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Most businesses, including apparel manufacturers and retailers,
pay premiums for insurance. When a claim that is potentially
covered arises: do not let your insurance company
leave you naked. Insurers and insurance brokers may tell you that a
claim is not covered when there really is coverage under one or
more policies. Accordingly, when there is an unusual claim, you
should not rely on the advice of your insurance broker and you
should definitely not rely on the advice of your insurer. Instead,
consult with insurance coverage counsel who can assist you with
obtaining the coverage to which you are entitled under your
policies.
A case in point is a July 13, 2012 opinion from the California
Court of Appeal that potentially benefits the entire apparel
industry: Travelers Property Casualty Company of America v.
Charlotte Russe Holding, Inc., et al. ("Charlotte
Russe"). The Charlotte Russe opinion reaffirmed the
broad coverage of a duty to defend under an insurance policy. In
most cases, the costs of defense are going to exceed the costs of a
settlement by an "innocent" apparel manufacturer or
retailer.
In the Charlotte Russe case, an apparel manufacturer entered
into an agreement with the retailer whereby the retailer became the
exclusive sales outlet for the manufacturer's
so‐called "premium" or "high end"
brand of apparel. When the retailer began to sell the
manufacturer's apparel at "fire sale" prices, the
manufacturer claimed, among other things, that the retailer was
disparaging the manufacturer's goods. The logic employed by the
manufacturer was that, by selling the manufacturer's apparel at
low prices, the retailer was implying that the subject apparel was
not of a "premium" or "high end" quality.
Multiple lawsuits soon followed.
The retailer tendered the lawsuits to its insurer and the
insurer declined to defend or indemnify the retailer, citing to
certain exclusions in the policy and the insurer's
interpretation of certain case law. Adding insult to injury, the
insurer then sued its own insured seeking a Court declaration that
the insurer had no obligation to satisfy any of its duties under
the policy. The insurer won in the Trial Court, but the Court of
Appeal reversed that decision.
The Court of Appeal held, among other things, that the
manufacturer's allegations of price discounts "may"
result in a loss that "might" be covered under the
"personal injury" coverage provided under a Commercial
General Liability Insurance Policy (probably the most common policy
for a business). The Court of Appeal then reaffirmed that a
"liability insurer's duty to defend arises when a suit
against its insured seeks damages that are potentially within the
policy's coverage . . . [a]n insurer has no duty to defend its
insured only if the claim against it cannot, by any conceivable
theory, raise an issue that would bring it within policy's
coverage."
An insurer, to avoid its duty to defend, must show that there is
no possibility that a covered loss may result from
the tendered claim. In stark contrast, an insured must only show
that there might be a covered loss to make the insurer obligated to
defend a claim. Of course, litigation may be necessary to make the
insurer comply with its obligations to its insured.
In Charlotte Russe, the underlying lawsuits settled before the
appellate court opinion issued. However, although not discussed in
Charlotte Russe, the Court of Appeal's reversal was not a mere
pyrrhic victory. When an insured prevails against the insurer for
breaching its duty to defend, the insurer becomes liable for the
attorneys' fees incurred by the insured in its defense. The
insurer may also be liable for the attorney's fees incurred by
the insured in the coverage lawsuit if the insurer's denial was
unreasonable. The insurer also becomes potentially liable to its
insured for additional damages, including punitive damages.
The lesson learned from the Charlotte Russe case is that when an
insurer says "no," you should not take "no" for
an answer. Instead, you should consult with insurance coverage
counsel to determine your rights under the policy. Preferably,
insurance coverage counsel should be consulted at the outset, since
the assistance of experienced insurance coverage counsel from the
beginning may make a difference with respect to whether the insurer
accepts coverage at the tender stage of the claim.
Steven Brower is a Shareholder and Administrative Chair
of the firm's Litigation Practice Group.
Jeffrey H. Kapor is a Shareholder and Chair of the
Firm's Apparel Practice Group.
Jason Goldstein is Senior Counsel in the Firm's
Litigation Practice Group.
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