Waiting Room Solutions v. Excelsior Insurance Company

Background

Waiting Room Solutions, Limited Liability Limited Partnership sued Excelsior Insurance Company and Liberty Mutual Group Inc. The action sought declarations that Excelsior had a duty to defend Waiting Room and non-party Lawrence Gordon in an underlying state-court action and a duty to indemnify them under the Excelsior policy.

The underlying action was brought by five former Waiting Room employees. They alleged that an employee placed a camera disguised as a pen in a women’s restroom, that Waiting Room personnel handled or deleted recordings, and that Waiting Room later demanded secrecy about the incident. The underlying plaintiffs asserted ten causes of action. The state court dismissed all but gender-discrimination claims brought by three plaintiffs and intentional-infliction-of-emotional-distress claims brought by all five plaintiffs.

Excelsior initially agreed to defend Waiting Room subject to a full reservation of rights. In April 2019, Excelsior denied coverage, denied any duty to defend or indemnify, and withdrew from the defense. Waiting Room then filed this coverage action in New York state court, and defendants removed it to federal court based on diversity jurisdiction. Waiting Room filed a cross-motion to dismiss for lack of subject-matter jurisdiction, while defendants moved to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).

Subject-Matter Jurisdiction

The court denied Waiting Room’s jurisdictional motion. It held that the amount in controversy was more than $75,000 because the potential value of the duty to indemnify was substantial and Waiting Room’s own estimate of defense costs through trial was also well above $75,000. The court therefore concluded that federal diversity jurisdiction existed.

Insurance Coverage

Applying New York law, the court explained that the insured must show that the underlying allegations fall within the policy’s coverage. The policy covered damages because of “bodily injury,” “property damage,” “personal injury,” or “advertising injury.” It covered bodily injury or property damage only when caused by an “occurrence,” defined as an accident.

The policy’s definition of “personal injury” was limited to specified offenses, including false arrest, malicious prosecution, certain wrongful entry claims, defamation or product disparagement, and publication violating a person’s privacy rights. The court held that the remaining gender-discrimination and intentional-infliction-of-emotional-distress claims did not fall within that definition.

The court also held that the remaining claims did not arise from an occurrence. The gender-discrimination claims alleged intentional disparate treatment, and the underlying state-court decision allowed those claims to proceed based on Waiting Room’s alleged intentional demand for secrecy. The intentional-infliction-of-emotional-distress claims likewise rested on intentional conduct that allegedly directly harmed the former employees. Because the claims did not involve an accidental event under the policy, they were not covered.

The court concluded that there was no possible factual or legal basis for requiring Excelsior to indemnify Waiting Room under the policy. As a result, Excelsior also had no duty to defend the underlying action.

Waiver and Estoppel

Waiting Room argued that Excelsior had waived its right to deny coverage or was barred by estoppel because it waited about a year after the state court dismissed most of the underlying claims before denying coverage. The court rejected those arguments. Excelsior’s initial letter expressly reserved its rights, and Waiting Room did not allege that the reservation was defective. The letter also allowed Waiting Room and Gordon to select their own counsel.

The court further held that New York Insurance Law § 3420(d)(2), which requires timely disclaimers for certain accident-related bodily-injury claims, did not apply because the underlying claims fell outside the policy’s coverage from the outset rather than being barred by a policy exclusion or breach of a policy condition.

Disposition

The court granted defendants’ motion to dismiss under Rule 12(b)(6), denied Waiting Room’s cross-motion to dismiss for lack of subject-matter jurisdiction, directed the Clerk to terminate the motions, and closed the case. The court did not reach defendants’ additional arguments concerning attorneys’ fees or Liberty Mutual’s request for dismissal.