New Jersey Insurance Blog

Introduction

When will it end is a refrain that must be on many liability insurers’ minds when it comes to liability under commercial general liability policies issued decades ago.  Many such policies contain anti-assignment clauses, the purpose of which is to allow an insurer to limit its liability to successor companies and better gauge its potential future liability.  In Givaudan Fragrances Corp. v. Aetna Cas. & Sur. Co., 442 N.J. 28 (2015), however, the New Jersey Supreme Court held that an anti-assignment clause in an insurance policy is no bar to the post-loss assignment of an insurance claim.

Givaudan dealt with the issue of the assignment of claims under decades-old insurance policies.  The Court held that “once an insured loss has occurred, an anti-assignment clause in an occurrence policy may not provide a basis for an insurer’s declination of coverage based on the insured’s assignment of the right to invoke policy coverage for that loss.”  The reasoning behind this rule is that liability under an occurrence-based policy attaches once the occurrence takes place even though no claim has been asserted.  Thus, the insurer becomes obligated to the insured on the date of the loss and that obligation may freely be assigned.

Recently, the Appellate Division reached a similar conclusion in Cooper, LLC  v. Columbia Cas. Co., 2018 WL 1770260 (April 13, 2018).  The real issue in Cooper, however, was not whether the claims could be assigned, but rather whether they had, in fact, been assigned.  That case involved coverage for environmental damage under multiple policies that were in effect during the period from 1971 through 1980.  The policies had been issued to McGraw-Edison Company.  The plaintiff, Cooper, was named as a potentially responsible party at a hazardous waste site that had been owned by McGraw-Edison.  As the successor in interest to McGraw-Edison, Cooper sought coverage under the McGraw-Edison policies.

The Corporate Restructuring

In May 1985, McGraw-Edison, which the court refers to as Old McGraw, was acquired by Cooper.  A series of complex transactions concerning the business operations, assets, and liabilities of Old McGraw then took place.

First, Old McGraw’s business operations were divided among ten “Mirror Image Companies.”  The Mirror Image Companies owned an acquisition company named CI Acquisition.  CI Acquisition, in turn, owned another acquisition company named CM Mergerco.  Neither acquisition company owned any operating assets.

On May 30, 1986, Old McGraw and CI Acquisition merged.  As part of the merger, CI Acquisition assumed all of Old McGraw’s obligations and liabilities.  The merger agreement stated that “all the property, rights … and other assets of [every] kind and description” were being transferred from Old McGraw to CI Acquisition.  Although the agreement makes no refence to insurance policies or claims, the appellant-insurers did not dispute that Old McGraw’s rights under its insurance policies were transferred to CI Acquisitions.

Five minutes after the merger took place, five of the Mirror Image Companies were merged together to form McGraw-Edison Company, which the court refers to as New McGraw.  CI Acquisition then distributed all its assets (which just minutes ago had been owned by Old McGraw) to New McGraw and the remaining Mirror Image Companies.  The transfer of assets took place by way of bills of sale.  In the New McGraw bill of sale, CI Acquisitions transferred “all of [its] assets, rights and projects of every kind and nature … used in or related to all operations other than its Power Systems, Controls, Clark and Service operations.”  Once again, the agreement made no reference to insurance policies or claims.  It did indicate, however, that New McGraw assumed all of CI Acquisition’s liabilities.  After the transfer of assets, CI Acquisition, which only held the assets for a matter of minutes, was liquidated.

Over the next eighteen years, Cooper owned New McGraw and the remaining Mirror Image Companies.  In November 2004, Cooper merged New McGraw into itself.

Transfer of the Insurance Rights

There was no dispute that if the insurance rights had been transferred to New McGraw as part of the 1986 bill of sale, they would have been transferred to Cooper as part of the 2004 merger.  Thus, the bill of sale between CI Acquisitions and New McGraw was the critical document.  The bills of sale purportedly transferred various rights to New McGraw and the surviving Mirror Image Companies, but the specific rights that were transferred to each company were never identified.

As noted by the court, “in interpreting the 1986 Bill of Sale between CI Acquisition and New McGraw, the analysis boils down to whether the language alone clearly provided for the transfer of the insurance rights, and, if so, which entity received those rights.”  Id. at *4.  The court found the language in the bill of sale (“all … assets, rights and properties of every kind and nature”) was sufficient to transfer any insurance rights.  The dispositive question, however, was whether those rights were transferred to New McGraw or one of the Mirror Image Companies.

Because the bill of sale was not clear with respect to that issue, the court relied on the deposition testimony of several witnesses.  One witness was the general counsel of Cooper, who previously worked in the law department.  She testified that the bill of sale was intended to transfer all of the assets and liabilities of Old McGraw, which had been acquired by CI Acquisitions, to New McGraw.  She further testified that the Mirror Image Companies did not receive any new rights through the asset sales and that they had no interest in the insurance rights.  However, she did not participate in the drafting of the bill of sale, although she had general knowledge concerning Cooper’s business operations.

The other two witnesses worked in Cooper’s risk management and insurance department.  Although neither individual was involved in the 1986 asset sale, they claimed to have knowledge of Cooper’s business operations prior to and after the sale.  In addition, and more significantly, they had knowledge concerning Cooper’s dealings with Old McGraw’s insurers.  Significantly, they testified that Cooper had made retroactive premium payments to the insurers and had submitted claims under the policies, which were, in fact, paid by the insurers.  There also was documentary evidence supporting this testimony.

While general knowledge about Cooper’s business practices arguably has questionable relevance on the issue of the parties’ intent, the fact that the insurers treated Cooper as having rights under the policies directly supported the argument that Old McGraw’s rights under the policies had been transferred to Cooper.

Notably, even though Cooper’s general counsel had no personal knowledge concerning the intent of the drafters of the bills of sale, the court credited her testimony because she was designated as the corporate designee.  According to the court:

Under N.J.R.E. 602, witnesses may not testify to a matter unless they have personal knowledge of it. One exception to that requirement is set forth in Rule 4:14-2, which provides that a party may depose a corporation, and the corporation must designate one or more persons to testify on its behalf. These corporate witnesses may then testify “as to matters known or reasonably available to the organization,” even if these matters are outside the witness’ personal knowledge.

Id. at *5.  While the court’s recitation of the rules is correct, the corporate designee must still have a basis for his or her testimony.  That is something that seemed to be lacking in this case in that no reference was made to the source of the information about which the witness testified.

Conclusion

In light of the Givaudan decision, the Appellate Division’s ruling in Cooper that the insurance rights could be transferred is not surprising.  Because liability for environmental contamination attached at the time the contamination occurred, which in this case was in the 1970s and early 1980s, there was no question that any potential right to assert a claim arose long before the transfer of Old McGraw’s rights under the policies.

What the case shows is how difficult it is to predict when an insurer’s potential liability will end.  It does not appear that insurance coverage was on the mind of Cooper when it undertook the series of transactions that ultimately resulted in it being named as a potentially responsible party at a hazardous waste site 23 years later.  Unfortunately for the insurers, their acceptance of premiums and payment of claims under policies issued decades earlier undercut their argument that Cooper had no rights under the policies.

© William D. Wilson and NJInsuranceBlog.com, 2018.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.

In a recent case, the United States District Court for the District of New Jersey held that an insured had no duty to defend an insured accused of falsely advertising the origin of its product.  Albion Engineering Company, a New Jersey company, was sued by a competitor for false advertising because it claimed that its products were made in America when, in fact, they were made in Taiwan.  Albion then sought coverage from its insurer, Hartford Fire Insurance Company.  The Hartford policy provided coverage for, among other things, personal and advertising injury.  In Albion Engineering Co. v. Hartford Fire Ins. Co., 2018 WL 1469046 (D.N.J. March 26, 2018), Judge Noel L. Hillman held that there was no coverage for the claims.

Many liability policies provide coverage in connection with “advertising injury.”  In determining the extent to which such coverage exists, it is necessary to closely examine the policy language because the wording of such coverage provisions varies widely.  In addition, over the years insurers have modified their policy wording to address issues raised by the courts.  Thus, decisions issued just a few years ago may have little or no relevance.

The policy at issue in Albion defined “personal and advertising liability” to include injury arising out of the “[o]ral, written or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services . . . .”  Thus, coverage was limited to two types of claims: defamation and disparagement.  As summarized by the court:

The issue before this Court is whether the [the underlying action] asserts a claim for “injury . . . arising out of . . . publication of material that slanders or libels a person or organization or disparages a[n] . . . organization’s goods, products or services.”

Id. at *7.  In other words, the issue addressed by the court was whether falsely stating that one’s products are manufactured in the United States is defamatory toward, or disparages products made by, a competitor.

Both Albion and its competitor, Newborn Brothers Co., Inc., a Maryland-based company, manufacture caulking guns and accessories in Taiwan.  Albion claimed, however, that its products were manufactured in the United States.   Newborn sued Albion in federal court in New Jersey, asserting claims for false advertising and product marking under the Lanham Act and tortious unfair competition.  Newborn’s allegations against Albion were summarized by the court as follows:

Albion’s misrepresentations and material omissions concerning the geographic origin of the subject merchandise include that these products are “Made in America” and Albion’s failure to disclose that these products are “Made in Taiwan” are unfair competition that has injured Newborn by causing distributors to substitute the subject merchandise for Newborn’s competitive goods.

Id.

Albion commenced a separate action against Hartford in federal court in New Jersey after Hartford refused to defend it in the underlying action.  Both parties subsequently moved for summary judgment.  Although the duty to defend is broader than the duty to indemnify, Hartford took the position that it had no duty to defend Albion in the underlying action because the allegations against Albion did not give rise to potentially covered claims.

As noted by the court, to state a valid claim for product disparagement under New Jersey law, it must be alleged that the defendant made “false allegations concerning plaintiff’s property or product.”  Id. at *7 (quoting Gillon v. Bernstein, 218 F. Supp. 3d 285, 294 (D.N.J. 2016)).  There was no allegation in the underlying action that Albion made any statements whatsoever about Newborn’s products or that it compared their products in any way.  Nor did Albion claim that only its products were manufactured in the United States.  Rather, Albion simply advertised, albeit falsely, that its own products were made in the United States.  Because Newborn did not allege that Albion disparaged Newborn’s products, the court held that there was no coverage for the claims.  According to the court:

Under New Jersey law, the allegedly disparaging publication must concern the plaintiff in the Newborn Suit or its products. The allegation that Plaintiff falsely represented that its products were made in the United States when they were in fact made in Taiwan contains no statement that references Newborn, explicitly or implicitly.

Id. at *9.

The court further held that Newborn, the underlying plaintiff, failed to state a defamation claim that would trigger a duty to defend.  “As with disparagement, an essential element of defamation is that the statement be concerning the plaintiff.”  Id. at *13.  Because Albion made no reference to Newborn’s products, any defamation claim also would fail.

The court did not address the validity of the Lanham Act claims, presumably because there was no allegation that they would trigger a duty to defend.

Interestingly, Albion lied about its products, but it did not lie enough to trigger insurance coverage.  Had Albion stated that it was the only manufacturer whose products were made in the United States, that its products were somehow better than its competitors’ products because they were made in the United States, or pointed out that Newborn’s products were manufactured overseas, coverage may have been triggered.  Of course, had it done that, Albion also would have opened itself up to potentially greater liability.

As a result of the court’s decision, Albion is left to cover its own costs in the two litigations and any potential judgment in the Newborn action.  In addition, because Albion and Newborn are not the only manufacturers of such productions, Albion may face additional lawsuits.  It would be interesting to see if any “benefit” Albion received from falsely advertising its products outweighed the cost it must now pay.  Regardless, Albion has changed its advertising since the commencement of the underlying action by Newborn.  Albion now states on its website that its products are “designed” in the United States and that it has “substantial USA quality control and manufacturing capabilities.”

© William D. Wilson and NJInsuranceBlog.com, 2018.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson and NJInsuranceBlog.com with appropriate and specific direction to the original content.