A foundation that until recently authenticated Andy Warhol works can proceed with a lawsuit against its insurer seeking coverage for millions in legal fees it incurred defending a now-settled lawsuit accusing the foundation of rigging the authentication process for its own benefit, a Manhattan judge has ruled.

Manhattan Supreme Court Justice O. Peter Sherwood (See Profile) on Dec. 6 rejected several arguments put forth by Philadelphia Indemnity Insurance Company claiming that it was not liable for the fees under a series of policies it issued to the Andy Warhol Foundation for the Visual Arts Inc. The case is Andy Warhol Foundation v. Philadelphia Indemnity Insurance, 
650917/11.

Until early this year, the Warhol Foundation ran the Andy Warhol Art Authentication Board, a 16-member board that evaluated submitted artworks to determine whether they were authentic Andy Warhol works. The foundation shut down the board in part because of the legal fees it incurred defending lawsuits challenging its findings, including the $4.6 million plus interest at issue in the case against Philadelphia Indemnity.

According to Sherwood’s decision, the foundation bought four liability insurance policies from Philadelphia Indemnity in 2002 and 2003, with a total aggregate limit of $24 million. The foundation maintains that it bought the policies specifically to protect itself against lawsuits by collectors angry that their works were deemed not 
authentic.

In 2001, Joe Simon-Whelan submitted what he believed was a self-portrait by Warhol for authentication. The board determined that it was not authentic. He submitted it again in 2003, and the board members said they would conduct further research, but refused Simon-Whelan’s request to meet with them to argue for the work’s authenticity.

In 2007, Simon-Whelan filed a putative class action against the board and the foundation, alleging they were conspiring to control the market in Warhol works.

In 2010, another plaintiff, Susan Shaer, filed a substantially identical suit. However, Simon-Whelan and Shaer eventually dropped the suit, conceding that they didn’t have enough evidence to back up their case (NYLJ, Nov. 15, 2010).

Shortly after the case was dropped, the foundation sued Philadelphia Indemnity, which had refused to cover the fees it incurred in the litigation, seeking to compel the insurer to pay out under its policies.

The insurer moved for summary judgment. It pointed to exclusions in the policies disclaiming coverage for liability arising from furnishing or failing to furnish certain specified “professional services,” including the services of an attorney, architect, engineer, physician, dentist or psychologist, among others.

The insurer argued that the art evaluation service provided by the Authentication Board was such a professional service, even though art authentication was not one of the listed services and the foundation maintained that it had bought the insurance policies specifically to protect itself from liability arising from its authentication services.

Sherwood rejected the insurance company’s argument, citing the Appellate Division, Second Department’s decision last year in Bentoria Holdings v. Travelers Indemnity, 84 AD3d 1135, 1136, which held that, for a policy to exclude liability from coverage, it “must do so in clear and unmistakable language” and be “subject to no other reasonable interpretation.” Sherwood noted that the decision put a “heavy burden” on insurers.

Philadelphia Indemnity “cannot carry its burden, at least as to the Professional Service Exclusion in the 2002 D&O Policy,” he wrote. “The Exclusion lists specific occupations that involve specialized knowledge, training or skill. Authentication services is not listed.”

Sherwood also rejected Philadelphia Indemnity’s argument that the foundation had not made good faith efforts to get the fees from Simon-Whelan and Shaer. He said the foundation had investigated and concluded that the two lacked the ability to satisfy any judgment against them, making further litigation against them “pointless.”

“The Foundation was forced to defend two meritless but costly lawsuits, and PIIC has wrongfully refused to honor its obligation under the policies to reimburse us for those costs,” Michael Straus, chair of the foundation, said in an emailed statement. “We therefore intend to pursue a full recovery of the money from our insurer for the benefit of the artists and museums who depend on us for grants.”

“This important victory eliminates the core legal issues in the case—neither the D&O professional services nor Lanham Act exclusions apply, and the Foundation was well within its rights under the Standstill Agreement to pursue this lawsuit against PIIC,” Nicholas Gravante Jr., a Boies, Schiller & Flexner partner who is lead counsel for the foundation, said in an email. “The Foundation bought the insurance policies for exactly the circumstances at issue, and we are pleased that the Court has required PIIC to comply with them.”

The motion was argued by Luke Nikas, an associate at Boies Schiller. The firm also represented the foundation in the underlying litigation against Simon-Whelan and Shaer.

Eric Sauter, a partner at Wilson Elser Moskowitz Edelman & Dicker who represents the insurer, could not be reached.

@|Brendan Pierson can be contacted at bpierson@alm.com.