HNRK Coverage Corner

Last month, the Second Circuit held that commercial general liability insurers owed no duty to defend or indemnify a retailer of unfinished firearms in underlying “ghost gun” lawsuits because the lawsuits at issue did not allege injuries arising from an “accident” as defined by Texas law and were thus not “occurrences” under the policies.    

Background

In Granite State Insurance Company v. Primary Arms, LLC, the insurance dispute arose from lawsuits by the State of New York and the cities of Buffalo and Rochester against Primary Arms, LLC (“Primary Arms”), a Texas-based seller of firearms and firearm components.  The plaintiffs alleged that Primary Arms intentionally marketed, sold, and shipped unfinished frames and receivers into New York in a manner designed to evade regulation, resulting in the proliferation of untraceable firearms and increased costs associated with gun violence and law enforcement.  All three plaintiffs included claims for public nuisance; the State sought relief pursuant to claims for negligence per se and negligent entrustment as well.

Primary Arms demanded defense costs and indemnification under its commercial general liability policies.  Both Granite State Insurance Company and National Union Fire Insurance Company of Pittsburgh, PA (the “Insurers”) denied coverage and sought declaratory relief in the Southern District of New York.  The district court granted summary judgment in favor of the Insurers, concluding that the allegations in the underlying complaints did not trigger the Insurers’ duty to defend.  The parties agreed that the district court’s ruling was dispositive of the duty to indemnify; accordingly, the district court entered final judgment and Primary Arms appealed.

The Court’s Duty to Defend Analysis

The policies provided coverage for bodily injury or property damage caused by an “occurrence,” which was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  

The policies did not define “accident.”  Drawing from Texas law, which the parties agreed applied to the dispute, the court adopted a definition of “accident” as a “fortuitous, unexpected, and unintended event.”  Under Texas law, an act is not an accident where 1) an intentional act occurs and 2) that act causes “injuries that ordinarily follow from or could be reasonably anticipated from the intentional act.”  Notably, a different standard applies under New York law, which focuses on the insured’s intent to cause harm, rather than the foreseeability of injuries resulting from its conduct.  See, e.g., Olin Corp. v. Lamorak Ins. Co., 332 F. Supp. 3d 818, 844 (S.D.N.Y. 2018) (“the focus is on whether Olin subjectively expected and intended the specific damage that resulted from its waste-disposal practices”); Brooklyn Law Sch. v. Aetna Cas. & Surety Co., 849 F.2d 788, 789 (2d Cir. 1989) (holding that “a chain of unintended though expected or foreseeable events that occurred after an intentional act” constitutes an “accident”).  (See an earlier Coverage Corner post on this topic here.)    

Focusing solely on the factual allegations in the three underlying complaints, the court concluded that the claims against Primary Arms were premised on intentional conduct.  The complaints alleged that Primary Arms deliberately structured its business practices, marketing strategies, and sales channels to facilitate the sale of ghost gun components to customers who could not lawfully obtain completed firearms. The resulting proliferation of untraceable weapons, and the costs associated with their criminal misuse, were alleged to be foreseeable consequences of that conduct.

The court rejected Primary Arms’ argument that references in the complaints to negligence (i.e., non-intentional) theories triggered coverage.  The court explained that it is required to look only at the factual allegations in the underlying complaints and “ignore conclusory legal labels.”  Looking at the language of the complaints, the court found there were no allegations of Primary Arms negligently performing a deliberate act.  Rather, the complaints allege intended acts that were performed as intended.  Regardless, the court found that it did not matter if the theories were premised on negligent acts; the plaintiffs had not alleged a covered “accident” because the alleged injuries—including increased law enforcement costs—were the “natural and expected result of the insured’s actions.”

The court also rejected Primary Arms’ argument that “products-completed operations coverage,” which covers injury that “occur[s] away from premises you own or rent and arising out of ‘your product’ or ‘your work,’” independently triggered a duty to defend.  That coverage, the court explained, remains subject to the same requirement that the underlying claims arise from an occurrence: the policies do not have a separate or more permissive definition of “accident” that applies to products liability claims.   

Duty to Indemnify

Because the underlying complaints did not allege a covered occurrence, the court held that the Insurers owed no duty to defend.  It followed that there was also no duty to indemnify, as Texas law recognizes that the duty to indemnify is narrower and cannot exist in the absence of a potential duty to defend.