Illinois Finds Coverage for Additional Insured Despite Lack of Coverage for Named Insured Engineer Under Professional Services Exclusion; California Finds Fire-Sale Pricing of High End Goods May Trigger Personal Injury Coverage for Trade Disparagement
Illinois and California appellate courts recently issued two policy-holder favorable decisions. In both cases, the trial court had granted summary judgment in favor of the insurance company and denying coverage, and in both cases the trial court decisions were reversed.
In the Illinois case, Patrick Engineering, Inc. v. Old Republic General Insurance Co. --- N.E.2d ---, 2012 WL 3010344, Ill.App.2 Dist, July 20, 2012 [not yet released for publication], an engineering firm entered into a consulting agreement with an electric utility. As required by the agreement, the engineer procured a CGL policy naming the utility as an additional insured. The policy's professional services exclusion excluded coverage for property damage "arising out of the rendering or failure to render" engineering services.
While working on a project designed by the engineer, the utility damaged the sewers of a local municipality, which then sued the utility on a negligence theory. The utility tendered its defense to the insurer, which rejected the tender, denying coverage based on the policy's professional services exclusion. In a subsequent lawsuit filed by the engineer and utility to determine coverage, the insurer argued that because the damage arose out of the engineer's services, the professional services exclusion operated to bar coverage both for the named insured engineer and the additional insured utility--even though all parties agreed that the utility did not perform any engineering services. The trial court granted summary judgment in favor of the insurer.
On appeal, the court found coverage by analyzing the interplay of the policy's additional insured endorsement, professional services exclusion, and separation-of-insureds clause. The additional insured endorsement provided that an "Insured" included the listed additional insured if liability arose in whole or in part out of the engineer's work. The separation-of-insureds clause provided that the insurance applied separately to each insured. The appellate court agreed with the utility that it could rely on the "arising out of" language in the additional insured endorsement to claim status as an additional insured, and that the separation-of-insureds clause then provided coverage to the utility despite the professional services exclusion because the utility had not performed professional services. In other words, the fact that the named insured performed professional services did not trigger that exclusion for the additional insured.
In the California case, Travelers Property Casualty Co. of America v. Charlotte Russe Holdings, Inc. --- Cal.Rptr.3d ---, 2012 WL 2356477, 2d App. Dist., June 21, 2012 [ordered published July 13, 2012], a manufacturer of high-end apparel entered into an exclusive sales agreement with a clothing store. The manufacturer subsequently sued the store, alleging that the store's sale of the high-end apparel at deeply discounted prices harmed the apparel brand.
The store tendered its defense to its insurer under its CGL policy, which provided coverage for both personal and advertising injury, and required defense of any suit seeking damages for those injuries. The personal injury coverage extended to offenses arising out of the business (but not advertising). The advertising injury coverage extended to offense committed in the course of advertising the business, but excluded injuries arising from breach of contract. The personal injury coverage contained no such exclusion. Both provided coverage for claims alleging injury from disparagement of goods.
The insurer declined to either indemnify or defend, on the basis that a reduction in price of a good is not disparagement of that good. The insurer filed a declaratory relief action to determine that it owed no duty to defend or indemnify. In support of its motion for summary judgment, the insurer argued that California law equated disparagement with trade libel, requiring a false statement and resulting loss of business. The trial court found for the insurer.
On appeal, the court found that the allegations of injury to the apparel brand by offering the brand at a low price could reasonably be interpreted as disparagement of that brand, and that therefore the claims were potentially covered by the personal injury coverage of the policy. The court reached this result by noting that California law permitted disparagement by implication, and that disparagement claims were not required to be expressly stated as disparagement or trade libel. The court disagreed with the insurer that a disparagement claim required the allegation of trade libel, but noted that even if it did, the selling of a high-end product at discounted prices could be construed as an implied false statement by the seller that the high-end product was not, in fact, high-end.
Because the court found coverage under personal injury, it avoided deciding whether coverage would have been available under advertising injury, and thus did not reach the potentially thornier issue of whether the breach of contract exclusion would have excluded coverage when no breach of contract was proven since the underlying litigation had settled.