Insurance Policyholder Advocate & Attorney David Gauntlett : Gauntlett Law Firm : Insurance Recovery, Policy Interpretation : Irvine, Orange County, California

position on whether it would or would not agree to that amount prior to consummation of the settlement.

In reversing the trial court, the court of appeals found that Myoda’s ability to recover the $50,000 from American Family could not be adjudicated as a matter of law because differing inferences could arise on the undisputed facts.

The court found that the “voluntary payments” clause was not implicated because the settlement took place after Myoda tendered the matter to American Family. Westchester Fire Ins. Co. v. G. Heileman Brewing Co., 321 Ill. App. 3d 622, 637 (2001), citing Faust v. The Travelers, 55 F.3d 471 (9th Cir. 1995) (construing California law).

Alliance Syndicate, Inc. v. Parsec, Inc., 318 Ill. App. 3d 590 (2000) was factually distinguishable because it addressed a settlement following tender on behalf of a third party that was not an additional named insured. This had no application, however, to the scenario where the settlement was post-tender and the insurer agreed to defend.

The court therefore found Commonwealth Edison Co. v. National Union Fire Ins. Co., 323 Ill. App. 3d 970, 972-73 (2001) more analogous and the insured need not obtain its insurer’s consent but could contest indemnification at a later date because of its reservation of rights.

as well as misappropriation.

Both Federal and St. Paul initially denied a defense, and thereafter St. Paul reconsidered, though subject to a right to seek reimbursement. The court found that allegations that KI displayed the CAMPUS furniture in its showroom without authorization does not amount to a claim KI improperly used S&P advertising materials.

The key issue in the court’s view is whether the unique aesthetic design of the furniture may be considered in and of itself to be an advertising idea or material such that its unauthorized use or display would constitute advertising injury under the relevant policy language. Id. at *8.

The court rejected KI’s suggestion that the product itself by virtue of its design constitutes “advertising.” The court reasoned:

It is not the product per se that is the advertising, because even the best product can lie dormant in a forgotten cellar somewhere and no one would say its intrinsic qualities alone had “advertised” it. Instead, advertising is communication about a product, and as such it cannot logically be the product itself. This distinction is implicit in St. Paul's definition: “Advertising means attracting the attention of others [to the product] by any means for the purpose of seeking customers or increasing sales or business.” The advertising – the means or act of attracting attention – needs an object; it is not itself the object.

Id. at *9.

Relying on New York case law, the court surveyed none that reached an opposite conclusion on this point.

[See] Accessories Biz, Inc. v. Linda and Jay Keane, Inc., 533 F.Supp.2d 381, 388 (S.D.N.Y.2008) (“L & J argues that the Samples themselves are a form of advertising, but New York courts have routinely held that the phrase ‘advertising idea’ does not include the product itself.”); Hosel & Anderson, Inc. v. ZV II, Inc., 2001 WL 392229, *2 (S.D.N.Y.2001) (“[t]he product itself is not an advertisement within the meaning of the policy”).

Id. at *9.

On closer examination, each of these cases deals with the precise policy language at issue or involves an improper assumption that liability attaches because the advertising aspect and nexus to same are met. The product may constitute a form of “advertising injury” offense under certain circumstances; i.e., it’s an advertising idea. Unique trade dress as well as design patent claims would appear to meet this criteria.

Recharacterizing the suit as one simply based on misappropriation of design and not its promotional use, the court does not parse the specific allegations, which suggest the latter.

Distinguishing other cases, the court found that false advertising fact allegations, which created a mistaken impression about the original product, could trigger a defense. Indiana Ins. Co. v. Super Natural Distributors, Inc., 2003 WI App 244, 2003 WL 22336427, at *10 (Wis. Ct. App. 2003); Superformance Int’l, Inc. v. Hartford Cas. Ins. Co., 203 F. Supp. 2d 587, 597 (E.D. Va.2002).

In Acuity Mutual Ins. Co. v. Bagadia, 750 N.W.2d 817 (Wis. 2008), the court found that sending samples of a trademarked or copyrighted product to potential customers met the causal nexus between injury and advertising activity and that advertising likely materially contributed to consumer confusion. Id. at 831. The court found, on the fact allegations, no injury alleged based on consumer confusion or any advertising of the product. Kreuger, 2008 WL 4962669, at *10.

The court found the absence of any competitive relationship between KI and S&P critical, as S&P had never developed or sold any of the furniture itself. KI was simply a former distributor who decided to create its own duplicative furniture line. In a telling part of the opinion, the court describes certain parts of the opinion where references to display or advertising of products are asserted as “essentially surplusage.” Id. at *11. The court continued:

These citations within the complaint are not a component of any injury (since they do not relate to the merits of any of the claims), but rather are offered as simply background material or evidence.

Id. at *11.

This attempt to parse what are fact allegations that are the thrust of the allegations does not prove that there is no possibility for coverage under the fact allegations noted that could relate to liability for the dissemination of misappropriated items as a separate ground for relief. The court found it telling that KI was not alleged to have stolen S&P’s advertising idea, material, slogan, style, or title. Id. at *12.

The court found that St. Paul’s failure to specify in its counterclaim a request for reimbursement of defense fees barred it from such relief. The court, after serving authority and determining that the right to reimbursement was a majority not minority rule, agreed to permit St. Paul the right to amend its pleading but not to recover relief thereon, which would be the subject of further proceedings.

$310,492.99, the present value of future royalty payments.

The D&O policy was issued from January 22, 1999 to January 22, 2002 on a claims-made basis with $10M policy limits and a SIR of $150,000. The insurer had delayed issuing a coverage opinion which concluded that there was no express exclusion for patent infringement or breach of contract cases. The court reasoned:

       The Court finds that all defense costs incurred by Combimatrix arose out of its indemnification of Montgomery for alleged wrongful acts committed by Montgomery. Specifically, the underlying Nanogen action centered on Nanogen’s accusations that Montgomery stole Nanogen’s technology and brought it to Combimatrix. Accordingly, Combimatrix and Montgomery presented a single and joint defense to the Nanogen suit.

Id. at *10.

The court found that the actions alleged by Nanogen against Montgomery arose from Montgomery’s actions as an officer of Combimatrix.

It was only when Montgomery was an employee at Combimatrix that he could have committed the alleged wrongful acts of revealing Nanogen confidential information or using Nanogen’s confidential information inappropriately.

Id. at *11.

The court reasoned:

       Contrary to Defendant’s position, the Court finds that, in this case, the duty to advance defense costs is broad as the duty to defend. See Hurley v. Columbia Cas. Co., 976 F.Supp. 268, 275 (D.Del.1997) . . . Shapiro v. Am. Home Assurance Co., 616 F.Supp. 906, 913 (D.Mass.1985) (finding that an insurance contract’s “statement of the duty to reimburse costs of defense ... is at least as broad as the duty to defend under traditional insurance provisions.”).

Id. at *11.

Notice was all that was required. No specific advice that a self-insured retention had been exhausted was necessary to trigger the insurer’s immediate obligation to reimburse defense costs.

       Furthermore, the explicit language of the Policy itself required Combimatrix to do no more than it did to notify Defendant of its claim.

Id. at *13.

A settlement was concluded in a manner so as to render it involuntary and in response to defendant’s breach of its duties where the insurer defendant refused to advise further on its insurance coverage position after initially denying a defense. Jamestown Builders, Inc. v. General Star Indemnity Co., 77 Cal. App. 4th 341, 346, 91 Cal. Rptr. 514 (1999). Id. at *13.

The insurer’s conduct in asserting non-coverage of patent infringement claims absent a specific exclusion was a breach of the covenant of good faith and fair dealing.

At trial, Favilla [who handled the claim for NUFI] conceded that the Policy did not contain any exclusions related to breach of contract and patents. Favilla admitted that he gave the coverage opinions to the insured even though he lacked sufficient information to determine whether any exclusions applied.
. . . .
       On November 3, 2003, almost 3 years after receiving notice of the claim, Plunkett [who handled the claim for NUFI following Favilla] wrote a first and final coverage letter to Combimatrix. Plunkett approached the review in a manner that revealed a steadfast determination to deny coverage.
Id. at *16.

Punitive damages were inappropriate, however, because there was no sufficient showing of malice, fraud or oppression.

The court noted that the Insurers could have included an allocation requirement in their contracts that would require allocation before any defense fees be paid but that none existed. Each of the cases requiring allocation followed New Jersey law that mandated apportionment between covered and noncovered claims.

Even these authorities, in the court’s view, would not require apportionment based on which overt acts occurred within which of the alleged different towers’ coverage periods, especially as the court noted that the Department of Justice was amending its acquisition chart to identify distinct overt acts though lack of judicial economy in the Insureds’ proposed allocation scheme was manifest.

The court concluded:

[The insured] was entitled to the full benefit of the duty to defend which [the insurer] owed him, and to limit the value of that benefit by reducing the amount which was actually expended in defending the counterclaim [which was covered by insurance], because it overlapped the steps taken in prosecuting the complaint [which was uncovered], would deprive plaintiff of that full benefit.

Id. at *13.

Finding a New York decision on point, it adopted its reasoning, citing The Trustees of Princeton University v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2008 WL 2277830 (N.Y. App. Div. 1st Dept. June 5, 2008) for its view that:

“As the policy obligates [the insurer] to advance all defense costs as they are incurred, subject to a right of recoupment of payment for noncovered costs after the underlying litigation is completed, the court had no obligation at this juncture to rule on the allocation of defense expenses.”

Id. at *14.

A survey of national authority evidences that the majority trend permits reimbursement for fees incurred in connection with prosecution of a complaint where they dove-tail with those essential to defend a counterclaim. See Adobe Systems, Inc. v. St. Paul Fire & Marine Ins. Co., No. C 07-00385 JSW, 2007 WL 3256492, at *9 (N.D. Cal. Nov. 5, 2007).

The court found that if there is no right to reimbursement in the policy it should not be implicated by a court following decisions such as General Agents Ins. Co. of America, Inc. v. Midwest Sporting Goods Co., 828 N.E.2d 1092, 1103 (Ill. 2005); First Insurance Co. of Hawaii v. State, by Minami, 665 P.2d 648, 654 (Haw. 1983); Perdue Farms, Inc. v. Travelers Cas. and Surety Co. of Am., 448 F.3d 252, 258 (4th Cir. (Md.) 2006); Terra Nova Ins. Co. Ltd. v. 900 Bar, Inc., 887 F.2d 1213, 1219 (3d Cir. (Pa.) 1989); Shoshone First Bank v. Pacific Employers Ins. Co., 2 P.3d 510, 514 (Wy. 2000); Liberty Mut. Ins. Co. v. FAG Bearings Corp., 153 F.3d 919, 924 (8th Cir. (Minn.) 1998); Westchester Fire Ins. Co. v. Wallerich, 527 F. Supp. 2d 896, 908 (D. Minn. 2007).

The Virgin Islands court relied on

title 22, section 819 of the Virgin Islands Code (“Section 819”) [which] provides that “[n]o agreement in conflict with, modifying, or extending any contract of insurance shall be valid unless in writing and made a part of the policy.”  V.I.Code Ann. tit. 22, § 819 (1968). Pursuant to Section 819, General Star was prohibited from constructively amending the Policies by reserving the right to reimbursement of defense costs in a subsequent letter.

Notably, a number of jurisdictions have similar statutory provisions which would support, by the same logic, the limitation of policies to their actual language.

Medical Liability Mut. Ins. Co. v. Alan Curtis Enterprises, Inc., ___S.W.3d ___, 2008 WL 2205868 (Ark. 2008)

In another contemporaneous case, the Arkansas Supreme Court joined a growing number of jurisdictions including Illinois and Texas who found that absent a contract provision in the policy permitting reimbursement of attorneys’ fees for a carrier who either agreed to defend or was adjudicated to owe a defense could not seek recoupment of monies expended for a defense.

In reaching that conclusion the court presumed that it was following the minority rule.  It did not observe how many jurisdictions had in fact articulated it.  Instead the court cited United Nat’l Ins. Co. v. SST Fitness Corp., 309 F.3d 914 (6th Cir. (Ohio) 2002); Cincinnati Ins. Co. v. Grand Pointe LLC, 501 F.Supp.2d 1145 (D.Tenn.2007); Buss v. Superior Court, 16 Cal.4th 35, 65 Cal.Rptr. 2d 366, 939 P.2d 766 (1997).

Neither of Arkansas’ statutory schemes supported an award of attorneys’ fees under the reimbursement fact pattern before the court.  Since Arkansas’ public policy was best evidenced by its statutes and they did not provide such remedy, there was no need to imply one.  See, e.g., State Farm Mut. Auto Ins. Co. v. Henderson, 356 Ark. 335, 342, 150 S.W.3d 276, 280 (2004).