Dollar Phone Corp. v. St. Paul Fire and Marine Ins. Co.,
2012 WL 1077448 (E.D.N.Y.)
This magistrate’s report and recommendation dealt with
Dollar’s claim that St. Paul wrongly refused to defend and indemnify it in an
underlying New Jersey case. Dollar provides
prepaid telephone card services, and was one of more than 100 defendants in a (very
interesting, I
thought) false
advertising case brought by competitor IDT Telecom. IDT’s complaint alleged that Dollar etc.
defrauded customers by promising more minutes per dollar than they actually
provided, thus allegedly implying that IDT’s cards were overpriced and harming
its market share. Dollar settled with
IDT, but IDT accused it of violating the agreement, and Dollar was reinstated
as a defendant. They settled again in
2008. Dollar kept St. Paul apprised at
all times of this, but St. Paul refused to defend.
NY law controls; the St. Paul policy covered advertising
injury, relevantly defined as “Making known to any person or organization covered
material that disparages the business, premises, products, services, work, or
completed work of others.” The
magistrate judge agreed with St. Paul that IDT’s underlying complaint didn’t
assert a disparagement advertising injury offense because the underlying
defendants’ ads were not alleged to make specific reference to IDT nor even to
make a more general disparaging reference to competitors. Any negative effect on competitors’
reputations was by implication. Even
using the dictionary meaning of “disparge,” some reference or comparison to
competitors’ products would be required, even if not by name. The unambiguous meaning of “disparage” in the
policy “requires either an allegation that the advertisement specifically
referred to the competitor's products or touted one's own products as superior
to those of its competitors.” This was
lacking from the underlying complaint. “It
is only by referring to both the New Jersey plaintiff's advertisements and
those of Dollar Phone that a consumer would draw the conclusion that Dollar
Phone's products were superior.”
In addition, the magistrate judge concluded that an
exclusion applied, though the law requires exclusions to be strictly construed
and narrowly read. The relevant
exclusion was that St. Paul wouldn’t cover advertising injury due to the
failure of Dollar’s products to perform as advertised: “We won't cover
advertising injury that results from the failure of your products, your work,
or your completed work to conform with advertised quality or performance.” Here, failure of Dollar’s products to perform
as advertised was the entire basis of the underlying complaint—“precisely the type of harm contemplated in the plain
language of the non-conformity exclusion.”
However, St. Paul’s other arguments failed—coverage was not
eliminated due to an exclusion for
advertising injury “that results from the wrong description
of the price of your products, your work or your completed work,” since the
underlying complaint didn’t allege that consumers were charged more than the
advertised price for Dollar calling cards.
Nor was coverage eliminated due to an exclusion for knowing
falsity. This exclusion applies when a
complaint’s allegations are based solely on
intentional conduct. But where liability
might be premised on unintentional or unknowing conduct, the exclusion won’t
apply, and the underlying complaint included both allegations of intentional
conduct and allegations that would allow IDT to recover based on showing
negligence (or, I would add, no fault whatsoever, under the Lanham Act). The magistrate judge suggested that it
mattered that some of the specific allegations in the underlying complaint
didn’t specify Dollar’s alleged state of mind, though as I read the earlier
cases the better question is whether the insured could still be liable under
the cause of action alleged without a guilty mind because that cause of action
doesn’t actually require intent.
The magistrate judge also accepted St. Paul’s argument that
it was not required to cover Dollar under the Errors & Omissions provisions
of the policy, because of an exclusion from the E&O coverage for “loss that
results from any actual or alleged violation of any securities, antitrust,
restraint of trade, unfair or deceptive trade practices, unfair competition, or
other consumer protection law.” This
exclusion goes beyond the exclusion for intentional conduct.
Dollar argued that the Lanham Act fell outside the trade
exclusion because consumers don’t have a private cause of action thereunder,
making it not a consumer protection law.
The magistrate judge concluded that (1) a statute can protect consumers
without providing them a private cause of action, and (2) the allegations still
clearly stated claims for “unfair or deceptive trade practices” or “unfair
competition.”
Dollar also brought clams under NY GBL § 349, which St. Paul
contested on the ground that private contract disputes aren’t within the scope
of the law, which governs deceptive trade practices. Dollar argued that it had presented evidence
that St. Paul's claims handling practices are deceptive as defined in the
statute because St. Paul has failed to train its claims adjusters in accordance
with accepted insurance industry standards, thus showing a consumer-oriented
harm. Courts almost uniformly hold that
disputes between policyholders and insurers lack the necessary consumer impact,
unless plaintiffs allege that they purchased insurance policies based on
defendants' false representations regarding the terms of the insurance
policies.
Dollar argued that St. Paul had a system in place designed
to deny legitimate insurance claims because it trained and supervised adjusters
badly. But its factual claims didn’t
identify any materially deceptive acts or omissions. Even assuming that St. Paul’s adjusters
weren’t adequately trained, that isn’t itself deceptive or fraudulent absent
false promises by St. Paul about their training or expertise on which Dollar
relied. This was a breach of contract case, not a deceptive practice case.
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