80 F. Supp. 3d 442
E.D.N.Y2015Background
- Insurer (General Star) issued a Commercial Lines Policy to Driven Sports covering 11/1/2012–11/1/2013 with $3M aggregate and $2M personal/advertising-injury limit; policy provides insurer a right and duty to defend and defines Supplementary Payments to include “all expenses we incur.”
- Driven Sports manufactured and marketed a pre-workout supplement called Craze, advertised as containing "only natural ingredients."
- Three putative class actions (California, Illinois, and a separate California action) alleged Craze actually contained ETH, a synthetic methamphetamine analog, and asserted false advertising, consumer protection, and related claims premised on Craze’s failure to conform to its advertising.
- General Star defended the suits under a full reservation of rights and sought a declaratory judgment that (1) it had no duty to defend/indemnify because of a Failure-to-Conform exclusion and (2) it could recoup defense costs; Driven Sports moved for partial summary judgment opposing recoupment.
- The court held the Failure-to-Conform exclusion (excluding personal/advertising injury "arising out of the failure of goods ... to conform with any statement of quality or performance made in your 'advertisement' ") barred coverage for all underlying claims, denied insurer recoupment of defense costs, but held insurer’s defense expenses reduce the policy limits under the Supplementary Payments clause.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1. Duty to defend under Failure-to-Conform exclusion | Exclusion applies; complaints arise from Craze’s failure to match advertised quality | Underlying claims include separate advertising/disparagement harms that are not excluded | Held: exclusion applies; all underlying claims arise from failure to conform and are excluded, so no duty to defend or indemnify |
| 2. Whether some claims are covered (mixed claims doctrine) | N/A — insurer argues no covered claims | Some underlying claims are distinct advertising/disparagement claims that could be proved without proving nonconformity | Held: underlying claims cannot be proved without proving nonconformity; no potentially covered claims exist |
| 3. Ambiguity of “quality or performance” | N/A — insurer contends language unambiguous and covers ingredients | "Quality or performance" is vague and need not cover ingredient/origin statements | Held: term includes ingredients; exclusion language is unambiguous and reasonably read to cover these allegations |
| 4. Recoupment of defense costs after reservation of rights | Insurer seeks restitution/unjust enrichment to recoup defense costs paid for excluded claims | Driven Sports: insurer rejected negotiated recoupment agreement; unjust enrichment barred where contract covers subject matter | Held: recoupment denied — unjust enrichment barred because policy addresses expenses and insurer could have bargained for reimbursement; equitable considerations also preclude recoupment |
| 5. Do defense expenses reduce policy limits (self-liquidation)? | Insurer: Supplementary Payments include "all expenses" and reduce limits; seeks declaration that defense costs erode limits | Driven Sports disputes scope/ambiguity of Supplementary Payments regarding attorneys’ fees | Held: Supplementary Payments expressly include "all expenses" and state they will reduce limits; defense expenses (including legal fees) reduce policy limits |
Key Cases Cited
- Auto. Ins. Co. of Hartford v. Cook, 7 N.Y.3d 131 (N.Y. 2006) (insurer’s duty to defend is "exceedingly broad")
- R.C. Bigelow, Inc. v. Liberty Mut. Ins. Co., 287 F.3d 242 (2d Cir. 2002) (failure-to-conform exclusion barred coverage where product marketed as "all natural")
- State of N.Y. v. AMRO Realty Corp., 936 F.2d 1420 (2d Cir. 1991) (courts will not adopt strained interpretations to create coverage)
- CGS Indus., Inc. v. Charter Oak Fire Ins. Co., 720 F.3d 71 (2d Cir. 2013) (insurer bears heavy burden to show exclusion places complaint "solely and entirely" within it)
- Fed. Ins. Co. v. Am. Home Assur. Co., 639 F.3d 557 (2d Cir. 2011) ("arising out of" means originating from, incident to, or having connection with)
- Fitzpatrick v. Am. Honda Motor Co., 78 N.Y.2d 61 (N.Y. 1991) (policy language is primary touchstone for duty to defend)
- U.S. Underwriters Ins. Co. v. Val-Blue Corp., 85 N.Y.2d 821 (N.Y. 1995) (where excluded conduct is the operative act giving rise to recovery, exclusion controls)