Health Care Indus. Liab. Ins. Program v. Momence Meadows Nursing Ctr., 566 F.3d 689 (7th Cir. (Ill.) 2009)

Posted on August 6, 2009 by David Gauntlett

At issue were False Claims Act assertions against a healthcare insurance program by a former nurse. The court affirmed the district court’s finding of no defense. At issue was the alleged exposition of thousands of false charges Momence submitted to Medicare and Medicaid, which allegedly “failed to meet ‘professionally recognized standards of healthcare.’ 42 U.S.C. § 1320c-5(a)(2).”

The court denied any potential coverage under the CGL policy’s “property damage” and “bodily injury” provisions. Momence asserted that any damages that might result from counts one and two are “because of” the “bodily injury” suffered by

Momence residents, thereby triggering Healthcap’s duty to defend.

The injuries to the residents as alleged by the plaintiffs relate back to Momence's cost reports to the government where it certified that it provided quality services and care. Plaintiffs claim Momence knew that was false. The statutory damages they seek result from those allegedly false filings, and not from any alleged bodily injury to the residents. . . .

Under the FCA and the IWRPA, the plaintiffs do not have to show that any damages resulted from the shoddy care. See Horizon W. Inc. v. St. Paul Fire & Marine Ins. Co., 214 F.Supp.2d 1074, 1077-79 (E.D.Cal.2002) (citing 31 U.S.C. § 3729(a)) (“Liability under the FCA is based solely upon the creation or presentation of false claims to the government, not upon the underlying conduct used to establish the falsity of such a claim.”), aff'd, 45 Fed.Appx. 752 (9th Cir.2002). Instead, all the plaintiffs need to show is that Momence billed the government for services and a level of care that it knew it was not providing. See United States ex rel. Fowler v. Caremark RX, L.L.C., 496 F.3d 730, 740-41 (7th Cir.2007) (providing elements of FCA claim); see also Scachitti v. UBS Fin. Servs., 215 Ill.2d 484, 294 Ill.Dec. 594, 831 N.E.2d 544, 557 (2005) (noting the similarity between the FCA and the IWRPA and finding case law on the FCA “instructive” regarding the interpretation of the IWRPA).

Id. at 695-96.

Emphasizing this point, the court suggested that a False Claims Act suit is unlikely to generate CGL coverage since the operative wrongful conduct is simply the misrepresentation of a claim which will rarely implicate “advertising injury” or any form of “personal injury” itself even though the elements of predicate acts were describing why the claim was false may do so.

Other courts have recognized this distinction between the proof required for the FCA claim and the conduct underlying the false claims. They uniformly hold that an insurer is not obligated to defend a qui tam suit merely because the insurer would have to defend the insured against a suit for damages resulting from the insured's conduct underlying the qui tam action.

Id. at 695.

The court distinguished the only case urged by insured a qui tam action which ultimately resulted in an intervention suit by the impacted Southern California municipalities, Watts Industries, Inc. v. Zurich American Ins. Co., 121 Cal. App. 4th 1029, 18 Cal. Rptr. 3d 61 (2004).

Implicit in the court’s analysis of Watts is its view that even were the allegations as asserted by the actual injured party, in this instance a governmental entity, to trigger a right to a defense for that entity’s allegations, until an amendment to add the entity as a party the fact that a qui tam suit aligned with the insured’s interests could not give rise to potential coverage.

The court parted company with Momence’s view while agreeing that it is the factual allegations in the complaint, not the legal basis for liability of the plaintiff that controls, those facts must support a theory of recovery which alleges potential coverage and that theory must be raised in the complaint.

This view does not appear applicable to offense based coverage analysis and the case in which it is cited Ill. Emcasco Ins. Co. v. Nw. Nat’l Cas., 337 Ill. App. 3d 356, 271 Ill. Dec. 711, 785 N.E. 2d 905, 908 (2003) was in fact one for “bodily injury” as was true of the coverage sought in this fact scenario.

The court pointed out that the plaintiff in the underlying suit did not seek damages for substandard medical care which could be a form of bodily injury and as mere employees of Momence, not residents, as they lacked standing to sue on the resident’s behalf. Such claims are implicit in the court’s analysis that parties that lack standing to sue on their own behalf cannot meet the coverage criteria of the policy based on the questionable analysis of the 7th Circuit.

In BASF AG v. Great Am. Assur. Co., 522 F. 3d 813, 819 (7th Cir. 2008), applying Illinois law, which appears inconsistent with the logic in another case cited but not analyzed with specificity in this case, Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 223 Ill. 2d 352, 307 Ill. Dec. 653, 860 N.E.2d 307, 315 (2006). The potential to amend the suit where one of the qui tam litigant’s mother died a few weeks before Absher left Momence’s employ, in the court’s view was problematic because there were no factual allegations suggesting such a claim. This would not be a qui tam claim but would be a claim seeking distinct relief from that asserted, of which there was insufficient notice.

While an insurer certainly has a duty to defend its insured against any complaint that leaves open the possibility of coverage, Ill. Emcasco Ins. Co., 271 Ill.Dec. 711, 785 N.E.2d at 907, that duty is premised on the facts the parties to the underlying complaint actually alleged in their complaint, not on those facts that a nonparty to the suit could have alleged had it decided to sue as well.

Id. 696, n.9.

The court also found unavailing what it described as a tortured attempt to describe counts factually alleging emotional distress as a form of bodily injury since it viewed the employment related practice exclusion as foreclosing any coverage for same.

The court found that personal injury liability for disparagement must be caused by a medical incident under the terms of the professional liability policy and absent such allegations no coverage thereunder could be triggered.
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E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co., ___ F. Supp. 2d ___, 2008 WL 5396889 (N.D. Cal. Dec. 16, 2008)

Posted on January 23, 2009 by David Gauntlett

Analyzing implicit disparagement claims court noted,

At least one other jurisdiction has specifically addressed the issue of whether disparagement coverage can be triggered when a policy holder was not alleged to have disparaged a specifically identified product or business. See Knoll Pharmaceutical Co. v. Automobile Ins. Co. of Hartford, 152 F.Supp.2d 1026, 1037-38 (N.D.Ill.2001) (applying Illinois law). . . . In the litigation underlying the insurance coverage dispute in Knoll, the plaintiffs alleged that the policyholder had advertised its thyroid drug as “more effective than or superior to the other drugs available to treat hyperthyroidism” and had wrongly claimed that its drug was “not bioequivalent to competing products,” thereby disparaging competing manufacturers. Id. at 1036. Although the complaint in the underlying litigation did not allege disparagement of any specific competitors or products, the court in Knoll found a duty to defend because allegations of statements that the policyholder's drug was superior to other drugs were “disparaging in that they criticize the quality of other companies' ... products as being inferior.” Id. at 1038.

Id. at *5.

In finding disparagement by implication in E.piphany, the court noted that statements made by the insured that were allegedly false, it was the “only” producer of “all Java” “fully J2EE” software

solutions which was an “important differentiator” between competing products, even though some competitors offered products for these exact features was disparaging of one principal competitor, Sigma, who did not purport to have such capabilities.

 

The Court reasoned,

The gravamen of the Underlying Complaint, therefore, is that Plaintiff made false claims about the superiority of its own products, which clearly and necessarily implied the inferiority of Sigma's competing products, resulting in damages to Sigma.

Id. at *6.
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UMG Recordings, Inc. v. American Home Assur. Co., No. 06-56076, 2008 WL 4107315 (9th Cir. (Cal.) Sept. 2, 2008)

Posted on September 29, 2008 by David Gauntlett

The Ninth Circuit affirmed the district court ruling by Judge Pregerson. It concluded that American did not have a duty to defend Island Def Jam Music Group, a division of UMG, from a suit filed against Def Jam by TVT Records, Inc. and TVT Music, Inc. in a contract dispute respecting the right to produce and market recording music performances by a rap group known as Cash Money Click (CMC).

Property damage was unavailable because there was no “occurrence” as the damage was the result of an intended or expected event.

Shell Oil Co. v. Winterthur Swiss Ins. Co., 15 Cal. Rptr. 2d 815, 838 (Ct. App. 1993).

The allegations did not concern UMG’s good as TVT maintained ownership rights to the CMC album. Thus, it was of no moment that the Irv Gotti CD “announces the upcoming release of the CMC Album in November 2002,” making the album itself an “advertisement” so as to fall within the Policy’s coverage for infringement of copyright in your advertisement.

The court also found no personal injury coverage for disparagement:

Here, the statement that Def Jam mischaracterized something to the artists about TVT’s efforts to protect its own rights does not concern TVT’s goods or products. Neither does it state any inadequacy about TVT’s services to the artists. The allegation is so vague it is hard to say exactly what it means, but at most it merely alleges that TVT will not stand on its own rights, which is not disparagement of TVT’s services.

Id. at *2.

The slander argument was waived as it was not raised in the trial court pursuant to Monetary II Ltd. P’ship v. Comm’r, 47 F.3d 342, 347 (9th Cir. 1995). Id. at *3.

Judge Graber concurred and dissented in part, finding Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 123 Cal.Rptr.2d 256, 269-72 (Ct. App. 2002) pertinent under disparagement coverage and requiring a defense thereunder:

False statements that may influence a third party not to use the plaintiff’s services, to the financial detriment of the plaintiff, trigger the duty to defend a claim of disparagement of services.

Id. at *3.

The dissent was willing to look at the contextual scenario where the allegations that TVT will not stand on its own rights could disparage TVT’s services to third parties because TVT depends on the willingness of others to put themselves in its hands to release albums.
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Defamation and Disparagement

Posted on September 23, 2008 by David Gauntlett

ABM Indus., Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, Nos. 06-16939, 06-17144, 2008 WL 3992334 (9th Cir. (Cal.) Aug. 14, 2008) (Fletcher, Tallman, Dawson)

The court looked to the elements under Texas law for pleading causes of action for slander and libel in evaluating whether potential coverage arose. Although hard to believe from the court’s opinion, it appears that there were

tenant estoppel certificates that set forth an opinion by ABM reflecting how two potential lenders evaluated the risk of making a loan. These lenders were then sued for interference with prospective economic advantage. The court also found that it was a “mere legal opinion, not a statement of fact,” that was the subject matter of the tenant estoppel certificate. The court does not explain why a legal opinion is not actionable. It urged:

Texas law requires as essential elements of [a libel] claim a factual statement that harms an individual’s or corporation’s reputation.
 

Id. at *1.

This approach does not permit reference to any implications which may have flowed from statements which were libelous, which implications the court does not evaluate.
 

Turning its attention to disparagement, the court found that the assertion of a legal position on the enforceability of a lease agreement expressed in a tenant estoppel certificate did not implicate a good, service or product under the ordinary meaning of those terms. This is a curious interpretation of the services to be rendered by a landlord to a tenant under the terms of a lease, which legal obligations include a number of actions which would be deemed services in most contexts. Notably, there is no contention that the particular statement was protected by a litigation privilege. So long as it could be actionable, it seems to matter not whether an opinion is stated which has the effect of libeling a party or disparaging its goods.
 

The Ninth Circuit’s perfunctory treatment of this issue evidences the court’s unwillingness to look to other prior precedent where it more broadly construed the scope of defamation/disparagement claims. The notion that a legal opinion is not actionable so as to create coverage for defamation and disparagement is inconsistent with Nvidia Corp. v. Federal Ins. Co., No. 04 C 7178, 2005 WL 2230190, at *12 (N.D. Ill. Sept. 6, 2005), where the statement that VisionTek was selling unlicensed goods was found to be both defamatory and disparaging. In Western Int’l Syndication Corp. v. Gulf Ins. Co., No. 05-55092, 2007 WL 625264, at *2 (9th Cir. (Cal.) Feb. 26, 2007), disparagement was implicated by statements which cast doubt on Apollo’s intangible right to broadcast shows. In Pennfield Oil Co. v. American Feed Industry Inc. Co. Risk Retention Group, Inc., No. 8:05CV315, 2007 WL 1290138, at *1, 8 (D. Neb. March 12, 2007), the assertion of FDA approval for multiple uses of a drug was in question. In Liberty Mutual Ins. Co. v. OSI Indus., Inc., 831 N.E.2d 192, 199 (Ind. Ct. App. 2005), statements that questioned who had ownership rights to exclusive secret technology were pertinent.
 

In short, in a number of prior cases, including those from the Ninth Circuit, the fact that a statement was part of an opinion – even a legal opinion – made no difference to the actionable character of the conduct, and the Texas cases cited do not require a contrary result even if the elements for proof of liability in the underlying action are of any moment. However, this juxtaposition of the underlying case with the coverage case is contrary to applicable law.
 

In Aurafin-OroAmerica, LLC v. Federal Ins. Co., No. 04-56681, 188 Fed. Appx. 565, 2006 WL 1880088 (9th Cir. (Cal.) June 26, 2006), the court reasoned:

The facts alleged in D & W’s counterclaims, taken together, could potentially allege a claim for true libel because an allegation that D & W was a patent infringer – a pejorative allegation of shady business practices – was implicit in OroAmerica’s statement to QVC that D & W’s gold chains infringed its patents. See Atlantic Mut. Ins. Co. v. J. Lamb Inc., 100 Cal.App.4th 1017, 123 Cal.Rptr.2d 256, 269 (Cal.App.2002).

        . . . The viability of the underlying claim against the insured does not affect an insurance company’s duty to defend. Rather, even “when the underlying action is a sham,” the insurer may terminate its duty to defend only by “demur[ring] or obtain[ing] summary judgment on its insured’s behalf.” Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th 1076, 17 Cal.Rptr.2d 210, 846 P.2d 792, 799 (Cal.1993). Thus, the district court erred when it relieved Federal of its duty to defend based on the merits of D & W’s underlying defamation claim.
 

Id. at 566.
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National Union Fire Ins. Co. of Pittsburgh, PA v. Starplex Corp., 220 Or. App. 560, 188 P.3d 332 (2008)

Posted on August 28, 2008 by David Gauntlett

In a decision which took over a year to issue from date of submission, the court found a defense arose for fact allegations for defamation, affirming the trial court’s ruling. At issue were allegations that Starplex intentionally interfered with the Pierre plaintiffs’ business relationships based on their race or national origin; and that the Port intentionally discriminated against the plaintiffs by impairing their ability to contract with fair paying customers based on the plaintiffs’ race or national origin.

In a section of the verdict form captioned “Hostile Environment,” the jury found that the Starplex employees and the Port intentionally discriminated against the plaintiffs by creating a hostile work environment based on the plaintiffs’ race or national origin. Id. at 338.

The trial court, finding defamation and disparagement, ultimately determined that one of the carriers, Scottsdale, had indemnity obligations. Nevertheless, it reasoned that statements allegedly made to the Pierre plaintiffs were “derogatory and defamatory,” that, under the circumstances, they were published, and that the plaintiffs suffered special harm consisting of loss of business and wages and injury to their reputations. Id. at 339 n.2.
 

Finding defamation from the use of racial epithets, the court noted:

We conclude that there were sufficient allegations in each of the Pierre plaintiffs' complaints that, reasonably interpreted, possibly gave rise to coverage under Nautilus's policy-specifically, coverage of defamation claims. First, each of the complaints included allegations that the starters referred to the Pierre plaintiffs “in racially offensive terms” and that the defendants used “racial epithets.” Those allegations were sufficient to show that statements made by the Starplex starters were defamatory under the definition of such statements set out above. In addition, where each complaint alleged that the statements “referred to” the Pierre plaintiffs in those terms, that the statements were made at the airport, that the Pierre plaintiffs suffered “humiliation” as a result, that the statements were intended to interfere with the Pierre plaintiffs' business relations, and that the plaintiffs lost business as a result, we conclude that, for purposes of the duty to defend, the complaints adequately alleged or gave rise to an inference that the statements were published to third parties. Finally, even assuming that the statements were not defamatory per se because, on their face, they lacked the required nexus to the Pierre plaintiffs' competence to perform their jobs, we agree with the trial court that the Pierre plaintiffs alleged special harm in the form of detriment to their business operations.

Id. at 347.

The employment-related practices exclusion did not bar a defense, even though it stated, “This insurance does not apply to: ‘Bodily injury’ or ‘personal injury’ to: (1) A person arising out of any: . . . (c) Employment-related practices, policies, acts, or omissions, such as coercion, demotion, evaluation, reassignment, discipline, harassment, humiliation or discrimination directed at that person:”

Nothing in the analysis of the language in [Clinical Research Institute v. Kemper Ins. Co., 191 Or. App. 595, 84 P.3d 147 (2004)] suggests that the relevant wording, albeit broad, applies to nonemployees. As discussed above, in that case, the court determined that the term “employment-related” means connected or linked to employment, whether past, current, or future. However, the Pierre plaintiffs were not employed by either of the defendants in the Pierre litigation. Accordingly, the trial court's conclusion that the employment-related practices exclusion did not apply here was correct.

Id. at 349.

The court did not address the issue of what might have occurred had co-employees acted improperly in a way not overseen or corrected by the employer. While there is an express employee-employee exclusion available to carriers, none was included in this form of policy. Conduct that served no employment purpose and was not related to the supervisorial activities of the employer vis-à-vis the employee directly would appear outside the scope of this exclusion as well.

 
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Be Careful What You Wish For - Successful Litigation That Eliminates Potentially Covered Claims May Deprive the Insured of Insurer Defended Litigation Costs

Posted on June 9, 2008 by David Gauntlett

Vansteen Marine Supply, Inc. v. Twin City Fire Ins. Co., No. 13-05-00231-CV, 2008 WL 599850 (Tex. App. - Corpus Christi March 6, 2008) (Valdez)

Hartford agreed to defend libel and defamation claims in a suit seeking a declaration that a non-competition clause was void and that the former president of Vansteen was entitled to damages from the company. Following a grant of summary judgment on the defamation and libel issues, the insurer sent a notice that it was withdrawing its defense obligation. The court also determined that there was no right to receive affirmative prosecution costs despite the insured’s arguments that they were also defensive of the suit against it. This because requiring a duty to defend which would envision payment of such attorneys’ fees would rewrite the insurance policies that the parties signed. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983); Witkowski v. Brian, Fooshee & Yonge Props., 181 S.W.3d 824, 830 (Tex. App. - Austin 2005, no pet.).

Had the attack on the liable/defamation claims awaited the conclusion of trial, the defense activities would arguably have dovetailed with the affirmative relief sought and entitled the insured to obtain an insurer funded trial. While some inconvenience may have attended the continued presence of the defamation claims throughout, absent evidence that it would have lead to a different result therein, delaying a motion to eliminate them until the trial concluded would have been preferable from an insurance coverage maximization perspective. Absent a dismissal of the liable and defamation claims, these affirmative prosecution costs, to the extent prove to also dovetail with defense costs, would have been recoverable. See

Adobe Systems Inc. v. St. Paul Fire and Marine Ins. Co., No. C 07-00385 JSW, 2007 WL 3256492 (N.D.Cal., 2007) (“The Court finds persuasive the reasoning in IBP, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, which held that even though an insured initiates a lawsuit, that fact does not automatically preclude coverage for defense-type legal fees and expenses where the insured is resisting a contention of liability for damages. 299 F.Supp.2d 1024, 1031 (D.S.D.2003) (citing Simon v. Maryland Cas. Co., 353 F.2d 608, 613 (5th Cir.1965) (holding that sub-contractor insured was entitled to recover legal fees and expenses from insurer for bringing a declaratory judgment action asserting it was not negligent and was entitled to be paid funds withheld by the general contractor, despite a ‘defense’ clause in policy); Potomac Elec. Power Co. v. California Union Ins. Co., 777 F.Supp. 980, 984-85 (D.D.C.1991) (finding that an affirmative suit brought by an insured is not per se unrecoverable as a defense cost)).”) Id. at *9.

Even without an affirmative counterclaim, a motion designed to eliminate from potential coverage, the only claim on which a defense rests, can be problematic for the insured. Thus, Winklevoss’ counsel in Lynchval Systems Inc. v. Chicago Consulting Actuaries, Inc., No. 95 C 1490, 1998 WL 151814 (N.D.Ill. March 27, 1998) brought a successful motion to eliminate the express count for trade libel, which lawsuit Federal, previously defended. The court subsequently determined (when Federal’s withdrawal was challenged) that absent that claim, there was no basis for potential coverage under that pleading. Winklevoss Consultants, Inc. v. Federal Ins. Co., 991 F. Supp. 1024 (N.D. Ill. 1998).

A subsequent case, Winklevoss Consultants, Inc. v. Federal Ins. Co., 11 F. Supp. 2d 995 (N.D. Ill. 1998) reversed that result by finding that a distinct false advertising claim in subsequent pleading contained fact allegations of disparagement sufficient to trigger a defense. The court, however, refused to relate back that defense to the date of the earlier pleading. There were no true pleaded facts raising the potential coverage that came to Federal’s knowledge before tender of the second amended complaint which contained the pertinent coverage triggering allegations.
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Tortious Interference Claims Based on Contract Breaches Found Within Exclusions to Directors & Officers As Well As "Advertising Injury" Coverage

Posted on May 22, 2008 by David Gauntlett
Although the general rule is that facts, not labels of causes of action, trigger a defense under offense-based policies, as well as those looking to wrongful acts such as Directors & Officers policies, mere reference to terms that might otherwise trigger a defense, such as disparagement or misrepresentation, were deemed insufficient in and of themselves to show that the conduct fell within potential coverage.

Greektown Casino, LLC v. Zurich Am. Ins. Co., No. 07-CV-13583, 2008 WL 597814 (E.D. Mich. Feb. 29, 2008)

At issue were claims for tortious interference with contract and business relations causing Greektown to breach its agreement with plaintiffs. The court observed:
19. The comments, statements and representations made by Kewadin employees/agents were made for the specific purpose of wrongfully interfering with and inducing the disruption of existing business relationships, causing Greektown to terminate its business relationship with Lane and Lane & Associates.
Id. at *2.

There was no express cause of action for disparagement or fact allegations that denigrated the products, goods or services of another.

The court found Exclusion 4(h) to an American Home Assurance policy entitled Directors, Officers and Private Company Liability Insurance Policy precluded a defense. It excepted from coverage claims “alleging, arising out of, based upon or attributable to any actual or alleged contractual liability of the Company or any other Insured under any express contract or agreement.” Id. at *5.

A further exclusion references various types of claims, including antitrust, business competition, unfair trade practices, and tortious interference in another’s business or contractual relationships. The court found that the tortious interference claim was excluded by the anti-competitive behavior exclusion.

The court reasoned:

Lane’s complaint plainly alleges that Greektown breached an express contract for his services as an agent of record. Whether or not Greektown was actually a party or signatory to this alleged contract may be relevant to the merits of the underlying action – but not to the clear and unambiguous policy exclusion.
Id. at *6.

Looking at a separate “advertising injury” coverage policy by Zurich American, the court found that fact allegations of disparagement were sufficiently inarticulate under the tortious interference count to trigger a defense. The court analyzed and distinguished several unpublished Michigan cases – Veterans of Foreign Wars v. Auto-Owners Ins. Co., No. 202664, 1999 WL 33444142 (Mich. Ct. App. May 25, 1999) (per curiam) (unpublished), and National Union Fire Ins. Co. of Pittsburgh v. Alticor, Inc., No. 05-15, 2005 WL 2206461 (W.D. Mich. Sept.12, 2005) (unpublished), aff'd, Nos. 05-2479 & 06-2538, 2007 WL 2733336 (6th Cir. Sept. 19, 2007) (per curiam) (unpublished). Id. at *8.

The National Union case criticized the absence of any “actual allegation of product disparagement, slander or libel.” Id. at *9. The court noted that this determination was subsequently affirmed by the Sixth Circuit. The Sixth Circuit found the absence of a claim for damages “because of” the alleged misrepresentations or disparagement determinative and the mere recitation of terms such as “disparagement” or “misrepresentation” insufficient. National Union, 2007 WL 2733336, at *6. The court stated:
Plaintiffs’ argument is that there is a necessary inference from the wording of the tortious interference allegations in the complaint that Kewadin’s employees must have used disparaging or defamatory remarks. The Court agrees with the reasoning of the Michigan Court of Appeals in Veterans of Foreign Wars – and an insured’s assertion that an individual may have “possibly” used defamatory language in connection with a tortious interference claim is not sufficient, in itself, to show that the tortious interference claim is “arguably” within the “personal or advertising injury” policy coverage.
Id. at *9.

Discovery propounded by the insured to claimants in the underlying action, seeking factual clarification of the basis for alleged “disparagement” that complaint references but does not explain could well have led to a different result here. 
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Class Action Lawsuits Alleging Fact Based Disparagement Claims Arising Out of Actionable Conduct Do Not Trigger a Defense

Posted on May 9, 2008 by David Gauntlett


BASF AG v. Great Am. Assur. Co., ___ F.3d___, 2008 WL 1701864 (7th Cir. (Ill.) 2008)

This case might better be described as a tale of two courts. Since the inconsistency between the analytic approach of the Seventh Circuit applying Illinois law to that of the Supreme Court of Illinois has been deepened by this new decision.

The court reversed the district court and questioned the Illinois District Court decision on which the district court had relied, Knoll Pharm. Co. v. Automobile Ins. Co., 210 F. Supp. 2d 1017, 1025-28 (N.D. Ill. 2002). That earlier case had resolved following appellate argument on appeal. The judge who was to have authored the opinion for that panel, Judge Kanne, authored the opinion on the BASF Seventh Circuit decision.

Applying Illinois law, the court found that the phrase “arising out of” did not expand the potential plaintiff to a class who could raise potential coverage claims under otherwise uncovered antitrust allegations so long as disparagement formed a basis for the potential coverage. The court rejected the argument that the consumer plaintiff class implicitly advanced a disparagement claim by pleading that Boots violated the Illinois Consumer Fraud and Deceptive Business Practices Act (CFA), 815 ILCS 505/1 et seq.

The court distinguished that Act from the TCPA fax ad claim at issue in the Valley Forge Ins. Co. v. Swiderski Electronics, Inc., 223 Ill. 2d 352, 860 N.E.2d 307 (Ill. 2006) suit from the Illinois Supreme Court, where the court analogized a violation of privacy law to the violation of seclusion implicit in a TCPA fax ad claim. The court, however, ignored the fact that the CFA specifically provides a remedy to a consumer who is injured by disparaging comments made by one merchant against another which impacts that consumer. Thus, the same argument that the court found persuasive in Swiderski applies here. The court simply failed to analyze this aspect of the CFA. The court claims:

[T]he CFA allows consumers to recover damages for the economic injuries they suffer. It does not directly advance the interest another business has in preserving the reputation of its products that a disparagement action protects.
Id. at *8.

However, this is a distinction without a difference since, if a form of unfair trade practice is implicated, and a consumer has a damage remedy where a competitor damages another competitor, this is no different from when the seclusion interest in a statutory scheme is implicated by a blast fax and a class action claimant seeks relief for this indirect injury.

The true basis for the court’s opinion is a reluctance to find coverage under tort-based concepts where the gravamen of the cause of action is for other distinct statutory violations. To wit:

It seems extremely unlikely to us that the parties intended antitrust and racketeering claims to be covered – or even potentially covered – by a policy definition that sounds in libel, slander, and disparagement.
Id. at *9.

The court did not take into account the fact that many insurers are presently writing broad forms of unfair competition and reputational injury coverage in multi-media and cyberspace policies, which include express antitrust exclusions, an express acknowledgment that but for such an exclusion coverage might otherwise arise in that context. The court simply added exclusionary language not present in the policy to aid the insurer under the guise of discerning the parties’ mutual intent.
Intent, however, is derived from an objective review of policy language, not vague notions of what would be in the best interests of consumers long-term. Thus, the court also notes:

Reading an insurance policy’s coverage provisions as expansively as BASF desires would be a precarious proposition: it might sweep within the breadth of the policy risks that the insurer did not and would not contract to cover – risks that were not considered when setting the premiums for the policy.
Id. at *8.

If the consideration of risks, i.e., that omniscience of underwriters of insurance policies was a consideration, then there would never be any practical coverage under offense-based policies issued to cover forms of “advertising injury” and “personal injury”. This for the simple reason that no underwriting effort was undertaken to ascertain what risks might fall within the scope of their coverage. Insurers simply adopted a form of advertising liability policy and excluded advertisers from it by exclusion.

The court’s analytic approach is inconsistent with that adopted by the majority of courts, including the Supreme Court of Illinois. It is likely that the same fate may await this opinion as has American States Ins. Co. v. Capital Assocs. of Jackson County, Inc., 392 F.3d 939 (7th Cir.2004) rejected by the majority of courts but still followed where undefined policy offenses are redefined to fit within the narrowest common law tort that can be imagined.

Compare and contrast Terra Nova Ins. Co. v. Fray-Witzer, 449 Mass. 406, 869 N.E.2d 565 (Mass. 2007) (applying New Jersey law) which noted:

We note in passing that the significance of American States Ins. Co. v. Capital Assocs. of Jackson County, Inc., 392 F.3d 939 (7th Cir.2004), was undermined significantly by Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 223 Ill.2d 352, 307 Ill. Dec. 653, 860 N.E.2d 307 (2006), which was released after the judge made his decision here. The American States decision was governed by Illinois law.

Id. at 415 n.9.

Articulating the logic in accord with the Swiderski approach but more succinctly, the Massachusetts Court stated:

The insurers' reasoning that the content of the material, rather than its mere existence, must violate the right of privacy is unpersuasive. In effect, the insurers argue that the policy's definition of injury should be read to say “[o]ral or written publication of material, the content of which violates a person's right of privacy.” But New Jersey law is clear that when construing an ambiguous phrase in an insurance policy, courts should “consider whether clearer draftsmanship by the insurer ‘would have put the matter beyond reasonable question.’ ” Progressive Ins. Co. v. Hurley, 166 N.J. 260, 274, 765 A.2d 195 (2001), quoting Doto v. Russo, 140 N.J. 544, 557, 659 A.2d 1371 (1995). In other words, had Terra Nova and Royal wished their policies to pertain only to violations of privacy created by the content of material, it was incumbent on them to draft explicit policies to that effect.

Id. at *417-418.

Notably, this shift of the burden to the insured to be more appropriate in its choice of policy language is key. Under the BASF approach, the Seventh Circuit seeks to guess what an insurer might have meant by the policy it drafted in light of how its economic interest may have been furthered. In effect, this is post claims underwriting which is properly been rejected by virtually every court to encounter it. It also seeks to assess the subjective intent of the parties given credence to what their intentions might have been at the time of drafting even though not clearly expressed by their policy language. This is contrary to proper analytic principals recognized nationwide. Havstad v. Fidelity National Title Ins. Co., 58 Cal.App.4th 654, 68 Cal.Rptr.2d 487, 490 (Cal.App. (1 Dist.) 1997) (An insured’s subjective intent or expectation regarding the policies of coverage is irrelevant and cannot be used to construe the meaning of the policy’s language.)

A subsequent New Jersey case parted company with the Fray Witzer decision because different policy language was issued by St. Paul in the case it analyzed to wit “advertising injury” offense means “making known twenty person organization covered material that violates a person’s right of privacy”. This policy language is more like that in Resource Bankshares Corp. v. St. Paul Mercury Ins. Co., 407 F.3d 631 (4th Cir. (Va.) 2005) which the Terra Nova court distinguished. Even more problematic is Ace Mortg. Funding, Inc. v. Travelers Indem. Co. of America, No. 1:05-cv-1631-DFH-TAB, 2008 WL 686953 (S.D.Ind., March 10, 2008) therein Judge Hamilton parted company with the Swiderski approach even though Indiana often applies and follows Illinois law.

Conceding that the language as issue was more like that in Capital Associates than Resource Bankshares, nevertheless, the court followed the Capital Associates because of an earlier decision by a different Indiana judge had done so in Erie Ins. Exch. v. Kevin T. Watts, Inc., No. 1:05-CV-867-JDT-TAB, 2006 WL 1547109 (S.D. Ind. May 30, 2006). While the Erie Ins. Exch. decision was on appeal, it settled and the district court elected to follow his fellow judge in Indiana rather than the more recent views expressed by the Supreme Court of Illinois in Swiderski without explanation, saying “Courts have already spilled a great deal of ink over this issue. Without adding new insights to the debate, this court agrees with Judge Tinder's prediction of Indiana law in Erie Insurance Exchange . . .” Id. at 3. Notably, the court does not cite Fray Witzer or seek to distinguish it as the most recent articulation by a state’s Supreme Court in addressing this issue. Hopefully this decision will be appealed to the Seventh Circuit which will predict Indiana’s Supreme Court authority in a way more consistent with the Illinois Supreme Court. However, as that court is the Seventh Circuit, this remains to be seen.

Another, even more troubling aspect of the BASF court’s opinion, is the gratuitous observation that “[i]t seems extremely unlikely to us that the parties intended antitrust and racketeering claims to be covered-or even potentially covered-by a policy definition that sounds in libel, slander, and disparagement. See Riso, 479 F.3d at 162.” Id. at *9. In addition to rewriting the policy for the insurer’s benefit introducing subjective considerations, it also fails to note the plethora of case authority that has readily found antitrust claims do indeed potentially trigger coverage where the fact allegations trigger coverage under the pertinent offenses at issue.

See American Contract Bridge League v. Nationwide Mutual Fire Ins. Co., 752 F.2d 71, 75 (3d Cir. (Pa.) 1985) (claim of monopoly power and antitrust violations); Bankwest v. Fidelity and Deposit Co., 63 F.3d 974, 981 (10th Cir. (Kan.) 1995) (claim for interference with bank lines of credit); Curtis-Universal, Inc. v. Sheboygan Emerg. Med. Servs., Inc., 43 F.3d 1119 (7th Cir. (Wis.) 1994) (claim of conspiracy to exclude competing ambulance service from market entrance); Federal Ins. Co. v. Stroh Brewing Co., 127 F.3d 563 (7th Cir. (Ind.) 1997) (discriminatory pricing practices in beer distribution); Lime Tree Village Community Club Ass’n v. State Farm Gen. Ins. Co., 980 F.2d 1402, 1406-07 (11th Cir. (Fla.) 1993) (claims of discrimination, slander of title and unreasonable restraint on trade); Ruder & Finn, Inc. v. Seaboard Cas. Co., 422 N.E.2d 518 (N.Y. 1981) (claims of conspiracy to circulate anti-aerosol publicity intended to result in an aerosol product boycott); St. Paul Fire & Marine Ins. Co. v. Medical X-Ray Center, PC, 146 F.3d 593, 594-95 (8th Cir. (Minn.) 1998) (antitrust and interference claims by competing radiologists).

This view is inconsistent with the majority of case law nationally, as well as the earlier federal court opinions authored by Judge Posner which the present panel gives lip service to but does not follow. In effect the court suggests that the insured should have bought express coverage for antitrust violations despite the fact that such coverage is rarely available and thereby places the burden on the insured to find coverage that references labels of causes of action rather than the actual fact allegations within pleadings.

Such an approach also substitutes a focus on injury and damages which is inappropriate in analyzing offense-based policies. See Curtis-Universal, Inc. v. Sheboygan Emerg. Med. Servs., Inc., 43 F.3d 1119, 1122 (7th Cir. (Wis.) 1994) (“The plaintiff’s complaint, upon which the insurer’s duty depends, need not even set forth the plaintiff’s legal theories. What is important is not the legal label that the plaintiff attaches to the defendant’s (that is, the insured’s) conduct, but whether that conduct as alleged in the complaint is at least arguably within one or more of the categories of wrongdoing that the policy covers.” (emphasis added; internal quotation marks omitted).

Noting why the character of offense-based coverage requires a different analytic approach from that adopted by the court here, Judge Croskey, a noted insurance coverage scholar and legal writer as well as jurist, noted in Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1032, 123 Cal. Rptr. 2d 256, 267 (2002), “Coverage . . . is not determined by the nature of the damages sought in the action against the insured, but by the nature of the claims made against the insured in that action. . . . ‘[c]overage ... is triggered by the offense, not the injury or damage which a plaintiff suffers.’”

A recent state court opinion followed the modern trend enunciated by Judge Castillo in Knoll Pharm. Co. v. Automobile Ins. Co., 210 F. Supp. 2d 1017, 1025-28 (N.D. Ill. 2002). In an April 7, 2008 decision in Medmarc Casualty Ins. Co. v. C. R. Bard, Inc., the Superior Court of New Jersey, Union County: Law Division, Docket No. UNN-L-2435-05 (April 7, 2008), a New Jersey State Court Judge denied summary judgment to Medmarc Casualty Ins. Co. finding that C.R. Bard, Inc. was entitled to a defense for fact allegations of disparagement under pertinent “personal injury” coverage that were indirectly asserted against it in the context of an antitrust lawsuit.

Following principles of New Jersey law that are fully in accord with those in recognized by the Illinois Supreme Court in Swiderski, the court reasoned:

Although the disparagement alleged in the Southeast Missouri Hospital complaint is not of the hospital’s own products, Medmarc has cited no portion of the Policies that limits the coverage provided to claims made by the party whose products have been disparaged. Instead, the Policies speak of injuries “arising out of” such conduct.

“Arising out of” is a “critical phrase” in the interpretation of the insurance contract[s] and is given an expansive interpretation in both coverage and exclusion provisions. It has been “defined broadly . . . to mean conduct ‘originating from,’ ‘growing out of’ or having a ‘substantial nexus’ with the activity for which coverage is provided . . . .”

Here, the insurance policies provide coverage for injuries “arising out of” conduct “that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.” The Southeast Missouri Hospital amended complaint alleges a number of causes of action that can fairly be characterized as “originating from,” “growing out of” or having a “substantial nexus with” Bard’s alleged disparagement of Rochester’s products.”

This thoughtful exposition of New Jersey law is fully in accord with the logic of Fray Witzer and represents the better reasoned “policy language centric” view of this issue.
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"Personal Injury" Coverage Disparagement/Invasion of Privacy

Posted on May 5, 2008 by David Gauntlett
Insurers achieved three favorable rulings in cases which to date remain unpublished.

Chimera Investment Co. v. State Farm Fire & Cas. Co., No. 06-4268, 2008 WL 681701 (10th Cir. (Utah) March 11, 2008)

The first addresses coverage for disparagement. It found that an insured could not obtain coverage under the “personal injury” offense of “oral or written publication of material that disparages a goods products or services of another for slandering it own services”. The insured, a real estate management company which allegedly slandered a home owners association services in speaking to a condominium unit owner. The court found that the injuries for which the claimant sought to recover in a state court lawsuit where no reported injuries to the homeowners association arose did not trigger a defense. The connection between the “offense” of slander of the association’s services to the injuries sustained by the claimant did not come within “advertising injury” coverage in the courts view where the suit was for unlawful entry, trespassing and wrongful eviction from a condominium unit. It found that the policy’s “arising out of” language did not make a difference.

The two remaining cases addressing “invasion of privacy” as forms of “personal injury” coverage Ace Mortgage Funding, Inc. v. Travelers Indem. Co. of Am., No. 1:05-cv-1631-DFH-TAB, 2008 WL 686953 (S.D. Ind. March 10, 2008)

In a blast fax case embraced a minority view articulated by Judge Easterbrook in American States Ins. Co. v. Capital Associates of Jackson County, Inc., 392 F.3d 939, 942-943, (C.A.7 (Ill.) 2004) which predicted this would follow the logic of Capital Associates in accord with the views of another district judge in Indiana. See Fury Insurance Exchange v. Kevin T. Watts Inc., No. 1:05-CV-867-JDT-TAP, 2006 WL 1547109 (S.D.Ind. May 30, 2006).  This despite the fact that the Supreme Court of Illinois as well as the majority of subsequent cases nationwide have rejected its analytic approach. See Terra Nova Ins. Co. v. Fray-Witzer, 869 N.E.2d 565, 574 (Mass. 2007) (applying New Jersey law).

In effect, the insurers argue that the policy's definition of injury should be read to say “[o]ral or written publication of material, the content of which violates a person's right of privacy.” But New Jersey law is clear that when construing an ambiguous phrase in an insurance policy, courts should “consider whether clearer draftsmanship by the insurer ‘would have put the matter beyond reasonable question.’. . . In other words, had Terra Nova and Royal wished their policies to pertain only to violations of privacy created by the content of material, it was incumbent on them to draft explicit policies to that effect.

The Seventh Circuit found the policies “advertising injury” coverage for “invasion of privacy” refers to injury caused by publication only for intrusions on secrecy. It thereby imported words of limitation not set forth in the policy. There is no part of the policy that requires that the content of the message be that which invades privacy. The “general analytical principals” in Capital Associates ignore proper construction of the policy against the insurer who could have chosen more precise language to achieve an end which the court should not adopt under the guise of interpretation.

National Fire Ins. Co. of Hartford v. NWM-Oklahoma, LLC, Inc., Case No. CIV-07-545-F, 2008 WL 697298 (W.D. Okla. March 12, 2008)

The insured, a weight loss management company, was sued for “invasion of privacy” when it permitted a supervisorial employee, Susanna Reed, to “listen in” on conversations between plaintiff Hammers and customers for training purposes. The publication was disseminated through a baby monitoring system used to keep tabs on a particular employee. The court noted that even if publication required communication of information to third parties other than the corporate participants, that was potentially available since any of the defendant’s customers could overhear the conversations.

The court found, however, that the “willful violation of a penal statute or ordinance committed by or with the consent of the insured” exclusion applied since federal wiretap act, 18 U.S.C. § 2510 were found to fall within the scope of that exclusion.

There was, in the court’s view, no evidence of “implied consent”, nor did the claimants have an expectation that their oral communications would not be intercepted. The court reasoned that “if, as a factual matter, the claims for injury asserted in the civil suit as to which insurance coverage is sought arise from acts that amount to a ‘willful violation of penal statute,’ the exclusion is triggered . . .” Id. at *9. The court’s application of this exclusion to bar a defense prejudged the merits.

The court’s order does not consider the possibility that until there is an adjudication against the insured and liability could arise for mere tort of “invasion of privacy” but not for violation of federal wiretapping law, a potentially covered “offense” would trigger a defense that would not implicate the penal acts exclusion.
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