Opinion
No. 602459/02.
2013-03-1
CONTINENTAL CASUALTY CO., Plaintiff, v. QUALITY KING DISTRIBUTORS, INC., Pro's Choice Beauty Care, Inc., Glenn Nussdorf and Marcy J. Blick, Defendants National Union Fire Ins. Co. of Pittsburgh, PA, Plaintiff, v. Quality King Distributors, Inc., Pro's Choice Beauty Care, Inc., Glenn Nussdorf and Marcy J. Blick, Defendants.
Sedgwick LLP, New York, for Plaintiff National Union. Edwards Wildman Palmer LLP, New York, for defendants.
Sedgwick LLP, New York, for Plaintiff National Union. Edwards Wildman Palmer LLP, New York, for defendants.
SALIANN SCARPULLA, J.
In this action, plaintiff National Union Fire Insurance Company of Pittsburgh, P.A. (“National Union”) moves for summary judgment seeking a declaration that it is not obligated to provide defense and indemnification to defendants Quality King Distributors, Inc. (“Quality King”), Pro's Choice Beauty Care, Inc. (“Pro's Choice”), Glenn Nussdorf (“Nussdorf”) and Marcy J. Blick (“Blick”) (collectively “defendants”), and dismissing defendants' counterclaim pursuant to CPLR § 3212. Defendants cross-move for summary judgment on their counterclaim for a declaration that National Union is obligated to provide defense and indemnification in two underlying federal actions.
Quality King is a wholesaler of hair care products. In 2000, Sebastian International (“Sebastian”), a manufacturer of “salon only” professional hair products, commenced an action alleging that Quality King illegally diverted, decoded, and sold Sebastian products to pharmacies, distributed and sold counterfeit Sebastian products, and distributed and sold materials that infringed on Sebastian's copyrights and trademarks. See Sebastian International v. Vincenzo Russolillo et al., CV–00–03476 (C.D.Ca.) (“ Sebastian I ”). Sebastian specifically alleged fourteen causes of action against Quality King, including copyright infringement, trademark infringement, trademark counterfeiting, trademark dilution, false designation of origin, and racketeering.
In 2002, Sebastian commenced a second action against Quality King, Pro's Choice, Nussdorf, and Blick alleging that the defendants violated the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”) through predicate offenses including copyright infringement. See Sebastian International v. Quality King Distributors, CV–02–3466 (C.D.Ca.) (“ Sebastian II ”). In Sebastian I and Sebastian II, Sebastian also alleged that “Quality King supplies retailers, such as Drug Mart, CVS and Rite Aid, with diverted and decoded Sebastian products and also sells diverted Sebastian products directly to consumers via the Internet from its website, http://www.qualityking.com.”
Quality King is insured under two commercial general liability policies issued by Continental Casualty Company (“CCC”) (collectively, the “CCC Policies”) and two commercial umbrella policies issued by National Union (collectively, the National Union Policies”).
On July 3, 2002, CCC commenced this action for a declaratory judgment that it has no obligation to defend or indemnify defendants in the Sebastian I or Sebastian II actions. On November 6, 2002, National Union commenced a similar action for a declaratory judgment that it has no obligation to defend or indemnify the defendants in the Sebastian I and Sebastian II actions. Both the CCC and National Union actions were consolidated under the above-captioned index number pursuant to an order dated March 13, 2003.
Pro's Choice is a “spin off” corporation of Quality King and is named as an additional insured under the CCC and National Union Policies. Nussdorf is an officer of Quality King and Blick is an officer of Pro's Choice.
To date, the March 13, 2003 consolidation order has not been filed with the Trial Support Office. I now order the parties to serve a copy of the consolidation order upon the Clerk of the Trial Support Office, who will then mark the court's records to reflect the consolidation.
Defendants filed a counterclaim against CCC for a declaratory judgment that “CCC is contractually required to defend and indemnify Quality King with respect to Sebastian I, and to defend and indemnify Quality King, Pro's Choice, Nussdorf and Marcy Blick with respect to Sebastian II.” Defendants also filed a counterclaim against National Union for a declaratory judgment that National Union is obligated to indemnify and defend Quality King in Sebastian I and all defendants in Sebastian II for the amounts “in excess of the coverage provided under the CCC policies, up to the limits of coverage under the National Union policies.”
A. The Insurance Policies
The CCC Policies consist of two commercial general liability policies, each in the amount of $1 million dollars per occurrence, with the first policy effective from October 1, 1999 to October 1, 2000 and the second policy effective from October 1, 2000 to October 1, 2001. Both policies provide that CCC will “pay those sums that the insured becomes legally obligated to pay as damages because of personal and advertising injury' “ and that CCC has the “right and duty to defend the insured against any suit' seeking those damages.”
The CCC Policies cover “advertising injury” which is defined as injury “arising out of one or more of the following offenses ... f. The use of another's advertising idea in your advertisement'; or g. Infringing upon another's copyright, trade dress or slogan in your advertisement.' “ An “advertisement” is defined as a “notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.”
The National Union Policies consist of two commercial umbrella policies, each in the amount of $25 million dollars per occurrence, with the first policy effective from October 1, 1999 to October 1, 2000 and the second policy effective from October 1, 1999 to October 1, 2000. The policies provide that National Union will pay “those sums in excess of the Retained Limit that the Insured becomes legally obligated to pay” because of advertising injury.
The National Union Policies define “Retained Limit” as the greater of either: (1) “the total of the applicable limits of the underlying policies listed in the Schedule of Underlying Insurance” or (2) the self insured retention amount (i.e., $10,000) in the event of a covered occurrence “not covered by the underlying policies listed in the Schedule of Underlying Insurance.” The National Union Policies each contain a Schedule of Underlying Insurance, which lists the CCC policy corresponding to the same policy period.
The National Union Policies cover advertising injury which is defined as “injury arising solely out of your advertising activities as a result of one or more of the following offenses: ... 3. Misappropriation of advertising ideas or style of doing business; or 4. Infringement of copyright, title or slogan.”
The National Union Policies provide defense coverage when: (1) the “applicable Limits of Insurance of the underlying policies listed in the Schedule of Underlying Insurance” have been exhausted by payment of claims, or (2) when damages are sought for advertising injury “covered by this policy but not covered by any underlying insurance listed in the Schedule of Underlying Insurance.”
B. Motion and Cross–Motion for Summary Judgment
In its motion for summary judgment, National Union argues that it has no defense or indemnification obligation because the CCC Policies have not been exhausted. National Union submits evidence that Quality King settled the Sebastian I action for the amount of $200,000 on September 10, 2010, and that Sebastian II was voluntarily dismissed by Sebastian International on November 3, 2003. National Union argues that the CCC Policies, each with applicable limits of $1 million dollars, have not been exhausted by the $200,000 settlement.
In opposition and in support of their cross-motion, defendants argue that National Union has an obligation to indemnify and defend them, in the event that I find that CCC does not have a duty to indemnify or defend them in the two underlying actions. Defendants argue that National Union's duty to indemnify and defend may arise because the National Union Policies may cover advertising injuries not covered under the CCC Policies. According to defendants, the National Union Policies may provide broader coverage because they cover injury arising from defendants' “advertising activities” whereas the CCC Policies only cover injury arising from defendants' “advertisements.”
In reply, National Union argues that defendants have failed to demonstrate that the CCC Policies provide no coverage such that National Union's duty to defend and indemnify is triggered. National Union further argues that the CCC and National Union Policies provide the same type of coverage for “advertising injury” with respect to the two underlying actions.
On October 10, 2012, I heard oral argument on this motion and cross-motion for summary judgment, and I was advised by counsel that defendants had entered into a confidential settlement with CCC. On December 5, 2012, the defendants and CCC filed a stipulation discontinuing all claims by CCC against defendants and all counterclaims by defendants against CCC. Although this action is now discontinued with respect to CCC, the parties have requested a determination of their respective rights and obligations under the National Union Policies.
Discussion
A movant seeking summary judgment must make a prima facie showing of entitlement to judgment as a matter of law and offer sufficient evidence to eliminate any material issues of fact. Winegrad v. New York Univ. Med. Ctr., 64 N.Y.2d 851, 853 (1985). Once a showing has been made, the burden shifts to the opposing party to demonstrate the existence of a triable issue of fact. Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 324 (1986); Zuckerman v. City of New York, 49 N.Y.2d 557, 562 (1980).
However, when only issues of law are raised in connection with a motion for summary judgment, the court may and should resolve them without the need for a testimonial hearing. Hindes v. Weisz, 303 A.D.2d 459, 460–461 (2d Dep't 2003).
I. National Union's Duty to Defend
An insurer's duty to defend an action brought against an insured is determined by the allegations in the complaint. Fitzpatrick v. Am. Honda Motor Co., Inc., 78 N.Y.2d 61, 65 (1991). If the facts alleged raise a reasonable possibility that the insured may be held liable for some act or omission covered by the policy, then the insurer must defend. A. Meyers & Sons Corp. v. Zurich Am. Ins. Group, 74 N.Y.2d 298, 302 (1989).
An insurer may be relieved of its duty to defend if it can establish, as a matter of law, that there is no possible factual or legal basis upon which it might eventually be obligated to indemnify its insured under the terms of the policy. Frontier Insulation Contractors, Inc, v, Merchants Mut. Ins. Co., 91 N.Y.2d 169, 175 (1997).
Here, I find that National Union does not have a duty to defend the two underlying actions. Based on the language of the policies, National Union's duty to defend only arises under two circumstances: (1) when the applicable limits of the CCC Policies have been exhausted, or (2) when the National Union Policies provide coverage for advertising injury that is “not covered” by the CCC Policies. National Union demonstrated that it has no duty to defend because neither circumstance applies to this case.
First, National Union demonstrated it has no duty to defend because the CCC Policies have not been exhausted. The documents submitted show that defendants agreed to pay a $200,000 settlement in the Sebastian I action, and that the Sebastian II lawsuit was voluntarily dismissed. From the evidence of the $200,000 settlement, it is clear that the CCC Policies, each of which provide coverage up to $1 million, have not been exhausted. Eveready Ins. Co. v. Illinois Nat. Ins. Co., 62 AD3d 404, 404 (1st Dep't 2009). Defendants failed to produce any evidence that the applicable limits of the CCC Policies have been exhausted and do not appear to invoke coverage on that basis.
Second, National Union demonstrated it has no duty to defend because CCC had the primary duty to defend the Sebastian I and Sebastian II actions. The CCC Policies provide coverage for advertising injury arising out of the “use of another's advertising idea” or from the infringement of “another's copyright, trade dress or slogan.” Both complaints in the underlying actions contained allegations that gave rise to CCC's primary duty to defend.
Specifically, the Sebastian I complaint alleged that defendants injured Sebastian through copyright infringement, trademark infringement, trademark dilution, and trademark counterfeiting. These allegations raised a reasonable possibility that defendants may be held liable for copyright and trademark offenses, which fall within the scope of the CCC Policies. The CCC Policies expressly cover copyright infringement. The CCC Policies also provide coverage for trademark infringement and other trademark offenses through its coverage of offenses arising out of “the use of another's advertising idea.” Allou Health & Beauty Care, Inc. v. Aetna Cas. and Sur. Co., 269 A.D.2d 478, 480 (2d Dep't 2000) (finding “advertising ideas” coverage to include trademark offenses); Cosser v. One Beacon Ins. Group, 15 AD3d 871, 873 (4th Dep't 2005). In addition, the Sebastian II complaint alleges that defendants violated RICO through copyright infringement, which also gave rise to CCC's primary duty to defend that action.
Both complaints also contained sufficient allegations that defendants committed copyright and trademark offenses in an “advertisement” as required by the CCC policies. The complaints alleged that Quality King “sells diverted Sebastian products directly to consumers via the Internet from its website, http://www.qualityking.com.” This allegation was sufficient to establish the possibility that defendants infringed Sebastian's copyrights and trademarks through an “advertisement”—i.e., Quality King's website which may have served as a notice to the public for the purpose of attracting customers.
Because CCC had a duty to defend several claims in each underlying action, CCC's duty to defend extended to the entire underlying actions. “If any of the claims against the insured arguably arise from covered events, the insurer is required to defend the entire action.” Frontier Insulation Contractors, Inc., 91 N.Y.2d at 175.
In their motion, defendants argue, however, that there may be some claims in the complaints not covered by the CCC Policies, which may give rise to National Union's duty to defend those claims. However, even assuming that such claims exist, CCC's primary duty to defend would cover those claims as well, such that National Union's duty to defend is not triggered. Sport Rock Intern. Inc. v. American Cas. Co. of Reading, PA, 65 AD3d 12, 17–18 (1st Dep't 2009) (finding that primary insurer had a duty to defend entire action even if some claims were not covered by the primary insurer but covered by the excess insurer).
Accordingly, National Union's motion for summary judgment seeking a declaration that it has no defense obligation is granted, and defendants' cross-motion for summary judgment seeking a declaration that National Union has a defense obligation is denied.
II. National Union's Duty to Indemnify
While the duty to defend is determined by the allegations in the complaint, the duty to indemnify is determined by the actual basis for the insured's liability to a third person. Servidone Const. Corp. v. Sec. Ins. Co. of Hartford, 64 N.Y.2d 419, 424 (1985); Atl. Mut. Ins. Co. v. Terk Technologies Corp., 309 A.D.2d 22, 28 (1st Dep't 2003).
Here, I find that National Union does not have a duty to indemnify the defendants for the $200,000 settlement in the Sebastian I action. Based on the language of the policies, National Union only has a duty to indemnify in two circumstances: (1) for sums in excess of the “total applicable limits” of underlying insurance, or (2) for sums in excess of the self-insured retention amount (i.e., $10,000) when the National Union Policies provide coverage for an occurrence not covered by any underlying insurance.
First, National Union demonstrates that it has no duty to indemnify because there are no sums in excess of the applicable limits of the CCC Policies. Defendants also fail to produce any evidence of additional amounts to be indemnified above CCC's limits.
Second, National Union is not obligated to provide indemnification because there is no showing that the CCC Policies did not cover defendants' losses from settling the Sebastian I action. CCC had a duty to defend the two underlying actions and was therefore liable for the amount of any reasonable settlement if it was a covered loss. Hotel des Artistes, Inc. v. General Acc. Ins. Co. of America, 9 AD3d 181, 193 (1st Dep't 2004).
Accordingly, National Union's motion for summary judgment seeking a declaratory judgment that it has no obligation to indemnify defendants is granted, and defendants' motion for summary judgment seeking a declaratory judgment that National Union has an obligation to indemnify them is denied.
In accordance with the foregoing, it is hereby
ORDERED that the prior order of the Court dated January 10, 2013, which denied this motion and cross-motion and discontinued this action is vacated; and it is further
ORDERED that plaintiff National Union's motion for summary judgment seeking a declaration that it has no obligation to defend or indemnify Quality King in the Sebastian I action, or defendants Quality King, Pro's Choice, Nussdorf, and Blick in the Sebastian II action is granted; and it is further
ORDERED that defendants Quality King, Pro's Choice, Nussdorf, and Blick's cross-motion for summary judgment seeking a declaration that plaintiff National Union is obligated to defend and indemnify them in the Sebastian I and Sebastian II actions is denied; and it is further
ORDERED that defendants shall serve a copy of the consolidation order dated March 13, 2003 with notice of entry upon the Clerk of the Trial Support Office, 60 Centre Street, Room 158, who is, upon such service directed to mark the court's records to reflect the consolidation.
Settle judgment.
This constitutes the decision and order of the Court.