Insured Fails to Persuade Seventh Circuit That Former Customer s Lost Future Profits Were Because of Property Damage

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1 October 2018 October 2018 Insured Fails to Persuade Seventh Circuit That Former Customer s Lost Future Profits Were Because of Property Damage The U.S. Court of Appeals for the Seventh Circuit, affirming a district court decision, has ruled that a judgment against an insured manufacturer for a former customer s lost profits was not damages that the insured was required to pay because of property damage within the meaning of its excess insurance policy. A former customer sued Berry Plastics Corporation, alleging that certain foil laminate that Berry had delivered was defective, which caused a product to fail. The jury found in the former customer s favor and awarded it $7.2 million in damages. The jury did not itemize its damage award, but the award was based on the testimony of the former customer s damages expert, who put the company s out of pocket costs at $643, and its future lost profits at $6,563,607. Berry asked its excess insurer to indemnify it for all but the first $1 million of the award, which Berry s primary liability insurer agreed to cover. The excess carrier refused. It asserted that because the entirety of the $6.2 million for which Berry sought indemnification represented its former customer s lost profits on a product that had yet to be ordered and manufactured, there was no property damage for which it had the duty under its policy to indemnify Berry. Berry sued, contending that all the damages it had been ordered to pay, including future lost profits, were because of the property damage that its defective foil laminate product had caused to its former customer s product. The U.S. District Court for the Southern District of Indiana entered judgment in favor of the insurer, and Berry appealed to the Seventh Circuit. The Seventh Circuit s Decision The Seventh Circuit, applying Indiana law, affirmed. In its decision, the circuit court observed that lost profits were a form of business loss and, as such, were not the type of injury typically covered by a commercial general liability insurance policy. Property damage resulting from a manufacturer s product after it left the manufacturer s hands was a distinctly different form of risk from the disappointed commercial expectations of the manufacturer s customer, the circuit court said.

2 According to the Seventh Circuit, even assuming that Indiana law would permit the recovery of lost future profits under the Berry policy, an award of business losses depended on whether those losses were specifically due to property damage or instead to the failure of Berry s foil laminate product to function as expected and warranted. The circuit court noted that the jury in the underlying litigation against Berry only had to decide whether Berry had breached its agreement with the former customer and certain warranties Berry made regarding its foil laminate and to determine the losses that resulted from these breaches. The jury, the circuit court continued, was not called upon to decide whether Berry s defective product resulted in property damage, let alone whether the losses that [the former customer] suffered were because of such damage. The court concluded that Berry had not shown that some or all of the lost profits awarded by the jury were the result of property damage. Instead, Berry had implicitly presumed that because its product failed in such a way as to cause property damage, all damages resulting from the failure of its component were necessarily because of property damage. The Seventh Circuit ruled that Berry was not entitled to indemnification from its insurer. The case is Berry Plastics Corp. v. Illinois National Ins. Co., No (7th Cir. Sept. 10, 2018). Insurance Did Not Cover Suit Against College That Did Not Allege Property Damage, Missouri Appeals Court Holds An appellate court in Missouri, affirming a trial court s decision, has ruled that a lawsuit against a college asserting unfair and deceptive practices did not allege property damage within the meaning of the college s insurance policy. Classmates in the Applied Sciences of Practical Nursing Program at Saint Louis College of Health Careers ( SLCHC ) sued SLCHC under the Missouri Merchandising Practices Act ( MMPA ), alleging unfair and deceptive practices in its representation of the program. In particular, they alleged that SLCHC sold them the program as a 60 hour degree program but that SLCHC lacked approval to award a degree and only could provide a lesser diploma. SLCHC s insurer denied coverage and a defense, on the basis that the classmates action did not allege property damage under the policy as it did not allege any [p]hysical injury to tangible property or [l]oss of use of tangible property. The classmates obtained a judgment against SLCHC, and then sued SLCHC s insurer, seeking to recover the judgment. A Missouri trial court granted summary judgment in favor of the insurer, ruling that the classmates had not alleged a claim that was possibly or potentially within the policy s coverage. The classmates appealed. They argued that the award of a diploma rather than a degree was a 2

3 loss of property. They also contended that the books and supplies they had purchased were useless because SLCHC did not deliver its promised degree. The Missouri Appellate Court s Decision The appellate court affirmed. In its decision, the appellate court ruled that the classmates had not alleged physical injury to tangible property or the loss of use of tangible property. Instead, the appellate court concluded, the students took issue with SLCHC s misrepresentation of its Applied Sciences of Practical Nursing Program and sought to recover tuition based on this misrepresentation. The appellate court stated that the classmates loss was monetary and that it was well settled that money was not tangible property. Therefore, the court ruled, SLCHC s failure to award the promised degree was not property damage. The appellate court also rejected the classmates contention that the loss of books and supplies constituted property damage. The court concluded that the books and supplies were part of the monetary fraud alleged by the classmates and were not covered as property damage. The case is Spencer v. Hartford Casualty, No. ED (Mo. Ct. App. Sept. 25, 2018). Tenth Circuit Affirms That Ceiling Cave In Was Not a Covered Collapse, and Upholds Dismissal of Bad Faith Claim The U.S. Court of Appeals for the Tenth Circuit has affirmed a district court s decision that an insurance policy did not cover an insured s claim for damage suffered when the ceiling in the living and dining areas of her home caved in. After the ceiling in the living and dining areas of a home caved in, engineers determined that the nails used in the construction had failed to hold. The homeowner submitted a claim for the damage to her insurer. The insurer denied the claim, and the homeowner sued for breach of contract and bad faith denial of coverage. The U.S. District Court for the Eastern District of Oklahoma dismissed the homeowner s complaint for failure to state a claim. The homeowner appealed to the Tenth Circuit. The Tenth Circuit s Decision The circuit court affirmed. 3

4 In its decision, the circuit court noted that the parties disputed whether the ceiling cave in qualified as a collapse under the policy. The circuit court said that it did not have to decide that issue because, even assuming that the cave in was a collapse, the policy covered only a collapse caused by one or more of the circumstances listed in the policy. The homeowner s complaint, the circuit court added, did not contain any well pleaded facts to show that any of these circumstances applied. Accordingly, the Tenth Circuit concluded, the limited coverage for collapse under the policy did not apply to the owner s claim and the owner s breach of contract claim had been properly dismissed. The circuit court reached the same conclusion with respect to the owner s bad faith claim. It explained that, under applicable Oklahoma law, an insurer did not act unreasonably by withholding payment based on a legitimate dispute regarding coverage. Moreover, the Tenth Circuit added, when a court concludes that there was no breach of an insurance policy, it follows that an insurer s denial of coverage was not unreasonable. Therefore, the circuit court ruled that the the district court had not erred in concluding that the owner had not stated a plausible bad faith claim. The case is Coonce v. CSAA Fire and Casualty Ins. Co., No (10th Cir. Sept. 4, 2018). Policy Excluded Coverage for Collapsed Wall, But Insureds Bad Faith Claims May Proceed, Washington District Court Rules A federal district court in Washington has ruled that a homeowners insurance policy precluded coverage for a retaining wall collapse but that the insureds could proceed with their claims against their insurer for bad faith and violation of the state s consumer protection law. A retaining wall collapsed at the home Stephen and Karen Jones, who resided in the State of Washington. They tendered a claim to their homeowners insurance carrier. An engineer sent to inspect the collapse determined that the wall buckled due to excessive lateral earth pressure from retained soils behind the wall. The parties agreed that the soil, saturated by water, grew too heavy for the retaining wall to bear, causing the wall to give way. The insurer denied coverage, initially based on its policy s earth movement exclusion. The insureds sued, and the insurer invoked five new policy provisions as the reason for denying coverage of their claim. 4

5 The insureds amended their complaint, and the insurer moved for summary judgment on their claims for breach of contract, bad faith, and violation of Washington s Consumer Protection Act ( CPA ). The District Court s Decision The district court found coverage excluded under the policy s water exclusion. The district court noted that the parties agreed that the wall buckled from the weight of the water soaked soil backfill, which was likely saturated from the heavy rainfall that occurred during the preceding two months. The district court ruled that an excluded peril caused the loss and the loss was not covered. The district court, however, held that the insured s bad faith and CPA claims could go forward, explaining that an insurer may still be liable for bad faith or for violating the CPA even if denial of coverage was ultimately warranted. The district court held that, based on the insureds complaint, the insurer may have violated insurance regulations, breached its duty of good faith, and committed an unfair or deceptive act. The district court noted that the Joneses alleged that they had been forced to sue to learn all the reasons why the insurer considered the wall s collapse to fall outside their policy. Accordingly, the district court concluded that summary judgment was not warranted on the insured s bad faith and CPA claims. The case is Jones v. State Farm Fire and Casualty Co., No. C RSL (W.D. Wash. Sept. 7, 2018). Evidence Tampering Was Not Malicious Prosecution and Was Not Covered by County s Policy, Eighth Circuit Holds The U.S. Court of Appeals for the Eighth Circuit, reversing a decision by a federal district court in Nebraska, has ruled that an insurance policy that covered a county s law enforcement officers for wrongful acts, including malicious prosecution, did not cover an officer who had engaged in criminal evidence tampering. David Kofoed, a member of a county crime scene investigation unit in Nebraska, tampered with evidence and was charged criminally, tried, and convicted in a Nebraska state court. Two individuals sued Kofoed, alleging numerous constitutional violations. The trial court awarded the plaintiffs compensatory and punitive damages as well as attorneys fees and costs. The plaintiffs sought to recover their awards from the county s insurer under a policy that covered the county s law enforcement officers for wrongful acts including malicious prosecution. 5

6 The U.S. District Court for the District of Nebraska ruled in favor of the plaintiffs and ordered the insurer to pay them $5 million. The district court agreed with the insurer that its policy language expressly excluded criminal, dishonest, and fraudulent acts. However, the district court concluded that the malicious prosecution exception to the exclusion applied, because the crime of evidence tampering was analogous to the tort of malicious prosecution. The insurer appealed to the Eighth Circuit. The Eighth Circuit s Decision The circuit court reversed. In its decision, the circuit court ruled that, under applicable Nebraska law, criminal evidence tampering and civil malicious prosecution differed sufficiently such that one was not analogous to the other. It explained that a person who tampered with evidence did so either to undermine or to bolster a prosecution. By contrast, the Eighth Circuit continued, a malicious prosecution purposefully misused the government s prosecutorial power to start or sustain criminal charges against a person without probable cause it did not seek to undermine them. While both acts were dishonest and purposeful, the circuit court found, they were not interchangeable. Accordingly, the Eighth Circuit held that the insurance policy s malicious prosecution exception for intentional acts did not include the crime of evidence tampering. The case is Sampson v. Lambert, Nos , , , (8th Cir. Sept. 11, 2018). Insureds Breach of Policy s No Voluntary Payments Provision Doomed Coverage of Settlement, Ninth Circuit Says The U.S. Court of Appeals for the Ninth Circuit, affirming a district court s decision, has ruled that two insureds breached their insurance policy by settling a lawsuit without their insurer s knowledge or consent. A former employee sued Right Yogurt Inc. and a shareholder. They tendered defense of the action to their insurer, but before the insurer rendered a coverage decision, the insureds entered into a settlement agreement without the insurer s knowledge or consent. Thereafter, the insurer asked the U.S. District Court for the Central District of California to declare that it did not have a duty to defend or indemnify the insureds. 6

7 The district court ruled in favor of the insurer. The district court found, among other things, that the insureds had breached the policy s no voluntary payments provision (the NVP provision ) by entering into the settlement without the insurer s knowledge or consent. The former employee appealed to the Ninth Circuit, arguing that although the insureds had entered into the settlement without the insurer s knowledge or consent, it did not preclude coverage because: The insurer had abandoned the insureds by failing to respond to their tender; The insureds executed the settlement under duress and fear of financial ruin; and The insurer had breached its duty to provide an immediate defense by not rendering a coverage determination in the 12 week period between the date the insureds tendered their defense and the date the insureds executed the settlement. The Ninth Circuit s Decision The Ninth Circuit affirmed. In its decision, the circuit court explained that the abandonment exception generally applied in cases where the insurer expressly denied coverage and refused to provide the insured with a defense. Here, it found, at the time of the settlement, the insurer had not denied coverage to the insureds and its investigation still was ongoing. Therefore, the abandonment exception did not apply. The Ninth Circuit similarly rejected the argument that the settlement was enforceable because the insureds executed the settlement under duress and fear of financial ruin, finding no evidence to support that claim. Finally, the court rejected the former employee s contention that the policy s NVP provision was unenforceable because the insurer had breached its obligation to provide an immediate defense, ruling that the facts did not support the argument. Accordingly, the Ninth Circuit concluded, the insureds executed the settlement without the insurer s knowledge or consent, and therefore, breached the NVP provision. The case is Amco Ins. Co. v. Morfe, No (9th Cir. Sept. 20, 2018). Insurance Policy Did Not Cover Losses from Third Party Data Breach, Florida District Court Declares A federal district court in Florida has ruled that an insurer was not required to defend an insured against a lawsuit alleging that its negligence led to a data breach that may have affected a hotel s customers credit cards. 7

8 After Rosen Hotels & Resorts, Inc. ( RHR ) learned of a potential credit card breach at one of its hotels, a forensic investigator found malware installed on the payment network and determined that customers credit cards used between September 2014 and February 2016 may have been affected. Thereafter, RHR told Rosen Millennium, Inc. ( Millennium ), which provided data security services for RHR, that it believed that the data breach had been caused by Millennium s negligence and it asked whether Millennium had insurance to cover such a loss. Millennium notified its insurer, which asked a court to declare whether it had a duty to defend Millennium against RHR s claim. The insurer moved for summary judgment. The District Court s Decision The district court granted the motion. In its decision, the district court explained that the insurance policy covered injury caused by a personal injury offense, which included [m]aking known to any person or organization covered material that violates a person s right of privacy. The district court held that RHR s claim against Millennium was not covered by the policy because RHR s claim did not meet the making known requirement. The data breach was a third party data breach, the district court reasoned, and Millennium had not made the credit card data known to anyone rather, a third party or third parties had done so. The district court held that the insurer the policy did not cover acts of third parties. The case is St. Paul Fire & Marine Ins. Co. v. Rosen Millennium, Inc., No: 6:17 cv 540 Orl 41GJK (M.D. Fla. Sept. 28, 2018). Highest Court in Massachusetts Broadly Interprets Advertising Idea The Supreme Judicial Court of Massachusetts, reversing a trial court s decision, has broadly interpreted the term advertising idea and ordered insurers to defend an insured in a case brought by heirs of a famous marathon runner. The heirs of the barefoot marathon runner Abebe Bikila sued Vibram USA, Inc., alleging that Vibram had improperly using the name Bikila to advertise Vibram s running shoes. The complaint also alleged that the Bikila family had by their commercial uses... intentionally associated their family name with Abebe Bikila s barefoot dedication to succeed under any circumstances. 8

9 Vibram tendered the defense to insurers from which it had acquired commercial general liability insurance policies. The insurers denied coverage, asserting that a policy provision covering improper use of another s advertising idea in your advertisement did not cover the claims raised by the Bikila family. The insurers then asked a Massachusetts state court to declare that they had no obligation to defend Vibram. The trial court granted summary judgment in favor of the insurers, reasoning that the complaint did not raise a claim that Vibram had used another s advertising idea in Vibram s advertisement but only raised claims implicating a personality right. Those claims, the district court said, were excluded from coverage under Vibram s insurance policy. Vibram appealed to the Supreme Judicial Court of Massachusetts, contending that the insurers had a duty to defend it in the Bikila family s action. The Massachusetts Supreme Judicial Court s Decision The court reversed, finding that the allegations against Vibram triggered the insurers duty to defend under the provision of their policies covering the use of another s advertising idea. In its decision, the court found that Vibram s use of Bikila to advertise its running shoes constituted an advertising idea. The court stated: Vibram used the name of a legendary barefoot marathon runner for purposes of calling attention to its running shoes that simulated barefoot running. The court decided that the Bikila family also had an advertising idea: using the name Bikila and the legacy that name conveyed to attract business to the family s ventures. According to the court, the Bikila family s complaint alleged that Vibram improperly used Bikila for the same purposes as the Bikila family used it: to advertise its running related ventures and business. Rejecting the insurers argument that the Bikila family s complaint raised claims related only to Abebe Bikila s right of publicity and not an advertising idea, the court concluded that Vibram s insurers had to pay Vibram s reasonable costs for defending the Bikila family s action. The case is Holyoke Mutual Ins. Co. in Salem v. Vibram USA, Inc., No. SJC (Mass. Sept. 12, 2018). In Case of First Impression, Ohio Court Finds That Bitcoin Is Property Under a Homeowners Policy An Ohio state court has ruled that bitcoin constitutes covered personal property, rather than money, under the terms of a homeowners policy. 9

10 James Kimmelman had a standard homeowners policy with Wayne Mutual Insurance Company. The policy included coverage for "Personal Property and a special sublimit of $200 for things like money and securities. Kimmelman allegedly suffered a loss of $16,000 in bitcoin that was stolen from his online account. Kimmelman sought coverage from Wayne Mutual under his homeowners policy. After conducting an investigation, Wayne Mutual determined that bitcoin was money, and therefore, Kimmelman s recovery was limited to the policy s $200 sublimit for monetary losses. Kimmelman filed a lawsuit against Wayne Mutual, including for breach of contract. Wayne Mutual moved for judgment on the pleadings. Wayne Mutual asserted that bitcoin is analogous to money because it is a medium to exchange things for value. It argued that bitcoin is best understood as a virtual currency, similar to money stored in an electronic wallet, like an online checking or savings account. In response, Kimmelman argued that bitcoin is not money, and instead, should be considered personal property under the homeowners policy. Kimmelman contended that bitcoin is not money because it is not yet a commonly used means of exchange. Kimmelman also argued that bitcoin was different than money because, unlike money, bitcoin is not regulated by a sovereign entity. Finally, Kimmelman pointed to a 2014 ruling by the Internal Revenue Service, which found that bitcoin was property for federal tax purposes. The Decision The court sided with the policyholder and denied Wayne Mutual s motion for judgment on the pleadings. It ruled that bitcoin was personal property, not money, under the homeowners policy. The court noted that, aside from the IRS ruling, the parties cited no governing authority on the status of bitcoin for insurance purposes. Relying on the IRS s ruling, the court held that bitcoin was personal property under the policy. The case is James Kimmelman v. Wayne Insurance Group, Court of Common Pleas, Franklin County, Ohio Civil Division, 18CV (Sept. 25, 2018). Rivkin Radler LLP 926 RXR Plaza, Uniondale NY Rivkin Radler LLP. All Rights Reserved. 10