The District Court for the Eastern District of New York ruled that a contracted security exclusion precluded an insurer's duty to defend when claims were made against a third-party security company and the insured. The case is Clear Blue Specialty Ins. Co. v. TFS NY, Inc., 2023 U.S. Dist. LEXIS 157665 (E.D.N.Y. 2023).
A man filed a personal injury action against TFS NY (TFS) after he was assaulted by employees at a nightclub owned and operated by the company. He later amended his complaint to include the third-party company that provided security for the nightclub. TFS had purchased a CGL policy from Clear Blue Specialty Insurance (Clear Blue), which included a Third Party or Contracted Security exclusion.
TFS and Clear Blue agreed on two key facts: that the Clear Blue policy was in effect at the time of the incident, and that Clear Blue would be obligated to defend TFS under an assault and battery endorsement. However, they differed on the application of the contracted security exclusion and whether it precluded coverage for the underlying suit because the complaint included allegations against the third-party security company.
The contracted security exclusion explicitly stated it did not cover losses related to the conduct of a third-party security vendor or its employees. The underlying complaint was filed against both TFS and the third-party security vendor. Therefore, argued Clear Blue, the contracted security exclusion applied and they did not owe TFS the duty of defense. TFS did not dispute that Clear Blue wasn't obligated to defend the claims against the security company. However, TFS argued it was still owed a defense because the underlying complaint had also been levied against TFS and its employees, who were covered by the Clear Blue policy.
TFS cited CGS Indus., Inc. v. Charter Oak Fire Ins. Co., 720 F.3d 71 (2d Cir. 2013). In that case, the insurance policy at issue excluded coverage for specific types of claims. The underlying suit included one type of claim that was covered and another that was not, so the judges of the Second Circuit enforced the insurance principle that obligates an insurer to defend a whole suit if any one claim is covered by the policy.
The difference between that case and TFS's case was the language of the exclusion: where the exclusion in CGS excluded only certain types of claims, the exclusion at issue in TFS stated that Clear Blue would not be obligated to defend TFS "[i]f a 'suit' or claim [was] brought against [TFS]" related to matters included in the third-party security exclusion. (emphasis added).
The judge referred to to policy, which stated multiple times that it did not cover "any . . . 'suit' . . . directly or indirectly based on, attributable to, arising out of, involving, resulting from or in any way related to the acts, omissions or operations of any third party or contracted security services provider" (emphasis added). There was no dispute that the underlying plaintiff's injuries were a "direct consequence and result of the acts of [all] the defendants" (emphasis added), which included the security company, TFS, and TFS employees. This lack of a dispute meant the underlying case, by default, was connected to claims against the third-party security company, bringing it within the scope of the exclusion.
Since the underlying complaint had made claims against TFS, its employees, and the third-party security company, and the contracted security exclusion expressly precluded coverage for claims against a third-party security provider, the court awarded summary judgment in favor of Clear Blue.
Editor's Note: The duties of defense and indemnity, though closely related, are still separate and distinct from each other. An insurer's duty to defend is only triggered when a claim against the insured could lead to coverage, not when it will lead to coverage. In this case, the judge pointed out that the underlying complaint had not been litigated in state court at the time this action was decided. In state court, the charges against the security company and TFS could be separated, either with the dismissal of the case against the security company, or a finding by a jury that the security guard provided by the security company that the guard was not part of the altercation that led to the underlying complaint. The court could not, therefore, rule on whether Clear Blue would be obligated to indemnify TFS.