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Payne & Fears (P&F) achieved another significant victory this week on behalf of a national homebuilder by securing the dismissal of a coverage action filed by its subcontractor and insurer in a hostile forum.
The client-homebuilder’s subcontractor’s liability insurer agreed to defend the client-homebuilder as an additional insured against a construction defect lawsuit pending Texas. The subcontractor filed a declaratory judgment action against its insurer in Illinois seeking a ruling that its insurer had no duty to defend the client-homebuilder in the Texas lawsuit. Unlike Texas law, under Illinois law property damage from defective construction is not a covered “occurrence” under general liability policies. The insurer brought the client-homebuilder into the Illinois action as a third-party defendant. P&F filed a motion to dismiss the entire Illinois action because (1) Illinois courts lack personal jurisdiction over the client-homebuilder and (2) the client-homebuilder was a necessary party to the action without whom the case could not continue.
The U.S. District Court for the Northern District of Illinois granted P&F’s motion (L&W Supply Corp. v. Alabaster Ins. Co., et al. N.D. Ill. Case No. 1:20-cv-03265 (March 18, 2021 Memorandum Opinion and Order)) and dismissed the action. The court found that the insurer had not met its prima facie burden of establishing the court’s personal jurisdiction over the client-homebuilder and that the client-homebuilder was a necessary party to the action because the relief requested by the subcontractor could not be obtained without affecting the client-homebuilder’s rights to insurance coverage.
Scott Thomas and Sarah Odia briefed the successful motion.
This case illustrates an important strategic issue that insureds ignore at their peril: Insureds need to be aware of jurisdictional and choice-of-law considerations when sued by their insurers so they can avoid what could be an unfortunate result if they do not challenge jurisdiction and they end up litigating coverage in a state (like Illinois) whose coverage laws are unfavorable to insureds. Although choice-of- law issues were not decided in this case, the forum in which your coverage action is litigated could have a significant impact on the outcome.
Rawlings was sued in a consumer class action alleging that Rawlings misrepresented the weight of its baseball bats in violation of California’s Unfair Competition Law, Consumer Legal Remedies Act, and False Advertising Law. (Richard Sotelo v. Rawlings Sporting Goods Co., Inc., U.S. District Case No. 2:18-cv-09166j-GW-MAA). Rawlings tendered its defense to Starr under two Directors & Officers Liability (“D&O”) policies. Starr denied coverage, arguing that the alleged consumer-based violations in Sotelo fell within Starr’s Anti-Trust Exclusion, which excludes coverage for losses from any claim alleging the violation of “any law…as respects to any of the following: anti-trust, business competition, unfair trade practices or tortious interference in another’s business or contractual relationships.”
Rawlings sued Starr seeking, among other things, declaratory relief regarding the meaning of Starr’s Anti-Trust Exclusion. In its motion for partial summary judgment, Rawlings argued that California law requires the district court to interpret the exclusionary language narrowly against Starr, and that the Anti-Trust Exclusion can only reasonably be interpreted as applying to anti-competitive conduct, not garden-variety consumer misrepresentation claims like Sotelo, even when they are pled under Unfair Competition Laws, the Consumer Legal Remedies Act, or False Advertising Laws.
The district court agreed with Rawlings, calling Starr’s position “logically defective,” finding that Starr’s Anti-Trust Exclusion only refers to “anti-competitive business practices and not to any conduct directed at consumers.” The district court stated that “[i]t would be strange for Starr to intend to include a consumer-protection component in an exclusion titled ‘Anti-Trust Exclusion’ without mentioning words such as ‘fraud’ or ‘misrepresentation’ or ‘consumer protection.’” And that “[i]t would lead to a strange result if an innocuously titled ‘Anti-Trust Exclusion’ could vitiate half of a policy’s coverage designed to protect (both the company and its directors and officers) against claims arising out of misleading statements or omissions.” This was especially true in the court’s eye, since Starr has used exclusions in other policies which expressly eliminate coverage for false advertising, misrepresentation, or unfair or deceptive trade practices. Starr simply chose not to use that language in the coverage it sold to Rawlings, and should not, therefore, benefit from this omission.
“Not only is this a home run for Rawlings, but this is a great decision for policyholders in California and throughout the country who purchase D&O policies to cover misrepresentation claims filed by consumers,” said Nate Cazier, a partner in Payne & Fears’ Insurance Litigation Group. “This decision reinforces the rule that insurers cannot use poorly drafted and overly broad exclusionary language to gut the core coverage they agree to provide companies that purchase D&O insurance. It also puts insurers on notice that there are consequences for not using readily available language.”