General Liability

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.


Court Rejects Insurer’s Expansive Reading of Data Breach Exclusion and Undefined Term “Data”

Many non-cyber policies include data breach exclusions, but few cases have addressed their scope.  In a recent case, a federal district court rejected an insurer’s broad interpretation of the term “data” as it was used in data breach exclusions in a multimedia liability policy. In Ellicott City Cable, the insurer contended that satellite television programming was “data” within the meaning of the exclusions.  The court found the term ambiguous, construed the ambiguity against the insurer, and ruled that the underlying lawsuit triggered the insurer’s duty to defend.  While the case did not involve a data breach, the decision demonstrates that data breach exclusions should be narrowly construed and also offers helpful guidance about interpreting the term “data” if it is undefined in a policy.

The underlying case involved a distribution arrangement between Ellicott City Cable and DirecTV, whereby Ellicott City Cable distributed satellite television programming to its customers. Apparently Ellicott City Cable was overzealous in serving its customers and allegedly distributed DirecTV’s programming beyond the scope of the contracts.  DirecTV sued Ellicott City Cable, alleging that Ellicott City Cable fraudulently obtained and distributed DirecTV’s programming.


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.


Laces Are Tied Tight on Arbitration Clauses When an Insurer Stands In the Shoes of Its Insured

Try as it might, Mitsui Sumitomo Seguros S.A. (“Mitsui”) could not kick an arbitration award that potentially freed its insured’s suppliers from liability for a 2007 incident at a Brazilian aluminum plant insured by Mitsui. Mitsui’s argument that it was not a party to the arbitration agreement between its insured—Alumina de Norte do Brasil S.A. (Alunorte), and the insured’s suppliers, Alstom Power, Inc. and Alstom Brasil Energia e Transporte Ltda—failed because the Mitsui-Alunorte insurance contract gave Mitsui a clear subrogation right and “an insurer-subrogee stands in the shoes of its insured.”

On Monday, June 20, 2016, Judge Hellerstein of the Southern District of New York held that Mitsui Sumitomo Seguros S.A. is bound by an arbitration clause between Alunorte and the insured’s suppliers, Alstom Power, Inc. and Alstom Brasil Energia e Transporte Ltda. Alunorte, a Brazilian aluminum refiner entered into a supply contract with Alstom Power and Alstom Brasil, a Brazilian power-generation service and equipment provider. The contract contained a clause stipulating that upon failure of good faith negotiations between the parties the disagreement would be arbitrated in New York under International Chamber of Commerce rules.

This case arises from an ICC ruling regarding two separate incidents involving products supplied by Alstom at the Alunorte facility, which resulted in lost property and profits. Mitsui sued Alstom in Brazilian courts for the indemnity payment it made to Alunorte following the incidents, alleging that Alstom was the cause of the damage. Alstom sought to have the claim dismissed in Brazil, and moved to the ICC in New York, per the arbitration clause in the supply contract. Mitsui entered a special appearance before the ICC, asserting that the ICC lacked jurisdiction in the matter. The ICC court claimed jurisdiction over the dispute and ultimately dismissed Mitsui’s indemnity claim against Alstom, finding that Alstom was not at fault for the incidents occurring in Alunorte’s facility and holding that Mitsui was bound to the arbitration agreement between Alunorte and Alstom as a subrogee of Alunorte.

Alstom sought to confirm the arbitration award in New York state court and Mitsui removed the case to the Southern District of New York. Mitsui filed a motion to dismiss Alstom’s petition, arguing that it was not bound by the arbitration clause provided in the supply contract, that the district court of New York lacked personal jurisdiction, and that dismissal was appropriate on forum non conveniens grounds. Judge Hellerstein found for Alstom and confirmed the award.


New York’s Highest Court Finds Policy Language Controls Allocation and Exhaustion Methods for Excess Coverage

In a major victory for policyholders, the New York Court of Appeals held on May 3, 2016 that manufacturers Viking Pump, Inc. and Warren Pumps, LLC are entitled to coverage under excess insurance policies for liability resulting from asbestos claims, and that the manufacturers are not required to exhaust the available primary policies before accessing the excess coverage.  This far-reaching ruling reaffirms the Court’s prior holdings that policy language is controlling in coverage disputes.


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.

Insurer Gets Smoked for Defense Coverage in Illinois

shutterstock_190454402An e-cigarette vendor has defense coverage because an Illinois federal judge found that the party suing it “has a very thin reed on which to rest a disparagement claim that is potentially separate and distinct from its trademark infringement claims.” The Court recently found in favor of the e-cigarette vendor seeking coverage for the defense of trademark related claims against it, construing ambiguities in the policy in favor of the insured.  The language at issue is typical of language in the personal and advertising injury coverage in commercial general liability policies.

Brent Duke and 21 Century Smoking, Inc. (the e-cigarette vendor) were sued by DR Distributors, LLC, CB Distributors, Inc., and Carlos Bengoa in a trademark infringement and unfair competition lawsuit.  21 Century put its insurer, Diamond State Insurance Company, on notice and Diamond defended the insured pursuant to a reservation of rights.  After some time, the insurer filed a declaratory judgment action seeking a determination that the underlying lawsuit is not covered by the insured’s policies and reimbursement of defense costs.  Century 21 filed a counterclaim for seeking continued coverage of its defense and reimbursement of defense costs.  The parties brought cross-motions for summary judgment.

21 Century’s CGL policies contained language standard to personal and advertising injury coverage, which obligated Diamond State to “pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury’” to which the insurance applies. Insurance is applicable to injury “arising out of . . . [o]ral or written publication, in any manner, of material that . . . disparages a person’s or organization’s goods, products, or services,” as well as any injury arising out of slogan infringement.  However, exclusions barred coverage for any injury “arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights” and injury “arising out of the unauthorized use of another’s name or product in your email address, domain name or metatag, or any other similar tactics to mislead another’s potential customers.”  Illinois courts regard “arising out of” as broad and vague and construe it in favor of the insured.  Claims for relief are excluded only if they would not have arisen “but for” the excluded conduct.

Diamond State argued that the intellectual property exclusion bars coverage for the complaint against 21 Century because it was almost entirely premised on 21 Century’s alleged infringement of DR Distributors’ trademark.  21 Century argued that several allegations in the underlying complaint of false or misleading statements could constitute elements of disparagement separate from trademark infringement.

The Court observed that disparagement is not defined by the policy and whether the allegations pointed to by 21 Century could constitute a claim of disparagement is unsettled law in Illinois, but that the underlying complaint and counterclaim adequately allege the prospect of a disparagement claim.  It reasoned that “because the underlying complaint alleged that 21 Century actively contacted customers of DR Distributors and made false and misleading statements regarding its affiliation with DR Distributors in order to sell those customers its competing products, it is conceivable that DR Distributors pleaded disparagement under the terms of the insurance policy.”

The policyholder prevailed in this case because the Court ultimately concluded that the potential disparagement claim triggered Diamond State’s duty to defend 21 Century. The decision affirmed Illinois precedent that “the insurer bears the burden of the underlying plaintiffs’ broad drafting.”

The Buss Stops Before the Last Frontier: Alaska Provides Policyholders Broader Defense Protection than California

shutterstock_132724088-2The 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.


Second Circuit Holds Ambiguity of Phrase “Caused Only By” Permits Coverage Where Uncovered Perils Contribute to Property Damage

shutterstock_283537649Imprecise usage of the word “only” in policy language may create ambiguities favorable to policyholders. The Second Circuit recently agreed with policyholders that their homeowners’ policy, which insured for property damage involving the collapse of a part of a building “caused only by one or more of the following” specifically named perils, provided coverage so long as a collapse was caused by one of the enumerated perils, regardless of whether a non-enumerated peril also contributed to the collapse. In an unpublished opinion, the Court rejected the insurer’s interpretation, which the district court had accepted, that coverage was limited to collapses exclusively caused by one of the enumerated perils.

The Court found not only that both interpretations of the plain language were reasonable, which should lead to a resolution of the ambiguity in the policyholder’s favor, but further determined that several considerations supported the homeowners’ interpretation. First, the Court explained that under settled New York case law on insurance contracts, the word “caused” implicates the concepts of proximate causation:  if a covered peril is the predominant cause of the loss, the concurrent operation of a non-covered peril will not defeat coverage. (See our recent coverage of the Fifth Circuit’s application of the concurrent-cause doctrine under Texas law.) The policy did not indicate any intent to override this established rule by drafting reasonably clear language. Moreover, the Court pointed out that the insurer obviously knew how to draft language to that effect because another provision in the same policy included a so-called “anti-concurrent cause” claims, which excluded certain perils from coverage “regardless of any other cause or event contributing concurrently.” Additionally, the Court observed that it would be reasonable for a homeowner whose home collapsed predominantly due to a listed peril to expect coverage.

The Court also dismissed the insurer’s contention that the charge from the district court to the jury was proper because the jury instructions used the same “caused only by” language as the policy. Rather, the Court found that the actual use of that phrase in the jury instructions either improperly altered the phase’s context from that in the policy or else preserved the ambiguity and impermissibly relegated the task of contract interpretation to the jury.

This decision reinforces the point that policyholders who pay close attention to the grammatical construction of policy provisions may find the key to obtaining the policy benefits for which they have paid. As the Second Circuit stressed, “most fundamentally, insurance policies are to be construed, and ambiguity assessed, in light of the reasonable expectations of the insured.”

Insurer’s Duty to Defend Is Triggered by Cause of Action Not Specifically Alleged in Complaint

shutterstock_245321842_400x300A recent federal district court decision demonstrates how the expansive duty to defend can even include unstated causes of action arising out of minimally alleged facts. U.S. District Judge Jon S. Tigar of the Northern District of California ruled that Federal Insurance Company had a duty to defend MedeAnalytics, a healthcare data analytics provider, against a breach of contract complaint by former business partners under the personal injury coverage of MedeAnalytics commercial liability policies—even though the complaint did not assert a cause of action for personal injury. Instead, the complaint alleged that MedeAnalytics made disparaging comments about its former business partners to their employees to lure away the employees. Federal refused to defend MedeAnalytics, which subsequently settled the underlying lawsuit.

The Court granted MedeAnalytics’ motion for partial summary judgment and held that the underlying complaint, although short of detail, sufficed to give rise to potentially covered liability for a libel or slander claim because it alleged publication to third persons and alleged disparaging content. These allegations, the Court explained, are sufficient to trigger the duty to defend under California law, which does not require additional detail in the complaint. The court also rejected the insurer’s contention that the complaint needed to allege that the disparaging statements were false. Even though the underlying complaint did not state a cause of action for libel or slander, the duty to defend nevertheless arose where, under the facts alleged, the complaint could be amended to state a potentially covered claim.

The Court also rejected the insurer’s argument that a breach of contract exclusion eliminated the potential for coverage. Instead, the exclusion for “personal injury arising out of breach of contract” applied only to actual breaches of contract rather than alleged breaches of contract. Other provisions in the policy that included “actual or alleged” language demonstrated that the parties had known how to exclude alleged breaches of contract if that had been their intent. The exclusion did not eliminate the potential for coverage because Federal failed to advance conclusive evidence of an actual breach of contract.

This decision affirms the expansive scope of the duty to defend and illustrates that policyholders should not dismiss out of hand the possibility of coverage where a complaint does not expressly assert a covered cause of action.