HNRK Coverage Corner

On September 16, 2020, Judge Failla of the SDNY issued a decision in Philadelphia Indemnity Ins. Co. v. Streb, Inc., Case No. 19-CV-366 (KFP), ruling that a CGL carrier had no duty to defend a personal injury action because undisputed “extrinsic evidence” (i.e., facts not alleged in the complaint) conclusively established that an exclusion applied.

The insured (Streb, Inc.), a not-for-profit dance and performance company, was a defendant in a personal injury action brought by a participant in an aerobics class who was severely injured on a trampoline.  Streb’s CGL policy contained a Designated Ongoing Operations Exclusion, which barred coverage for “Any claims arising out of the use of any aerial equipment including but not limited to the use of a trapeze or trampoline.  Excluding performers who dive off stage and/or participate in human pyramids.”  (Emphasis added). The underlying personal injury complaint was “largely devoid of any of the specific factual circumstances surrounding the Injury and fail[ed] to plead many facts concerning the Injury that are undisputed by the parties.”  Thus, although the complaint did not “mention that [the insured’s customer] was using a trampoline when she was injured,” there was no dispute that she was.  In general, an insurer’s duty to defend “remains even though facts outside the four corner of [the] pleadings indicate that the claim may be meritless or not covered.” (See our previous post on this principle here.)

However, Judge Farilla concluded that an exception to the “four corners rule” previously discussed on this blog applied: 

“when evidence extrinsic to the complaint and unrelated to the merits of plaintiff’s action plainly take the case outside the policy coverage.”  This exception applied because “it is undisputed that [the insured’s customer] was using a trampoline at the time of the Injury, and Defendant does not claim that it is a disputed fact in the underlying lawsuit.” Defendant argued that the exclusion was ambiguous, relying on the testimony of a gymnastics expert that the “mini-tramp” used in Streb’s aerobics class did not constitute “aerial equipment” “within the field of gymnastics,” and therefore does not fall within the exclusion.  Judge Farilla rejected this argument, explaining:

In support of its argument that it is reasonable to read the Exclusion so that “aerial equipment” modifies “trampoline,” Defendant argues that: (i) a mini-tramp is not considered aerial equipment in the gymnastics field, and (ii) one proffered definition of trampoline suggests that a mini-tramp is a type of trampoline that is not aerial equipment.  Accepting Defendant’s ipse dixit definition of aerial equipment, and its assertion that aerial equipment should be read to modify trampoline, these arguments still fail. First, the testimony and opinion of Melanie K. Hall, Defendant’s expert, relates to the meaning, within the field of gymnastics, of “aerial equipment” as a term distinct from “rebound equipment.” Considering this evidence in Defendant’s favor by accepting Hall’s opinion that such a distinction is well-established in the gymnastics field does not suggest that the insurance contract is ambiguous. As discussed above, evidence of custom in the gymnastics field is not persuasive in defining equipment for the purposes of interpreting an insurance contract. Nor is there any reason to believe that the use of the phrase “aerial equipment” in the Exclusion was imported from the gymnastics field or that the parties were attempting to distinguish it from “rebound equipment.” Second, Defendant’s citation to a single dictionary definition to suggest that trampolines must be “several feet above the floor”, is undermined by the other dictionary definition Defendant cites, which does not contain a height requirement. In fact, despite claiming that the distinction between trampoline and mini-tramp is a critical one for the purpose of contract interpretation, Defendant offers no evidence that there is any meaningful distinction whatsoever. Indeed, Defendant and its employees use the term “mini-tramp” interchangeably with trampoline and they refer to mini-tramps as a type of trampoline.  With its interpretative gymnastics, Defendant tries to manufacture a carve-out for mini-tramps, which Defendant argues are not “aerial equipment” even if they are “trampolines.” To accept Defendant’s contorted reading throws out the plain language of the contract. The Exclusion is not ambiguous and Defendant fails to suggest otherwise.

Judge Farilla’s conclusion that the meaning policy terms have in the insured’s industry was “not persuasive” “for the purposes of interpreting an insurance contract,” seems to run counter to the principle that “the plain meaning of a clause in an insurance contract is determined according to . . . the understanding of someone engaged in the insured’s line of business.” K. Bell & Assocs., Inc. v. Lloyd’s Underwriters, 97 F.3d 632, 639 (2d Cir. 1996).  Indeed, even in cases involving standard form contracts, courts have looked to industry-specific definitions. In a case previously covered on this blog, for example, the Second Circuit held that “[t]he parties are not required to tailor language for every policy in order for terms to have industry-specific meanings.”  Beazley Ins. Co., Inc. v. ACE Am. Ins. Co., 880 F.3d 64, 70 (2d Cir. 2018). Also of note:  Under New York law, the so-called four-corners rule referred to in this decision does not inure to the benefit of the insurer.  That is, in assessing the duty to defend, New York law does not permit the insurer to employ a “wooden application of the ‘four corners of the complaint’ rule” “when it has actual knowledge of facts establishing a reasonable possibility of coverage” – even if those facts are not pled in the complaint.  Fitzpatrick v. American Honda Motor Co., 78 N.Y.2d 61, 66-67 (1991).