When Negligent Conduct Does Not Constitute an Accident

Background Facts

Edwin and Todd Lupo were officers and shareholders of Oak Park Marina, Inc., which owned and operated a public marina on the shore of Lake Ontario in New York. Oak Park maintained the marina, the restrooms, and shower facilities. In 1993 the Lupos installed hidden video surveillance cameras in the marina's restrooms and the changing areas, supposedly to curb vandalism and theft. They then played the videos at a local bar named "Cutters," which they also owned and operated, for the amusement of the patrons.

The Underlying Actions

In 1996 at least five suits were filed against the Lupos in New York Supreme Court (Monroe County). These complaints all alleged essentially the same facts: that the Lupos videotaped their female patrons and employees in various stages of undress without their knowledge; that they edited the videotapes; and that they then played them for themselves and their friends at Cutters.

All the complaints also pled essentially the same causes of action, including: (1) negligent infliction of emotional distress; (2) reckless and intentional infliction of emotional distress; and (3) publication of the videotapes without consent in violation of New York Civil Rights Law Section 51 (McKinney 1992).

The New York Appellate Court, Fourth Department, issued an opinion in one of the actions arising from the Lupos's alleged voyeurism. See Dana v Oak Park Marina, Inc., 660 NYS2d 906 (4th Dept 1997). At its core, the Dana opinion affirms a New York Supreme Court order refusing to dismiss the complaint in its entirety, holding that plaintiffs had pled a good cause of action for, inter alia, reckless and intentional infliction of emotional distress. See Dana, 660 NYS2d at 911. The court went on to rule that plaintiffs had a valid emotional distress cause of action, at least against Oak Park, sounding in negligence, under the New York General Business Law.

The Coverage Dispute

When the underlying actions were filed, the Lupos contacted London Underwriters, who had issued them a commercial general liability (CGL) insurance policy effective for the term February 28, 1992, to February 28, 1993 (the "Policy"). The Lupos requested that London Underwriters defend the underlying state actions. The insurers responded by filing suit in the U.S. District Court for the Western District of New York. The insurers sought a declaratory judgment that they had no duty to defend because:

1. The conduct alleged in the underlying complaints was not covered by the Policy; and
2. Even if it was, certain Policy exclusions, including one barring indemnification for "loss due to . . . any act of a dishonest character" (the "Dishonesty Exclusion") abrogated such coverage.

The District Court

The district court held that London Underwriters was obligated to defend both the Lupos and Oak Park under the Policy's Bodily Injury Endorsement. That Endorsement provided coverage for:

any and all claims for which [the Assured] may be held liable for damages arising out of accidents occurring during the term of this insurance as respects: (1) bodily injuries accidentally sustained....

The district court reasoned that under governing New York law, the term "bodily injury" extends to mental distress, even without physical manifestations. The district court concluded that the Lupos's alleged conduct was "accidental" and, thus, covered by the Bodily Injury Endorsement because the Lupos never "intended" to make the videos public and thereby cause plaintiffs emotional distress. The insurers appealed.

Was It an Accident?

The court reviewed New York precedent, noting that an "accident," under New York insurance law, is an event which, from the insured's point of view, "was unexpected, unusual, and unforeseen." Thus, damages arising from negligence constitute an "accident" for purposes of coverage. In addition, damages arising from an intended act may also be deemed accidental, so long as they arise out of "a chain of unintended . . . [subsequent] events." Conversely, there can be no coverage for damages that "flow directly and immediately" from an insured's intentional act.

Oak Park argued that the court was bound by the Fourth Department holding that the underlying complaints stated a cause of action against Oak Park for negligence-specifically for the breach of the statutory duty imposed by New York General Business Law Section 395.b(2) to refrain from installing hidden video cameras. Oak Park maintained that the district court correctly concluded that the damages suffered by plaintiffs arose from an "accident" because the Lupos never intended the videos to come to the attention of plaintiffs and thereby expose plaintiffs to emotional distress.

The court of appeals disagreed. It found it was obvious that there was nothing "accidental" about the Lupos's alleged conduct in this case. They intentionally installed the concealed video cameras. Then they intentionally exhibited the resulting footage in a bar. Whether or not the emotional distress was inflicted negligently, the harm "arose out of" conduct that was indisputably an intentional, albeit furtive, wrong. The court remarked that the only unintended or negligent aspect of the case was the Lupos's expectation that their victims would never discover the video voyeurism. The mere fact that the Lupos got caught does not constitute an "unintended . . . [subsequent] event" sufficient to make the resulting damage to plaintiffs "accidental."

The court also addressed two other issues, ultimately ruling in favor of the insurers on all issues. The district court's denial of a declaratory judgment to London Underwriters and the award of attorney fees to defendants was reversed. The case was remanded for entry of a declaratory judgment in favor of London Underwriters.

How Other Jurisdictions Would View the Dispute

In a case remarkably like Commercial Union, and which reached the same result, Trinity Universal Insurance Company v Cowan, 945 SW2d 819 (Tex 1997), the Texas Supreme Court held that the conduct of a grocery store clerk in developing and distributing "revealing" photographs of a customer was not considered an accident. In Texas, an event is determined to be "accidental" by its effect. Because the invasion of the customer's privacy was of a type that "ordinarily follows" from the clerk's conduct, and the injuries could be "reasonably anticipated from the use of the means, or an effect that the clerk was charged with producing," his conduct was not an accident.

In contrast to Commercial Union and Trinity, the highest court of Maryland found that intentional conduct that negligently caused harm does constitute an accident. In Sheets v Brethren Mutual Ins. Co., 679 A2d 540 (Md 1996), the court held that alleged damage from negligent misrepresentation resulted from an accident within the meaning of the policy. When a negligent act causes damage that is unforeseen or unexpected by the insured, the act is an "accident" under a general liability policy.

Questions Raised by the Cases

Practitioners are left with two questions: When do negligent acts constitute an accident? and When do they not? The answer lies in recognizing that when negligent acts are pled, a court must separate the means from the end, because the conduct itself is intrinsically intentional. ¹ The word "accident," as used in the policy does not distinguish between the "accidental means" versus the "accidental result." Most courts have recognized that unless the policy expressly requires either an accidental means or result, courts should interpret the term "accident" as encompassing either accidental means or results. An intentional act may be the subject of a cause of action pled in negligence. Therefore, in order to forfeit coverage, both the act and the harm have to be intended.

What's the Answer?

Even though the plaintiffs in Commercial Union and Trinity did not intend that their victims would ever learn that their privacy had been violated, the courts found that harm was inferred by the nature of the act. Some acts do not warrant insurance coverage, even if the perpetrator had no intention of getting caught.

The puzzlement of Commercial Union, however, is that the court was faced with the law of the case holding that the injured plaintiffs had a valid cause of action against the insured for negligent infliction of emotional distress arising from the violation of the privacy law. Merely because the cause of action was pled in negligence did not convince the court of appeals that there was a potentiality of unintended and unexpected harm. Rather, the court held that there was nothing "accidental" about the insured's alleged conduct. The conduct was heinous.

The court's conclusion was based on the assumption that the conduct had a substantial probability that it would result in harm. ² Thus, the court concluded that the "means" was intentional, and the "end" was so likely to have resulted in harm that it was as if the harm was intended.

Practical Advice

Commercial Union Assurance Co. v Oak Park Marina, Inc., is a wake-up call to insurance coverage lawyers. Lawyers may jump to conclusions based on the nature of the pleading in the underlying lawsuit. In this instance, the coverage lawyers who argued that the "occurrence" analysis ended with the ruling that a valid cause of action for negligence existed in the underlying suit were proved wrong.

Similarly, Sheets v Brethren Mutual proves that coverage lawyers may find themselves wrong if they conclude that no duty to defend exists merely because fraud is the only cause of action pled. Fraud may often be proven with the same elements as negligent misrepresentation which does not support a per se finding that the resultant harm was substantially likely to occur.

The facts are ever important, as no coverage issue is decided in a vacuum. Context is everything. The application of the words to the factual situation will continue to be determinative of the outcome of the coverage debate, not abstract tests or rules recited mindlessly.