Every policyholder in every industry should make sure that it in fact has obtained insurance covering the actual, specific risks presented by its line of business.

That point is the critical one driven home by the U.S. District Court for the Central District of California in United Specialty Insurance Company v. E-Cig Vapor Emporium, LLC, No. EDCV 18-0002 JGB (SHKx), 2018 WL 5098859 (C.D. Cal. Oct. 15, 2018).  While applicable to any business in any industry, this lesson is particularly valuable to businesses in certain newer industries – such as the vaping, e-cigarette, and cannabis industries – where the market for insurance may be more limited and the coverages offered may be more restrictive.

The policyholder in E-Cig Vapor Emporium was “a company specializing in the retail sale of vaporizers and vaporizer accessories.”  After some back and forth involving its reinsurer and the policyholder’s brokers, United Specialty Insurance Company issued a general liability insurance policy to the policyholder.  That policy, however, specifically excluded from its commercial general liability coverage “coverage for ‘Products-Completed Operations.’”  In other words, with limited exception, it excluded coverage for “all ‘bodily injury’ and ‘property damage’ occurring away from premises you own or rent and arising out of ‘your product’…”

Pause here and consider:  Isn’t that precisely the coverage that a company selling vaporizers and vaporizer accessories would want and need?  Wouldn’t it want and need coverage in the event a customer purchased a vaporizer, took it home, was injured using it, and then sued the company?

In fact – far from surprising – that happened.  In E-Cig Vapor Emporium, the policyholder was seeking coverage for an underlying lawsuit in which the underlying plaintiff alleged that “he suffered bodily injury and property damage when an electronic cigarette [that he bought from the policyholder] in the pocket of his pants caught on fire while he was at work, burning his leg, hand and clothes.”

The insurance company initially “agreed to defend [the policyholder] in [the underlying lawsuit], but reserved the right to recover defense expenses incurred to defend [the policyholder] if it was later determined no duty to defend existed.”  Thereafter, the insurer filed a coverage action and then sought summary judgment.

With little to no hesitation, the federal district court found that the policyholder was not entitled to coverage for the underlying lawsuit and that the insurance company was entitled to summary judgment:

The language of the insurance contract in question is not ambiguous.  Pursuant to the plain language of the insurance policy, bodily injury and property damage occurring away from the premises of the [policyholder’s] store and arising from [the policyholder’s] products or work were excluded from coverage.  Put more plainly, products liability claims are generally not covered by this insurance plan if they arise from events off the [policyholder’s] premises, [and the insurance company] was not obligated to indemnify or defend [the policyholder] from such claims, unless they were subject to one of several enumerated exceptions.

The court also thoroughly rejected the policyholder’s fallback argument that it was entitled to coverage due to one such exception (i.e., the so-called “transportation exception”).

More recently, on December 6, 2018, the district court granted the insurance company’s unopposed motion for default judgment against the underlying plaintiff, i.e., the injured individual, who was also named as a defendant in the coverage action.  See United Specialty Ins. Co. v. E-Cig Vapor Emporium, LLC, No. EDCV 18-0002 JGB (SHKx), 2018 WL 6629246 (C.D. Cal. Dec. 6, 2018).

E-Cig Vapor Emporium thus offers a cautionary tale for all policyholders.  Every policyholder should know and understand its insurance policies, what they cover, as well as what they do not cover.  Every policyholder also should ensure that it has the right coverage(s) for the risks presented by its line of business.  For example, a business that manufactures and/or sells products should make sure that it has products liability insurance.  Do not count on a court to rewrite an insurance policy and/or to find coverage where none exists.  As the U.S. District Court for the Central District of California observed: “It is not within the Court’s power to rewrite the policy such as to bind the insurer to coverage of risks that were not contemplated by either party at the time of the formation of the contract.”

Policyholders doing business in certain newer industries – such as the vaping and/or cannabis industries – should pay particular attention to this tale.  Many commercial general liability policies being offered for sale today to such businesses exclude coverage for products liability.  And even certain products liability policies being offered to such businesses exclude coverage in certain circumstances – exclusions that would gut the coverage being offered.

Insurance, though, is not worth much if it does not cover the risks a business actually faces.  Make sure it does.