| Natural Organics, Inc. v OneBeacon Am. Ins. Co. |
| 2013 NY Slip Op 00189 [102 AD3d 756] |
| January 16, 2013 |
| Appellate Division, Second Department |
| Natural Organics, Inc., Respondent, v OneBeaconAmerica Insurance Co., Appellant. |
—[*1] Meyer, Suozzi, English & Klein, P.C., Garden City, N.Y. (Kevin Schlossser ofcounsel), for respondent.
In an action, inter alia, for a judgment declaring that the defendant is obligated todefend and indemnify the plaintiff in an action entitled Nature's Plus Nordic A/S vNatural Organics, Inc., commenced in the United States District Court for theEastern District of New York under case No. 2009-Civ-4256, the defendant appeals (1),as limited by its brief, from so much of an order of the Supreme Court, Nassau County(Warshawsky, J.), dated January 20, 2011, as denied that branch of its motion which wasfor summary judgment dismissing the complaint and declaring that it is not obligated todefend or indemnify the plaintiff in the underlying action, and (2) from an order andjudgment (one paper) of the same court dated April 26, 2011, which granted theplaintiff's motion for summary judgment declaring that the defendant is obligated todefend it in the underlying action and to pay previously incurred defense costs, declaredthat the defendant is so obligated, and severed the remaining causes of action.
Ordered that the appeal from the order dated January 20, 2011, is dismissed; and it isfurther,
Ordered that the order and judgment dated April 26, 2011, is affirmed; and it isfurther,
Ordered that one bill of costs is awarded to the respondent.
The appeal from the intermediate order dated January 20, 2011, must be dismissedbecause the right of direct appeal therefrom terminated with the entry of judgment in theaction (see Matter of Aho, 39 NY2d 241, 248 [1976]). The issues raised on theappeal from the order dated January 20, 2011, are brought up for review and have beenconsidered on the appeal from the order and judgment dated April 26, 2011 (seeCPLR 5501 [a] [1]).
The plaintiff Natural Organics, Inc. (hereinafter NOI), is a manufacturer of health[*2]supplement products, including those sold under thetrade name Nature's Plus. An action was commenced against NOI in the United StatesDistrict Court for the Eastern District of New York (hereinafter the federal action) inwhich it was alleged, inter alia, that NOI, after wrongfully terminating its exclusivedistributorship agreement with Nature's Plus Nordic A/S (hereinafter NPN), issued apress release announcing the appointment of House of Nature A/S (hereinafter HON), acompetitor of NPN, as the exclusive distributor for Nature's Plus products in Norway,Denmark, Sweden, and Finland (hereinafter the Nordic region). The complaint in thefederal action asserted causes of action against NOI alleging, inter alia, unfaircompetition pursuant to the Lanham Act (15 USC § 1125 [a]) on the basis that,through the press release, NOI misrepresented to consumers that HON was the soledistributor for Nature's Plus products in the Nordic region when NPN remained the soledistributor for those countries. It alleged that the press release caused confusion andmistake and deceived consumers as to the affiliation, connection, or association of NPN,HON, and NOI, and as to the origin, sponsorship, or approval of NPN's and HON'sproducts, causing a diversion of trade from NPN and harm to its reputation and goodwill.
NOI tendered its defense in the federal action to its insurer, the defendantOneBeacon America Insurance Co. (hereinafter OneBeacon), pursuant to coveragewhich provided for "personal and advertising injury liability." The OneBeacon policydefined "personal and advertising injury" as injury arising out of "[o]ral or writtenpublication of material that slanders or libels a person or organization" or "[o]ral orwritten publication of material that disparages a person's or organization's goods,products or services." OneBeacon disclaimed coverage, on the basis that the allegationsof the complaint in the federal action did not fall within the definition of "personal andadvertising injury," and further, that the policy contained an exclusion of coverage forpersonal and advertising injury "arising out of a breach of contract."
NOI commenced this action against OneBeacon seeking damages and a judgmentdeclaring that OneBeacon was obligated to defend and indemnify it in the federal action.NOI moved for summary judgment declaring that OneBeacon is obligated to defend it inthe federal action and to pay previously incurred defense costs. OneBeacon moved forsummary judgment dismissing the complaint and declaring that it is not obligated todefend or indemnify NOI in the federal action.
In an order dated January 20, 2011, the Supreme Court denied OneBeacon's motion.In an order and judgment dated April 26, 2011, the Supreme Court granted NOI'smotion, and declared that OneBeacon had a duty to defend NOI in the federal action andto pay previously incurred defense costs.
An insurer's duty to defend is liberally construed and is broader than the duty toindemnify (see Fieldston Prop.Owners Assn., Inc. v Hermitage Ins. Co., Inc., 16 NY3d 257, 264 [2011]; Automobile Ins. Co. of Hartford vCook, 7 NY3d 131, 137 [2006]). The duty to defend "arises whenever theallegations in a complaint state a cause of action that gives rise to the reasonablepossibility of recovery under the policy" (Fitzpatrick v American Honda MotorCo., 78 NY2d 61, 65 [1991]; see BP A.C. Corp. v One Beacon Ins. Group, 8 NY3d 708,714 [2007]). "If the allegations of the complaint are even potentially within the languageof the insurance policy, there is a duty to defend" (Town of Massena v HealthcareUnderwriters Mut. Ins. Co., 98 NY2d 435, 443 [2002]; see New York City Hous.Auth. v Commercial Union Ins. Co., 289 AD2d 311, 312 [2001]). Moreover, if "anyof the claims against the insured arguably arise from covered events, the insurer isrequired to defend the entire action" (Frontier Insulation Contrs. v Merchants Mut.Ins. Co., 91 NY2d 169, 175 [1997]). An insurer may be required to defend under thecontract "even though it may not be required to pay once the litigation has run its course"(Automobile Ins. Co. of Hartford v Cook, 7 NY3d at 137).
Here, the allegations of the federal complaint fall within the policy's coverage for"personal and advertising injury" arising from product disparagement. The statement thatHON had been appointed the exclusive distributor of Nature's Plus products in theNordic region could imply that NPN's inventory of Nature's Plus products wasunauthorized (see Unique Sports Generation, Inc. v LGH-III, LLC, 2005 WL2414452, *10-11, 2005 US Dist LEXIS 22133, *31-36 [SD NY 2005]; cf. HeritageMut. Ins. Co. v Advanced Polymer Tech., Inc., 97 F Supp 2d 913, 933 [SD NY2000]).[*3]
"When an exclusion clause is relied upon to denycoverage, the burden rests upon the insurance company to demonstrate that theallegations of the complaint can be interpreted only to exclude coverage" (Town ofMassena v Healthcare Underwriters Mut. Ins. Co., 98 NY2d at 444; seeInternational Paper Co. v Continental Cas. Co., 35 NY2d 322, 325 [1974]). Here,OneBeacon failed to meet its burden of demonstrating that the allegations of productdisparagement fell wholly within the exclusion for personal and advertising injuriesarising out of a breach of contract, that the exclusion is subject to no other reasonableinterpretation, and that there is no possible factual or legal basis upon which it mayeventually be held obligated to indemnify NOI under the policy (see FrontierInsulation Contrs. v Merchants Mut. Ins. Co., 91 NY2d at 175).
In insurance contracts, the phrase "arising out of" is " 'ordinarily understood to meanoriginating from, incident to, or having connection with' " (Maroney v New York Cent. Mut.Fire Ins. Co., 5 NY3d 467, 472 [2005], quoting Aetna Cas. & Sur. Co. vLiberty Mut. Ins. Co., 91 AD2d 317, 320-321 [1983]). It "requires only that there besome causal relationship between the injury and the risk for which coverage is provided"or excluded (Maroney v NewYork Cent. Mut. Fire Ins. Co., 5 NY3d 467, 472 [2005]). If the plaintiffs in thefederal action cannot prove product disparagement without proving a breach of contract,the exclusion will apply (see Mount Vernon Fire Ins. Co. v Creative Hous., 88NY2d 347 [1996]; US Underwriters Ins. Co. v Val-Blue Corp., 85 NY2d 821[1995]). Here, the press release was allegedly false and disparaging to NPN's productswithout regard to whether NOI breached its agreement with NPN. Although thecomplaint in the federal action alleged that the announcement of HON as exclusivedistributor for the region was false and misleading because NPN remained the soledistributor for the region "by nature of the agreement," the product disparagement claimdoes not necessarily arise out of NOI's alleged breach of contract, and, thus, coverage isnot excluded under the policy.
Independent of the breach of contract claim, for which there is plainly no coverage,the press release allegedly violated the Lanham Act by suggesting to NPN's customersthat its products were not genuine (see Unique Sports Generation, Inc. v LGH-III,LLC, 2005 WL 2414452, *10, 2005 US Dist LEXIS 22133, *31-36 [SD NY 2005]),or that the remaining inventory was somehow unauthorized (see Ruder & Finn vSeaboard Sur. Co., 52 NY2d 663, 670 [1981]). The elements of a productdisparagement claim under the Lanham Act are that the defendant: (1) made materialmisrepresentations or descriptions about the nature or characteristics of either defendant'sor plaintiff's goods, services or commercial activities, (2) used the false or misleadingmisrepresentations in commerce, (3) made the representations in the context ofcommercial advertising or commercial promotion, and (4) made the pleading partybelieve that it is likely to be damaged by the representations (see 15 USC §1125 [a]). The Lanham Act is silent as to the rationale or reason for the offendingmisrepresentations. That the misrepresentations may or may not arise from a breach ofcontract is of no moment to the claim.
Here, without reference to the contract, NPN can potentially establish the productdisparagement by the press release which called into question the genuineness of theproduct and whether the remaining inventory was unauthorized. With or without abreach of contract, the value of the disparaged product was allegedly diminished. Thus,OneBeacon's duty to defend NOI in the federal litigation was triggered (see U.S.Underwriters Ins. Co. v Val-Blue Corp., 85 NY2d at 823).
Accordingly, the Supreme Court properly granted NOI's motion and deniedOneBeacon's motion. Angiolillo, J.P., Leventhal, Austin and Roman, JJ., concur.[Prior Case History: 2011 NY Slip Op 30240(U).]