A recent Law 360 story by Bill Wichert, “Insurer Aims to Undo McCarter Fee Ruling in School IP Fight,” reports that a school’s insurer claimed a New Jersey state judge relied on an inapplicable standard in urging him to undo a ruling that the business must cover attorney fees charged by McCarter & English LLP for trademark litigation work performed before the institution notified the insurance company about the case. In The Lewis School of Princeton's suit against the business, Philadelphia Indemnity Insurance Co. moved for reconsideration of that opinion, saying Superior Court Judge Robert T. Lougy improperly found that the business must demonstrate “appreciable prejudice” from the school’s conduct to avoid such coverage and failed to do so.
McCarter & English billed The Lewis School for about $147,000 in fees — a fraction of which the insurer has already covered — but the amount of damages owed by Philadelphia Indemnity are to be determined at trial, the opinion said. The school has settled related malpractice claims against McCarter & English. Philadelphia Indemnity argued that its duty to defend was not triggered until the school notified it about the underlying litigation on May 9, 2018, thus the company is not responsible for any fees incurred beforehand. The company said it did not have to show appreciable prejudice in denying that pre-notice coverage.
The appreciable prejudice standard only applies under state law in matters “where there is a denial of coverage and forfeiture of coverage based on late notice,” Philadelphia Indemnity said in its brief. That’s not the case here since the business ultimately appointed counsel to defend The Lewis School and agreed to cover post-notice fees, the company said. “The court has erroneously conflated the law regarding when the insurer’s duty to defend begins (i.e., upon presentation of the claim) and the entirely separate case law regarding the standards applicable when the insurer denies coverage based on late notice,” the brief states.
The business relied in part on the New Jersey Supreme Court’s 1992 SL Industries v. American Motorists Insurance Co. opinion, saying it set forth that insurers were not on the hook for pre-notice defense costs. The opinion “did not carve out any exceptions whatsoever — including whether or not the insurer could show appreciable prejudice,” Philadelphia Indemnity said. “SL Industries demonstrates that an insurer is not required under New Jersey law to reimburse the insured’s pre-tender defense costs, irrespective of any considerations regarding prejudice,” according to the company’s brief.
Philadelphia Indemnity asserted that Judge Lougy mistakenly found in his opinion that SL Industries is not relevant since it “‘does not address the appreciable prejudice standard.’” SL Industries doesn’t address the standard “because, just as in the instant case, the insurer did not disclaim or argue forfeiture of coverage based on late notice,” the company said.
The business also has said the appreciable prejudice standard didn’t apply in the case because, in denying pre-notice coverage, it relied on how The Lewis School ran afoul of a voluntary payment provision of its policy. That provision states, “No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”
Judge Lougy, however, concluded that the standard applied to such a provision, citing the state Appellate Division’s 1987 Solvents Recovery Service v. Midland Insurance Co. opinion. In that decision, the court “considered whether coverage was defeated by the insured’s failure to comply with a provision substantially similar to the provision at issue here, which prohibited the insured from ‘voluntarily mak[ing] any payment, assum[ing] any obligation or incur[ring] any expense,’” the judge said.
Philadelphia Indemnity countered that Solvents Recovery applied the standard to a different provision at issue in that case. Even if the standard is applicable to the pre-notice fees in question, the insurer said the judge should have denied summary judgment to The Lewis School on the issue of the company’s liability in order for the parties to conduct discovery regarding whether Philadelphia Indemnity suffered appreciable prejudice as a result of the school’s conduct.
Philadelphia Indemnity has paid the school for about $13,000 in post-notice fees but refused to cover the balance of such costs because the insurer said it never consented to retaining McCarter & English and since the firm’s hourly rate is unreasonable, court documents state.