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.
Insurers’ recalcitrance to providing coverage for the “Business E-mail Compromise” (BEC) scam is a topic we’ve frequently discussed. On Monday, the Ninth Circuit heard oral argument in a BEC coverage action, Taylor & Lieberman v. Federal Insurance Company, a California case we’ve previously described.
The fraudster in that case sent spoofed e-mails in 2012 to an accounting firm purporting to be from one of the firm’s clients. At the “client’s” request, the accounting firm executed two wire transfers from the client’s bank account, over which the firm had power of attorney, in amounts just under $100,000 each to banks in Malaysia and Singapore. The firm finally detected the scheme when it called the client for confirmation after receiving a third e-mail requesting another transfer of $128,000 to Malaysia. The accounting firm was able to recover most of the first wire transfer but nothing from the second, resulting in a $100,000 loss to the client’s account, which the firm restored.
The Ninth Circuit recently held in St. Paul Mercury Insurance Co. v. Federal Deposit Insurance Corp. that a D&O policy’s insured-versus-insured exclusion does not prevent the Federal Deposit Insurance Corporation (“FDIC”), as receiver of an insured failed bank, from obtaining coverage under such policy. In so doing, the Court of Appeals follows the Eleventh Circuit and other courts that have addressed this issue and sided with the policyholder. This decision, while unpublished, is a timely one for policyholders, as regulators including the FDIC litigate these claims arising out of the financial crisis. Just this week, a Georgia jury returned a verdict in favor of the FDIC that awarded almost $5 million in damages for claims relating to a bank’s negligent management by its former officers and directors.
The FDIC brought claims against the former directors and officers of Pacific Coast National Bank for negligence, gross negligence, and breaches of fiduciary duty. The FDIC alleged that the former directors’ pursued an aggressive lending strategy, failed to ensure that loan practices complied with the bank’s policies, and inadequately supervised subordinate officers, which led the bank to suffer millions of dollars in losses. The insurer, The Travelers Companies, Inc., which comprises appellant Saint Paul Mercury Insurance Company, filed a declaratory judgment action to establish that the policy does not cover the FDIC’s claims. Considering the parties’ cross-motions for summary judgment on the action, the district court rejected Travelers’ contention that the exclusion barred coverage, holding that the exclusion did not expressly bar claims by the FDIC.
On appeal, the key issue was whether the language of the exclusion, which barred coverage for claims brought “by or on behalf of any Insured or Company,” was ambiguous. The FDIC argued that the phrase “on behalf of,” as applied to its action against the directors, was ambiguous, relying on the facts that it initiated the underlying case almost three years after the bank’s failure and that no person from the bank had any involvement in bringing its claims.
The duty to defend is broad, as established, for example, in the California Supreme Court decision in Buss v. Superior Court, but is it possible to be even broader? The Alaska Supreme Court recently answered yes, handing a win to policyholders in that state.
The duty to defend—a promise by the insurer to pay for the policyholder’s defense against claims brought by a third party—appears in many liability policies and can be very helpful for a policyholder. Under the duty to defend, the insurer must defend both claims that are within the scope of the policy and those that may be covered by the policy—at least unless and until a court determines that those claims are not. Where there is a dispute between the insurer and policyholder as to whether certain claims are covered, to avoid a conflict of interest, a policyholder typically may choose to have the insurer pay for independent defense counsel.
Insurers that have paid for the defense of claims later determined not to be covered frequently demand repayment of their expenses. Of late, they have run into some difficulty trying to do so.
For example, as we previously reported, in recent years, several state and federal courts have rejected insurers’ attempts to recoup defense costs for non-covered claims absent express contractual language requiring the insured to repay those costs.
In answering questions posed by the Ninth Circuit, the Supreme Court of Alaska recently held that Alaska law goes further.
In 1991 Congress passed the Telephone Consumer Protection Act (“TCPA”) to protect customers from unsolicited telemarketing. It has since become an attractive avenue for consumer class action litigation. In the past, defendant-policyholders sought coverage under their Commercial General Liability (CGL) policies for costs incurred as a result of TCPA claims. When CGL policies began to include exclusions for TCPA claims, insureds began to seek coverage elsewhere, including under D&O policies. When presented with a TCPA claim, many D&O carriers have argued that coverage is precluded under the personal injury claim exclusion—particularly the “invasion of privacy” provision of the personal injury claim exclusion—found in the majority of private company D&O policies. While some courts have relied on this exclusion to bar coverage for TCPA claims, its application is questionable. Now the Ninth Circuit is about to weigh in.
In 2012, Los Angeles Laker fan David Emanuel sent a text message to a number posted on the scoreboard at the Staples Center during a game. He was responding to an invitation to attendees to text personal messages for the purpose of having them featured on the scoreboard. After sending his text, Mr. Emanuel received a promotional text back from the Los Angeles Lakers and incurred a charge from his phone company for the incoming text.
The Lakers’ response text message became the basis of a class action lawsuit brought by Mr. Emanuel on behalf of himself and others similarly situated. The lawsuit alleged that the Lakers violated the TCPA when the promotional response to Mr. Emanuel was sent. The California district court ultimately dismissed the case with prejudice, and the parties settled the case while an appeal was pending.
The Lakers turned to their insurer, Federal Insurance Co., for coverage related to the class action. Federal denied coverage and refused to defend the Lakers against the claims alleged in the lawsuit. Federal’s basis for denial was an exclusion for claims “based on, arising from, or in consequence of . . . invasion of privacy.”