, however, because there is no evidence in the record that liability was in dispute, and GEICO's attempt to interject liability as an issue in the arbitration a mere one day prior to its commencement should not have been permitted.
Less than one month after the appellants submitted their demand for arbitration, GEICO filed a petition to stay the SUM arbitration on the grounds that (1) the offending vehicle was insured by Empire Insurance Company (hereinafter Empire) and, therefore, there was no uninsured motor vehicle involved in the accident, (2) with respect to underinsurance, Empire had not tendered its policy nor was any payment made exhausting the Empire policy, (3) the appellants were impermissibly seeking a separate $100,000 for the appellant Lowell Sherman who was not involved in the accident, and (4) the appellants had not complied with the conditions precedent to demanding SUM arbitration in that they failed to appear for depositions and medical examinations. There was no mention in GEICO's petition for a stay that the appellants were improperly attempting to submit to arbitration less than all of the issues in dispute, or that liability was also in dispute. After Empire tendered its policy, the Supreme Court denied the petition and directed the parties to complete disclosure and proceed to arbitration.
GEICO had a second opportunity to challenge the appellants' limitation to damages only in their demand for arbitration. Rule 6 of the AAA rules, entitled Change of Claim, provides that "[i]f a party desires to make any new or different claim, the same shall be made in writing and filed with the AAA and a copy shall be mailed to the other party. After the arbitrator has been appointed, no new or different claim may be submitted except with the arbitrator's consent." The record contains no evidence that GEICO submitted a written claim contesting liability to the AAA or to the appellants, assuming such a claim was previously preserved and remained timely at the arbitration.
The arbitration was scheduled for February 1, 2001. The appellants received on January 31, 2001, a letter from GEICO to the AAA dated January 22, 2001, stating that Abdullah, the driver of the offending vehicle, and his passenger, would testify at the arbitration. Although GEICO did not specify in the letter what these individuals would testify to, there was no other purpose for the offending driver to testify at the arbitration if GEICO was not challenging liability. Thus, the appellants became aware the day prior to the scheduled arbitration, for the very first time, that GEICO was disputing the issue of liability in this matter. At the very least, this late notice should not have been countenanced, as it violated Rule 19 of the AAA rules, which requires 15 days' notice of witnesses to be called at an arbitration, as well as Rule 6, since GEICO did not request permission of the arbitrator to make a new or different claim. The appellants were further stymied the next day when the arbitrator overruled their objections to these witnesses and to the interjection of liability into the arbitration. The arbitrator stated "it probably won't matter anyway." Apparently it did matter because the arbitrator submitted an award in favor of GEICO finding no liability on the part of the offending driver thereby rendering academic the issue of damages.
The Supreme Court and the majority focus solely on the appellants' election to arbitrate damages only, relegating it to a conscious choice of the insured to arbitrate only one of the matters they and the insurance company did not agree upon. This overlooks the fact that the record is devoid of any evidence that GEICO ever disputed liability or informed the appellants that there was a dispute as to liability as well, at least not until the day before the arbitration. Under these circumstances, it is unfair and unjust to confirm this arbitration award.
Accordingly, I would reverse the judgment, vacate the order, deny the petition, grant the cross petition, and remit the matter to the American Arbitration Association for a new determination by a different arbitrator.