Duty to Defend

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.


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.


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.

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.


“Escape” Clause Offers Insurer No Escape from Duty to Defend

shutterstock_127645646-2Houdini managed an escape from a straight jacket while suspended 40 feet in the air.  But that trick turned out to be easier than a primary insurer’s recent attempt to escape its duty to defend in California. In Underwriters of Interest Subscribing to Policy No. A15274001 v. ProBuilders Specialty Ins. Co., Case No. D066615, Ct. App. Dist. 4, Oct. 23, 2015 (“Underwriters”), the California Court of Appeal ruled that an “other insurance” clause in a CGL policy that purported to eliminate an insurer’s duty to defend if another insurer picked up the defense was unenforceable.

Underwriters filed an equitable contribution action against a co-insurer, ProBuilders, claiming ProBuilders had shirked its duty to pay a portion of defense costs that Underwriters had agreed to pay to defend a mutual policyholder in a construction defect case. ProBuilders claimed that it had no duty to defend principally based on the language of an “other insurance” clause in its policies. That clause stated that ProBuilders had the right and duty to defend the insured against any suit seeking damages to which the insurance applied, provided that no other insurance affording a defense against such a suit was available to the insured. ProBuilders argued that since Underwriters had agreed to defend the policyholder, there was other defense insurance available to the policyholder, thus excusing ProBuilders from its obligation to provide a defense. The trial court agreed.

Not so fast, the Court of Appeal found. It observed that the “other insurance” clause in the Probuilders’ policies was an “escape” clause—so named because if enforced, it permitted a primary insurer to escape the defense obligation it otherwise agreed to assume. Such clauses, which one court has described as permitting an insurer to escape “a seemingly ironclad guarantee of coverage” in the presence of other insurance, Commerce & Indus. Ins. Co. v. Chubb Custom Ins. Co., 75 Cal. App. 4th 739, 744-745 (1999), are disfavored under California law and are not enforced as written. As noted by the court, the “modern trend” in California is to require all primary insurers on the risk to contribute equitably to the policyholder’s defense on a pro rata basis, regardless of the literal language of the “other insurance” clauses in each of the policies. Notably, the Court of Appeal decision was influenced by two facts: (1) ProBuilders had issued a primary-level insurance policy, and (2) the ProBuilders policies might be the only policies that provided the policyholder a defense as to a portion of its claim (based on the policy period and geographic reach of the ProBuilders’ policies). Based on these facts and the “modern trend” of law, the appellate court found that the escape clause in the ProBuilders policies would not be enforced to bar Underwriters from seeking an equitable contribution of defense costs it had incurred.

The Underwriters decision forcefully reinforces important existing California law that an “other insurance” clause—regardless of its language—cannot relieve a primary-level insurer of its independent duty to defend its policyholder. The underpinning for this rule is sensible: where two insurers each owe a duty to defend and each has a conflicting “other insurance” clause in its policies, a policyholder should not be left without a defense (or in doubt about its defense) while insurers point fingers at one another. An “other insurance” clause is an appropriate equitable mechanism to apportion a covered loss among two or more insurers that share the same risk at the same level, but never at the expense of the policyholder. Underwriters confirms that even among insurers, an insurer cannot avoid an equitable contribution claim on the basis of an “other insurance” clause that purports to foist the entire defense obligation onto the other, at least where primary insurance is at issue and there is a possibility that the policyholder could be left without a defense for some portion of its claim.

Cumis is Catching On: Nevada High Court Adopts California’s Right to Independent Defense Counsel

shutterstock_28950121When an insurer agrees to defend its insured for a liability claim, it retains counsel to represent the interests of the insured, forming a so-called “tripartite relationship.” Often the interests of the insured and insurer are aligned: both want to avoid or minimize liability. Situations sometime arise where the interests of the insured and the insurer are in conflict, like when an insurer agrees to defend but reserves its right to deny coverage based on certain policy exclusions. In those cases, the defense counsel could have divided loyalty on how to defend the claim where it might espouse one theory to avoid liability for the insurer, but saddle the insured with uncovered liability. A classic example is when an insurer reserves its right to deny coverage for conduct found to be intentional and not negligent. The defense counsel can try to prove negligence and require the insurer to indemnify a judgment; or counsel could protect the interests of the party who pays the bills (and retains her on a consistent basis) and not fight against a finding that the insured acted intentionally.

Because of this possibility of a conflict, California pioneered a requirement for the insurer to retain independent counsel for the insured in the case San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc., Cal. Rptr. 494 (1984). The requirement was subsequently codified in a statute. Many states have adopted the requirement for independent counsel—so-called “Cumis counsel”—where an insurer has reserved its rights and created a conflict of interest. Nevada has now joined those ranks with the recent decision in State Farm Mutual Automobile Ins. Co. v. Hansen, Case No. 64484, September 24, 2015.


California Supreme Court Finds That Insurer Can Recoup Excessive Fees from Policyholder’s Independent Counsel

shutterstock_120116785The California Supreme Court ruled recently that Hartford Casualty Insurance Company can recoup payment of allegedly unreasonable and excessive fees it paid to the policyholders’ independent defense counsel from counsel itself, rather than from its policyholder. The Court acknowledged that the facts of the case before it were “unusual” and that its holding was narrow and limited to those facts.

The dispute arose after Hartford denied a defense to its policyholders, which were sued for various business-related torts. The policyholders initiated coverage litigation and obtained summary adjudication that Hartford owed a duty to defend and, because of its reservation of rights, was required to pay for independent counsel to represent the policyholders. The policyholders retained Squire Patton Boggs (US) LLP as independent counsel; Squire also represented them in the coverage action. After Hartford failed to promptly pay independent counsel’s defense invoices, the policyholders sought, and won, an enforcement order from the trial court. That order, drafted by Squire, stated that “‘[t]o the extent Hartford seeks to challenge fees and costs as unreasonable or unnecessary, it may do so by way of reimbursement after resolution of the [underlying action].’”

After the underlying action was resolved, Hartford, by way of a cross-complaint filed against Squire in the coverage action, sought reimbursement of $13.5 million in defense costs it had paid to Squire. Squire demurred, contending that Hartford’s right to reimbursement, if any, was against its insureds, not its independent counsel. The trial court agreed, and the Court of Appeal affirmed. The California Supreme Court accepted review.

The Court reversed, relying on the language of the order drafted by Squire. The Court found that allowing Hartford to seek reimbursement from Squire was “consistent” with the terms of the order, which “expressly preserved Hartford’s right to pursue reimbursement for excessive fees and grounded that reimbursement right in principles of restitution and unjust enrichment.” In allowing the insurer to purse a reimbursement claim against the law firm, the Court found no interference with the attorney-client privilege or the right of independent counsel to control the defense—an argument that found somewhat more traction in the concurring opinion. That opinion noted that “where the insurer and insured are bitterly divided and the insurer has forfeited its statutory oversight authority, counsel will face a conflict between its duty of loyalty to the insured and its understandable desire to avoid liability in a subsequent reimbursement action by the insurer.”

Because this was a narrow ruling, the Court expressly left open the broader—and arguably more important—question of whether a breaching insurer, absent a court order such as the one before it, “ought to be able to pursue anyone for alleged overpayments.” Stay tuned.