Bad Faith

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.

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Early Data Breach Insurance Case Discusses Cyber Policy Coverage for Traditional Risks

shutterstock_287179454Last May, we told you that the “waiting has ended“ for courts to start weighing in on cyber insurance policies, as the District of Utah issued one of the first federal court decisions construing such a policy in Travelers Property Casualty, et al. v. Federal Recovery Services, Inc., et al., No. 2:14-CV-170. Although the claims at issue were not the sort of data breach and cybersecurity liability claims for which policyholders eagerly anticipate guidance, it was, as we noted, an important step in understanding how a court may approach these policies. In the first weeks of 2016, the Travelers court revisited the May 2015 decision, and affirmed its prior findings in favor of the insurer.

In the May decision, the court had found that under the cyber policy at issue, the insurer had no duty to defend its insured, a payment and account processing company, against tort claims alleging that the insured improperly—and intentionally—withheld customer payment and account data from the plaintiff, a gym network, the plaintiff had entrusted to it.

The policy at issue was a Travelers CyberFirst Technology Errors and Omissions Liability Form Policy. Under the policy, the duty to defend attaches when the plaintiff’s suit alleges an action by the insured that, if true, would constitute a covered claim under the policy. The insured sought coverage through an E&O module that provided coverage for “any error, omission, or negligent act.” The plaintiff alleged, however, that the insured acted with “knowledge, willfulness, and malice.” The court held that because the complaint alleged intentional, instead of negligent misconduct, the insurer did not have a duty to defend.

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Last But Not Least: Insurer Cannot Defeat Policyholder’s Damages Claims By Offset of Settlement Payments

shutterstock_118419133Being the last insurer to the settlement table may have lost some of its luster in California.

On January 22, 2015, California’s intermediate appellate court decided McMillin Companies, LLC v. American Safety Indemnity Co., in which McMillin, a contractor, sued 12 liability insurers for breach of contract and breach of the covenant of good faith and fair dealing after the insurers refused to defend McMillin against underlying construction defect lawsuits.

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