Holy Stromboli! Grocer Loses Coverage and Bad Faith Battle Against Excess Carrier

In Charter Oak Insurance Company v. Maglio Fresh Foods, No. 14-4094, 2015 U.S. App. LEXIS 19268 (3d Cir. Nov. 4, 2015), the Third Circuit held that because the underlying lawsuit did not present a covered “advertising injury” claim, and there was no exhaustion of the primary policy, the insured’s excess carrier could not have acted in bad faith.

As background, the underlying plaintiff, Leonetti’s, a supplier and competitor of Maglio Fresh Foods, brought a lawsuit against Maglio. First, the “Maglio brand claim” alleged that after Maglio found a new manufacturer and terminated its private label manufacturing agreement with Leonetti’s, Maglio continued to use boxes reflecting product information about the stromboli made by Leonetti’s. Second, the “Forte brand claim” alleged that Maglio sold stromboli under the “Forte” brand name, although Leonetti’s had purchased and obtained exclusively rights to distribute Forte products.

Maglio was defended by its primary insurer, Charter Oak Fire Insurance Company , pursuant to a reservation of rights letter. The Charter Oak policy had a limit of $1 million. Charter Oak determined that only the allegations concerning “trade libel” were potentially covered under the policy. Notably, none of the specific “trade libel” allegations concerned the Maglio brand claim. American Guarantee & Liability Insurance Company, Maglio’s excess and umbrella insurer, acknowledged the claim, but after determining the case was unlikely to reach the excess layer of coverage, closed its file.

Following a jury trial, there was a mistrial as to the Forte brand claim, but the jury returned a verdict in favor of Leonetti’s on the Maglio brand claim. The jury awarded $2 million in compensatory damages and $555,000 in punitive damages. Upon learning of the verdict, American Guarantee informed Maglio that it had no duty to provide a defense or indemnity since Charter Oak was providing a defense and because the Maglio brand claim was not covered.

After the court retried the Forte claim, the jury found in favor of Leonetti’s, awarding $660,000 in compensatory damages. Charter Oak had previously made known that it was willing to pay its $1 million limit towards settlement and dismissal of all claims. After the second verdict, Charter Oak deposited its policy limit with the court to halt the accrual of interest and facilitate settlement.

After unsuccessful settlement discussions and an unsuccessful agreement between Maglio and Charter Oak to obtain an appeal bond, Maglio entered into a settlement agreement and assignment of rights with Leonetti’s, awarding $4.5 million to Leonetti’s and assigning to Leonetti’s its claims against the insurers.

In response to Maglio’s settlement, Charter Oak informed Maglio that it breached the policy’s cooperation clause and filed a declaratory judgment seeking a ruling that the claims in the underlying lawsuit were not covered under the policy. American Guarantee, a defendant in the declaratory judgment action, filed a cross-claim seeking a similar declaratory judgment. Maglio responded with allegations of breach of contract and bad faith.

The district court granted the insurers’ motions for summary judgment, concluding that neither policy covered the Maglio brand claim or the Forte brand claim. The counterclaims and cross-claims brought by Maglio, however, proceeded to trial. Charter Oak settled with Maglio immediately prior to trial.

After a bench trial, the district court concluded that American Guarantee did not act in bad faith. Further, it held that Charter Oak’s tender of its policy limits did not affect American Guarantee’s obligation to defend Maglio since Charter Oak continued its defense, and the policy limits were not exhausted by the claim. Further, there was no bad faith because American Guarantee acted properly with respect to the Forte brand claim by hiring coverage counsel and monitoring the underlying action. Maglio appealed.

The Third Circuit upheld the lower court’s decision since the American Guarantee policy clearly did not apply to either the Maglio brand claim or the Forte brand claim. Specifically, the Maglio brand claim did not constitute an “advertising injury,” and the verdict for the Forte brand claim did not exhaust the limits of the underlying insurance policy. With respect to the Maglio brand claim, the court concluded there was no disparagement. The Third Circuit reasoned no evidence at trial established that any consumer ever knew that Leonetti’s made a Maglio stromboli. Hence, the theory of liability did not concern disparagement of Leonetti’s stromboli, but rather, mere false statements about Maglio’s own product. As a result, the theory of liability was based upon unfair competition, not disparagement. Irrespective of whether “advertising injury” was alleged in the Maglio brand claim, the “knowledge of falsity” exclusion applied to bar coverage since a broker and sales manager of Maglio knew that the brand boxes used by Maglio contained false statements. The Third Circuit reasoned that under Pennsylvania law, the knowledge of the broker and sales manager would be imputed to Maglio.

In addition, the Third Circuit stated that Maglio’s bad faith claim must fail since it was difficult to conceive how American Guarantee acted in bad faith when it owed no duty to indemnify. Further, the Third Court found significant that American Guarantee’s defense provision was never triggered by the Forte brand claim since the Charter Oak policy was never exhausted. Therefore, the Third Circuit affirmed the district court.