Court Holds that Insured’s Expectations Do Not Override Language of Consumer Protection Exclusion

A New Jersey federal district court, applying New Jersey law, has held that a professional liability insurer was entitled to judgment on the pleadings on the basis that coverage for a complaint against its insured for violations of consumer protection laws was barred by the policy’s exclusion for consumer protection claims.  Hanover Insurance Co. v. Retrofitness, LLC, 2017 WL 4330366 (D.N.J. Sept. 29, 2017).

A putative class filed a complaint against the insured alleging violations of the New Jersey Truth-in-Consumer Contract, Warranty and Notice Act, New Jersey Retail Installment Act, New Jersey Consumer Fraud Act, and New Jersey Health Club Services Act.  The insured tendered the suit to its miscellaneous professional liability insurer, and the insurer denied coverage and sought a declaratory judgment that it had no duty to defend the underlying action.

In the insurer’s motion for judgment on the pleadings, it argued that that the consumer protection exclusion barred coverage for the suit and that the underlying action did not allege any Wrongful Acts because it did not allege any negligent conduct.  The exclusion barred coverage for claims “[a]rising out of . . . violations of any local, state or federal consumer protection laws.”  The insured did not dispute that the statutes it was alleged to have violated were consumer protection laws.  Instead, the insured argued that because the plaintiffs asserted causes of action against it in its capacity as a franchisor, they necessarily alleged negligence by implication.  The court concluded that this argument was without merit, noting that even if the plaintiffs had alleged negligence arising out of the violations of the consumer protection statutes, the exclusion would still apply.

The court also rejected the insured’s argument that it was entitled to coverage based on its “reasonable” expectation that the policy it purchased covered the risk inherent in its franchisor/franchisee relationships.  The court determined that the consumer protection violation exclusion was unambiguous and unequivocal, and that coverage is determined by what the insured actually purchased and not what it hoped to purchase.  The court did not decide whether the underlying suit alleged Wrongful Acts that would trigger the policy’s insuring agreement, because the consumer protection exclusion was dispositive as to the insurer’s duty to defend.