General Star Indemnity Company v. Driven Sports, Inc.

Filing 50

ORDER granting in part and denying in part 19 Motion for Summary Judgment; granting in part and denying in part 20 Motion for Partial Summary Judgment. For the reasons set forth herein, plaintiff's motion for summary judgment is granted i n part and denied in part. More specifically, plaintiff's motion is granted to the extent it seeks a declaratory judgment that (1) General Star has no duty to defend or indemnify Driven Sports in the underlying Craze Actions, and (2) the limits of liability of the Policy are reduced by the amount of any defense payments for the Craze Actions not repaid to General Star. However, plaintiff's motion is denied to the extent it seeks a declaratory judgment that General Star is entitled to recoup all amounts paid for defense of the Craze Actions. Defendant's motion for partial summary judgment is granted to the extent that General Star has no right to recoup from Driven Sports all defense expenses for the Craze Actions. However, the defendant's motion is denied in all other respects. The Clerk of the Court shall enter judgment accordingly and close this case. SO ORDERED. Ordered by Judge Joseph F. Bianco on 1/23/2015. (Moe, Alison)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
_____________________
No 14-CV-3579 (JFB)(ARL)
_____________________

GENERAL STAR INDEMNITY COMPANY
Plaintiff,
VERSUS

DRIVEN SPORTS, INC.,
Defendant.
___________________
MEMORANDUM AND ORDER
January 23, 2015
___________________

JOSEPH F. BIANCO, District Judge:
Plaintiff is an insurer who issued a
liability and litigation insurance policy (“the
Policy”) to defendant, a producer and seller
of a pre-workout energy supplement called
“Craze.” In 2013, defendant was sued in
three separate actions (“the Craze Actions”)
alleging that Craze contains an illegal and
potentially dangerous methamphetamine
analog, and defendant sought coverage
under the Policy. Both parties have moved
for summary judgment, asking the Court to
declare the extent of plaintiff’s obligation to
defend the underlying lawsuits.
The Court concludes that the underlying
lawsuits are excluded from coverage by a
provision in the Policy (“the Failure to
Conform Exclusion”) which states that the
Policy does not apply to “‘[p]ersonal and
advertising injury’ arising out of the failure
of goods, products or services to conform
with any statement of quality or
performance
made
in
[defendant’s]

‘advertisement.’”
According to the
complaints in the underlying lawsuits,
defendant’s advertisements allegedly (1)
made a statement of quality about Craze,
namely, that it contained only natural
ingredients, and (2) Craze failed to conform
with those statements, because it actually
contained an illegal and potentially
dangerous methamphetamine analog. It is
abundantly clear that all the injuries alleged
in these underlying lawsuits “aris[e] out of”
Craze’s failure to conform with Driven
Sports’ statements, and thus, the Failure to
Conform Exclusion bars coverage.
Plaintiff also seeks to recoup its
expenses in defending the underlying
lawsuits, but the Court declines to award
recoupment as a remedy, finding that the
New York Court of Appeals would find
recoupment to be inappropriate under these
circumstances.
Plaintiff’s theory for
recoupment is that defendant has been
unjustly enriched because plaintiff has
incurred the costs in representing defendant

whose motion is under consideration.”
Lumbermens Mut. Cas. Co. v. RGIS
Inventory Specialists, LLC, 628 F.3d 46, 51
(2d Cir. 2010) (internal quotation marks and
citation omitted).

in the underlying litigation, even though the
Court has now concluded that the underlying
claims are excluded from coverage.
However, unjust enrichment claims are
generally precluded under New York law
where the contract addresses the particular
subject matter at issue. Here, the Policy
provides that plaintiff will pay “all
expenses” with respect to the underlying
lawsuits, and plaintiff did not include a
recoupment provision in the Policy. In
addition, plaintiff sought to reach a
recoupment agreement with defendant, but
defendant refused. The Court will not, in
essence, create that recoupment agreement
and re-write the Policy by relying on a
quasi-contract theory, when plaintiff could
have addressed recoupment in the Policy,
but chose not to. Recent decisions in other
jurisdictions have reached the same result,
and the Court concludes that those case are
persuasive, and that the New York Court of
Appeals would reach the same conclusion
under New York law.

Although the parties’ Rule 56.1
statements contain specific citations to the
record, the Court cites to the statements
rather than to the underlying citations.
Unless otherwise noted, where a Rule 56.1
statement is cited, that fact is undisputed or
the opposing party has not pointed to any
contradictory evidence in the record. The
Court also cites the complaints in the
underlying actions, which have been
attached as exhibits and the contents of
which are not disputed by either party.1
1. Policy Language
Plaintiff issued a “Commercial Lines
Policy” (“the Policy”) providing litigation
and liability insurance to defendant covering
the period from November 1, 2012 to
November 1, 2013. (Pl. 56.1 ¶ 1.) The
Policy has a $3 million aggregate limit of
liability, and a $2 million limit for a
personal and advertising injury for any one
person. (Id. ¶ 2.) The Policy explains
plaintiff’s duty to both defend and
indemnify defendant as follows:

However, the Court agrees with plaintiff
that its expenses in defending the underlying
lawsuits do reduce the Policy’s limits of
coverage.
I. BACKGROUND
A. Factual Background

We will pay those sums that the
insured becomes legally obligated
to pay as damages because of

The Court takes the following facts from
the parties’ Rule 56.1 Statements of Fact,
declarations, and the exhibits attached
thereto, construing the facts in the light most
favorable to the nonmoving party. See
Capobianco v. City of New York, 422 F.3d
47, 50 (2d Cir. 2005). Where, as here, both
parties move for summary judgment, “each
party’s motion must be examined on its own
merits, and in each case all reasonable
inferences must be drawn against the party

1

Both parties requested that the Court take judicial
notice of certain materials: plaintiff submitted filings
from related New York cases in order to show the
content of the contract provisions at issue, and
defendant submitted certain dictionary definitions.
The Court has taken judicial notice of these materials,
without objection from either party. See Fed. R.
Evid. 201(b) (“The court may judicially notice a fact
that is not subject to reasonable dispute.”).

2

“Personal and advertising injury”
means
injury,
including
consequential
‘bodily
injury,’
arising out of [inter alia] . . . [o]ral
or written publication, in any
manner, of material that slanders or
libels a person or organization or
disparages
a
person’s
or
organization’s goods, products or
services.

‘personal and advertising injury’ to
which this insurance applies. We
will have the right and duty to
defend the insured against any
‘suit’ seeking those damages.
However, we will have no duty to
defend the insured against any
‘suit’
seeking
damages
for
‘personal and advertising injury’ to
which this insurance does not
apply. We may, at our discretion,
investigate any offense and settle
any claim or ‘suit’ that may result.
But . . . [t]he amount we will pay
for damages and Supplementary
Payments is limited as described
[elsewhere] . . . and . . . [o]ur right
and duty to defend ends when we
have used up the applicable limit of
insurance in the payment of
judgments,
settlements,
or
Supplementary Payments.

(Id. ¶ 4.) However, certain personal and
advertising injuries are expressly excluded
from coverage by the Failure to Conform
Exclusion. In particular:
This insurance will not apply to . . .
Quality or Performance of
Goods—Failure to Conform to
Statements
“Personal and advertising injury”
arising out of the failure of goods,
products or services to conform
with any statement of quality or
performance
made
in
your
“advertisement.”

(Id. ¶ 3.)
The “Supplementary Payments” referred
to above are defined as including specific
types of investigative expenses, such as an
insured’s time off from work, and also costs
such as bail bonds and interest. (Id. ¶ 6.)
The Policy also defines “Supplementary
Payments” more generally, however:

(Id. ¶ 5.)
2. Underlying Craze Actions
On August 22, 2013, Nutrition
Distribution LLC (“Nutrition”) filed a
complaint against defendant in the United
States District Court for the Central District
of California (id. ¶ 8), describing the suit as
“a civil action arising from Defendants’
false
advertising
and
blatant
misrepresentations regarding its Craze preworkout nutritional supplement which is
marketed as containing a natural extract as
its active ingredient, when, in fact, it
contains
illegal
analogs
to
methamphetamine.” (Ex. 2 to Duffield
Decl. ¶ 1.)

We will pay, with respect to any
claim we investigate or settle or
any ‘suit’ against an insured we
defend: . . . [a]ll expenses we incur.
(Id.)
The Policy contemplates these expenses
in defense of a “personal and advertising
injury,” which it defines as follows:

3

In October and November of 2013,2
Shantell Olvera and Marcus Wagner filed
putative class actions against defendant in
the United States District Court for the
Northern District of California, which were
ultimately consolidated into one action. (Pl.
56.1 ¶¶ 9-13.) The consolidated complaint
alleges that defendant markets Craze as
containing “only natural ingredients” (Ex. 7
to Duffield Decl. ¶ 42), when in fact it
contains ETH, a synthetic and potentially
dangerous methamphetamine analog. (Id. ¶¶
51, 81.)

However, the text of the Policy does not
address whether plaintiff could seek
recoupment. Instead, as noted above, it
simply says that plaintiff “will pay, with
respect to any claim we investigate or settle
or any ‘suit’ against an insured we defend: .
. . [a]ll expenses we incur.” (Id. ¶ 6.)
When
originally
negotiating the
provision of coverage, plaintiff had
proposed that defendant sign a “non-waiver
and defense funding agreement,” which
“provided that defense expenses would
erode the Policy’s limit of liability and that
Driven Sports would agree to repay any
defense expenses in the event that it is
finally determined that such amounts are not
covered under the Policy.” (Ex. 114 to
Lowe Decl. at 1.) Defendant rejected
plaintiff’s offer, and thus plaintiff’s
reservation of the right to seek recoupment
remained unilateral. (Id. at 1-4.)

On December 10, 2013, Andrew Stewart
filed a putative class action complaint
against defendant in the United States
District Court for the Northern District of
Illinois, alleging that defendant “fail[ed] to
disclose the presence of an illegal
methamphetamine analog in its ‘Craze’ . . .
pre-workout supplement in any of its
representations regarding the Product.” (Ex.
8 to Duffield Decl ¶ 1.) The complaint
further
describes
the
“illegal
methamphetamine analog” as “similar to the
highly
addictive
psychoactive
drug
methamphetamine” (id. ¶ 10), with an
alleged potency “somewhere between
methamphetamine and ephedrine, both of
which are banned substances.” (Id. ¶ 16.)

B. Procedural History
Plaintiff filed the complaint in this
action, seeking a declaratory judgment, on
June 6, 2014. Defendant answered and
counter-claimed on July 18, 2014. The
parties cross-filed motions for summary
judgment on July 28, 2014, and opposed
each other’s motions on August 11, 2014.
The parties replied in further support of their
motions on August 22, 2014. On August 29,
2014, defendant sought leave to file a surreply in order to respond to certain cases
cited in plaintiff’s reply. Plaintiff opposed
that request, but the Court granted it on
September 4, 2014, while informing plaintiff
that it could address any matter raised in the
sur-reply at the oral argument, which was

3. Coverage for the Underlying Actions
Plaintiff agreed to provide a litigation
defense in all three underlying actions,
subject to a complete reservation of its
rights, including the right to recoup any
amounts paid in the defense of the actions, if
it were determined that the Policy did not
require coverage. (Pl. 56.1 ¶¶ 15-17.)

2
There is no dispute concerning whether any of the
underlying actions are within the Policy’s period of
coverage.

4

held on September 29, 2014.3 Following the
oral argument, defendant submitted a
number of “supplemental requests for
judicial notice.” Plaintiff objected to these
supplemental submissions on procedural
grounds, and also opposed them on the
merits.

particular parts of materials in the record,
including
depositions,
documents,
electronically stored information, affidavits
or declarations, stipulations (including those
made for purposes of the motion only),
admissions, interrogatory answers, or other
materials; or (B) showing that the materials
cited do not establish the absence or
presence of a genuine dispute, or that an
adverse party cannot produce admissible
evidence to support the fact.” Fed. R. Civ.
P. 56(c)(1). The court “is not to weigh the
evidence but is instead required to view the
evidence in the light most favorable to the
party opposing summary judgment, to draw
all reasonable inferences in favor of that
party,
and
to
eschew
credibility
assessments.” Amnesty Am. v. Town of W.
Hartford, 361 F.3d 113, 122 (2d Cir. 2004)
(quoting Weyant v. Okst, 101 F.3d 845, 854
(2d Cir. 1996)); see also Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986)
(summary judgment is unwarranted if “the
evidence is such that a reasonable jury could
return a verdict for the nonmoving party”).

The matter is fully submitted before the
Court, and the Court has fully considered the
submissions and arguments of the parties
(including the post-argument submissions).4
II. STANDARD OF REVIEW
The standards for summary judgment are
well settled. Pursuant to Federal Rule of
Civil Procedure 56(a), a court may only
grant a motion for summary judgment if
“the movant shows that there is no genuine
dispute as to any material fact and the
movant is entitled to judgment as a matter of
law.” Fed. R. Civ. P. 56(a). The moving
party bears the burden of showing that he or
she is entitled to summary judgment.
Huminski v. Corsones, 396 F.3d 53, 69 (2d
Cir. 2005). “A party asserting that a fact
cannot be or is genuinely disputed must
support the assertion by: (A) citing to

Once the moving party has met its
burden, the opposing party “must do more
than simply show that there is some
metaphysical doubt as to the material
facts. . . . [T]he nonmoving party must come
forward with specific facts showing that
there is a genuine issue for trial.” Caldarola
v. Calabrese, 298 F.3d 156, 160 (2d Cir.
2002) (emphasis in original) (quoting
Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 586-87 (1986)). As the
Supreme Court stated in Anderson, “[i]f the
evidence is merely colorable, or is not
significantly probative, summary judgment
may be granted.” Anderson, 477 U.S. at
249-50 (citations omitted). Indeed, “the
mere existence of some alleged factual
dispute between the parties” alone will not
defeat a properly supported motion for

3

Although plaintiff opposed defendant’s request to
file a sur-reply, it is clear that plaintiff was not
prejudiced by defendant’s filing of the sur-reply. The
Court has considered all of the filings related to both
cross-motions, and at oral argument, plaintiff did not
specifically address any aspect of defendant’s surreply.
4
The Court need not consider the plaintiff’s
procedural objections to defendant’s post-argument
submissions because, even after fully considering the
merits of the materials and arguments contained
therein, the Court concludes that defendant is still
entitled to summary judgment on the application of
the Failure to Conform Exclusion, and nothing in
those supplemental submissions affect the Court’s
determinations on the merits of the issues contained
in the cross-motions.

5

summary judgment. Id. at 247-48 (emphasis
in original). Thus, the nonmoving party
may not rest upon mere conclusory
allegations or denials but must set forth
“‘concrete particulars’” showing that a trial
is needed. R.G. Grp., Inc. v. Horn &
Hardart Co., 751 F.2d 69, 77 (2d Cir. 1984)
(quoting SEC v. Research Automation
Corp., 585 F.2d 31, 33 (2d Cir. 1978)).
Accordingly, it is insufficient for a party
opposing summary judgment “merely to
assert a conclusion without supplying
supporting arguments or facts.” BellSouth
Telecomms., Inc. v. W.R. Grace & Co., 77
F.3d 603, 615 (2d Cir. 1996) (quoting
Research Automation Corp., 585 F.2d at
33).

District courts may also consider: “(1)
whether the proposed remedy is being used
merely for ‘procedural fencing’ or a ‘race to
res judicata’; (2) whether the use of a
declaratory judgment would increase friction
between sovereign legal systems or
improperly encroach on the domain of a
state or foreign court; and (3) whether there
is a better or more effective remedy.” Dow
Jones & Co., Inc. v. Harrods Ltd., 346 F.3d
357, 359-60 (2d Cir. 2003). Neither of the
first two concerns are present, and there
does not appear to a better or more effective
remedy.
III. DISCUSSION
Plaintiff argues that the Craze Actions
are not covered under the Policy because
these actions do not allege a “personal or
advertising injury,” and thus they do not fall
within the Policy’s coverage. Plaintiff
argues, in the alternative, that even if the
Craze Actions fall within the ambit of the
Policy’s coverage, the “Failure to Conform”
clause of the Policy expressly excludes the
Craze Actions from coverage. The
discussion below assumes, without deciding,
that the underlying lawsuits allege a
“personal and advertising injury” within the
Policy’s definition of that term; in particular,
that they allege disparagement by defendant
against the competitors of Craze. Although
the word “disparage[]” as used in the
Policy’s definition of “personal and
advertising injury” has been subject to
different interpretations, the Court’s
conclusion that the underlying claims are
excluded from coverage under the “Failure
to Conform” clause makes it unnecessary to
determine whether they also allege
disparagement. The Second Circuit took the
same approach when it affirmed Dollar

Where, as here, both parties move for
summary judgment, “each party’s motion
must be examined on its own merits, and in
each case all reasonable inferences must be
drawn against the party whose motion is
under consideration.” Lumbermens Mut.
Cas. Co., 628 F.3d at 51 (internal quotation
marks and citation omitted).
Finally, the Court notes that both parties
seek a declaratory judgment. “The decision
to grant declaratory relief rests in the sound
discretion of the district court.” Lijoi v.
Continental Cas. Co., 414 F. Supp. 2d 228,
247 (E.D.N.Y. 2006). That discretion is
informed by two primary considerations: (1)
whether the judgment will serve a useful
purpose in clarifying or settling the legal
issues involved; and (2) whether it would
finalize the controversy and offer relief from
uncertainty. See Broadview Chem. Corp. v.
Loctite Corp., 417 F.2d 998, 1001 (2d Cir.
1969). The lack of any dispute about these
factors indicates that the present motion is
useful and will offer relief to the parties.
6

interpretation, and applies in the particular
case.” Sea Ins. Co. v. Westchester Fire Ins.
Co., 51 F.3d 22, 26 (2d Cir. 1995) (internal
quotation marks and citations omitted). “As
with questions concerning coverage,
questions concerning exclusions from
coverage are assessed by examining the
allegations in the claims asserted.” Dollar
Phone Corp. v. St. Paul Fire & Marine Ins.
Co., CV-09-1640 (DLI) (VVP), 2012 WL
1077448, at *9 (E.D.N.Y. Mar. 9, 2012)
report and recommendation adopted, 2012
WL 1078994 (E.D.N.Y. Mar. 30, 2012),
aff’d, 514 F. App’x 21 (2d Cir. 2013).

Phone, which is discussed in more detail
below.5
A. The Failure to Conform Exclusion
Plaintiff argues that coverage is barred
by the Policy’s Failure to Conform
Exclusion, which states that the Policy does
not apply to “‘[p]ersonal and advertising
injury’ arising out of the failure of goods,
products or services to conform with any
statement of quality of performance made in
your ‘advertisement’” (Pl. 56.1 ¶ 5), and the
Court agrees.
An insurer’s duty to defend is
“exceedingly broad,” and the insurer “will
be called upon to provide a defense
whenever the allegations of the complaint
suggest . . . a reasonable possibility of
coverage.” Auto. Ins. Co. of Hartford v.
Cook, 7 N.Y.3d 131, 137 (2006) (internal
quotation marks and citation omitted).
When an insurer seeks to avoid the duty to
defend based on an exclusion, the insurer
“must demonstrate that the allegations of an
underlying complaint place that pleading
solely and entirely within the exclusions of
the policy and that the allegations are
subject to no other interpretation.” CGS
Indus., Inc. v. Charter Oak Fire Ins. Co.,
720 F.3d 71, 77 (2d Cir. 2013) (internal
quotation marks and citation omitted). In
other words, “[a]n insurer seeking to avoid
its obligation to defend an insured on the
basis of a policy exclusion bears a ‘heavy
burden’ . . . . [to] establish that the exclusion
is stated in clear and unmistakable language,
is subject to no other reasonable

Here, the allegations in each of the
underlying complaints plainly reveal that
they are excluded from coverage, because
each claim below “aris[es] out of”6 Craze’s
failure to conform with Driven Sports’
statements about the product’s quality. In
particular:
(i) The Nutrition complaint states that it
“is a civil action arising from
Defendants’ false advertising and
blatant misrepresentations regarding
its Craze pre-workout nutritional

6
New York state courts, as well as other courts in
this circuit, have held that the phrase “arising out of”
is not ambiguous, and is “ordinarily understood to
mean originating from, incident to, or having
connection with.” Fed. Ins. Co. v. Am. Home Assur.
Co., 639 F.3d 557, 568 (2d Cir. 2011) (internal
quotation marks and citations omitted); see also id.
(“The phrase requires only that there be some causal
relationship between the injury and the risk for which
coverage is provided.”); Consol. Edison Co. of New
York v. Hartford Ins. Co., 610 N.Y.S.2d 219, 221
(1994) (stating that phrase “focuses not upon the
precise cause of the accident . . . but upon the general
nature of the operation in the course of which the
injury was sustained”).

5

The parties do not dispute that New York law
governs the Court’s interpretation of the Policy, as it
did in Dollar Phone.

7

only natural ingredients.”); ¶¶ 134-35
(“Defendants have made unfair,
deceptive, untrue or misleading
statements in advertising mediums,
including the Internet . . . . and
Plaintiffs and Class members would
not have purchased Craze had they
known it contained an illegal
substance.”); ¶ 141(a) (“Defendants
have misrepresented the . . .
characteristics, or ingredients of
Craze.”); ¶ 156 (“[Plaintiffs] would
not have purchased the Products but
for Defendants’ material omissions
and
affirmative
acts
or
representations in connection with the
marketing, advertising, and sale of
the Products.”); ¶ 161 (“Defendants
have engaged in unfair, false, and
misleading or deceptive acts and
practices by making false and
unsubstantiated
representations
concerning the safety, legality, and
ingredients of Craze.”); ¶ 168
(“Defendants concealed, suppressed,
or omitted material facts.”); ¶ 175
(“[I]n selling and advertising the
Product, Defendants . . . . concealed,
suppressed, or omitted material
facts.”);
¶
182
(“Defendants
knowingly
misrepresented
and
intentionally omitted and concealed
material information regarding its
Product by failing to disclose to
Plaintiffs and Class Members the
known defects.”); ¶ 196 (“Defendants
represent
and
claim
in
its
advertisements . . . that Craze is a
dietary supplement containing only
naturally occurring substances.”); ¶
211 (“Defendants [sic] deceptive
conduct as defined herein, constitute
violations . . . by representing that the
product has approval, characteristics,
and ingredients that it does not

supplement which is marketed as
containing a natural extract as its
active ingredient, when, in fact, it
contains
illegal
analogs
to
methamphetamine.”
(Ex. 2 to
Duffield Decl. ¶ 1.) The complaint’s
two causes of action (both under the
Lanham Act) each claim injury based
on the failure of Craze to conform
with
defendant’s
statements
concerning its “nature, characteristics
and qualities” (id. ¶ 29), and
concerning its ingredients. (Id. ¶ 36.)
(ii) The Olvera/Wagner complaint is
based on the allegation that Craze
contains ETH, a synthetic and
potentially
dangerous
methamphetamine (Ex. 7 to Duffield
Decl. ¶¶ 51, 81), despite the fact that
“Driven Sports markets Craze as
containing only natural ingredients.”
(Id. ¶ 42.) The causes of action in
Olvera/Wagner are asserted under
various states’ statutes, and although
they address a variety of theories of
recovery,
including
consumer
protection, false advertising, unfair
competition, and deceptive practices,
each claim arises out of the failure of
Craze to contain only natural
ingredients,
as
promised
in
defendant’s advertisements. (See id.
¶¶ 110-11 (“Defendants have
misrepresented the . . . quality . . . of
Craze . . . . [and] advertised Craze as
containing only natural ingredients
but intended to sell Craze with a
synthetic
methamphetamine
analog.”); ¶ 120 (“Defendants
advertised, marketed, and otherwise
disseminated information to the
public through advertising mediums
including the Internet statements to
the effect that Craze is composed of
8

contains
[a
synthetic
methamphetamine analog].”).)

have,”); ¶ 220 (“Defendants agreed
to, and did in fact, . . . continu[e] to
sell Craze to the consuming public
while . . . . [d]efendants concealed,
suppressed, or omitted material facts
regarding the product.”); ¶ 228
(“Defendants engaged in unfair and
deceptive practices, including but not
limited to engaging in part of a
scheme or plan to sell Craze to the
public without disclosing that it
contained an illegal, synthetic,
methamphetamine analog that has
never been tested on humans.”); ¶
238 (same).)

By focusing on Craze’s failure to
conform to defendant’s own statements
about it, the allegations and claims in the
underlying complaints are strikingly similar
to the underlying actions at issue in Dollar
Phone, another case decided in this district
and affirmed by the Second Circuit. In
Dollar Phone, the plaintiff sought coverage
for an underlying lawsuit alleging that
“Dollar Phone and its codefendants
defrauded their customers by failing to
provide the number of minutes promised on
their calling cards and in their
advertisements.” 2012 WL 1077448 at *1.
The plaintiff in the underlying action argued
that the misrepresentation created the
impression that competitors’ calling cards,
offering fewer minutes, were overpriced. Id.
The district court held that an exclusion
nearly identical to the one here—stating that
the insurer “won’t cover advertising injury
that results from the failure of [the
insured’s] products . . . to conform with
advertised quality or performance”—barred
coverage. 2012 WL 1077448, at *10.

(iii)The Stewart complaint is styled as “a
consumer protection class action
based on Defendant’s failure to
disclose the presence of an illegal
methamphetamine analog in its
‘Craze’ . . . pre-workout supplement
in any of its representations regarding
the Product.” (Ex. 8 to Duffield Decl
¶ 1.) The complaint asserts one cause
of action under the Illinois Consumer
Fraud Act, and one based on the
implied warranty of merchantability,
and each arises out of the failure of
Craze to contain only natural
ingredients,
as
promised
in
defendant’s advertisements. (Id. ¶ 19
(“Plaintiff purchased ‘Craze’ seeking
a product with the qualities
represented
in
Defendant’s
advertising.”); ¶ 36 (“In the course of
conducting business, Defendants
committed unfair or deceptive acts
and
practices
by
concealing,
suppressing, or omitting material
facts.”); ¶ 46 (“Defendant’s ‘Craze’
pre-workout supplement does not
achieve the ordinary purposes of a
pre-workout
supplement
in
a
reasonably safe manner because it

The district court in Dollar Phone
distinguished cases where similar exclusions
did not apply because the underlying injury
was due to misstatements about the
underlying plaintiff’s product (as opposed to
the underlying defendant’s product, which
was at issue in Dollar Phone and here), and
explained that “the harm to the [underlying]
plaintiff’s reputation is premised entirely on
the inaccuracy of Dollar Phone’s promises
as to the number of minutes their cards
provide . . . [which] led consumers to
assume that [the underlying plaintiff’s]
products were inferior.” Id. In other words,
the court held that the plain language of the
exclusion encompasses misstatements about
9

considered in those cases. Like in Dollar
Phone, where the allegation was that the
actual quality of Dollar Phone’s calling-card
minutes did not match its advertised quality,
the allegation here is that Craze’s actual
quality (containing a synthetic and
potentially dangerous ingredient) did not
match its advertised quality (containing only
natural ingredients). Furthermore, Driven
Sports’ alleged misstatements about Craze
are factually on all fours with those at issue
in R.C. Bigelow, where, as here, the insured
falsely advertised that its product was “all
natural.” Accordingly, the Court follows the
Second Circuit’s decisions in those cases,
and concludes that the Failure to Conform
Exclusion bars coverage here.

one’s own product quality which injure a
competitor, as opposed to misstatements
about the competitor’s products, which
would more likely cause a “personal and
advertising injury” that has nothing to do
with the quality or performance of the
insured’s product.
On appeal, the Second Circuit affirmed
Dollar Phone, finding “no ambiguity in the
policy language, which plainly allows the
insurer to disclaim coverage here....
[because] [t]he gravamen of the complaint at
issue alleged in relevant part that Dollar
Phone advertised calling cards that provided
fewer minutes than advertised.” 514 F.
App’x at 22. Based upon those allegations,
“[t]here [was] no question that the poor
quality exclusion applies.” Id. In so
holding, the Second Circuit echoed its
reasoning in a similar case under
Connecticut law, where it held that a similar
Failure to Conform Exclusion barred
coverage for claims against a tea company
that its product contained artificial flavors,
despite the fact that it was marketed as “all
natural.” See R.C. Bigelow, Inc. v. Liberty
Mut. Ins. Co., 287 F.3d 242, 244, 246 (2d
Cir. 2002) (“Although Celestial’s complaint
against Bigelow included claims of false
advertising, these claims did not trigger a
duty to defend under the advertising injury
provision because the concerned allegedly
false claims about Bigelow’s products, and
such false claims about the insured products
are explicitly excluded from the policy.”).

Defendant
makes
three
distinct
arguments for the inapplicability of the
Failure to Conform Exclusion, and also has
made various arguments based upon a series
of post-argument “supplemental requests for
judicial notice.” The Court addresses each
in turn and, as set forth below, finds each
argument to be without merit.
1. Covered and Uncovered Claims
One of defendant’s arguments suggests
that there may be both covered and excluded
claims in the underlying complaints, which
would trigger plaintiff’s obligation defend
the entire action. See CGS Indus., 720 F.3d
at 83 (noting that “if any of the claims are
covered by the policy, the insurer
consequently has a duty to defend the entire
action”). Defendant relies on R.C. Bigelow
as an example of such a holding, where the
Second Circuit found the duty to defend
triggered by other claims, besides the ones
that it held were excluded. 247 F.3d at 24849. Dollar Phone is distinct, in defendant’s
view, because it dealt with underlying
allegations that were “premised entirely on

The language of the Policy here is nearly
identical to the policies in Dollar Phone and
R.C. Bigelow, and the “gravamen of the
complaint[s] at issue” here—in fact, each
claim in each complaint, as shown above—
likewise alleges that Craze failed to meet its
advertised quality, in a manner almost
identical to what the Second Circuit
10

the inaccuracy of Dollar Phone’s promises
as to the number of minutes their cards
provide,” 2012 WL 1077448 at *10
(emphasis added), without any covered
claims in the underlying complaints. Here,
defendant contends that the underlying
allegations are not premised entirely on
Craze’s quality or performance, but also on
whether
defendant
disparaged
its
competitor’s product in a manner that
creates a separate claim not covered by the
Failure to Conform Exclusion.

each of them plainly arises out of—meaning
“originating from, incident to, or having
connection with,” Fed. Ins. Co., 639 F.3d at
568—the allegation that defendant placed an
illegal and potentially dangerous synthetic
ingredient into Craze while advertising that
it contained only natural ingredients.
Defendant argues that its statements on
the Craze website compare Craze favorably
to other products generally and disparage
those other products, thus giving rise to
freestanding
disparagement
claims
regardless of whether Craze contained a
synthetic ingredient. This argument lacks

The Second Department of the New
York Appellate Division recently noted that,
when an insured makes this argument
concerning partially covered and partially
uncovered underlying claims, the question is
whether the plaintiffs in the underlying
action would be able to prove the allegedly
covered claim without proving the
uncovered claim. See Natural Organics,
Inc. v. OneBeacon Am. Ins. Co., 102 A.D.3d
756, 759, 959 N.Y.S.2d 204 (N.Y. App. Div.
2d Dep’t 2013).

Still, the Court found the claims to be excluded, and
reaffirmed that decision the following year. See
Mount Vernon Fire Ins. Co. v. Creative Hous., 88
N.Y.2d 347, 352 (1996) (“Similarly, though Hunter’s
claim sounds in negligence, the theory she asserts has
little to do with whether the injury sought to be
compensated was based on an assault excluded under
the policy. Instead, the language of the policy
controls this question and while the theory pleaded
may be the insured’s negligent failure to maintain
safe premises, the operative act giving rise to any
recovery is the assault. While the insured’s
negligence may have been a proximate cause of
plaintiff’s injuries, that only resolves its liability; it
does not resolve the insured’s right to coverage based
on the language of the contract between him and the
insurer. Merely because the insured might be found
liable under some theory of negligence does not
overcome the policy’s exclusion for injury resulting
from assault.”). Thus, it is evident that, under New
York law, the Court’s focus in this situation must
remain on whether the injury alleged in the
underlying actions arose out of the excluded conduct,
because that is the question under the Policy, which
does not ask which legal theory the insured uses to
characterize the underlying allegations. Accord
Fitzpatrick v. Am. Honda Motor Co., 78 N.Y.2d 61,
68 (1991) (“While the allegations in the complaint
may provide the significant and usual touchstone for
determining whether the insurer is contractually
bound to provide a defense, the contract itself must
always remain a primary point of reference.”).

Here, the Court’s exposition supra of
each individual underlying claim shows that
none of them could be proven without
proving that Craze failed to conform with
defendant’s advertisements about its quality.
Cf. U.S. Underwriters Ins. Co. v. Val-Blue
Corp., 85 N.Y.2d 821, 823 (1995) (holding
that “[t]he plethora of claims surrounding
[the underlying plaintiff’s] injury . . . are all
‘based on’ [the excluded assault and battery]
without which [the underlying plaintiff]
would have no cause of action”).7 As such,

7

The Court observes that the insured in U.S.
Underwriters had a stronger case for coverage
because there was sharper distinction between the
exclusion and the underlying claims: the underlying
claims alleged negligence, while the exclusion
addressed assault and battery. 85 N.Y.2d at 822.

11

upon true facts. As the Supreme Court of
North Carolina explained:

force unless defendant can link these
website statements to the underlying
allegations in the Craze Actions. See Dollar
Phone, 2012 WL 1077448, at *9
(“[Q]uestions concerning exclusions from
coverage are assessed by examining the
allegations in the claims asserted.”)
However, a search of the underlying
complaints yields no references to these
website postings; the only references to
them are in defendant’s moving papers.
Although the complaints make vague
references to “disparagement” as a
prohibited act under certain state statutes,
and also refer generally to defendant’s
internet marketing, one need only read the
underlying allegations to see that they
nonetheless all arise from Craze’s failure to
conform with its advertised quality.

There is a distinction between
being injured by an advertisement
and being injured by a product’s
failure to perform as advertised. . . .
However, there is also a distinction
between being injured by an
advertisement and being wrongfully
injured by an advertisement. . . .
Thus, even though [the underlying
plaintiff] suffers the same type of
injury whether or not the
advertisement is false, [the
underlying plaintiff] may only
recover damages on account of its
injury when the advertisement is
false. The remedy for the injury
inflicted by a truthful advertisement
is found in the marketplace, not in
the courthouse.

For that reason, the website is not
extrinsic evidence which may give rise to
coverage even if it is not referenced in the
underlying allegations.
See, e.g.,
Fitzpatrick, 78 N.Y.2d at 63. Even if one
attributes knowledge of the website to
plaintiffs in the Craze Actions based upon
the extrinsic evidence provided by
defendant, that extrinsic evidence cannot
create underlying claims which are not
asserted, and which defendant has not
shown are ever likely to be asserted in this
litigation. Defendant simply has not shown
that there is any injury to an underlying
plaintiff that did not arise out of Craze’s
failure to conform with statements about its
quality, and instead resulted purely from
some negative comparison made by
defendant in advertising Craze. Such an
injury would have to exist even if Craze had
performed as advertised, and contained only
natural ingredients. However, under that
scenario, the underlying plaintiff would have
no claim, because the comparison between
Craze and its competitors would be based

Harleysville Mut. Ins. Co. v. Buzz Off Insect
Shield, L.L.C., 692 S.E.2d 605, 614 (N.C.
2010).
Thus, as much as defendant attempts to
re-brand the underlying claims as
advertising injuries, they plainly arise out of
how Craze actually performed, which left its
consumers exposed to an allegedly
dangerous and synthetic substance, and its
competitors unable to compete. (Ex. 2 to
Duffield Decl. ¶¶ 16-17, 33, 39-40.) The
gravamen of the Nutrition complaint is not
that defendant’s advertising made its
competitor’s product appear inferior, either
by explicit or implicit statements, but
instead that Craze actually was a more
potent product, which left the Nutrition
plaintiff unable to compete. (Ex. 2 to
Duffield Decl. ¶¶ 16-17.) The difference in
potency is alleged to be the result of Craze’s
failure to conform with defendant’s
12

590 F. Supp. 2d 1244, 1248 n.5 (N.D. Cal.
2008).8

advertisements that it contained only natural
ingredients. (Id. ¶¶ 17, 33, 39-40.) In other
words, the crux of the Nutrition action is
that Driven Sports obtained an unfair
competitive
advantage
by
making
misrepresentations
about
Craze’s
ingredients. It is alleged that Driven Sports
would not have been able to obtain this
competitive advantage if its consumers had
known the truth about the contents of Craze.
Neither the competitors nor the consumers
could prove these injuries without proving
that Craze failed to conform to defendant’s
advertising about its quality. Therefore, the
Court concludes that all of the underlying
claims are excluded, and there are no
potentially covered claims.

Likewise, in Safety Dynamics, Inc. v.
Gen. Star Indemnity Co., an unpublished
Ninth Circuit case which defendant relies
upon even more heavily than E.piphany, the
court distinguished between a “failure of
goods” and a “failure of advertising.” 475
F. App’x 213, 214 (9th Cir. 2012). The
court did not offer an explanation for that
distinction (other than a citation to an
insurance law treatise), and as plaintiff

8
The Court also notes that E.piphany was decided
before the California Court of Appeal decided Total
Call Int’l, Inc. v. Peerless Ins. Co., which the Second
Circuit cited approvingly when it affirmed Dollar
Phone. See 514 F. App’x at 22 (citing 181 Cal. App.
4th 161, 172 (Cal. Ct. App. 2010)). Total Call and
Dollar Phone involved very similar underlying
allegations that phone cards did not contain the
advertised number of minutes, and the exclusion in
Total Call is identical to the one in the Policy in this
case. 181 Cal. App. 4th at 165. Like Dollar Phone,
Total Call held that the underlying complaints did not
fit under the “advertising injury” line of cases,
because they did not describe disparaging statements
about competitor’s products, but instead statements
about the insured’s own products, and the failure of
the insured’s products to conform with the advertised
quality. Id. at 171. Accordingly, the court concluded
that the failure to conform exclusion barred coverage,
citing analogous cases from the Seventh and Eighth
Circuits (which were also cited in Dollar Phone,
2012 WL 1077448, at *10), and from the Eastern
District of Virginia. See 181 Cal. App. 4th at 172
(citing Skyline Techs., Inc. v. Assurance Co., 400
F.3d 982, 984 (7th Cir. 2005); New Hampshire Ins.
Co. v. Power-O-Peat, Inc., 907 F.2d 58, 58-59 (8th
Cir. 1990); Superformance Int’l v. Hartford Cas. Ins.,
203 F. Supp. 2d 587, 589-90 (E.D. Va. 2002)).
Although the E.piphany Court denied reconsideration
after Total Call, see Infor Global Solutions (Mich.)
Inc. v. St. Paul Fire & Marine Ins. Co., 686 F. Supp.
2d 1005, 1007 (N.D. Cal. 2010), the reasoning of
Total Call was later affirmed by the Supreme Court
of California. See Hartford Cas. Ins. Co. v. Swift
Distrib, Inc., 326 P.3d 253 (Cal. 2014).

2. Statements About One’s Own
Product versus the Product of One’s
Competitor
Defendant also makes a closely-related
second argument which draws on cases
outside of New York involving the
distinction, discussed in Dollar Phone,
between statements about one’s own
products and the products of one’s
competitor. In those cases, courts found that
the
underlying
complaints
alleged
misrepresentations about the competitor’s
product, which made the injuries different
than the “failure to conform” captured by
the quality exclusions. For example, in
E.piphany, Inc. v. St. Paul Fire & Marine
Ins. Co., the Court noted that the underlying
claims were “not related to the performance
of Plaintiff’s products” because they were
“based on alleged trade libel committed by
Plaintiff, with respect to negative
comparisons
Plaintiff
made
about
competitors vis-à-vis Plaintiff’s products.”

13

notes, it does not appear that New York law
recognizes such a distinction, but the Ninth
Circuit did suggest that the failure-toconform exclusion did not apply because
“[t]he [underlying] complaint alleges that
Safety Dynamics’s false claims about its
own product . . . made Safety Dynamics’s
product look better versus ShotSpotter’s.”
Id.

other words, defendant contends that the fact
that Craze was advertised to contain only
natural ingredients, but actually contained an
illegal
and
potentially
dangerous
methamphetamine
analog,
does
not
unambiguously relate to Craze’s “quality or
performance,” such that plaintiff cannot
carry its burden to show that the only
interpretation of those words includes a
product’s ingredients. Although it is true, as
noted above, that “exclusions are subject to
strict construction and must be read
narrowly,” Cook, 7 N.Y.3d at 137, the
Second Circuit (applying New York law)
has “decline[d] to obligate an insurer to
extend coverage based on a reading of the
complaint that is linguistically conceivable
but tortured and unreasonable.” State of
N.Y. v. AMRO Realty Corp., 936 F.2d 1420,
1428 (2d Cir. 1991); see also Metro Life Ins.
Co. v. RJR Nabisco, Inc., 906 F.2d 884, 889
(2d Cir. 1990) (“Language whose meaning
is otherwise plain is not ambiguous merely
because the parties urge different
interpretations in the litigation.”); Paul K.
Rooney, P.C. v. Chicago Ins. Co., 00 CIV.
2335 (JGK), 2001 WL 262703, at *7
(S.D.N.Y. Mar. 16, 2001), aff’d sub nom.
Rooney v. Chicago Ins. Co., 26 F. App’x 53
(2d Cir. 2001) (“This is consistent with the
principle of New York law that contracts are
to be given their reasonable interpretation
and are not to be construed in a strained or
tortuous fashion.”).

The opinions in Safety Dynamics and
E.piphany are not instructive here, because
those cases contain, in each instance, no
more than a sentence discussing a failure to
conform clause. Moreover, to the extent that
these cases are in tension with the Second
Circuit’s holdings in Dollar Phone9 and
Bigelow, this Court is bound to follow the
Second Circuit’s caselaw, and does so here.
3. Whether “Quality” is Vague
Defendant also argues against the
applicability
of
the
exclusion
by
characterizing the language of the exclusion
itself as vague, suggesting that the words
“‘quality or performance’ do[] not include a
statement that the product has the
characteristic
of
including
certain
ingredients.” (Def. Mem. Opp. at 9.) In

9

In particular, this Court finds it difficult to reconcile
Safety Dynamics with Dollar Phone. Although the
Ninth Circuit’s summary opinion in Safety Dynamics
makes no mention of the underlying facts, the district
court’s opinion in that case presents a strikingly
similar fact pattern to the scenario at issue in Dollar
Phone. In Safety Dynamics, a competitor claimed that
a gunshot-sensor system falsely advertised the
potency and efficacy of its sensors, which gave the
company an unfair competitive advantage by
claiming that a consumer required fewer sensors, and
that therefore its product was less expensive than its
competitors. See Safety Dynamics v. Gen. Star
Indem. Co., No. 09-CV-695 (D. Ariz. March 4,
2011).

The Court concludes that it is a tortured
and unreasonable reading of both the
underlying complaints and the Policy to
contend that Craze’s ingredients are not a
“quality” of the product.
Under any
reasonable definition of “quality,” the
presence of an illegal and dangerous
synthetic substance is a failure to conform
with the product’s advertised “quality,”
when the advertisements stated that it
14

contained only natural ingredients.10
Therefore, the Court concludes that there is
no reasonable basis for a difference of
opinion concerning the meaning of “quality”
as used in the Failure to Conform Exclusion,
and it is unambiguous as a matter of law.
See Metro Life Ins., 906 F.2d at 889.
4.

under the Policy. Plaintiff opposes these
supplemental submissions on several
grounds. First, plaintiff correctly notes that,
in July 2014, Driven Sports sought leave to
file a motion for summary judgment,
representing to the Court that “[n]o genuine
issues of material fact bar adjudication” of
the issues in the case, and “[t]he case is
therefore properly positioned for a judgment
on the issues as a matter of law.” (ECF No.
10 at 2.) Plaintiff also argues that several
exhibits in these supplemental filings predated the oral argument and could have been
brought to the Court’s attention at an earlier
time. Second, plaintiff contends that certain
portions of these supplemental filings are
not properly the subject of judicial notice
because there is no evidence that the
discovery materials were filed in any court.
Third, plaintiff argues that the supplemental
evidence and arguments have no merits.
The Court need not address plaintiff’s
procedural and evidentiary objections
because, even having fully considered the
materials and arguments in the postargument filings by defendant, the Court
concludes that they do not alter the Court’s
determination that there is no duty to defend
the underlying lawsuits because of the
quality exclusion in the Policy.

Supplemental Submissions

Following oral argument, Driven Sports
submitted
several
filings
entitled
“supplemental requests for judicial notice.”
In
particular,
these
supplemental
submissions provide various materials from
the underlying Crave Actions -- including,
inter alia, deposition testimony, discovery
responses, and a preliminary injunction
motion -- in an effort to further support their
position that plaintiff has a duty to defend

10

The primary case on which defendant relies to
suggest that “quality” is inapplicable or ambiguous is
factually distinguishable, even if one assumes that
New York courts would have decided that case the
same way. In Jewelers Mut. Ins. v. Milne Jewelry
Co., a jeweler advertised its products as being of
authentic Native American origin, and faced
underlying litigation related to, among other things,
the accuracy of that claim. No. 2:06-CV-243 (TS),
2006 WL 3716112, at *1-3 (D. Utah Dec. 14, 2006).
The court concluded that a failure to conform
exclusion similar to the one in this case did not bar
coverage because the term “quality” was susceptible
to more than one meaning, and the parties disputed
whether it embraced the origin of the products or
merely their “fitness.” Id. at *3. Here, the nature of
the underlying allegations would not support a
similar distinction. Any reasonable definition of
“quality” includes whether the product at issue
contains an illegal and potentially dangerous
synthetic drug. See Rooney, 2001 WL 262703, at *5
(“Under New York law, the terms of an insurance
policy are to be interpreted in light of their natural
and reasonable meaning corresponding to the
reasonable expectation and purpose of the ordinary
businessman.”).

Having reviewed these supplemental
materials from the underlying lawsuits, the
Court concludes that nothing in those
materials
undermines
this
Court’s
determination that the underlying lawsuits
are all premised on the core allegation that
Craze, contrary to its labeling and Driven
Sports’
advertising,
contains
methamphetamines. For example, Exhibit
120 is a discovery request asking the
Nutrition action plaintiff to “[d]escribe all
facts supporting YOUR contention that
‘Craze’ was far more potent than any other
pre-workout supplement on the market.”
15

Nutrition complains that Driven
Sports failed to disclose the (alleged)
presence of methamphetamine in its
Craze product. Nutrition contends
that it was damaged by the omission
because customers achieved results
from Craze that were superior to
those from Nutrition’s “Supersize”
product, but no one knew that the
superior results derived from Craze’s
illegal ingredients. Nutrition further
seeks to restrain Driven Sports from
using the “Craze” name to maintain a
competitive advantage over Nutrition
based
on
customers’
positive
impressions of Driven Sports’
allegedly effective but illegal
product….[B]ecause the harm arises
out of Driven Sports’ statements
about its own product, the Failure to
Conform Exclusion would bar
coverage in any event.

(ECF No. 40-2.) In response, plaintiffs state
that Craze “contains methamphetamineanalogs,” and point to Craze user comments.
Similarly, in the preliminary injunction
motion
in
Nutrition,
the
plaintiff
unequivocally focuses upon Driven Sports’
statements about the ingredients in its own
product: “Craze’s labels include misleading
statements and designations that create the
false impression that Craze is an ‘all natural’
dietary supplement with Dendrobex acting
as [] its active ingredient, while egregiously
omitting that it contains designer drugs that
are
the
structural
analogues
of
methamphetamine.” (ECF No. 43-1 at 17.)
Moreover, it is clear from the motion that
any economic harm resulting from the
comparison between the two products by
consumers, including performance, all arise
from this alleged deception regarding the
ingredients: “[T]he Craze product labels
inaccurately represent the active ingredients
and fail to list the presence of
methamphetamine analogs. Thus, when
Craze is compared to Plaintiff’s ‘SuperSize’
pre-workout product, Driven Sports’ product
appears safer and more effective than
Plaintiff’s product – when, in fact, the FDA
found Craze to be ‘adulterated’ under the
Federal Food, Drug, and Cosmetic Act (the
“FDCA”). As a result of Driven Sports’
ongoing efforts to manufacture, market and
sell Craze, Plaintiff is continuing to lose
sales and the opportunity to establish and
strengthen its own brand through its
legitimate business efforts.” (Id. at 9.) In
addition, the deposition testimony of Kevin
Smith is completely consistent with the
allegations that are contained in the
Nutrition complaint. In opposition to the
supplemental submission regarding the
Smith deposition, plaintiff argues the
following:

(ECF No. 48 at 2-3) (footnote omitted).
This Court agrees with plaintiff’s argument
for the reasons discussed supra.
In short, none of these supplemental
excerpts submitted by defendant from the
discovery materials and motions in the
underlying lawsuit demonstrate that any of
the plaintiffs are making any claims
unrelated to the alleged ingredients in Craze.
In other words, it is abundantly clear that the
underlying actions were brought, and
continue to be litigated, over the alleged
false and misleading statements by Craze
about its ingredients, and the alleged injuries
resulting therefrom.
Therefore, having
carefully reviewed the supplemental
submissions following oral argument, the
Court does not believe that these
submissions alter the Court’s conclusion that
the Failure to Conform Exclusion bars
coverage in connection with the underlying
16

Craze actions. Thus, General Star has no
duty to defend or indemnify11 Driven Sports
in the Craze Actions.

2, 2012) (noting lack of objection to
recoupment award). In the third, the court
awarded recoupment based on the lack of
evidence that the insured refused to consent
to the insurer’s reservation of the right to
seek recoupment. See Gotham Ins. Co. v.
GLNX, Inc., No. 92 Civ. 6415 (TPG), 1993
WL 312243, at *4 (S.D.N.Y. Aug. 6, 1993).
The fourth case also noted the reservation of
rights, and although it provided no
discussion of the effect of that reservation,
its only citation on the matter was to a case
where the reservation of rights was
unopposed. See Certain Underwriters at
Lloyd’s London Subscribing to Policy No.
SYN-1000263 v. Lacher & Lovell-Taylor,
P.C., 112 A.D.3d 434, 435, 975 N.Y.S.2d
870 (N.Y. App. Div. 2013) (citing Am.
Guar. & Liab. Ins. Co. v. CNA Reins. Co.,
16 A.D.3d 154, 155, 791 N.Y.S.2d 525
(N.Y. App. Div. 2005)).

B. Recoupment
Plaintiff also argues that, because the
underlying claims are excluded from the
Policy, it should be able to recoup its costs
in representing defendant to this point in the
underlying litigation. Although plaintiff
cites several cases in which New York
courts mention the possibility of recoupment
in dicta,12 courts actually awarded
recoupment in only four of those cases. In
two of those, the request for recoupment
appears to have been unopposed. See Amer.
Family Home Ins. Co. v. Delia, No. 12-cv5380 (ADS)(WDW), 2013 WL 6061937, at
*2 (E.D.N.Y. Nov. 15, 2013) (awarding
recoupment as part of a default judgment);
Max Specialty Ins. Co. v. WSG Investors,
LLC, No. 09-CV-05237 (CBA)(JMA), 2012
WL 3150579, at *9 (E.D.N.Y. Apr. 20,
2012), report and recommendation adopted
at 2012 WL 3150577, at *4 (E.D.N.Y. Aug.

Thus, although some courts have
awarded recoupment, it is unclear under
New York law whether that remedy is
appropriate, or even authorized, under these
circumstances, where defendant effectively
resisted the idea of recoupment from the
very beginning by rejecting plaintiff’s offer
of a separate recoupment agreement. In the
absence of any clear guidance from the New
York courts, this Court must predict how the
New York Court of Appeals would address
this question. See Travelers Ins. Co. v. 633
Third Associates, 14 F.3d 114, 119 (2d Cir.
1994) (“Where the substantive law of the
forum state is uncertain or ambiguous, the
job of the federal courts is carefully to
predict how the highest court of the forum
state would resolve the uncertainty or
ambiguity.”).

11

The policy is written such that the Failure to
Conform Exclusion excuses both the duty to defend
and the duty to indemnify. The Failure to Conform
clause specifies that “this insurance will not apply” if
the clause’s conditions are met. Because the Court
has determined that the clause applies, the policy no
longer applies, and consequently plaintiff has no duty
to defend or indemnify.
12
In its reply brief, plaintiff cites a number of cases
where the possibility of recoupment is mentioned, but
not awarded. See XL Specialty Ins. Co. v. Level
Global Inv., L.P., 874 F. Supp. 2d 263, 282, 292
(S.D.N.Y. 2012); U.S. Specialty Ins. Co. v. Liberty
Partners L.P., No. 11 Civ. 3736 (HB), 2011 WL
5428971, at *5 (S.D.N.Y. Nov. 8, 2011); Dupree v.
Scottsdale Ins. Co., 947 N.Y.S.2d 428, 429 (N.Y.
App. Div. 2012); Fed. Ins. Co. v. Kozlowski, 792
N.Y.S.2d 397, 404 (N.Y. App. Div. 2005); Trs. of
Princeton Univ. v. Nat’l Union Fire Ins. Co. of Pgh,
Pa., 839 N.Y.S.2d 437 (N.Y. Sup. Ct. 2007).

The relevant New York law under
consideration is unjust enrichment, because
plaintiff’s argument for recoupment is not
17

based in the text of the Policy itself. It is
undisputed that no provision of the Policy
explicitly grants plaintiff the right to seek
recoupment. Instead, plaintiff argues that
defendant would be unjustly enriched by
legal representation to this point in the
underlying cases, where it has been held that
the claims in those cases are excluded from
the Policy.

Therefore, this was the provision in which
plaintiff could have contracted for a right to
seek recoupment, but it did not do so. This
Court is obliged, under New York law, to
interpret the Policy as it is written in keeping
with an average insured’s reasonable
expectations, see Cragg v. Allstate Indem.
Corp., 17 N.Y.3d 118, 122 (2011). The
Policy says “[a]ll expenses.”
Plaintiff
cannot now qualify that term by relying on a
quasi-contract theory. See Angela R. Elbert
and Stanley C. Nardoni, Buss Stop: A Policy
Language Based Analysis, 13 Conn. Ins. L.J.
61, 95-97 (2006-2007) (“Allowing the
insurer to shift defense costs back to the
insured through reimbursement would
contravene the [expenses] clause’s express
promise that the insurer will pay them. . . .
Quasi contractual remedies . . . are not
designed to overcome such express
contractual terms. . . . The promise to bear
all expenses in the cases the insurer defends
weighs heavily against the right of
recoupment.”)

However, the fact that the Policy does
not explicitly provide for recoupment does
not mean that it is silent concerning who
bears the costs of legal representation, and
New York law generally precludes claims of
unjust enrichment where a contract covers
the “particular subject matter” at issue. See
IDT Corp. v. Morgan Stanley Dean Witter &
Co., 12 N.Y.3d 132, 142 (2009). The Policy
is an extensive, detailed contract governing
the particular subject matter of coverage for
claims against defendant: in particular, the
Policy’s Supplementary Payments provision
states that plaintiff “will pay, with respect to
. . . any ‘suit’ against an insured . . . [a]ll
expenses we incur.” (Ex. 1 to Duffield
Decl.) As is discussed infra, plaintiff agrees
that this provision covers legal expenses.13

Alternatively, the Court concludes that,
even applying the test for unjust enrichment

was obligated to defend Insured pursuant to the
insurance contract, it did, in fact, provide a defense.
Under the plain language of the contract, therefore, it
was obligated to pay for the expenses it incurred in
connection with the defense, an obligation that would
be eviscerated if Insured had to reimburse Royal.”).
The Second Circuit, applying New York law, has
likewise noted that the duty to defend arises ex ante,
even when there is uncertainty concerning the
underlying claims. See Bridge Metal Indus., LLC v.
Travelers Indem. Co., 559 F. App’x 15, 18 (2d Cir.
2014). Notably, in Bridge Metal, the Second Circuit
found that the ex ante situation was uncertain,
triggering the duty to defend, even where (as here)
only a “handful” of cases supported the insured’s
position. Id.

13

To the extent that plaintiff argues that the Policy
does not cover the defense of an excluded claim, the
provision does not make that distinction on its face.
Furthermore, “[t]he problem with this argument is
that [the insurer] is attempting to define its duty to
defend based upon the outcome of the declaratory
judgment action. Although an insurer’s duty to
indemnify arises only after damages are fixed, the
duty to defend arises as soon as damages are sought.”
Gen. Agents Ins. Co. of Am. v. Midwest Sporting
Goods Co., 828 N.E.2d 1092, 1103 (2005); see also
Am. & Foreign Ins. Co. v. Jerry’s Sport Ctr., Inc., 2
A.3d 526, 542 n.14 (Pa. 2010) (“Royal's obligation to
pay, with respect to ‘any suit against an Insured we
defend . . . [a]ll expenses we incur’ arguably answers
the question before us. Here, Royal defended Insured.
It was, therefore, contractually obligated to pay all
defense expenses it incurred. Regardless of whether it

18

under New York law, plaintiff’s argument is
unpersuasive. “It is well settled that ‘[t]he
essential inquiry in any action for unjust
enrichment . . . is whether it is against equity
and good conscience to permit the defendant
to retain what is sought to be recovered.’”
Sperry v. Crompton Corp., 8 N.Y.3d 204,
215, (2007) (quoting Paramount Film
Distrib. Corp. v. State of New York, 30
N.Y.2d 415, 421 (1972)). In addition, under
the theory of unjust enrichment, “[a] party
will not be relieved of the consequences of
his own failure to proceed with diligence or
to exercise caution with respect to a business
transaction.” Charles Hyman, Inc. v. Olsen
Indus., Inc., 642 N.Y.S.2d 306, 311 (1996).

condition on its defense that was not
bargained for.”); Jerry’s Sports Ctr., 2 A.3d
at 544 (“Where the insurance contract is
silent about the insurer’s right to
reimbursement of defense costs, permitting
reimbursement for costs . . . . would amount
to a retroactive erosion of the broad duty to
defend.”); Shoshone First Bank v. Pac.
Emps. Ins. Co., 2 P.3d 510, 515 (Wy. 2000)
(“The insurer is not permitted to unilaterally
modify and change policy coverage.”).
Plaintiff’s awareness of this risk is suggested
by its attempt to provide for recoupment in a
separate agreement after defendant tendered
its claims. Defendant rejected that offer,
and, as a matter of equity and good
conscience, the Court will not now imply the
same agreement into the Policy.

As other courts have noted, plaintiff
bears the risk of not providing for
recoupment in the Policy itself, and plaintiff
is not saved by its later, unilateral
reservation of rights.14 See, e.g., National
Sur. Corp. v. Immunex Corp., 297 P.3d 688,
694 (Wash. 2013) (“[A]llowing recoupment
to be claimed in a reservation of rights letter
would allow the insurer to impose a

To hold otherwise would risk eroding
the well-established doctrine under New
York law of imposing an “exceedingly
broad” duty to defend on insurers. Cook, 7
N.Y.3d at 137. New York law recognizes
that “a provision for defense of suits is
useless and meaningless unless it is offered
when the suit arises,” Fitzpatrick, 78 N.Y.2d
at 70 (internal quotation marks and citation
omitted), and thus requires an insurer to
“come forward to defend its insured no
matter how groundless, false or baseless the
suit may be.” Id. (internal quotation marks
and citation omitted). As it operates now,
this rule incentivizes an insured to seek
coverage, but if insurers can threaten the
later collection of costs, an insured’s
incentives would change drastically, and he
would be faced with a “Hobson’s choice” in
any close case. In other words, an insured
whose claim might be covered could be
dissuaded from seeking coverage out of
concern that the legal costs would be so
prohibitive that the insured could never pay
them if a court later disagreed.
See
Immunex, 297 P.3d at 695 (citing Midwest

14

Although the parties dispute which is the majority
rule in other jurisdictions, both parties referred to an
article published by the American Bar Association in
2011, noting that “[t]here is a fairly even split among
state and federal courts” concerning recoupment.
Bob Allen, Gary Thompson, and Sara M. Thorpe,
Reversing Course: Can an Insurer Seek
Reimbursement from its Policyholder for Amounts
Related to Noncovered Claims?, at 3, accessed at
https://apps.americanbar.org/litigation/committees/in
surance/docs/2011-cle-materials/11
ReimbursementPaymentClaims/11aReversingCourse
CanInsurer.pdf. However, as the title of that article
suggests, there has been a recent trend toward courts
rejecting claims for recoupment. Id.; see also
Immunex, 297 P.3d at 693 (“More recently, however,
courts deciding in the first instance whether insurers
can recover defense costs have generally concluded
that they cannot.”).

19

factually or legally liable or because the
occurrence is later proven to be outside the
policy’s coverage.”). Allowing plaintiff to
recoup its costs would effectively require
that insurers only defend to the same extent
that they must ultimately indemnify.

Sporting Goods, 828 N.E.2d at 1102). Thus,
the insured would lose the benefit of his
bargain with the insurer, which the insured
struck believing that the insurer was
obligated to defend him, at least initially,
even in the most borderline cases. A
judicial alteration of that contractual
balance, without any Policy language
justifying such an outcome—and, in fact,
with Policy language promising that the
insurer will pay all expenses— is contrary to
the “reasonable expectations of the average
insured,” Cragg, 17 N.Y.3d at 122, and to
the related principle in New York law that
“[i]f the terms of a policy are ambiguous . . .
any ambiguity must be construed in favor of
the insured and against the insurer.” White
v. Cont’l Cas. Co., 9 N.Y.3d 264, 267
(2007).

It is also relevant to the Court’s
consideration of equity and good conscience
that an insurer receives some benefit from
undertaking a defense, even if it believes the
claims are excluded. “When an insurer
defends under a reservation of rights, it
insulates itself from potential claims of
breach and bad faith, which can lead to
significant damages, including coverage by
estoppel15. . . . Conversely, when an insurer
declines to defend altogether, it saves money
on legal fees but assumes the risk it may
have breached its duty to defend or
committed bad faith.” Immunex Corp., 297
P.3d at 693-94; see also Jerry’s Sport Ctr., 2
A.3d at 545 (“Insured was not unjustly
enriched by Royal’s payment of defense

Furthermore, awarding recoupment in
this case would effectively make the duty to
defend coextensive with the duty to
indemnify, despite the fact that New York
courts have repeatedly held that the duty to
defend is broader. “The duty to defend
arises whenever the allegations in a
complaint against the insured fall within the
scope of the risks undertaken by the insurer,
regardless of how false or groundless those
allegations might be.” Seaboard Sur. Co. v.
Gillette Co., 64 N.Y.2d 304, 310 (1984)
(internal quotation marks and citations
omitted). “Though policy coverage is often
denominated as liability insurance, where
the insurer has made promises to defend it is
clear that [the coverage] is, in fact, litigation
insurance as well.” Id. In this sense, an
insurer contracts with an insured to defend
more than the policy obligates the insurer to
ultimately pay. Fitzpatrick, 78 N.Y.2d at 65
(“[A]s the rule has developed, an insurer
may be contractually bound to defend even
though it may not ultimately be bound to
pay, either because its insured is not

15

Although plaintiff cites a recent decision of the
New York Court of Appeals for the proposition that
coverage by estoppel is not available under New
York law, plaintiff would still have an incentive to
defend this suit because of the possibility of suit for
bad faith or breach of contract, and because it would
want to ensure the quality of representation.
Furthermore, the holding in K2 Inv. Grp., LLC, v.
Amer. Guar. & Liability Ins. Co., which allows
insurers who wrongly fail to defend and then face
claims for indemnification to argue that coverage was
excluded by the terms of the policy, is not
inconsistent with this Court’s holding that
recoupment is an inappropriate remedy in this case.
22 N.Y.3d 578, 586-87 (2014). The duty addressed
in K2 is the duty to indemnify, while this case
concerns the broader duty to defend. If anything, K2
reinforces the distinction between those two duties,
because the Court concluded that the insurer
undoubtedly breached its duty to defend, even if there
was a genuine dispute of fact concerning its duty to
indemnify. Id. at 584.

20

costs. Royal had not only the duty to defend,
but the right to defend under the insurance
contract. This arrangement benefited both
parties. The duty to defend benefited Insured
to protect it from the cost of defense, while
the right to defend allowed Royal to control
the defense to protect itself against potential
indemnity exposure.”); Terra Nova Ins. Co.
v. 900 Bar, Inc., 887 F.2d 1213, 1219-20 (3d
Cir. 1989) (“Faced with uncertainty as to its
duty to indemnify, an insurer offers a
defense under reservation of rights to avoid
the risks that an inept or lackadaisical
defense of the underlying action may expose
it to if it turns out there is a duty to
indemnify. At the same time, the insurer
wishes to preserve its right to contest the
duty to indemnify if the defense is
unsuccessful. Thus, such an offer is made at
least as much for the insurer’s own benefit
as for the insured’s. If the insurer could
recover defense costs, the insured would be
required to pay for the insurer’s action in
protecting itself against the estoppel to deny
coverage that would be implied if it
undertook
the
defense
without
reservation.”).
Given these potential
benefits for the insurer in fulfilling its duty
to defend, other “courts have . . . [found]
that concerns of equity and fairness weigh
against reimbursement, because an insurer
benefits unfairly if it can hedge on its
defense obligations by reserving its right to
reimbursement while potentially controlling
the defense and avoiding a bad faith claim.”
Jerry’s Sport Ctr., 2 A.3d at 539.

C. Self-Liquidation
However, the Court agrees with plaintiff
that the Policy is self-liquidating, such that
plaintiff’s expenses in defending the
underlying actions count against the Policy’s
limit of liability. This result is compelled by
the Policy’s plain language, which defines
plaintiff’s “Supplementary Payments,” to
include “[a]ll expenses” incurred by plaintiff
in defending the underlying lawsuits. (Pl.
56.1 ¶ 6.)
Immediately following the
definition of “Supplementary Payments,”
the Policy states in bold, capital letters that:
THESE
PAYMENTS,
EXCLUSIVE OF SALARIES
AND EXPENSES OF OUR
OWN EMPLOYEES, WILL
REDUCE THE LIMITS OF
INSURANCE.
(Id.) Thus, no reasonable factfinder could
conclude anything other than that plaintiff’s
“Supplementary Payments,” which include
defense expenses, reduce the limits of the
Policy.
Defendant argues that the Policy should
have been clearer concerning whether
attorneys’
fees
were
included
in
“Supplementary Payments.” The definition
of “Supplementary Payments,” however,
includes “[a]ll expenses” incurred “with
respect to any claim we investigate or settle
or any ‘suit’ against an insured we
defend.”16 (Id.) That definition may be

For these reasons, even if plaintiff’s
claim of unjust enrichment is not precluded
by the Policy, the Court holds that defendant
was not unjustly enriched by plaintiff’s
coverage of legal representation. Under
these circumstances, the Court finds that the
New York Court of Appeals would find
recoupment to be an inappropriate remedy.

16

The Court also notes that the Supplementary
Payments provision, in a section that discusses
coverage for indemnitees, specifically references
“attorney’s fees” as a type of Supplementary
Payment. (See ECF No. 19-5 at 43 (“So long as the
above conditions are met, attorneys’ fees incurred by

21

broad, but it is not ambiguous. Cf. Emps.
Reins. Corp. v. Mid-Continent Cas. Co., 358
F.3d 757, 768 (10th Cir. 2004) (“A plain
reading of the supplementary payments
provision indicates that it covers [attorneys’
fees] . . . . The provision provides that [the
insurer] will pay all expenses which it incurs
with respect to any claim that it investigates.
Certainly, [the insurer] investigated the
claims for which it litigated coverage.
Moreover, the fees and expenses which [the
insurer] incurred . . . are expenses which it
incurred with respect to such claims.
Accordingly, the declaratory judgment fees
and expenses fall within the plain and
ordinary meaning of the supplementary
payments
provision.”);
Commercial
Underwriters Ins. Co. v. Royal Surplus
Lines Ins. Co., 345 F. Supp. 2d 652, 671-72
(S.D. Tex. 2004) (holding that attorneys’
fees fell under similar “all expenses”
definition of Supplementary Payments);
Dotson v. Chester, No. 94-1194, 1994 U.S.
App. LEXIS 28279, at *13 (4th Cir. 1994)
(interpreting the phrase “all expenses” in an
insurance contract to include attorney’s
fees). In fact, as was discussed supra, the
lack of ambiguity in that statement
convinces the Court that plaintiff’s claim of
unjust enrichment must fail, because the
“[a]ll expenses” provision covers the subject
matter at issue, thereby precluding recovery
under a quasi-contractual theory.

were reduced only by “the payment of
judgment or settlements.” 960 N.Y.S.2d
364, 366 (N.Y. App. Div. 2013). Here, the
equivalent provision states that the limits are
reduced by “the payment of judgments,
settlements, or Supplementary Payments.”
(Pl. 56.1 ¶ 3.) Thus, there is no question here
that “Supplementary Payments” may reduce
the limits of coverage. The question is
simply whether the Policy adequately
defines “Supplementary Payments” to
include attorney’s fees, and the Court holds
that it does.17 If “Supplementary Payments”
includes “[a]ll expenses,” then it must
include all that plaintiff spends, of which the
cost of providing legal representation to
defendant is a major component. Under the
Policy’s plain language, that cost reduces
the limits of the Policy’s coverage.
IV. CONCLUSION
For the foregoing reasons, plaintiff’s
motion for summary judgment is granted in
part and denied in part. More specifically,
plaintiff’s motion is granted to the extent it
seeks a declaratory judgment that (1)
General Star has no duty to defend or
indemnify Driven Sports in the underlying
Craze Actions, and (2) the limits of liability
of the Policy are reduced by the amount of
any defense payments for the Craze Actions

The cases defendant cites are not to the
contrary. In In re East 51st Street Crane
Collapse Litigation, the Appellate Division
held that a similar policy was ambiguous
because it stated that the limits of coverage

17

Defendant also cites two cases from other
jurisdictions, but both are distinguishable based upon
the language of the policies at issue. In Flowers v.
Max Specialty Ins. Co., the definition of
“supplementary payments” stated that such payments
would not reduce the limits of insurance, unlike here,
where the reduction is expressly stated. 761 S.E.2d
787, 792 (W. Va. 2014). In Ill. Union Ins. Co. v. N.
Country Ob-Gyn Med. Grp., Inc., the court reviewed
an arbitration panel’s interpretation of the words
“incurred by the insureds,” which are not at issue
here. No. 09CV2123 (LAB) (JMA), 2010 WL
2011522, at *3-5 (S.D. Cal. 2010).

us in the defense of that indemnitee, necessary
litigation expenses incurred by us and necessary
litigation expenses incurred by the indemnitee at our
request will be paid as Supplementary Payments.”).)

22

not repaid to General Star. However,
plaintiff’s motion is denied to the extent it
seeks a declaratory judgment that General
Star is entitled to recoup all amounts paid
for defense of the Craze Actions.
Defendant’s motion for partial summary
judgment is granted to the extent that
General Star has no right to recoup from
Driven Sports all defense expenses for the
Craze Actions. However, the defendant’s
motion is denied in all other respects. The
Clerk of the Court shall enter judgment
accordingly and close this case.
SO ORDERED.

______________________
JOSEPH F. BIANCO
United States District Judge
Dated: January 23, 2015
Central Islip, NY
***
Plaintiff is represented by Cara T. Duffield
and John Howell of Wiley Rein LLP, 1776
K Street NW, Washington, DC 20006; and
Vincent Proto of Budd Larner, 150 John F.
Kennedy Parkway, Short Hills, NJ 07078.
Defendant is represented by David A.
Gauntlett and James A. Lowe, Gauntlett &
Associates, 18400 Von Karman, Suite 300,
Irvine, CA 92612; and Eugene Killian, Jr.,
Killian & Salisbury, P.C., 555 Route 1
South, Suite 430, Iselin, NJ 08830.

23