selvin_potential insurance coverage

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Potential Insurance Coverage

Presented by:

Peter S. SelvinTroyGould PC

Business Litigation - Potential Insurance Coverage

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The Importance of Liability Insurance in Civil Litigation

Liability insurance provides protection (i.e., indemnity) in respect to a claim, but also funding for the insured’s defense to litigation. It also imposes a duty on the insurer to settle the case for its insured.

The law heavily favors policyholders. Where the policy provides a duty to defend, there are three

important features: first, the duty to defend is extremely broad; second, where there is a duty to defend, the carrier is obligated to defend both covered and uncovered claims; and third, a carrier that breaches the duty to defend may face huge penalties for doing so.

Coverage may be provided in many counter-intuitive situations.


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What is “Liability Insurance”?

Definition: Any type of insurance that protects an individual or business from the risk that they may be sued and held legally liable for something such as malpractice, injury or negligence. Liability insurance policies cover both legal costs and any legal payouts for which the insured would be responsible if found legally liable.


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Common Forms of Liability Insurance

Comprehensive General Liability (CGL) Errors and Omissions (E & O) Directors and Officers (D & O) Employment Practices (EPLI)


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How Is Liability Insurance Different From Other Forms Of Insurance?

“Third party” versus “first party” Trigger of coverage is not loss sustained by insured, but claim

asserted by third party Insurer has obligation to defend and indemnify insured in the

event a “claim” asserted by a third party


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Gross Anatomy of a Liability Policy

Insuring agreement – what does the policy cover? Trigger of coverage – is it a “claim”? “Occurrence” versus “claims made” coverage Notice or reporting of claim –different rules for “claims made”

versus “occurrence” based policies. Notice or reporting of “circumstances” Retention/deductible Exclusions


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Framing a Complaint to Trigger Coverage

The two key principles:1. The duty to defend is not limited by the causes of action that are

pled by the plaintiff. “…that the precise causes of action pled by the third party complaint may fall outside policy coverage does not excuse the duty to defend where, under the facts alleged, reasonably inferable or otherwise known, the complaint could be fairly amended to state a covered liability.” Scottsdale Ins. Co. vs. MV Transportation, 36 Cal.App.4th 643, 654 (2005); Hartford Casualty vs. Swift Distribution, 59 Cal.4th 277 (2014).


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Framing a Complaint to Trigger Coverage, cont.

The two key principles, cont.:2. Insurer must provide a complete defense to its insured even where

some causes of action may be outside coverage. Thus, if any claims in a third party complaint against a party insured under a CGL policy are even potentially covered by the policy, the insurer must provide its insured with a defense to all claims. Horace Mann Ins. Co. vs. Barbara B., 4 Cal.4th 1076, 1081 (1993). This requirement that an insurer provide a complete defense in a “mixed” action is necessary, even if outside the policy’s strict terms, to protect the insured’s litigation rights with respect to the potentially covered claims. Buss vs. Superior Court, 16 Cal.4th 35, 49 (1997).


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Reservation of Rights

“An insurer’s notification to an insured that coverage for a claim may not apply. Such notification allows an insurer to investigate (or even defend) a claim to determine if coverage applies (in whole or in part) without waiving its rights to later deny coverage based on information revealed by the investigation." Glossary of Insurance Management Terms (9th ed.). International Risk Management Institute, 2004, p. 192.


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Reservation of Rights, cont.

"An insured is entitled to know early in the litigation process whether the insurer intends to honor [its] duty [to defend] in order that the insured may take steps to defend himself. If in fact the insurer undertakes that defense the insured may reasonably rely upon the nonexistence of policy defenses. To hold otherwise would allow the insurer to conduct the defense of the action without the knowledge of the insured that a conflict of interest exists between itself and the insurer. The conflict is that the insurer retains a policy defense which would relieve the insurer of all liability while simultaneously depriving the insured of the right to conduct his own defense. It is the reliance of the insured upon the insurer's handling of the defense and the subsequent prejudice which gives rise to an estoppel in the first instance against the insurer from raising policy defenses.“ Penn-America Ins Co. v. Sanchez, 220 Ariz. 7, 202 P. 3d 472 (2008).


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The Duty to Defend

Under Civil Code § 2778(4), the duty to defend is implied in all liability insurance contracts unless the policy clearly and unambiguously excludes such a duty. One of the most basic cornerstones of modern insurance law is that the duty to defend is broader than the duty to indemnify. Gray v. Zurich Ins. Co., 65 Cal. 2d 263 (1966).

In order to trigger an insurer’s duty to defend, “the insured need only show that the underlying claim may fall within policy coverage.” Montrose Chemical Corp. v. Superior Court, 6 Cal. 4th 287, 300 (1993). “[T]he insurer must prove it ‘cannot.’” Montrose, 6 Cal. 4th at 300 (1993). This is so even if a claim is “insubstantial” and would not support an award of damages. Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 1086 (1993).

By contrast, the duty to indemnify is governed by facts established at trial. City of Laguna Beach v. Mead Reinsurance Corp., 226 Cal. App. 3d 822, 829-830 (1990). An insurer is obligated to indemnify against liability only if facts proven at trial show a covered claim. (California Insurance Law Handbook (2011) at § 46:1)


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Consequences of an Insurer’s Wrongful Failure to Defend

Where the carrier wrongfully fails to defend, it will be deemed to have waived any exclusions to coverage under the policy that it otherwise would have had with respect to its obligation to indemnify. If a carrier denies the insured a defense and it is ultimately determined that a defense was owed, the carrier can be subjected to a claim of bad faith and may ultimately be required to provide indemnity even where no duty to indemnify exists. Isaacson v. California Ins. Guarantee Assn, 44 Cal. 3d 775, 791 (1988). See also Amato v. Mercury Casualty Co., 53 Cal. App. 4th 825 (1997).

This seemingly harsh result advances the policy of incentivizing insurers to vigorously search the underlying claim for the purpose of finding a duty to defend. See Pension Trust Fund for Operating Engineers v. Federal Ins. Co., 307 F. 3d 944, 951 (9th Cir. 200); see also K2 Investment Group, LLC v. American Guarantee & Liability Insurance Company, 2013 WL 2475869 (NY App. 2013) (when a liability insurer has breached its duty to defend its insured, the insurer may not later rely on policy exclusions not contained in its initial disclaimer to escape its duty to indemnify the insured for a judgment against him).


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Once the duty to defend attaches, the insurer also has an obligation to settle the claim within policy limits

If the carrier rejects a reasonable settlement offer from the claimant that is within policy limits, it may be liable for any judgment that is in excess of the policy limits. See Communale v. Traders & Gen Ins. Co., 50 Cal. 2d 654 (1958).

Importantly, in rejecting such a settlement offer, the carrier may not take into account or consider any defenses it may have to coverage for the claim. See Johansen v. California State Auto Ass’n Inter-Ins. Bureau, 15 Cal. 3d 9 (1975).

At the same time, in order to establish a claim for bad faith, the insured must demonstrate that the policy obligated the insurer to indemnify the insured for the underlying loss. See Dewitt v. Monterey Insurance Company 204 Cal. App. 4th 233 (2012).


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Selection of Counsel

If a carrier assumes its insured's defense with no reservation of rights, the carrier normally controls the defense, including selection of counsel.

But "if a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall independent counsel to the insured". Cal. Civ. Code § 2860(a).

A conflict of interest may exist "when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer…" Cal. Civ. Code § 2860(b).

A carrier that refuses to fund independent counsel in circumstances where such a conflict of interest exists may be liable for breach of its duty to defend. See Montrose Chemical Corporation v. Century Indemnity Company, 2010 WL 3566700 (2010).


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“Cumis” Counsel’s Direct Exposure for FeesUnnecessary for the Insureds’ Defense

In 2015, the California Supreme Court decided in Hartford Casualty vs. J. R. Marketing, LLC, 61 Cal.4th 998 (2015) that an insurer may seek reimbursement directly from so-called “Cumis” counsel for fees attributable to time that was fraudulent or was otherwise manifestly useless and wasteful when incurred.

“Cumis counsel have been unjustly enriched at the insurer’s expense [and they] provide no convincing reason why they should be absolutely immune from liability for enriching themselves in this fashion.”


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Utilizing a CGL Policy’s coverage for “personal injury” or “advertising injury” in business disputes

In lawsuits involving claims of infringement, misappropriation or the violation of the right of privacy, the key portion of a CGL policy is the “personal injury” or “advertising injury” coverage found in Coverage B. That coverage section will typically contain language providing as follows:

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “personal and advertising injury” to which this insurance applies. We will have the right and duty to defend any “suit” seeking those damages…

b. This insurance applies to “personal and advertising injury” caused by an offense arising out of your business but only if the offense was committed in the “coverage territory” during the policy period.


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“Accidental” conduct is not required for coverage for personal or advertising injury

Importantly, coverage for personal or advertising injury does not depend on the existence of an “occurrence,” which typically is defined in terms of “accidental” conduct. See, e.g., General Accident Ins. Co. v. West American Ins. Co., 42 Cal. App. 4th 95, 103 (1996). Thus, coverage for personal and advertising injury is not limited to negligence and may even cover intentional torts. See, e.g., David Kleis, Inc. v. Superior Court, 37 Cal. App. 4th 1035, 1047 (1995).


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Recent appellate decision imposing duty to defend on liability carrier in connection with trade secrets claim by company against one of its

former employees

The recent unpublished appellate decision in Tetra Vue, Inc. vs. St. Paul Fire & Marine Ins. Co. (Cal. Ct. App. July 19, 2013, No. D061002) illustrates both the usefulness of Coverage B in business cases and the breadth of the duty to defend.

In that case, the Court of Appeal found that because the claims against the insured potentially alleged advertising injury, the insurer (St. Paul) was obliged to provide its insured with a defense where the insured’s former employer had accused him of misappropriating proprietary material and using that proprietary material in connection with the insured’s new business venture.


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Recent appellate decision imposing duty to defend on liability carrier in connection with trade secrets claim by company against one of its

former employees, cont.

The Court of Appeal held St. Paul could decline to defend only if it could conclusively eliminate the possibility that General Atomics was alleging it suffered harm from the misappropriation and use of its advertising material, an allegation that would trigger coverage under the policy. While the cross-complaint alleged only that Banks and TetraVue misused propriety General Atomics materials, it was possible that General Atomics itself at some point used the same materials to attract the attention of others to seek customers and/or increase its business.

If this were shown to have occurred, the use of the same materials by Banks and TetraVue would potentially constitute advertising injury, triggering coverage under the policy. As a result, the court found the cross-complaint alleged at least a possibility that a claim asserted by General Atomics against TetraVue and Banks might have been covered. The court of appeal reversed the trial court’s judgment and remanded the case for further consistent proceedings. 10 California Insurance Law & Litigation Alert (August 31, 2013) at p. 149.


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Examples of coverage in counter-intuitive situations

Patent infringement The application of D&O policies in business or IP disputes Cyber-related risks Construction defect claims Trade dress claims The concept of “disparagement”


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Patent infringement may be covered pursuant to a CGL policy’s “Advertising Injury” coverage

See, e.g., Amazon.com International, Inc. vs. American Dynasty Surplus Lines Ins. Co., 120 Wash. App. 610 (2004) (patent infringement covered under “misappropriation of advertising ideas” offense where infringed software itself constituted or embodied advertising technique); Hyundai vs. National Union Fire Ins. Co., 600 F. 3d 1092 (9th Cir. 2010) (coverage for infringement of business method patent arising out of Hyundai’s “build your own vehicle” feature on its website); Dish Network Corporation v. Arch Specialty Ins. Co., 659 F. 3d 1010 (10th Cir. 2011) (coverage for patent infringement where the patent involved a customer service telephone system that allowed customers to perform pay-per-view ordering and customer service over the phone).


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Because of the broad grant of coverage under D&O policies, many business and IP disputes may (surprisingly) be covered

Acacia Research Corp. v. National Union Fire Insurance Co. of Pittsburgh, PA, 2008 WL 4179206 (C.D. Cal. Feb. 8, 2008) (D&O carrier obligated to reimburse company and its officer for defense fees and settlement paid in IP theft/trade secrets case).

American Century Services Corp. v. American International Specialty Lines Insurance Co., 2002 WL 1879947 (S.D.N.Y. August 14, 2002) (patent infringement claims were potentially within coverage provision applicable to “wrongful acts”).

MedAssets, Inc. v. Federal Ins. Co., 705 F. Supp. 2d 1368 (N.D. Ga. 2010) (claim alleging misappropriation of confidential information was covered under D&O policy despite presence of “intellectual property” exclusion).


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Some cyber-related risks may be covered under traditional insurance policies

Although new insurance products have been developed which are specifically tailored for cyber-risk claims, some such claims may be covered under traditional insurance policies. See, e.g., Retail Ventures, Inc. v. National Union Fire Insurance Company of Pittsburg, PA, 691

F. 3d 821 (6th Cir. 2012) (insurance provided reimbursement to company for remediation expenses where company was victimized by computer hackers who stole private customer and credit card information); Creative Hospitality Ventures, Inc. v. United States Liability Ins. Co., 655 F. Supp. 2d 1316 (SD Fla. 2009) (violation of right of privacy, and hence “personal and advertising injury” coverage, under CGL policy triggered where vendor failed to redact customer credit card information from receipts).

Although this is a minority position, some cases also hold that data loss caused by a computer virus may be covered under business interruption or other first-party property policies. See, e.g., Southeast Mental Health Center, Inc. vs. Pacific Insurance Company, Ltd., 439 F. Supp. 831 (WD Tenn. 2006); Lambrecht and Associates vs. State Farm Lloyds, 119 S.W. 3d 16 (Tex. App. 2003).


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CGL Policy May Cover Defense of Data Breach Class Action

Travelers Indem. Co. v. Portal Healthcare Solutions, LLC, 2016 WL 1399517 (4th Cir. 2016)

The Fourth Circuit ruled that Travelers Insurance must defend a medical records company in a class action suit stemming from a data breach which resulted in the disclosure of its customers’ personal health information. The Court held that availability on the internet to the general public qualified as a “publication” within the meaning of the general liability policy. Thus, making any document or information available on the internet may constitute a “publication” for insurance purposes, where “publication” is a trigger for coverage.


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Insurers Are Held to Be Responsible for Defending Telemarketing Class Action Suits

National Fire Ins. vs. E. Mishan & Sons, Inc. 2016 U.S. App. Lexis 10151 (2nd Cir. 2016)

Insurers must defend home goods company (Emson) in two class actions arising from its alleged sharing of customer information with a telemarketer. According to the Court, at least some of the claims in the class actions fell outside policy exclusions for knowing and intentional conduct.


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Construction Defect Claims

Construction defect claims satisfy the “occurrence” requirement in a CGL policy. Geddes & Smith v. St. Paul Mercury Indemnity Co., 63 Cal. 2d 602 (1965); Economy Lumber Co. v. Ins. Co. of No. America, 157 Cal. App. 3d 641 (1984); Maryland Cas Co. v. Reeder, 221 Cal. App. 3d 961 (1990).

See also McMillin Management Services v. State Farm General Insurance Co., 2013 WL 5303056 (Cal. App. 4th Dist.) (insurer required to defend project manager in construction defect suit filed by group of homeowners); Anthem Electronics, Inc. v. Pacific Employers Ins. Co., 302 F. 3d 1049 (9th Cir. 2002).


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Trade Dress Claims

Recognizing that a product’s design or appearance may inherently also constitute a form of “advertising,” several courts have held that trade dress inherently constitutes “advertising” within the meaning of a CGL policy. See St. Paul Fire and Marine Ins. Co., v. Advanced Interventional Systems, 824 F. Supp. 583, 585 (E.D. Va. 1993), affirmed 21 F. 3d 424 (4th Cir. 1994) (holding that trade dress infringement “expresses essentially the same concept” as the term “style of doing business”); Poof Toy Products Inc. v. U.S. Fid. & Guar. Co., 891 F. Supp. 1228, 1232 (E.D. Mich. 1995) (trade dress infringement constitutes “advertising injury” under the advertising injury “offense” or “misappropriation of advertising ideas or style of doing business”); Peerless Lighting Corp. v. American Motorists Ins. Co., 82 Cal. App. 4th 995, 1000, fn 4 (2000) (“infringement of trade dress arguably qualifies as ‘[m]isappropriation of advertising ideas or style of doing business.’”)


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The concept of “disparagement”

One of the key “offenses” under a CGL policy’s Coverage B “is an oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.” (emphasis added)

As shown below, the concept of “disparagement” as used in this “offense” has been applied by courts to find coverage in connection with a variety of business claims.


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“Disparagement” as a basis for finding coverage in false advertising or unfair competition cases

Several recent cases have found that “disparagement”, which is a triggering “offense” in many CGL policies, may be implied for insurance coverage purposes where, for example, a vendor claims that it was the “only producer” of a certain software product (E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co., 590 F. Supp. 2d 1244 (N.D. Cal 2008)) or where it claims that its products are “more effective” or “superior” to those made by others (Knoll Pharmaceutical Co. v. Automobile Ins. Co. of Hartford, 152 F. Supp. 2d 1026, 1036 (N.D. III. 2001)).

More recently, a federal court applying California law determined that there was “disparagement” and hence insurance coverage where a complaint alleged that the insured had “implied to the marketplace” that it had a superior right to use a certain trademark and thus by implication represented that the underlying plaintiff did not have the rights to that trademark. Burgett, Inc. v. American Zurich Insurance Company, 2011 U.S. Dist. LEXIS 135449 (E.D. Cal. 2011).

These cases support a finding for coverage in false advertising or unfair competition cases, even where the underlying policy does not specifically identify these claims as covered “offenses”.


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The California Supreme Court Decision In Hartford Casualty v. Swift Distribution, 59 Cal. 4th 277 (2014)

But in 2014 the California Supreme Court significantly limited the doctrine of “implied disparagement” in the insurance coverage context:

“In evaluating whether a claim of disparagement has been alleged, courts have required that defendant’s false or misleading statement have a degree of specificity that distinguishes direct criticism of a competitor’s product or business from other statements extolling the virtues or superiority of the defendant’s product or business…[This] involves two distinct … requirements. A false and misleading statement (1) must specifically refer to the plaintiff’s product or business, and (2) must clearly derogate that product or business”. Id. at 291.

Thus, an insured’s attempt to copy or infringe on the intellectual property of another’s product does not, without more, constitute disparagement. Id. at 296.


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Key Take-Aways and Best Practices

There are opportunities to find coverage for lawsuits arising out of business, IP and other risks under traditional insurance policies, such as CGL, D&O and E&O.

Report claims immediately under all potentially pertinent policies. Be aware that there may be a reportable “claim” even if it has not ripened into an actual lawsuit. In addition, “circumstances” that do not yet constitute a “claim” may also be required to be reported.

Do not accept a declination of coverage, but instead hold your carriers to their statutory duties to investigate, respond, defend, settle and indemnify.

Consider the newer, non-traditional insurance products for IP infringement and cyber-liability to fill gaps in coverage left by traditional products.

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About the Speaker

Peter S. SelvinTroyGould PC1801 Century Park East, Suite 1600Los Angeles, CA [email protected]

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