Breaking Up is Hard to Do: Ninth Circuit Confirms Insurer’s Duty to Defend Ends Only When Case Clearly No Longer Has Potentially Covered Claims

On January 27, 2017, the Ninth Circuit affirmed a California district court’s rulings and jury findings that an insurer breached its duty to defend, recognizing that under California law, the expansive duty continues until the case clearly contains no potentially covered claims. The court rejected the insurer’s reliance on the policy’s prior noticed claims exclusion, and affirmed the finding that the insurer denied coverage in bad faith because the insurer anticipated denying the claims from the outset.

In Millennium Laboratories, Inc. v. Darwin Select Insurance Company, Millennium Labs sought personal and advertising injury coverage for underlying cases brought by two of its rivals, Ameritox and Calloway, alleging false advertising. Darwin denied coverage, refusing to provide a defense under its commercial general liability policy. Millennium sued Darwin for declaratory relief to establish Darwin’s duty to defend, breach of contract, and bad faith. The district court granted Millennium summary judgment on the duty to defend, and the jury found that Darwin’s denial of coverage was in bad faith.

In its unpublished opinion, the Ninth Circuit affirmed the district court’s grant of summary judgment to Millennium establishing Darwin’s duty to defend because the claims raised the “possibility” of coverage under the policy. The Court found that Darwin knew from the outset of the claim that Millennium faced potential disparagement claims. Millennium’s tender of claims to the insurer included allegations that Millennium intended to harm Ameritox and instructed its sales reps to do the same, and engaged in a concerted plan to attack Calloway through marketing efforts. The tender also disclosed a presentation by Millennium’s general counsel that said Millennium’s goal was to put Calloway out of business by the end of the year. A sales pitch distributed to Millennium’s sales force at that presentation disparaged Ameritox, stating that Ameritox sold “bad science,” harmed patients, and required governmental oversight.

Although Darwin argued that a policy exclusion for prior noticed claims barred coverage because Millennium had reported  cases to its previous insurer, the Court disagreed. There, because the potential for disparagement claims based on the general counsel’s statements only arose during the Darwin policy period—and such amended claims and allegations in discovery responses were newly tendered to Darwin—Millennium could only have reported the events to Darwin. Combined with Darwin’s failure to cite precedent for applying a prior noticed claims exclusion for events during an occurrence-based policy period and the requirement that policy exclusions be interpreted narrowly, the Court found that the exclusion did not apply and Darwin had breached its duty to defend.

The Court also affirmed the jury’s finding that Darwin had breached the implied covenant of good faith and fair dealing. Evidence showed that Darwin had assigned the claims to an inexperienced employee who recommended further investigation, but Darwin did not conduct a real investigation and instead hired outside counsel in anticipation of a lawsuit. Because the evidence suggested that Darwin anticipated denying Millennium’s claims from the outset, the jury’s verdict was supported by the evidence.

Finally, the Court overturned the district court’s denial of Darwin’s request to terminate its duty to defend Millennium in one of the underlying cases. The Ninth Circuit confirmed that the insurer duty to defend continues so long as a potentially covered claim remains, including to post-trial motions and an appeal. The duty to defend terminated at the point of the judgment, because by the time of the appeal in that underlying case, it was clear that the case no longer involved potentially covered claims for disparagement.

This opinion reaffirms that California law, like the law of many states, recognizes a broad duty to defend where there is a mere potential for coverage.