New York Insurance Coverage Law Update

May 28, 2020 | Insurance Coverage

Second Circuit Finds Coverage Where Insurer Unreasonably Delayed In Seeking Rescission and Its Exclusions Did Not Apply

WW Trading was sued and sought coverage from United States Liability Insurance Company (USLI) which sought to rescind its policy on the basis of WW Trading’s alleged misrepresentations in its application. The Second Circuit affirmed the district court’s finding of coverage on the ground that USLI unreasonably delayed in seeking rescission. The Court found that USLI “clearly had constructive knowledge of WW Trading’s potential misrepresentations” in 2014 when it “sent WW Trading a nonrenewal notice accusing WW Trading of violating the exact provisions of the insurance application that form the basis for USLI’s rescission claim.”  Yet, USLI did not assert its rescission claim until 2017. The Court also found that USLI’s “employee” and “construction operations” exclusions did not apply under the circum-stances. [U.S. Liability Ins. Co. v. WW Trading Co., No. 19-2661 (2d Cir. May 15, 2020)].

Eastern District Finds Duty To Defend Under Advertising Injury Coverage Despite Allegations Of Willful Conduct

Abbott Laboratories sued Value Wholesale and other pharmaceutical distributors alleging that they engaged in a wrongful scheme to “import[], advertis[e] and … distribut[e]” boxes of international glucose test strips that were not approved for domestic sale, and that the defendant pharmaceutical distributors profited from this scheme.  Abbott asserted claims for trademark and trade dress infringement, fraud, racketeering, unfair competition, and “other illegal and wrongful acts.”  Value sought coverage from KB Insurance Company (KBIC) under a policy providing coverage for damages because of “personal and advertising injury”, which was defined as injury arising out of one or more enumerated offenses, including the “use of another’s advertising idea in [Value’s] ‘advertisement’” and “[i]nfringing upon anoth-er’s copyright, trade dress or slogan in [its] ‘advertisement’”. KBIC denied coverage on the bases that the complaint did not allege a “causal nexus between its injuries and Value’s advertising activities” and various exclusions.  The United States District Court for the Eastern District of New York held that KBIC had a duty to defend, reasoning that Abbott’s complaint alleged that the Value’s advertising activities contributed to the alleged harm and, therefore, alleged a covered “advertising injury”.  As to the exclusions for “knowing violation of rights of another” and “material published with knowledge of falsity”, the court acknowledged that the complaint alleged willful misconduct, but opined that “several claims relating to Value’s allegedly infringing conduct” do not require proof of Value’s intent.  [Value Wholesale, Inc. v. KB Ins. Co., 2020 U.S. Dist. Precluded From LEXIS 56280 (EDNY March 31, 2020)].

Court Finds Insurer’s Disclaimer Based On Insured’s Failure to Cooperate Precluded Because Of Delay

Burlington Insurance Company defended Sublink, Ltd in an action arising from an accident at a construction project, and  Sublink’s Answer was stricken due to Sublink’s repeated failure to appear for a deposition.  Burlington filed an appeal on behalf of Sublink and, in May 2018, sent Sublink a letter warning its principal that his failure to appear for deposition violated the terms of Sublink’s insurance policy.  Burlington, however, did not disclaim coverage based upon Sublink’s failure to cooperate until 16 months later, after the appellate court upheld the striking of Sublink’s Answer. In Burlington’s coverage action seek-ing a declaration of no coverage, the court held that Burlington’s failure to timely disclaim in May 2018 when it was aware of sufficient grounds to do so rendered its subsequent disclaimer invalid under New York Insurance Law § 3420(d).  The court noted that the Appellate court’s decision may have “locked in” the prejudice to Burlington, but that an insurer is not required to establish prejudice due to noncooperation before it may disclaim. Instead, “[n]on-cooperation alone, if suffi-ciently willful and obdurate, will suffice.”   [Burlington Ins. Co. v. Sublink Ltd., 2020 NY Slip Op 50469[U] (Sup. Ct., N.Y. Cnty. 2020)].

District Court Rules that Criminal Act Exclusion Applies To Claims Alleging Hostile Work Environment And Sexual Harassment

Sway Lounge, LLC’s employee sued Sway for damages arising from an alleged sexual assault committed by her manager. The employee asserted causes of action for hostile work environment, sexual harassment, gender discrimination, retaliation, and assault and battery. Kinsale Insurance Company disclaimed coverage to Sway under its Employment Practices Liability Policy based upon, among other things, the Criminal Act Exclusion while precluded coverage for claims “based upon, arising out of or in any way involving any criminal act.”  The United States District Court for the Southern District of New York held that the Criminal Acts Exclusion precluded coverage.  The court noted that while Sway’s manager was not criminally prosecuted for the alleged sexual assault, it is the criminal “act”, not a criminal indictment or conviction, that triggers the exclusion.  [Hamilton Spec. Ins. Co. v. Kinsale Ins. Co., 2020 U.S. Dist. LEXIS 65916 (SDNY Apr. 15, 2020)].

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