Murray v. Greenwich Ins. Co., 533 F.3d 644 (8th Cir. 2008)

Posted on September 4, 2008 by David Gauntlett

Reversing District Court Judge Schiltz, Judge Bye authored an opinion (Smith and Colloton were on the panel) which found that an exclusion barred otherwise available coverage under a professional liability policy for alleged advertisement soliciting investors to buy real estate in Florida.

The alleged conduct included false advertising claims in connection with misrepresentations about the profitability of a real estate scheme calling for the acquisition of two Condominium Escrow Reservation Agreements. The pertinent exclusions D(1) and D(3) provided:

D. based on or arising out of:
1. the conversion, commingling, defalcation, misappropriation or improper use of funds or other property; [or]
...
3. the inability or failure to pay, collect or safeguard funds held for others.

Id. at 647.

The district court had concluded that the negligent misrepresentation claim alleged conduct separate from the improper use or failure to safeguard funds, i.e., the clients were wrongfully induced to deposit funds which were then mishandled. The court broadly read the “arising out of” language in the exclusion to extend it to bar any coverage, including a defense duty. It reasoned:
 

 Each of the claims asserted within the underlying complaint, either directly or by incorporation, allege an injury originating from, or having its origin in, growing out of, or flowing from the failure to return the deposited funds. See Associated Indep. Dealers, Inc. [v. Mut. Serv. Ins. Cos., 304 Minn. 179, 229 N.W.2d 516, 518 (1975)]. “But for” the failure to refund those deposits as promised, there would have been no claims. In other words, had the funds not been mishandled the claims alleged in the complaint would not have arisen. Thus, each of the claims is causally connected to and arose out of the failure to return the entrusted deposits. Accordingly, we conclude the exclusion applies and Greenwich has no duty to defend.

Id. at 650.

This broad reading of the exclusionary language, while consistent with other opinions of the Eighth Circuit applying Minnesota law, does not properly gauge the circumstances in which liability could attach for negligent misrepresentation, which in and of itself could create liability, and a damage remedy, whether or not the funds were then subsequently mishandled.

The court is simply looking at the mostly likely set of circumstances that might arise where mishandling of funds would be an aspect of liability, and assuming that no other possible scenario could arise consistent with the allegations of the complaint. It is premature to make this assumption in light of the breadth of those allegations and the rule against interpreting exclusions broadly.
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Dissent Challenges Court's Opinion that "Negligent Publication" Relates to a Narrow Tort Relating to "Defective Advice" or "Incitement"

Posted on August 19, 2008 by David Gauntlett

Sony Computer Entm’t Am., Inc. v. American Home Assur. Co., ___ F.3d ___, 2008 WL 2736012 (9th Cir. (Cal.) 2008) (Hall, Schroeder; dissent by Bybee)

Affirming district court Judge Hamilton, the court found no duty to defend arising out of negligent misrepresentation, false advertising under BPC § 17500, unfair business practices under BPC § 17200, and other related claims.

The pertinent policy, issued through an AIG entity, American Home Assurance Co., provided multimedia professional liability coverage and supplemented a policy, also issued by the same insurer, for commercial general liability coverage. The court appears to have assumed applicable law to be that the insurer’s construction of policy terms must be reasonable as opposed to a viable potential definition, in direct contrast to the Supreme Court of California’s recent analysis in MacKinnon. Thus, it stated:
 

"Accordingly, a provision is ambiguous 'only if it is susceptible to two or more reasonable constructions despite the plain meaning of its terms within the context of the policy as a whole.'"

Id. at *3.

The court derived this interpretation from its belief that

"The terms in an insurance policy must be read in context and in reference to the policy as a whole, with each clause helping to interpret the other. Cal. Civ.Code § 1641; Bay Cities Paving & Grading, Inc. v. Lawyers' Mutual Ins. Co., 5 Cal.4th 854, 867, 21 Cal.Rptr.2d 691, 855 P.2d 1263 (1993); Palmer v. Truck Ins. Exch., 21 Cal.4th 1109, 1115, 90 Cal.Rptr.2d 647, 988 P.2d 568 (1999)."

Id. at *3.

Quoting Bank of the West, 2 Cal. 4th at 1265, it stated:

"A court faced with an argument for coverage based on an assertedly ambiguous policy language 'must first attempt to determine whether coverage is consistent with the insured's reasonable expectations,' id., and '[i]n so doing ... must interpret the language in context, with regard to its intended function within the policy,' id."

Id. at *3.

Notably, this “reasonable expectations” approach in Bank of the West and the cases it cites was only called into force where there was a structural or contextual inconsistency. Thus, in Bank of the West, statutory provisions under 17500 had no damage remedy. Absent a damage remedy, the “as damages” provision was not triggered, and the definition of unfair competition dovetailing with the liability under that section was not a viable possibility. The court confuses this level of contextual reading with that arising from what, at base, is simply a preferred construction that the court deems most reasonable from that possibly chosen among others. At issue was the meaning of the term “negligent publication,” undefined in the AISLIC policy or in lay or legal dictionaries or in a California statute. The court noted:

"Sony argues that the term 'negligent publication' should have a broad meaning which it derives from stringing together the dictionary definitions of 'negligent' and 'publication.' According to Sony, 'negligent publication' in the AISLIC policy refers to 'a communication of information to the public, lacking or exhibiting a lack of due care or concern.' Sony argues that this definition, broad enough to include the false advertising and negligent misrepresentation claims in the Kim/Kaen lawsuits, is the plain meaning of the term."

Id. at *4.

The court disagreed. Accordingly, the court contended that the ordinary and popular sense of the word was not derived from an examination of dictionary definitions because it was not contextually available. The court further contends that “negligent publication” is enumerated among other torts and thus refers to a narrow tort relating to defective advice and incitement, not a broad tort distinct from those terms. Id. at *5.

However, the court’s supposition is demonstrably erroneous as disparagement, harm to the character or reputation of any person or entity, interference with rights of privacy or publicity, unauthorized use of name or likeness, unintentional failure to credit on a matter, and defective advice and incitement and negligent publication are clearly not simple torts which clearly defined prima facie elements. Rather, the offenses use generic and lay language. To adopt the court’s interpretation is to add words of limitation not set forth in the policy under the guise of construing context.

Nor does the context analysis the court relies on support such a narrow interpretation. American Motorists Ins. Co. v. Allied-Sysco Food Servs., Inc., 19 Cal. App. 4th 1342, 1347, 1350-51, 24 Cal. Rptr. 2d 106 (1993) limited humiliation’s meaning to the kind of humiliation envisioned based on the previous torts asserted in connection with it, which were indeed limited to tort theories – libel, slander, defamation of character, and invasion of the right of privacy. Id. at *5.

The court also makes the supposition that the negligent publication definition that Sony offers would give it too broad an amplitude and make other offenses redundant. Not so. The court’s supposition is demonstrably inaccurate. Sony’s definition would not dovetail with the liability for defamation, infringement of copyright, nor a number of the other offenses listed.

The court also sought to define the policy based on the fact that it was labeled a media liability policy and thus must be limited to the kind of claims normally faced by media publishers such as defamation and copyright infringement.

Again, the court is reading in words of limitation not set forth in the policy based on its supposition as to what the parties might have intended that the insurer did not bother to craft into the language. The purported case law the court cites is tort law, not construction of other media liability policies, inventing a tort of negligent publication which is not borne out by the authorities that it cites. And indeed, the court’s definition of negligent publication made it redundant of the definition of placing another in a false light, which is one of the offenses necessarily implicated by coverage for invasion of privacy.

It is no surprise that “negligent publication,” as the court deduces it as an actionable tort, has not been construed to encompass liability like that identified by Sony. Nor need this matter. There is no rule that requires the court to define what torts the carrier may have envisioned covering under broad generic language. Indeed, previous case law from courts of appeal, including the Lebas decision from Judge Croskey, often describes offenses, such as “misappropriation of advertising ideas or style of doing business,” that cannot be gauged to limit their scope to any particular tort but may encompass a range of wrongful behavior.

Case law elsewhere is fully in accord with this notion. Indeed, the conjecture that insurers must have intended to limit their coverage to torts where they clearly did not select limited tort language has the court simply rewriting the policy for the insurer’s benefit. The court thus concluded:

"[W]e hold that the term 'negligent publication' in the AISLIC policy refers to a very narrow tort in which the publication of material encourages or instructs readers to engage in harmful conduct. We reject Sony's expansive definition as inconsistent with the context of the policy as a whole and unsupported by the case law. Sony, a sophisticated purchaser, clearly could have purchased coverage for product defects or false advertising – indeed, Sony previously held an insurance policy with AISLIC that covered 'any error or omission, misstatement, misleading statement or misinterpretation' – yet the policy at issue in this lawsuit did not include such coverage."

Id. at *8.

In a backhanded way, the court clarifies that where an insured could have purchased broader coverage and had in the past, its decision to not do so must be read to limit the scope of the policy before it. This turns on its head the typical rules that place the burden on the insurer to write appropriate policy language, especially where a narrower form of policy was available but not selected by a particular insurer. See Fireman’s Fund Ins. Cos. v. Atlantic Richfield Co., 94 Cal. App. 4th 842, 115 Cal. Rptr. 2d 26 (2001).

The court also rejected suggestions that the applicable exclusions clarified the scope of the coverage from which the exclusion took away possible coverage. A products liability cover was found inapplicable because, as the court stated:

"The Kim/Kaen complaints did not allege that the defects in the PlayStation 2 caused them to experience a loss of use of game discs or DVDs. . . .

. . . [T]hough it is undisputed that certain discs did not properly play on the PlayStation 2, the complaints never suggested that the discs themselves did not function properly on other devices. Id. In this respect, the suit is easily distinguishable from the loss of use cases Sony cites, in which the insured's defective property rendered the property of a third party unusable. See Anthem Elecs., Inc. v. Pac. Employers Ins. Co., 302 F.3d 1049, 1057 (9th Cir.2002) (defective circuit boards inserted into scanners of third party plaintiff rendered scanners unusable) . . . ."

Id. at *10.

In a thoughtful dissent, Judge Bybee disagreed with the construction of the AISLIC policy. Critically, the dissent’s analysis is not addressed in the majority opinion. The dissent noted that the phrase “negligent publication” is not a term but a phrase made up of two individual words that have meaning both individually and in combination. The court reasoned:

"Turning to the dictionary, the word 'negligent' means “lacking or exhibiting a lack of due care or concern.' WEBSTER'S II NEW COLLEGE DICTIONARY 732 (1999). The word 'publication' means 'communication of information to the public.' Id. at 895, 51 Cal.Rptr.2d 566. Given the ordinary meaning of those words, a layperson might properly understand that the phrase 'negligent publication' means something like “communication of information to the public lacking or exhibiting a lack of due care or concern.' "

Id. at *13.

Such a meaning obviously dovetails with coverage for false advertising in a number of cases. The court found that an exclusion can clarify an ambiguity in an insuring clause in favor of coverage. American Alternative Ins. Corp. v. Superior Court, 135 Cal. App. 4th 1239, 37 Cal. Rptr. 3d 918, 924 n.2 (2006) (“Unquestionably, it may be considered part of the general circumstances impacting an insured's objectively reasonable expectations as to the scope and extent of coverage under a policy.”). Id. at *14.

The court thereafter reasoned:

"Exclusion P provides contextual evidence for the phrase 'negligent publication' within the affirmative coverage section of the AISLIC policy. If there was no affirmative coverage for false advertising or misrepresentation in advertising then the policy would have no need for an exclusion specifying that those claims were not covered. Why recite that certain acts are expressly excluded from the policy if they were never covered in the first place?"

Id. at *14.

At best, in the dissent’s view, the majority’s interpretation leaves Exclusion P meaningless and the other contra-indications referenced by the majority send mixed signals. Although the dissent does not take issue with the tort-focused analysis of the majority, had it done so the context arguments would not survive scrutiny. The dissent also was “puzzled” as to why cases that “do not yield one clear definition of ‘negligent publication’ should be seen as a limited set.” Id. at *15.

The dissent also noted:

"I am unaware that Sony missed any secret deadline after which a term may no longer be used in new judicial contexts, and the possible usages for the term is closed to the conjunction of the ways in which it had thus far been used."

Id. at *15.

In a telling part of the opinion, Judge Bybee states:

"I fear that in the course of implementing the common law system, we have become so adept at looking to judicial cases to obtain the solutions to the challenges we encounter, that we have come to believe that even when determining the ordinary and popular meaning of words, the solution is to be found in case law. The California Supreme Court has admonished that absent evidence that the parties intended the provision to have a specialized meaning that a term must be construed as would a layperson, and not as it might be analyzed by an attorney or an insurance expert, or, I might add, a judge. See E.M.M.I. Inc., v. Zurich Am. Ins. Co., 32 Cal.4th 465, 9 Cal.Rptr.3d 701, 84 P.3d 385, 390 (Cal.2004). I am quite certain that a layperson looks to a dictionary to determine the meaning of a phrase, not to case law."

Id. at *14.

 
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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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False Advertising Claims Trigger Coverage or a Competitor Initiates Suit Under Advertising Injury Coverage

Posted on May 25, 2008 by David Gauntlett

Two distinct decisions, one applying North Carolina the other Illinois law, both found false advertising claims fell within standard advertising injury coverage where initiated by competitors.

Granutec, Inc. v. St. Paul Fire & Marine Ins. Co., No. 5:96-CV-489-BO(2), 2008 WL 312146 (E.D.N.C. Jan. 16, 2008)

Granutec, Inc. (“Granutec”) is a North Carolina corporation that manufactures and sells generic, over-the-counter (“OTC”), pharmaceutical products. Following an initial agreement with Johnson & Johnson in 1989 to employ a color scheme for generic caplets different from that of the Tylenol Gelcaps, in February 1994 Granutec changed the color scheme to mimic the Tylenol Gelcaps. This conduct precipitated a suit against it for Lanham Act claims under 15 U.S.C. § 1125(a) and 43(a)(2) for false and deceptive advertising, as well as trademark trade/trade dress infringement.

Following issuance of a preliminary injunction against Granutec on December 21, 1995, Granutec agreed to market its OTC product in a color scheme that was conspicuously different from that used by McNeil, a Johnson & Johnson subsidiary, after incurring $500,000.00 in defense fees. Two policy forms were in effect from June 30, 1994 to July 31, 1994, a 1986 ISO form covering as “advertising injury” “misappropriation of advertising ideas or style of doing business”, and from August 1, 1994 to August 1, 1995, a St. Paul variant of an ISO 2001 policy form covering as “advertising injury” “unauthorized taking or use of any advertising material, slogan or title of others” the later policy included intellectual property exclusion.

Focusing on the express unfair competition claim pursuant to NCGS § 75-1.1 et seq., which prohibits “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce,” the court found a defense owed. It noted under the earlier 1986 ISO policy issued by Aetna:

McNeil alleged in its amended complaint that its advertising idea – portraying two “Gelcaps” on the front of the Tylenol box in a red and yellow color scheme – was wrongfully taken by Granutec for its own use on its generic packaging. . . . Granutec’s adoption of this color scheme will likely cause consumer confusion as to origin and generic equivalence. . . . Changing its generic product’s color scheme from red/orange to red/yellow represented an attempt by Granutec to simulate the likeness of the Tylenol Gelcap product. . . . Such allegations establish not only a prima facie case of unfair trade practices in violation of § 75-1.1 but also arguably fall within the meaning of “misappropriation of advertising ideas.”

Id. at *4-8.

The court found the causal nexus to advertising readily satisfied because the advertising content of the color scheme change was the basis for asserted liability. St. Paul was also held to have a duty to defend since there were distinct unfair competition allegations outside the scope of the intellectual property exclusion and the term “unauthorized taking or use of any advertising material” was deemed to be synonymous with misappropriation and advertising material to encompass ideas as well as tangible marketing tools.


Greenwich Ins. Co. v. RPS Products, Inc., 882 N.E.2d 1202 (Ill. App. Ct. (1st Dist.) 2008)

The underlying suit asserted claims for patent and trademark infringement as well as unfair competition. At issue was alleged infringement of the Holmes patent for its “HAPG 600 Harmony Air Filter.” An amended complaint tendered after denial by the carrier under a patent infringement exclusion asserted false advertising claims, to wit, the pertinent allegations assert in paragraph 9 that

The label on the H600 Replacement Filter box prominently displays the claim that it ‘Fits Holmes®,’ and lists the following Holmes® Harmony® Air Purifier Models: HAP 615, 625, 650, 675, 675RC. This designation is literally false because the RPS Replacement Filters do not meet Holmes performance standards, a high proportion of the RPS Replacement Filters are defectively manufactured and, when the RPS Replacement Filters are placed in one of the Holmes machines that they purportedly ‘fit’, the RPS filter will not allow the door to close.

Id. at 1204. It is further alleged in paragraph 13 that the replacement filter “substantially and materially underperforms.” Id.

The court quickly rejected the argument that a patent is property and the infringement of the patent is “damaging.” The court pointed out that property damage is defined in the Greenwich policy as “physical injury to tangible property, including all resulting loss of use of that property . . . .” A patent right encompasses intangible, incorporeal rights, not tangible property. Newark Morning Ledger Co. v. United States, 507 U.S. 546, 556, 123 L.Ed.2d 288, 300, 113 S.Ct. 1670, 1676 (1993).

Looking to the causal nexus sufficient to meet the requirement that the advertising of infringing products falls within the definition of advertising injury as contained in the Greenwich policy, the court noted:

The advertisement must instruct or explain to the purchaser exactly how to recreate or reassemble the product into one that infringes a patent. Count I of Holmes’ amended complaint (that RPS manufactured and sold allegedly infringing products) does not allege that RPS provided any detailed instructions to its customer on how to infringe the patent. RPS’ argument is, therefore, unpersuasive.

Id. at 1209 (citation omitted).

The court also found the patent infringement exclusion applicable to bar a defense in any event.

The court found the absence of the term “unfair competition” within the 1998 ISO policy language problematic. Neither disparagement nor trade dress infringement were specifically asserted in the court’s view. The court noted that trademark infringement is expressly excluded from the policy and therefore that count cannot trigger a defense as well. The court found that it was not problematic that the policy excluded trademark advertising injuries, yet covered trade dress advertising injuries. The court reasoned

The answer to RPS’ inquiry lies in the fact that trade dress infringement and trademark infringement are two different causes of action. See Schwinn Bicycle Co. v. Ross Bicycles, Inc., 870 F.2d 1176, 1182 (7th Cir.1989) (“[a] product’s trade dress is the overall image used to present it to its purchasers * * *. [Citation.] A trademark is thought of as something more specific, such as a logo” (emphasis in original )). We therefore find RPS’ argument unpersuasive.

Id. at 1212.

Notably, the court did not explain what coverage the trademark infringement might fall within, though it seems conceivable that the “use of another’s advertising idea in your ‘advertisement’ ” offense might have been contemplated. However, the court does not make its analysis on this point clear. Indeed, for a court of appeal decision it is remarkably inarticulate about the basis for its analysis. The court also fails to look at fact allegations that might underlay both the trade dress and trademark claims, as well as other case authority finding trademark claims readily covered, applying Illinois law under the very policy language at issue herein, to wit: Central Mut. Ins. Co. v. StunFence, Inc., 292 F. Supp. 2d 1072 (N.D. Ill. 2003).
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