CGL

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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5 Insurance Issues To Consider In Tech Transactions

A version of this article originally appeared in Law360 on August 25, 2016.

Technology services and software companies frequently face insurance issues when negotiating their intellectual property license or other services agreements, particularly in this era of data breaches and cloud computing. Numerous questions present themselves. Which party bears the risk in the event of a data breach? Does the company providing the indemnities have insurance to stand behind them? Whether your company is providing a service, engaging a vendor or negotiating a license agreement, keeping these five insurance issues top of mind can help safeguard your continued success.

Insurance as an Indemnity Backstop

Indemnification provisions are standard in commercial agreements, and these provisions frequently include boilerplate language that may be overlooked by a party. While such a provision will serve as the primary risk transfer mechanism in the agreement, insurance can provide an important backstop. If your company is providing the indemnity, you will want to check your policies to see if they provide coverage for the potential liabilities at issue. Many policies, including commercial general liability (CGL) policies, exclude coverage for liabilities assumed under a contract. For example, the Insurance Services Office (ISO) standard CGL form includes an exclusion barring coverage for bodily injury or property damage the policyholder is obligated to pay “by reason of the assumption of liability in a contract or agreement.” The exceptions to this are if the policyholder has the liability absent the contract or if the contract was previously identified as a covered “insured contract.” Other policies, however, such as technology errors and omissions (tech E&O) policies, do not include this limitation. Some tech E&O policies state that a breach of contract exclusion does not apply (and thus the policy provides coverage for) liability “assumed in any hold harmless or indemnity agreement.” If your company is being indemnified by the counterparty party, you will want to know whether that company has the financial resources, including insurance coverage, to stand behind the indemnity.

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Renowned Intellectual Property Jurist Restricts Applicability of IP Exclusion

A company facing IP-related claims might not look to its CGL policy (or other policies) for coverage. However, a recent decision from a leading voice on intellectual property suggests taking a closer look at the allegations and the policy. Last week, U.S. District Court Judge Ronald M. Whyte of the Northern District of California ruled that an intellectual property exclusion in a CGL policy does not apply to claims of breach of a patent license or patent misuse, or to allegations of harm resulting from false accusations of patent infringement. Judge Whyte’s order finding a duty to defend is an initial victory for Tessera, a developer of semiconductor technologies, in an ongoing battle with its insurer over coverage for a lawsuit brought against Tessera by Powertech Technology (PTI) in 2011.

In the underlying lawsuit, PTI alleged that Tessera had breached a patent licensing contract between the parties by initiating an investigation by the U.S. International Trade Commission (ITC). In that ITC investigation, Tessera allegedly falsely accused PTI’s products of infringing on Tessera’s patents and thereby disrupted PTI’s relationships with its customers. PTI also alleged a damages claim for patent misuse, but that claim was dismissed. Tessera and PTI settled the suit in 2014.

Tessera sought defense and indemnity against PTI’s claims under the personal injury coverage in its CGL policy. According to Tessera, PTI’s allegations supported covered claims for defamation, disparagement, malicious prosecution, and abuse of process under the policy. In response, the insurer sought a declaratory judgment that it had no duty to defend Tessera. Initially, the court agreed with the insurer. The Court found that PTI would be barred from bringing a defamation or disparagement claim under California’s statutory litigation privilege and that PTI could not bring a malicious prosecution or abuse of process claim because it was not a named party in the ITC proceeding. The court did not reach the applicability of the intellectual property exclusion.

On appeal, however, the Ninth Circuit reversed, finding that PTI had alleged facts that would have supported a potential claim for product disparagement. This was sufficient to trigger the insurer’s duty to defend under the policy’s personal injury coverage. (We recently covered a similar decision in Illinois in which a potential disparagement claim triggered the duty to defend.) The panel disagreed with the district court on the significance of California’s litigation privilege, explaining that even a “slam-dunk” privilege or defense does not affect an insurer’s duty to defend. The Ninth Circuit remanded for the district court to consider the applicability of the intellectual property exclusion in the first instance.

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Fourth Circuit Finds Potential Coverage For Data Leak As Publication Under CGL Policy

shutterstock_72943936_400x300This week, a Fourth Circuit panel in an unpublished decision validated arguments long made by policyholders: that commercial general liability policies may provide coverage for certain data breach liabilities. In this case, Travelers Indemnity Company v. Portal Healthcare Solutions, the appellate court affirmed the district court’s 2014 ruling that an insurer had the duty to defend a company that provides electronic medical record management services in a class action alleging that the company made patients’ confidential records publicly accessible by posting the records to an unsecured public website.

The policyholder, Portal Healthcare Solutions, under a contract with a New York hospital for the storage and maintenance of its patients’ confidential medical records, arranged to store the records electronically. The records were allegedly not stored in a secure manner. Two patients discovered that their hospital records were publicly viewable through the first link returned by a Google search on their names. In 2013, the patients brought a class action suit in New York against Portal for negligent storage of confidential medical records.

Portal had coverage under the personal or advertising injury provisions of its commercial general liability policy for damages arising from “the electronic publication of material” that “gives unreasonable publicity to a person’s private life” or that “discloses information about a person’s private life.” In a declaratory judgment action initiated by the insurer, the Eastern District of Virginia granted summary judgment to Portal, holding that the insurer had a duty to defend Portal against the class action.

The Fourth Circuit affirmed the district court’s judgment on its reasoning.  Portal’s alleged conduct of exposing medical records to online searching of a patient’s name fell within the plain meaning of “publication”: “to place before the public.” The court rejected the insurer’s arguments that (i) there was no publication, because Portal never intended to expose the records and (ii) there was no allegation that any unauthorized person actually accessed any of the records.

This week’s decision contrasts with an earlier decision of the Connecticut Supreme Court in Recall Total Information Management v. Federal Insurance Company, which we discussed last year. In that case, the Connecticut high court found no CGL coverage for claims arising from computer tapes containing employees’ personal information that fell off a van and were apparently taken by an unknown person. The district court in Portal Healthcare Solutions distinguished a single thief’s accessing the tapes in Recall from the posting of information on the internet before three billion people in Portal.

We have long asserted that there is coverage for certain data breach claims under the personal and advertising injury provisions of CGL policies. And while the Fourth Circuit’s decision validates that view, its impact may be limited. First, insurers will certainly argue that the facts of this unpublished decision—the posting of unsecured information on the internet—is different from situations in which hackers gain unauthorized entry to protected information. And, second, fewer and fewer policyholders are relying on CGL policies for coverage of data breach and cyber risks. For years now, insurers have marketed specialized cyber policies, in part by persuading policyholders that their CGL policies did not cover such risks, and by adding cyber exclusions to CGL policies. But even so, Portal may make a meaningful difference for insureds who do not have a cyber exclusion on their CGL policy if they don’t have any cyber insurance at all or if data breach litigation exhausts their cyber policy limits.

One Little Word: New York Federal Court Rejects Attempt to Broaden Employer’s Liability Exclusion

shutterstock_211545946So much depends on a single word! Recently, a New York federal court refused to construe an employer’s liability exclusion in a CGL policy to bar coverage for a bodily injury suit brought by the employee of an insured parent company against a subsidiary insured under the same policy as the parent. Considering both the language and purpose of the exclusion, this was the right outcome. But it might have come out the other way if one three-letter word in the policy had been different.

In Hastings Development, LLC v. Evanston Insurance Co., the insured subsidiary sought coverage under its CGL policy for a suit brought against it by an employee of its parent company (which also was insured under the policy), after the employee was injured while operating a mixing machine owned by the subsidiary in a building the subsidiary also owned. The employee alleged that the subsidiary was both negligent and reckless in operating the mixing machine. Initially, the employee also alleged that his employer, the parent company, was vicariously liable for the subsidiary’s alleged negligence, but later dismissed the claim against his employer after receiving workers compensation benefits.

Evanston, the plaintiff’s CGL insurer, denied coverage based on an employer’s liability exclusion in the policy. The exclusion provided that there was no coverage for any suit arising out of bodily injury to “an employee of the Named Insured arising out of and in the course of employment by any Insured, or while performing duties related to the conduct of the Insured’s business.” (Emphasis added). The insurer moved to dismiss on the basis of this exclusion, and the plaintiff cross-moved for summary judgment. The insurer argued that the exclusion applied because the underlying claimant was an employee of a Named Insured under the policy. The plaintiff-policyholder argued that the exclusion did not apply because the underlying claimant was not its employee (but rather an employee of its parent company) and the exclusion only bars coverage for suits by an employee against his or her own employer.

Applying New York law, the court determined that both parties’ interpretations of the exclusion were reasonable. The court reasoned that the phrase “an employee of the Named Insured” in the exclusion “could conceivably encompass employees of any of the Named Insureds . . . or be limited only to the Named Insured who employed the injured employee.” The court relied on a prior case in which a court held that a similarly-worded exclusion did not bar a suit brought against a general contractor by an employee of a subcontractor, reasoning that the purpose of an employer’s liability exclusion is to bar coverage when workers’ compensation coverage otherwise applies–which it doesn’t in a suit against an entity other than the injured employee’s employer. The court distinguished another case that involved a similar exclusion but referred to “any insured,” rather than “the Named Insured.” On the other hand, the court noted, the exclusion defined “employee” to refer to employees of “any Named Insured” – i.e., the definition of “employee” in the exclusion supported an argument that the exclusion applied to suits brought by employees of any Named Insured, while the exclusion otherwise referred only to employees of the Named Insured.

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“It’s a bird . . . it’s a plane . . . it’s ambiguous!” Texas Dissent Lambastes Insurer for Drafting Unclear Policy Language

shutterstock_194282381It’s rare that a judge publicly chastises an insurer for drafting a policy that’s difficult to understand and interpret. But recently, a dissenting judge on the Texas Court of Appeals did exactly that, accusing the insurer of instigating the coverage dispute by its failure to use language that clearly expressed the intent of the policy and making the court’s job in interpreting the policy language that much harder.

As with any other contract, an insurance policy should be interpreted to give effect to the parties’ mutual intent, which is usually inferred from the plain meaning of the policy language. A court will interpret a disputed term in its ordinary and popular sense, and avoid technical and legal meanings. Often, however, there is no such plain meaning. A policy term can be unclear on its face, inconsistent when read with other policy terms, or confusing when applied to a particular claim under the policy. And when a policy term is subject to two reasonable interpretations—generally, one proffered by the policyholder and the other by the insurer—it is deemed ambiguous.

The near universal rule applied to interpreting an ambiguous policy term is that a court must accept the reasonable interpretation most favorable to the insured—in other words, the insured’s proffered meaning. The reason for this rule—known as contra proferentem (literally, against the offeror)—is twofold. First, it addresses the historical disparity in bargaining power between policyholders and insurers. Most insurance policies are contracts of adhesion, drafted by the insurer and offered to the policyholder on a “take it or leave it” basis. Second, it assures that the policyholder actually receives the coverage it reasonably expected when it purchased the policy and paid a valuable premium.

But even when applying contra proferentem, courts rarely place public blame on insurers for drafting policy provisions that are less than clear. That was not the case, however, in Doe #1 v. National Union Fire Insurance Company of Pittsburgh, PA, in which the parties disputed whether a sexual conduct exclusion applied to all coverage for bodily injury under a CGL policy (as the insurer contended), or only to claims falling within a “Clergy Counseling Professional Liability Coverage” endorsement (as the policyholder contended). The trial court had found no ambiguity in the key policy language, found that the exclusion applied to all bodily injury coverage, and granted summary judgment to the insurer. The majority of the appellate court disagreed, finding the language to be ambiguous. It thus applied contra proferentem, reversed the trial court’s ruling, and remanded the case for further proceedings.

Seemingly annoyed about having to construe the complex and “odd[ly]” worded policy language, Chief Justice Quinn dissented, opening with the following remarks: “I wonder if insurance companies cause their own problems by writing policies laden with amendments, endorsements, and odd selection of words. The latter often hinder my ability to comprehend the numerous contracts and documents I am asked to read and construe on a regular basis.” He noted that the policy before the court contained “amendments and at least fourteen endorsements. Some are short. Some are long. Some are cryptic. And, together, they make the policy quite lengthy and difficult to read.”

Interestingly, Chief Justice Quinn did not find the disputed language to be ambiguous. Nevertheless, he openly blamed the insurer for writing a policy that was so unclear that it gave rise to a lawsuit. He concluded: “But, again, the entire dispute could have been avoided if the insurance company simply said what it purportedly intended. English is not a language of limited content. It encompasses more words than most people (including this writer) will ever read. Within that relatively limitless range, anyone charged with drafting a contract, policy, document or other writing can find terms that clearly express his intended thought. Writing is not magic; it is simply saying what you mean in a way for the eyes to read and the brain to comprehend. This, of course, presumes that the writer wants to be understood.”

Insurers would do well to heed these words.

Indemnification Claim Extinguishes Fire Caused by Insured v. Insured Exclusion

shutterstock_152247341The Fifth Circuit recently delivered good news to policyholders in a July 27, 2015 opinion that supports the argument that an indemnification right among co-insured parties may be covered, notwithstanding the insured-versus-insured exclusion. In Kinsale Insurance Co. v. Georgia-Pacific LLC, the indemnification right prevailed because the claim for which coverage was sought was for an indemnification request, not for the underlying property damage arising from a fire.

Georgia-Pacific hired Advanced Services, Inc. to demolish a plywood plant. Advanced Services, in turn, leased equipment for the work from H&E Equipment Services (“H&E”). When a fire in the plant damaged this equipment, H&E brought sued Advanced Services, which, in turn, brought a third-party demand for indemnification against Georgia-Pacific. Advanced Services held a Commercial General Liability policy issued by Kinsale Insurance Company, under which Georgia Pacific was an additional insured. The policy contained an insured-versus-insured policy exclusion that provided, in relevant part: “This insurance does not apply to claims or ‘suits’ for ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ brought by one insured against any other insured.”

Georgia-Pacific filed a claim under the insurance policy for any indemnification it might owe Advanced Services, but Kinsale Insurance denied the claim, citing the insured-versus-insured exclusion. The insurer then filed an action for a declaratory judgment that it did not owe indemnity to Georgia-Pacific, and the district court—applying Louisiana law—granted summary judgment in Kinsale’s favor. It held that the policy exclusion applied, as the original suit was for property damage, which is explicitly included in the exclusion.

The Fifth Circuit disagreed, finding that, because Advanced Service’s suit against Georgia-Pacific did not seek damages, but rather, indemnification, the exclusion did not apply. It was not persuasive to the court that the original action for which the indemnity was sought was for property damage, and the property damage claim was not brought by one insured against another. The court distinguished a prior Fifth Circuit case, Fidelity & Deposit Co. of Maryland v. Conner, pointing out that the exclusion in that case applied to any claim, without limitation based on the nature of the claim.

In making its decision, the court noted, “We do not deny that it is possible that Advanced’s indemnity claims could become a battle between two insureds over who, if either, was responsible for the fire and even whether there was shared responsibility. One central purpose of the insured versus insured exclusion no doubt is to keep the insurance company free from such litigation.” Nonetheless, the court found that the exclusion did not apply because this was not a claim for property damage, but one for indemnity.

The Fifth Circuit’s decision serves as a reminder for policyholders to look carefully at their insured versus insured exclusion to see if it is broadly worded to apply to all claims, or whether it is limited to certain types of claims, such as bodily injury and property damage in this case.

Don’t Get Burned: Tips for California Companies Facing Increased Risk of Wildfires

shutterstock_257553751California is in the midst of one of the worst droughts on record. In January 2015, Governor Jerry Brown issued an executive order that requires cities and towns to reduce water use by 25%. The $45 billion agriculture industry was spared from the mandatory water reduction, but nonetheless, the drought is expected to cause $2.7 billion in agriculture industry losses.

An important additional threat to California’s economy is the increased risk of wildfires following from both the drought and the water use controls. Over recent decades, wildfires have caused massive damage in California. According to one study, California is home to “[m]ore than 80% of all wildfire insured losses in the period 1980–2011 and the five costliest wildfire events for the insurance industry[.]”

The current drought conditions have created an even greater risk of catastrophic wildfires. The insurance industry recently warned that “the potential for wildfire has reached a peak that could cause $237.3 billion in property damages in high-risk areas.” This risk is exacerbated by commercial and residential development in rural areas that are more prone to fires than urban areas. And as of July 11, 2015, the California Department of Forestry and Fire Protection recorded almost 1,000 more wildfires than during the same time period in 2014.

Considering these depressing statistics, it is important for companies to manage their wildfire exposure by maximizing insurance coverage, to the extent practicable; obtaining as much coverage for wildfires as is possible in current policies; remaining alert to proposed changes in their insurance programs; and scrutinizing coverage available through subcontractors.

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Well-Suited: The Texas Supreme Court Finds Insurers Have a Duty to Defend EPA Administrative Proceedings

shutterstock_173804858Most standard form commercial general liability insurance policies provide that the insurer has the duty to defend any “suit” against the insured that seeks damages covered under the policy. In CGL policies issued before 1986, the term “suit” was not defined. And while all courts could agree that a “suit” encompasses a civil complaint filed in a court of law, they disagreed on whether proceedings that take place outside the courtroom, such as the administrative process initiated by a government ”PRP” notice, are “suits” that give rise to the insurer’s duty to defend.

The Texas Supreme Court is the latest court to weigh in on this issue, and its decision is good news for policyholders. On June 26, 2015, in a 5-4 decision, the court held that the term “suit” encompasses administrative enforcement actions by the Environmental Protection Agency under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA).

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Would Rot Damage Occur in a Garage If No One Were Around to See It? Yes, Judges Rule

shutterstock_230906596-2For centuries, the question whether an event even occurs before you know about it has perplexed philosophers. And judges. The U.S. Court of Appeals for the Eleventh Circuit last week came to a common-sense conclusion.

When developers or contractors are sued for defective construction, there’s often confusion over which insurance policy provides coverage. Commercial General Liability (CGL) policies cover property damage that “occurs” during the policy period, but this begs the key question – when is the damage deemed to “occur”? Is it when the work was done? Or when the property was damaged? Or when the damage was discovered?

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