407 F.Supp.3d 242
S.D.N.Y.2019Background
- Spandex House sued its insurers Hartford Fire and Hartford Casualty seeking a defense and indemnity for a copyright-infringement suit brought by Rex Fabrics (the underlying Rex Fabrics Action).
- Hartford’s CGL policy covers “personal and advertising injury,” including certain advertising-related copyright claims, but contains an Intellectual Property (IP) Exclusion barring coverage for any suit alleging IP infringement, subject to a narrow Advertising Exception that preserves coverage only if the only allegation in the suit is infringement or copying "in your advertisement" (or on your website in one endorsement).
- Rex Fabrics’s pleadings and related filings allege infringement through creation, manufacture, importation, distribution, sale, marketing, and advertising of the accused fabrics; Spandex House admitted it sold the alleged fabric in commerce.
- Hartford denied coverage, contending the IP Exclusion applies and the Advertising Exception does not because the underlying suit contains non‑advertising infringement allegations (sales/distribution/manufacture).
- The parties cross‑moved for summary judgment; the court considered the policy language, the underlying complaint and related docket materials, and New York law on duty to defend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Hartford has a duty to defend Spandex House in the Rex Fabrics Action | Spandex House: the policy covers "personal and advertising injury;" some Rex allegations concern advertising and the Advertising Exception therefore creates a reasonable possibility of coverage | Hartford: the IP Exclusion bars coverage for any suit alleging IP infringement; Rex alleges copyright infringement beyond advertising so the Exception does not apply | Court: Duty to defend denied. IP Exclusion applies and Advertising Exception does not because non‑advertising infringement allegations (sale/distribution/manufacture) exist |
| Whether the IP Exclusion is ambiguous or unenforceable | Spandex House: prior Hartford coverage decisions and policy wording create ambiguity; exclusion improperly narrows entire‑action rule | Hartford: exclusion is clear on its face; prior decisions/adjuster conduct cannot create ambiguity; endorsements gave adequate notice | Court: IP Exclusion is unambiguous and enforceable; extrinsic evidence cannot create ambiguity in clear language |
| Proper construction of the Advertising Exception ("in your advertisement") | Spandex House: infringement allegations inherently involve reproduction/distribution and punctuation/placement in the clause supports a broader reading | Hartford: the phrase requires a causal link between the alleged infringement and the insured’s advertising; mere display in an ad is insufficient | Court: Exception is narrow — requires that the only allegation be infringement caused by the insured’s advertisement (causal relationship); Rex contains other infringement theories so Exception fails |
| Whether considering unpleaded facts (Fitzpatrick) requires a different outcome | Spandex House: court must look beyond complaint; could be facts showing only advertising claims remain | Hartford: court may consider unpleaded facts but the record shows non‑advertising allegations remain | Held: Court followed Fitzpatrick by reviewing docket/unpleaded facts and concluded those facts confirm non‑advertising allegations remain; speculation that non‑advertising claims might be dismissed is insufficient to create reasonable possibility of coverage |
| Whether the policy violates New York’s entire‑action rule or is illusory/public‑policy barred | Spandex House: exclusion and exception improperly contract around entire‑action rule and render policy illusory | Hartford: policy is clear, permitted by freedom of contract, and analogous to other upheld exclusions; exception still leaves some meaningful coverage | Court: Policy does not violate entire‑action rule or public policy and is not illusory; parties may contract for narrow coverage and court enforces the clear language |
Key Cases Cited
- Fieldston Prop. Owners Ass’n, Inc. v. Hermitage Ins. Co., 16 N.Y.3d 257 (N.Y. 2011) (duty to defend exists when complaint presents a reasonable possibility of coverage)
- Hugo Boss Fashions, Inc. v. Federal Ins. Co., 252 F.3d 608 (2d Cir. 2001) (distinguishing duty to defend from duty to indemnify)
- Allianz Ins. Co. v. Lerner, 416 F.3d 109 (2d Cir. 2005) (duty to defend requires any possible factual or legal basis for coverage)
- Century 21, Inc. v. Diamond State Ins. Co., 442 F.3d 79 (2d Cir. 2006) (scope of duty to defend analysis)
- Fitzpatrick v. American Honda Motor Co., Inc., 78 N.Y.2d 61 (N.Y. 1991) (insurer may consider facts beyond the four corners of the complaint in assessing duty to defend)
- Palmieri v. Allstate Ins. Co., 445 F.3d 179 (2d Cir. 2006) (contract interpretation: unambiguous language is a matter of law)
- Mount Vernon Fire Ins. Co. v. Creative Hous. Ltd., 88 N.Y.2d 347 (N.Y. 1996) (IP‑type exclusions construed as unambiguous)
- J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 21 N.Y.3d 324 (N.Y. 2013) (New York enforces unambiguous insurance contract terms and recognizes limited public‑policy exceptions)
- Ogden Corp. v. Travelers Indem. Co., 924 F.2d 39 (2d Cir. 1991) (no duty to indemnify when no duty to defend exists)