by Traub Lieberman Straus & Shrewsberry LLP
In its recent decision in U.S. Specialty Ins. Co. v. Sussex Airport, Inc., 2016 U.S. Dist. LEXIS 60770 (D.N.J. May 9, 2016), the United States District Court for the District of New Jersey had occasion to consider the phrase “arising out of” when used in an exclusion to coverage.
United Specialty insured Sussex Airport under an airport liability policy. The policy contained a parachute jumping exclusion applicable to “bodily injury or property damage arising out of the conduct of or participation in, or preparation for, any parachuting activities.” Notwithstanding this exclusion, Sussex sought coverage under the policy for an injury that happened at a skydiving event that took place at the airport but that was organized by a tenant of Sussex’s. While United Specialty provided Sussex with a defense in the underlying suit, it brought a declaratory judgment action, seeking a ruling that the parachuting exclusion operated to preclude any defense or indemnity obligation.
Sussex argued that the exclusion applied only if the insured itself, i.e., Sussex, was directly involved in the skydiving event, and as such, the exclusion should not apply because the skydiving event in the underlying suit was not organized and operated by Sussex, but rather by a non-insured. The court disagreed, noting that under New Jersey law, the phrase “arising out of” must be interpreted broadly, meaning any substantial nexus between the insured and the excluded activity. With this in mind, the court agreed with United Specialty’s position that the exclusion applied to any parachuting activities taking place at the Sussex Airport, regardless of whether organized by an entity other than Sussex. As the court explained, adopting Sussex’s reading of the exclusion “would require the Court to rewrite the Exclusion such that it only applies where bodily injury occurred due to actions taken directly by the insured.”
In addition to holding that United Specialty did not have a duty to defend, the court held that United Specialty was entitled to reimbursement of defense costs it had already expended in the underlying suit. Such a result, it reasoned, follows from New Jersey law permitting an insurer to allocate between covered and non-covered causes of action where the distinction can be readily made. Since no aspect of the underlying suit came within the United Specialty policy, explained the court, the entirety of defense costs paid by United Specialty were made in connection with non-covered causes of action, and therefore subject to reimbursement.
Original article can be found here: http://www.jdsupra.com