KMT filed a claim with its insurers, Granite State Insurance Company and Berkshire Hathaway Specialty Insurance Company (BHSI). Both insurers denied coverage, asserting that the allegations of the underlying suit are not covered by their policies. KM asserted breach of contract and sought a declaration that the insurers must defend.

US District Court

The case was brought before the United States District Court for the Southern District of New York. Because the policies have no choice of law clause, the court applied New York's "center of gravity" approach and held that Missouri law governs. Under Missouri law, the duty to defend arises whenever there is "potential or possible liability to pay based on the facts at the outset of the case," determined by comparing the policy language with the allegations of the underlying complaint.

The policy stated that the insurers "will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies." Bodily injury or property damage must be caused by an "occurrence."

Bodily injury was defined as "bodily injury, sickness, or disease sustained by a person, including death resulting from any of these at any time." Occurrence was defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Accident was not further defined.
The court looked at a similar case Granite State Insurance Co. v. Primary Arms, involving a ghost gun retailer in Texas. Missouri law governs the present case, so the court looked at the definition of accident under Missouri law, defined as "that which happens by chance or fortuitously, without intention or design, and which is unexpected, unusual, and unforeseen."

An intentional act can still be an accident, but the "determinative inquiry" is whether the insured foresaw or expected the injury or damages, judged by whether a reasonably prudent person would foresee the harm, rather than by the insured's subjective intent. The court found that Texas' definition was substantially similar, so the court's reasoning in Primary Arms applied to the present case as well.

Intentional and Foreseeable

Both suits alleged intentional acts, not accidents. In Primary Arms, the court found that the retailer intended to sell, and knowingly sold, to people likely to create an unreasonable risk of harm to others.

The underlying lawsuit alleged that KMT marketed and repeatedly sold unfinished frames and receivers to New Yorkers, invested in marketing designed to expand its market share, and intentionally failed to control its sales to attract people looking to evade gun control laws, leading to an increase in the number of dangerous ghost guns in the state.

The court also found that the harm was foreseeable and that the financial burden on New York was the expected result of KMT's strategy. The surge of ghost guns increased the number of firearms likely to be used in a crime, increased the number of murders and suicides, and created a new primary and secondary market for illegal guns in the state.

The court found that those consequences could have reasonably been foreseen by KMT, who either knowingly sold or was willfully blind to the fact that its products would be converted into guns without serial numbers.

In Primary Arms, the court acknowledged that a government responding to increased gun-related incidents would naturally be expected to spend more on police deployment, investigations, community support services, and hospital resources. The court here similarly concluded that the financial burden to New York State was foreseeable and that the actions of KM were not an accident.

Editor's Note

The court ruled that the allegations against KMT in the underlying lawsuit do not allege an accident under Missouri law and, as such, do not qualify as an "occurrence" under the insurance policies. The court did not need to determine whether the suit sought damages for bodily injury since it was determined that KMT's actions were not an "occurrence."

The court granted the insurers' motion, concluding that the policies do not obligate Granite State or BHSI to defend or indemnify KMT in the underlying lawsuit.

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