Snowfall in Southern Louisiana is a rarity, but one doozy of a snowball fight has been ongoing since at least 2006 and has resulted in four separate lawsuits, now consolidated in the United States District Court for the Eastern District of Louisiana.
The snowballs at issue are “snoballs;” those confections of shaved ice drowned in various syrup flavorings, which are taken quite seriously in Southern Louisiana and are best served in the summertime.
Southern Snow Manufacturing Co., Simeon Inc. and Parasol Flavors LLC were, and are, competitors of SnoWizard Inc. in the business of manufacturing and selling snoball ice-shaving machines and snoball syrup flavor concentrates. In 2006, Southern Snow, Simeon and Parasol Flavors sued SnoWizard for trademark infringement and disparaging their businesses with regard to certain flavor names.
After being served, SnoWizard tendered the suit to its commercial liability insurer, Hanover Insurance Co., for defense and indemnity of the claim. Hanover has been trying to extract itself from this fight ever since. While it may be inching closer to freeing itself from involvement in the suit, Hanover finds itself, at present, obligated to continue providing a defense to SnoWizard against Southern Snow, et al.’s claims of disparagement, notwithstanding an earlier ruling by the court that its CGL policy does not provide coverage for those claims.
When SnoWizard first sought defense and indemnity from Hanover of and against Southern Snow, et al.’s claims, Hanover denied that its commercial liability policy provided coverage of the claims. In response, SnoWizard filed a third party complaint against Hanover.
After initial proceedings, Hanover and SnoWizard filed cross-motions for summary judgment and the court held that the term “disparages” as used in the complaints filed by Southern Snow, et al. was broad enough that potential coverage was not excluded; therefore, SnoWizard was entitled to a defense from Hanover under its policy.
SnoWizard and Hanover then entered into a settlement agreement in which Hanover agreed to provide a defense to SnoWizard subject to the three reservation of rights letters it issued to SnoWizard, and reserving all of Hanover’s coverage defenses.
Louisiana law regarding an insurer’s defense obligation is similar to that of most states. The duty to defend is broader than the duty to indemnify and it is determined from a reading of the plaintiffs’ petition and the applicable policy.
As the Louisiana Supreme Court has stated: “If, assuming all the allegations of the petition to be true, there would be both (1) coverage under the policy and (2) liability to the plaintiffs, the insurer must defend the insured regardless of the outcome of the suit.”
The Hanover policy provided in pertinent part that:
“We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies. We will have the right and duty to defend the insured against any ‘suit’ seeking those damages.”
In the initial stages of the proceedings, the court determined that the plaintiffs’ petition did not unambiguously exclude coverage. Subsequently, after discovery was conducted in connection with the merits of the claims of Southern Snow, et al. against SnoWizard, Hanover filed additional motions for summary judgment seeking to be relieved of its defense and indemnity obligations on the basis that the undisputed facts did not establish any liability under the policy for the claims asserted.
The court issued several rulings finding that Hanover’s policy did not provide coverage for the claims asserted by Southern Snow, et al., and, therefore, no indemnity was owed. However, it refused to terminate Hanover’s defense obligations.
After these rulings were issued, the case was assigned to a new judge who was asked by Hanover to reconsider the prior judge’s ruling regarding provision of a defense to SnoWizard. The basis for the original judge’s rulings is not clearly expressed in the ruling on the motion for reconsideration, but SnoWizard argued that the prior ruling was correct based on the ambiguities in the policy and based on the settlement agreement between it and Hanover.
With regard to the policy itself, SnoWizard pointed out that the “insuring agreement” portion of the Hanover CGL policy had been modified by an endorsement making changes applicable to Louisiana policies. The original insuring agreement provision had contained the following sentence, which was not included in the Louisiana changes endorsement: “However, we will have no duty to defend the insured against any ‘suit’ seeking damages for ‘personal and advertising injury’ to which this insurance does not apply.”
SnoWizard argued that the omission of this phrase, combined with the lack of any express policy language affirmatively terminating Hanover’s duty to defend under the circumstances of the case, meant that Hanover had a continuing duty to defend SnoWizard against the plaintiffs’ claims.
The court concluded that even without the omitted sentence the insuring agreement, as amended, provided that Hanover had the “right and duty to defend” the insured against any suit seeking damages “because of ‘personal and advertising injury’ to which this insurance applies.”
The converse would be that if the insurance did not apply there was no duty to defend. The court did not find it necessary for the policy to affirmatively state the converse, which was obvious and implicit, noting that the language should not be interpreted “in such a way as to force Hanover to assume obligations not reasonably contemplated by the contract or Louisiana law.” It noted that the contract would not be interpreted to “create affirmative duties where the insurance at issue would not even apply.”
SnoWizard also argued that notwithstanding the court’s ruling that there was no liability under the policy based on the undisputed facts established through discovery, Hanover had a continuing duty to defend it under the settlement agreement that the parties had entered into to resolve SnoWizard’s third party claim against Hanover. The court noted that in the settlement agreement, Hanover agreed to defend SnoWizard subject to its reservation of rights letters and its affirmative defenses. The court did not find Hanover’s defenses to be relevant, but, with respect to the reservation of rights letters, stated:
“The Settlement Agreement and the Reservation of Rights letters clearly state Hanover’s position that Plaintiffs’ allegations unambiguously fall outside of the policy’s coverage, and that the duty to defend does not attach until the insured receives notice of the allegations that fall within the policy’s coverage. Nevertheless, Hanover agrees to defend SnoWizard in the Consolidated Suits ‘because and to the extent’ Plaintiffs’ allegations of disparagement lack clarity, ‘which may or may not’ be covered under the policy ‘depending on the facts proven at trial.’ The Reservation of Rights letters do not explicitly address the termination of the duty to defend should a determination that coverage is excluded be made before trial.”
The court also noted that the settlement agreement was entered into after the original judge had determined that the plaintiffs’ petition did not unambiguously preclude coverage under the policy, but before the court found that there was no liability under the policy based on the undisputed facts.
Based on the foregoing, the court concluded that a material fact issue existed, and additional briefing was warranted, with regard to interpretation of whether the settlement agreement and reservation of rights letters, read together, required Hanover to provide a defense through trial even if a determination of no coverage had been made prior to trial.
So, How Much Longer?
Although Hanover is undoubtedly frustrated at its inability to finally conclude its obligation to defend SnoWizard, it can take comfort from the fact that the court had no problem finding that the policy itself did not require that Hanover provide a continuing defense of SnoWizard.
The settlement agreement was a confounding factor, and the court, given the already lengthy history of the proceedings, appears to have been acting cautiously in requesting further briefing on the effect of the agreement on Hanover’s duty to defend. Absent unexpected evidence casting further doubt on the intent behind the settlement agreement and reservation of rights letters, it would seem likely that a clear implication of the reservation of rights letters is that the duty to defend terminates whenever it is determined that the facts establish no liability, either at trial or beforehand.
While it is highly unusual that an insurer is required to defend an insured when it is acknowledged that there is no coverage for the claim at issue under the policy, Hanover is likely to be released from its defense obligation and is no doubt looking forward to placing this fight in its rear view mirror.