Gauntlett on Intellectual Property/Antritrust Insurance : Insurance Policyholder Advocate & Attorney David Gauntlett : Gauntlett Law Firm : Insurance Recovery, Policy Interpretation : Irvine, Orange County, California

Applying Illinois law, the court rejected the applicability of the fortuity doctrine to offense-based coverage, reasoning, at 236-37:

Cincinnati contends that the defamation and libel counts alleged in the counterclaims do not allege any fortuitous loss and, therefore, no duty to defend was triggered. . . .

Federal responds that Cincinnati has conflated intentional acts with intentionally caused injuries. Federal argues that the assertion of intentional acts does not run afoul of the fortuity requirement. Federal notes that none of the cases cited by Cincinnati involve the personal and advertising injury coverage at issue here. Federal asserts that, to expressly grant coverage for intrinsically intentional conduct and at the same time disclaim a duty to defend because the underlying allegations assert intentional conduct suggests that the Cincinnati policies either provide virtually non-existent coverage or contain a fatal ambiguity. Federal contends that, if Cincinnati's reasoning is correct – that personal and advertising injury coverage does not apply to the intentional acts of the insured – the coverage would be illusory.
. . . .
   “Allegations of recklessness may bring a defamation claim within the potential coverage of a policy which covers defamation but excludes knowing falsehoods.”

The court expressly rejected the argument that case law in Illinois made the fortuitous losses “a requirement in every insurance liability policy” and the court noted that Cincinnati cited no authority extending the “fortuitous loss” concept as articulated by it from this context. Id. at 237.

Addressing the illusory contract prohibition, in light of the “occurrence” predicate to defamation coverage which would render it illusory if interpreted narrowly as Cincinnati urged, the court reasoned:

[T]he Cincinnati policies purport to provide coverage for defamation and libel, but the 2003 to 2006 policy and the definition of “occurrence” provide coverage only for unintentional conduct. Accordingly, as in [Hurst-Rosche Engineers, Inc. v. Commercial Union Ins. Co., 51 F.3d 1336 (7th Cir. 1995)], the Cincinnati policies contain internal inconsistencies because, “on the one hand Cincinnati purports to provide coverage for intentional tort claims, and on the other hand Cincinnati denies coverage for those same claims.” Hurst-Rosche, 51 F.3d at 1345. Based on the well-reasoned decisions in [Tews Funeral Home, Inc. v. Ohio Cas. Ins. Co., 832 F.2d 1037 (9th Cir. 1987)] and Hurst-Rosche, we find that the ambiguity in the Cincinnati policies must be resolved in favor of the insureds or, in this case, the assignee of the insureds, Federal.

Id. at 240.

The court also independently determined that the occurrence language did not preclude coverage for the underlying counterclaim for defamation and libel as the Hurst-Rosche court also found under its fact scenario, 51 F.3d at 1546.

[A]lleged deliberate misconduct does not always bring a claim within an intentional conduct exclusion:
“[I]t is important to this case that the exclusion is not of intentional torts as such (nor is defamation an intentional tort in any simple sense), but of tortious conduct in which there is an intent to injure or an expectation of injuring. And in the case of defamation, at least, the exclusion does not track the tort. * * * [D]efamation is often not intended or expected to injure anyone.” Cincinnati Insurance Co. v. Eastern Atlantic Insurance Co., 260 F.3d 742, 746 (7th Cir.2001).

Id. at 240.

Neither an “intent to injure” nor an “expectation of injury” is an element of the tort of defamation. Moreover, since allegations of recklessness “may bring a defamation claim within the potential coverage of the policy which covers defamation but excludes knowing falsehoods,” Cincinnati’s duty to defend was triggered. Id. at 241.

Equitable contribution rights arose between the insurers. While equitable contribution does not apply to primary/excess insurance issues because they cover different risks by their very definitions, that both primary insurers issued coverage to the same insureds with different policy triggers did not make a difference, i.e., they need not both be occurrence-based and should permit contribution. Here, claims-made policies issued by Cincinnati were implicated as were occurrence-based policies by Federal, and contribution rights arose.

The court emphasized that the “other insurance” provisions in each of the subject policies reinforce the conclusion that Cincinnati and Federal provide coverage on the same basis. It reasoned,

Notably, Cincinnati's policies state that, “[i]f all of the other insurance permits contribution by equal shares, we will follow this method also.” Federal's “other insurance” provision states, “[i]f Loss arising from a Claim made against any Insured is insured under any other valid policy, prior or current, then this policy shall cover such Loss * * * only to the extent that the amount of such Loss is in excess of the amount of payment from such other insurance,” whether primary or excess.

Id. at 242.

Equally critical here is that Federal, which narrowly covers defamation in its standard form policies, elected to seek contribution, as the carrier offering narrower coverage may well and often does. So understood, Federal’s articulated grounds for coverage, which the court repeated although it did not analyze under the facts herein, evidence why potential coverage for “false advertising” claims may arise in a number of fact scenarios under standard form ISO policies.

Federal also asserted that, the numerous allegations by Reed that AHMA deceptively advertised its 2004 trade show by suggesting that it was the continuation of the trade show to which Reed claimed exclusive rights, separately implicated the covered offenses of “[m]isappropriation of advertising ideas or style of doing business” and “use of another's advertising idea in your ‘advertisement’ ” under both Cincinnati policies. In addition, Federal asserted that, under Illinois law, the policies' personal and advertising injury offenses encompassed Reed's count for alleged trademark infringement.

Id. at 226.

Critically, the alleged false advertising did not involve direct “wrongful taking” of the advertising idea of another, but rather its misuse to promote AHMA’s association with the 2004 trade show as a continuation of a prior trade show to which the claimant asserted exclusive rights.

This is analogous to the Ohio Cas. Ins. Co. v. Albers Medical, Inc., No. 03-1037-CV-W-ODS, 2005 WL 2319820 (W.D. Mo. Sept. 22, 2005) case, where a pharmaceutical company urged that its product was Lipitor when it was not its originator, but Pfizer, who sued it, was. The court readily found that this fact allegation fell within the “use of another’s advertising idea in your ‘advertisement’ ” offense where there was a misstatement of the defendant insured’s rights to promote a particular product, allegedly misleading consumers as to its proprietary rights connected with that product as well as its capacity to advertise itself as associated with it.

employment-related practices.

The underlying defamation claims were based on the statements of the insured Greenspoint’s controller James Sparks, general manager Mort Hall, and used car sales manager Jamie Mouton, who made racist and defamatory remarks about Martinez to third parties and ultimately fired him. These included statements by Mr. Satterfield and Mr. Holland. Mr. Mouton told them that Mr. Martinez was a “thieving spic beaner” or “thieving Mexican.” Id. at 56-57. They found that the statements were defamatory and that there was actual malice at the time the statements were communicated and that the respondents actually knew their statements to be false at the time of communication. Id. at 57.

Each of the parties making statements was a vice principal of the insured Greenspoint Dodge and thus their statements bound management. The Court noted:

In a section entitled “Allocation of Liability,” the arbitration panel specifically stated that a corporation is liable for its agents who engage in defamation if the agents are vice-principals, and then found Greenspoint, Apple, Sparks, Hall, and Mouton jointly and severally liable for the actual damages and assessed separate amounts for each of them for the punitive damages.
 

Id. at 58.

The principal focus of the court’s analysis was whether the knowledge of falsity exclusion precluded coverage for the defamatory statements where made by corporate vice principals. Greenspoint’s argument was that

The motion for summary judgment states that “director” has a well-understood and specific meaning when used in the context of organizations and when itemized along with “officers” and “shareholders.” . . . [T]he arbitration panel's determination that Sparks, Hall, and Mouton were vice-principals of the corporation is insufficient to make any of them a director, executive officer, or stockholder of the corporation, which are the terms used by the insurance policy for people who are “the insured.”
 

Id. at 62.

The court observed that under the law of the underlying forum, Texas,

A person's “status as a vice-principal of the corporation is sufficient to impute liability to [the corporation].” GTE Sw., 998 S.W.2d at 618. Corporations can act only through their agents. . . .
. . . .
. . . Courts use the “vice-principal” doctrine to “distinguish between the acts of ‘the corporation itself’ and ‘that of a mere servant or employee.’ ”
 

Id. at 64.

Explaining why the “vice principal” concept was not properly applied here to make the parties’ acts those of Greenspoint for insurance coverage purposes, the court noted that none of the identified actors who committed wrongful acts were “executive officers, directors or shareholders” as the policy required.

Drawing a distinction between the capacity of vice principals for tort law and the contract limitations of the policy’s exclusionary language, the court stated:

Put simply, under tort law Greenspoint is responsible for the actions of certain people in supervisory positions because their actions are determined to be the actions of the corporation, and liability is imposed even though the supervisors are not officers, directors or shareholders of the corporation. But the policy excludes from coverage only a false statement by Greenspoint, as it is defined under the policy, as officers, directors or shareholders of the corporation. We conclude that the terms of the policy itself control the definition of which people make up the corporation, for purposes of the insurance coverage. See Grimes Constr., Inc. v. Great Am. Lloyds Ins. Co., 51 Tex. Sup.Ct. J. 545, 248 S.W.3d 171, 172 (Tex.2008) (“[L]abels of tort or contract could not override the language of the insuring agreement”) . . . .

Id. at 65-66.

The court found the “knowledge of falsity” exclusion unavailing as the policy required Greenspoint itself to have knowledge of the defamation, which was not alleged.

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.