New Jersey Federal Court Addresses Related Wrongful Acts

In its recent decision Gladstone v. Westport Insurance Corporation, 2011 U.S. Dist. LEXIS 132100 (D.N.J. Nov. 16, 2011), the United States District Court for the District of New Jersey addressed the concept of related wrongful acts in the context of a lawyers malpractice insurance policy.

The issue presented to the Gladstone court was whether a malpractice lawsuit filed against Westport’s insured, Robert Gladstone, during the policy period was related to a claim first made against Mr. Gladstone prior to the policy’s issuance.  Both claims arose out of a suit in which Mr. Gladstone unsuccessfully represented numerous parties in a zoning ordinance matter.  Sometime after the suit ended, Mr. Gladstone brought a collection action against eleven of his former clients.  In 2006, one of the former clients, Merrick Wilson, filed an answer in which he asserted the affirmative defense that Mr. Gladstone’s work had not met the standards of professional conduct.  In 2007, another of the defendants in the collection action asserted a counterclaim, alleging that Mr. Gladstone committed malpractice in connection with his prosecution of the zoning matter.   Ultimately, Mr. Gladstone settled the collection action, as well as the counterclaim, and obtained releases from each of the defendants, with the exception of Merrick Wilson, who for reasons not clear to the court, was never advised of the settlements or that Mr. Gladstone’s suit was dismissed.

In 2007, Mr. Gladstone joined the New Jersey firm of Szaferman, Lakind, Blumstein & Blader, P.C. (“SLBB”), and SLBB’s malpractice policy, issued by Westport, was endorsed to include coverage for Mr. Gladstone’s work prior to joining the firm.  Westport renewed the policy, with a similar endorsement, for the period July 4, 2008 to July 4, 2009.  In May 2009, Merrick Wilson commenced a malpractice action against Mr. Gladstone for the same zoning ordinance matter.  Westport denied coverage to Mr. Gladstone on the basis that the 2009 claim related back to the counterclaim originally asserted in 2007, and thus constituted a claim first made prior to the inception of the 2008-009 policy.  In doing so, Westport relied on the following policy provision:

Two or more CLAIMS arising out of a single WRONGFUL ACT, as defined in each of the attached COVERAGE UNITS, or a series of related or continuing WRONGFUL ACTS, shall be a single CLAIM.  All such CLAIMS whenever made shall be considered first made on the date on which the earliest CLAIM was first made arising out of such WRONGFUL ACT …

The court agreed that, at a minimum, the counterclaim asserted in 2007 constituted a “claim” that was first asserted prior to the 2008-2009 policy period.  Thus, the questions for the court were: (a) whether the related acts provision was enforceable and (b) was whether Mr. Merrick’s 2009 lawsuit was sufficiently related to the earlier counterclaim such that it should be deemed first made prior to the policy’s date of inception.

The insured argued that the related wrongful act provision was ambiguous and unenforceable under New Jersey law.  In considering the issue, the Gladstone court observed that New Jersey’s Supreme Court had not yet addressed the issue of related claims in a professional liability policy.  This concept had been addressed, however, by the United States District Court for the District of New Jersey in G-I Holdings v. Hartford Fire Ins. Co., 2007 U.S. Dist. LEXIS 19069 (D.N.J., Mar. 16, 2007), aff’d, 586 F.3d 247 (3d Cir. 2009) and by a New Jersey state appellate level court in Passaic Valley Sewerage Commissioner v. St. Paul Fire and Marine Ins. Co., 2010 N.J. Super. Unpub. LEXIS 475 (N.J. Super. Ct. App. Div. Mar. 8, 2010), aff’d, 2011 N.J. LEXIS 686 (N.J., June 21, 2011).  In both cases, the courts held that related wrongful act provisions were unambiguous and enforceable under New Jersey law.  From these cases, the Gladstone court concluded that the provision in the Westport policy should be enforced.  As the court explained, the provision:

… is not unclear.  It does not include any undefined terms and is not so lengthy or convoluted that the average insured (especially the average lawyer!) would be unable to predict its effect in cases such as this one.

After determining that the provision was enforceable, the court considered whether it should be.  The standard for determining “relatedness,” explained the court, is whether “there is a logical connection between [the claims], even if different plaintiffs brought them.”  Thus, finding that the malpractice alleged in the 2007 counterclaim was identical to that alleged in Merrick Wilson’s 2009 malpractice suit, the court held that “[n]o reasonable jury could stray from the conclusion that the … [c]ounterclaim and the 2009 Wilson Malpractice Complaint arose from the same related wrongful acts – Mr. Gladstone’s alleged negligence during his work on the Hopewell Zoning Matter.”  Accordingly, the court concluded that Westport properly denied coverage for the Merrick suit on the basis that it was properly deemed a claim first made prior to the policy period.

Third Circuit Finds Additional Insured Coverage Based on Peculiar Risk Doctrine

In its recent decision Lafayette College v. Selective Insurance Company, 2001 U.S. App. LEXIS 22721 (3d Cir. Nov. 10, 2011), the United States Court of Appeals for the Third Circuit, applying Pennsylvania law, addressed under what circumstances additional insured coverage may be triggered.

The underlying suit in Lafayette arose out of a construction site injury at Lafayette College in Easton, Pennsylvania.  Lafayette had hired Telesis Construction, Inc. as the  general contractor to renovate a portion of the campus.  Telesis was insured under a general liability policy issued by U.S. Fire.  Telesis, in turn, subcontracted out a portion of the work to Alan Kunsman Roofing & Siding, Inc.  During the course of the renovation work, an employee of Kunsman fell from a scaffold and sustained severe injuries.  That employee later sued Lafayette and Telesis, among others. 

The primary coverage dispute in Lafayette was whether the college qualified for additional insured coverage under Telesis’ policy.  That policy’s additional insured endorsement stated that an entity such as Lafayette “is only an additional insured with respect to liability caused by your negligent acts or omissions at or from your ongoing operations performed for the additional insured at the job indicated by written contract or written agreement.”  In other words, the additional insured coverage was limited to vicarious liability imposed on Lafayette as a result of Telesis’ work. 

U.S. Fire argued that it did not have a coverage obligation to Lafayette because the underlying suit alleged that Lafayette was jointly and severally liable rather than vicariously liable for plaintiff’s injuries.  The court noted that while true, such was not fatal to Lafayette’s claim for coverage, as it is not the legal theories advanced, but rather the underlying facts that are dispositive of coverage issues.  With this in mind, the court addressed Lafayette’s contention that the underlying suit asserted liability based on the “peculiar risk doctrine,” which imposes liability on employers of independent contractors when: (1) a risk is foreseeable to the employer at the time of contract and (2) the risk is different “from the usual and ordinary risk associated with the general type of work done.”  The court explained that if the underlying complaint could be read to assert such a claim against Lafayette, such would be tantamount to an assertion of vicarious liability for the purpose of the additional insured endorsement in the U.S. Fire policy.

Looking to the underlying complaint, the court found sufficient allegations to substantiate Lafayette’s claim, notwithstanding the fact that plaintiff did not expressly assert a theory of legal liability based on the peculiar risk doctrine.  Among other things, the complaint alleged that defendants, including Lafayette, “knew or should have known that falls are one of the leading causes of fatalities and injuries at construction sites” and that defendants exposed plaintiff “to peculiar and unreasonable danger by refusing to permit workers to use the elevator and/or stairs inside the college to gain access to the roof and requiring workers … to climb more than 40 feet in the air on a vertically mounted scaffolding ladder without any adequate protection.”  These allegations, explained the court, established the foreseeability of the plaintiff’s injuries and that the risk involved was, in fact, different than ordinary risks associated with construction work.  As such, the court concluded that the two elements of a peculiar risk claim were satisfied by the underlying complaint, and U.S. Fire had a duty to defend Lafayette. 

   

Illinois Court Holds No Duty to Defend Water Intrusion Claim

In its recent decision Lagestee-Mulder, Inc. v. Consol. Ins. Co., 2011 U.S. Dist. LEXIS 129308 (N.D. Ill. Nov. 8, 2011), the United States District Court for the Northern District of Illinois addressed what allegations must be made in a construction defect lawsuit in order to trigger coverage under a general liability policy.

Lagestee, the general contractor on a construction project, was named as a defendant in a construction defect suit.  It sought coverage as additional insured under a commercial general liability policy issued to one of its subcontractors by Consolidated Insurance Company.  Consolidated denied coverage to Lagestee on the basis that the underlying suit did not allege property damage, but instead was limited to seeking a remedy of the alleged construction defects.  Notably, the suit did not allege any particular third-party property damage, although it did allege that as a result of certain of the defects, water was allowed to infiltrate the building.  The suit did not, however, identify any particular damage resulting from the water instrusion.

The court began its analysis by noting that Illinois court have long recognized the rule that “[w]here the underlying suit alleges damage to the construction project itself due to a construction defect, there is no coverage; by contrast, where the underlying suit alleges that the construction defect damaged something other than the project itself, there is coverage.”  As such, explained the court, the absence of any allegation of specific third-party property damage resulting from the alleged would be fatal to Lagestee’s claim for coverage.  Lagestee acknowledged that the underlying suit did not allege third-party property damage per se, as the suit related primarily to use of defective construction materials and faulty workmanship.  Lagestee nevertheless argued that a duty to defend was triggered by the water intrusion allegations, since the presence of water at the building raised the potential for resulting property damage.

The court disagreed, concluding that while “[i]t is true that the underlying complaint does not disavow the proposition that the water infiltration damaged something other than the building itself … the mere possibility that such damage occurred does not trigger a duty to defend under Illinois law.”  In other words, a court is not permitted under Illinois law to speculate as to what damages might have result from alleged water infiltration.  Rather, the duty to defend is determined based solely on the damages actually alleged.  Because the underlying suit did not identify any particular damage resulting from the water infiltration, but instead alleged only that the defective construction allowed for water infiltration, it was not permissible for the court to speculate that such infiltration could result in covered property damage.  Thus, concluded the court, Consolidated did not have a duty to defend Lagestee in the underlying suit.

Second Circuit Agrees that Pollution Exclusion Does Not Apply to Restaurant Odors

In 2010, the United States District Court for the Southern District of New York issued its decision in Barney Greengrass, Inc. v. Lumbermans Mut. Cas. Co., 2010 U.S. Dist. LEXIS 76781 (S.D.N.Y. July 27, 2010), a case addressing whether the pollution exclusion applied to restaurant odors.  The insured, Barney Greengrass (also known as the Sturgeon King), is a well-known delicatessen and fish purveyor located on New York’s Upper West Side.  It was sued by a residential tenant in the same building who claimed that the odors emanating from the restaurant were a nuisance.  Barney Greengrass’ commercial general liability insurer denied coverage on the basis of its policy’s pollution exclusion. 

In a particularly cheeky written opinion, the district court rejected the insurer’s contention that restaurant odors constitute a pollutant for the purpose of the exclusion, explaining that:

To read "pollution" as encompassing "restaurant odors," as defendant urges here, would contradict "common speech" and the "reasonable expectations of a businessperson," who has come to understand standard pollution exclusions as addressing environmental-type harms … Defendant's suggested interpretation of the exclusion is unreasonable because it would mean that plaintiff, the "Sturgeon King," procured liability insurance for its business while at the same time agreeing to exclude coverage for all "losses" caused by a byproduct integral to that business: the aromas which many people (other than Mr. Bohn, of course) apparently find quite pleasant. See Curt Gathje & Carol Diuguid, eds., ZAGAT: NEW YORK CITY RESTAURANTS 2009, Barney Greengrass, at 49 ("The smells alone are worth the price of admission."). We reject that interpretation, which "would infinitely enlarge the scope of the term 'pollutants.'" … Indeed, while the quality of plaintiff's restaurant smells may be in the nose of the beholder, ⁹ defendant's "pollution" argument -- as addressed to the odors here -- is malodorous to this Court.

In reaching its decision, the court distinguished other New York cases holding that odors can constitute a pollutant for the purpose of the pollution exclusion (Town of Harrison v. Nat'l Union Fire Ins. Co. of Pittsburgh, 653 N.Y.S.2d 75 (N.Y. 1996); Tri-Municipal Sewer Commission v. Continental Ins. Co., 636 N.Y.S.2d 856, 857 (N.Y. 2d Dep't 1996), explaining that those cases concerned odors from industrial facilities and thus involved traditional environmental pollution.  By contrast, noted the court, restaurant odors cannot be considered traditional environmental pollution.

In an opinion dated November 4, 2011, a three-judge panel for the United States Court of Appeals for the Second Circuit affirmed the lower court’s decision.  See Barney Greengrass, Inc. v. Lumbermens Mut. Cas. Co., 2011 U.S. App. LEXIS 22442 (2d Cir. Nov. 4, 2011).  The court rejected Lumbermens’ argument on appeal that fumes, as used in the policy definition of “pollutants,” should be interpreted to include odors.  The court explained that Lumbermens could have worded the policy language to include a specific definition of fumes, or could have included odors within the broader definition of “pollutants,” but elected not to.  The court further noted that under New York law, the terms used in the definition of “pollutants” (i.e., smoke, vapors, soot, fumes, acids, etc.) have been construed to mean industrial pollution.  As such, the court agreed that odors from industrial facilities, such as was the case in Town of Harrison and Tri-Municipal Sewer Commission, fall within the pollution exclusion, whereas restaurant odors do not.

Coincidentally, Barney Greengrass is not the only federal circuit decision in 2011 to address whether the pollution exclusion applies to restaurant odors.   In Maxine Furs, Inc. v. Auto-Owners Ins. Co., 2011 U.S. App. LEXIS 6706 (11th Cir. March 31, 2011), the United States Court of Appeals for the Eleventh Circuit, applying Alabama law, held that the pollution exclusion applied to the emanation of curry odors from an Indian food restaurant.  Under Alabama law, however, unlike New York law, the pollution exclusion is broadly construed to apply to matters not considered traditional environmental pollution. 

California Court Holds Non-Owned Site Disposal Exclusion Is Ambiguous

In its recent decision Sierra Recycling & Demolition v. Chartis Specialty Insurance Co., 2011 U.S. Dist. LEXIS 127354 (E.D. Cal. Nov. 3, 2011), the United States District Court for the Eastern District of California considered the scope a non-owned site disposal exclusion, a form of exclusion commonly found in pollution liability insurance policies.

Sierra Recycling concerned coverage under a contractors pollution liability insurance policy issued by Chartis (formerly known as American International Specialty Lines Insurance Company) to Sierra, which provided coverage for bodily injury, property damage or environmental damage resulting from pollution conditions caused by Sierra’s contracting operations.  The policy contained a non-owned site disposal exclusion, barring coverage for:

Bodily injury, property damage or environmental damage arising from the final disposal of material and/or substances of any type (including but not limited to any waste) at any site or location which is not owned, leased or rented by you.

Sierra was hired to transport construction debris from a demolition site.  It hauled some three hundred tons of debris to a facility that it did not own, lease or rent.   Of significance, the facility to which Sierra hauled the debris was not a landfill, but instead a recycling facility that sold, recycled, or otherwise transferred all material brought to its facility.  Sometime after Sierra transported the debris, it was advised by the facility that the debris contained elevated levels of zinc and mercury.  Sierra sought coverage for necessary cleanup costs under the Chartis policy, but Chartis disclaimed coverage on the basis of the non-owned site disposal exclusion.

In the ensuing coverage litigation, Chartis moved for summary judgment on the basis of the policy’s non-owned site disposal exclusion. Chartis argued that the exclusion applied to an insured’s “final disposal” of material at any site, regardless of its nature, as long as the site is not owned, leased or rented by Sierra. Sierra relinquishment of the debris at the facility, Chartis asserted, constituted “final disposal” for the purpose of the exclusion.  Sierra, on the other hand, argued that the exclusion was ambiguous, at least as applied to the facts before the court, because “final disposal” connoted disposal at a landfill (i.e. a place of final disposal), not at a recycling facility where material and waste will be resold, recycled or subsequently transferred to another facility or landfill.  Under Sierra’s interpretation, the exclusion does not apply to disposal of waste or material at an intermediary facility, even if the insured has otherwise relinquished control of the waste or material.

Without citing to any particular line of authority, court concluded that Sierra’s construction of the phrase “final disposal” was “in line with the ordinary and popular understanding of the term ‘final disposal, and … therefore reasonable.”  The court further held that Chartis’ construction of the exclusion as applying to an insured’s final relinquishment of waste or material also was reasonable.  Thus, under California law, explained the court, since both sides presented reasonable interpretations of the exclusion, it was necessarily was ambiguous and to be construed against the insurer.

7th Circuit Addresses Coverage for Alleged Antitrust Violation

In its recent decision Rose Acre Farms, Inc. v. Columbia Casualty Co., 2011 U.S. App. LEXIS 22063 (7^th Cir. Nov. 1, 2011), the United States Court of Appeals for the Seventh Circuit, applying Indiana law, had occasion to consider whether an insured was entitled to coverage under its general liability policies for alleged conspiracy to price fix.

The insured, Rose Acre, is one of the nation’s largest producers of eggs and was named as a defendant in a class action alleging violations of the Sherman Act for conspiracy to fix the price of eggs.  Rose Acre sought coverage under its general liability policies’ “personal and advertising injury” coverage for the offense of “use of another’s advertising idea in your ‘advertisement.’”  Specifically, Rose Acre claimed that it belonged to a trade association of egg producers that maintained a website advertising the benefits of free range chickens, which Rose Acre argued could be used to make customers believe that the high price of eggs “was the result not of a conspiracy among egg producers but instead of the chickens’ healthful and humane living conditions.”

Judge Posner, writing the opinion for the court, characterized Rose Acre’s theory as “convoluted,” particularly since the underlying suit contained no mention of Rose Acre’s advertising on any website.  More significantly, Judge Posner explained that even if the underlying suit could be read to allege that advertising was used as part of the antitrust conspiracy, the policies provided coverage only for the offense of misappropriation of another’s advertising idea.  That is the essence of an advertising injury, which the court explained, was not alleged in the underlying suit.  Rather, the underlying suit related to an alleged antitrust violation, which as Judge Posner wrote, is not within the contemplated coverage of a general liability policy:

Antitrust liability … is a major business risk, especially for one of the largest companies in a major market.  It is hardly likely that parties to an insurance contract would seek to cover such a serious risk indirectly through an “advertising injury” provision aimed at misappropriation and other intellectual-property torts.

Judge Posner further noted that the policies’ personal and advertising injury coverage contained exclusions applicable to knowing and criminal conduct, both of which necessarily are present in an alleged conspiracy to violate federal antitrust law.