New York Insurance Coverage Law Update

March 30, 2021 | Alan C. Eagle | Insurance Coverage

Second Department Holds Insurer Has No Duty To Defend Or To Indemnify Insured In Underlying Trademark Infringement Action

The insured was sued in an underlying action seeking damages and injunctive relief for alleged trademark infringement.  The insured tendered the action to its CGL insurer which disclaimed. The insured settled the underlying action and sued its insurer for coverage.  The parties agreed that the underlying action included allegations of “advertising injury” as defined by the policy.  On appeal, the  sole issue was the application of the Intellectual Property Exclusion, which pre-cluded coverage for “advertising injury … arising out of, giving rise to or in any way related to any actual or alleged … infringement or violation by any person or organization … of any intellectual property law or right [including trademarks]….” The Appellate Division, Second Department, held that the Intellectual Property Exclusion precluded coverage because of allegations in the underlying complaint that the insured counterfeited and in-fringed upon another’s trademark and engaged in the sale and distribution of offending goods.  The court also found that the insured failed to meet its burden of proving the applicability of the ex-ception to the exclusion for injury that does not “in any way relate to any actual or alleged assertion, infringement or violation of any intellectual property law or right, other than one described in the definition of advertising injury”, because the underlying complaint also contained allegations unrelated to advertising injury.  [Pro’s Choice Beauty Care, Inc. v. Great N. Ins. Co., 190 A.D. 3d 868 (2d Dep’t Jan. 20, 2021).]

First Department Finds No Coverage Under Claims-Made Policy And That Insurer Can Recoup Its Defense Costs

The insurer defended its insured in an underlying personal injury action under a reservation of rights, including the right to seek back its defense costs. The  Appellate Division, First Department, held that the insurer was not obligated to defend or to indemnify its insured because the insured reported the claim to its insurer outside of the policy period and extended reporting period, and that the insurer was entitled to withdraw from its defense of the insured and recoup the defense costs it had paid.  The court reasoned that New York Insurance Law §3420 (a)(5) permits a claims-made policy to set a time frame for reporting claims, irrespective of prejudice. Citing other First Department cases, the  court concluded that “New York law further permits insurers to provide their insureds with a defense subject to ‘a reservation of rights to, among other things, later recoup their defense costs upon a determination of non-coverage.’”  [Certain Underwriters at Lloyd’s London v. Advance Tr. Co. Inc., 188 A.D.3d 523 (1st Dep’t Nov. 17, 2020).]

Second Department Finds No Coverage Based On Late Notice But That Insurer Could Not Recoup Defense Costs

A default judgment was entered against the insureds in a personal injury action. After the entry of the judgment, the insureds provided notice to their insurer, which disclaimed coverage because of the late notice.  Upon the default being va-cated, the insurer agreed to defend the insureds under a reservation of rights.  However, when an appellate court reinstated the default judgment, the insurer disclaimed and reserved its rights to recover its defense costs in the personal injury action. The insurer then filed a declaratory judgment action against the insureds. The Appellate Division, Second Department, agreed that the insurer had no coverage obligation, but concluded: “To the extent that certain federal courts interpreting New York law and our sister appellate courts in New York have held that an insurer may recover its defense fees when there has been a determination that no duty to indemnify exists …, we decline to adopt that view.”  The court noted that “if the insurance company had wanted to include language [in its policy] that allowed it to recover the costs of defending claims that are later determined not covered, it could have done so,” but it did not.  [American West Home Ins. Co. v. Gjonaj Realty & Mgmt. Co., 192 A.D.3d 28 (2d Dep’t Dec. 30, 2020).]

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