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

I. INTRODUCTION

What one judge may categorize as “speculation,” another judge may find falls within the scope of “potentiality.” Potentiality requires a focus on any set of facts consistent with the claims pled that would not trigger exclusion but would still have the coverage provisions implicated. It matters not if the allegations are frivolous, groundless or false or would bar coverage if proven as alleged. The dividing line depends upon what facts may be reviewed in evaluating whether a defense is due.

Depending upon the forum, this may include the facts alleged in the current complaint, the four corners rule (the law in Florida and Texas); facts known to the insurer (the law in Illinois and New York); or facts available to the insurer, implicating a duty to investigate (the law in California and Massachusetts) (where facts “knowable” to the insurer are pertinent).

II. IN ASSESSING POTENTIAL COVERAGE IN “FACTS AVAILABLE” FORUMS, THE FOCUS IS ON THE PERTINENT FACTS THAT EVIDENCE HOW LIABILITY WILL ATTACH IN THE UNDERLYING ACTION

A. A Claimant’s Poor Draftsman Skills Cannot Avoid a Finding of Potential Coverage

An insurer is excused from defending only where “the basis for claiming potential liability under the policy is . . . tenuous and farfetched.” Giddings v. Industrial Indem. Co., 169 Cal. Rptr. 278, 282 (Ct. App. 1980). Insurers who urge a narrow construction of the potentiality doctrine misapprehend its import in light of this case law as a number of courts have found.

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I. INTRODUCTION

A growing number of insurers, following the lead of AIG (through its subsidiary AIG Mergers & Acquisitions Insurance Group) and Hartford (through its Nutmeg Insurance and Hartford Financial Products, Transactional Risk Group), offer insurance coverage for “representations and warranties” in connection with a merger and acquisition. Although typically issued to buyers, seller’s coverage is also available. As yet, no litigation has arisen over its terms and conditions. Nevertheless, negotiating these policies presents a number of challenges.

II. DOCUMENTS TYPICALLY REQUIRED FOR “REPRESENTATION AND WARRANTY” INSURANCE

A. List of Documents

The following checklist from AIG’s exploration of its policy application highlights that information which underwriters will require to evaluate the “representation and warranty” risk:

1. Draft acquisition agreement and related disclosure schedules;
2. Financial statements of the seller and the acquired company or business;
3. Any offering memorandum or other informational material prepared in connection with the transactions contemplated by the acquisition agreement;
4. Any proxy statement or information statement prepared in connection with the transactions contemplated by the acquisition agreement;
5. Buyer’s due diligence request list and responses thereto, if in writing;
6. Data room index or other due diligence document index prepared in connection with the transactions contemplated by the acquisition agreement;
7. Third party reports, studies or opinions;
8. Working group lists; and
9. Transaction time line.

B. Identifying and Supervising the Delivery of Only Necessary Documents to Underwriting

Typically a warranty and representations insuring agreement will provide, “The Insurer shall indemnify the Insureds for, or pay on their behalf, any Loss in excess of the Retention that is reported by the Named Insured to the Insurer during the Policy Period in accordance with Section 5 of this Policy.” The pertinent coverage is for a breach of a representation warranty. This can occur where there is either an inaccurate statement or a false or misleading one. Thus, AIG defines the breach as an “inaccuracy in the representation.”

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(CALIFORNIA/OHIO/TEXAS)

CALIFORNIA

New case law makes the applicability of California coverage law more likely in a number of circumstances.

First, California will rarely recognize the conflict of interests unless the policy issues behind the distinct rule would necessarily create a different result.

Western Int’l Syndication Corp. v. Gulf Ins. Co., 222 Fed.Appx. 589, 594, (9th Cir. (Cal.) 2007).

Second, California coverage law will apply if a conflict of law arises where the underlying suit is in California, as this is the place of performance.

Frontier Oil Corp. v. RLI Ins. Co., 153 Cal. App. 4th 1436, 1461 (Cal. Ct. App. (2d Dist.) 2007)

Third, recent case authority clarifies the right to independent counsel in California. In typical scenarios encountered by litigants in intellectual property disputes, an insurer that asserts an “expected and intended” conduct and knowledge of falsity the “first publication exclusion” creates a conflict entitling the insured to retain independent counsel at the insurer’s expense.

J.R. Marketing, LLC v. Hartford Casualty Ins. Co., 2007 WL 4217443 at *8 (Cal. Ct. App. (1 Dist.) November 30, 2007)

Fourth, recovery of defense fees precipitated by pursuit of intellectual property lawsuits may elicit counterclaims, which are themselves covered, thereby funding the cost of affirmative litigation.

Aurafin-OroAmerica, LLC v. Federal Ins. Co., 2006 WL 1880088 (9th Cir. (Cal.) June 26, 2006)

Adobe Systems, Inc. v. St. Paul Fire & Marine Ins. Co., No. C 07-00385 JSW, 2007 WL 3256492, *9 (N.D. Cal. Nov. 5, 2007)

Fifth, California recently expanded the “genuine dispute doctrine” to permit an award of bad faith damages for reasonable attorney’s fees expended in proving coverage only where insurers withheld benefits.

Wilson v. 21st Century Ins. Co., 42 Cal.4th 713 (Cal. 2007) (“In the insurance bad faith context, a coverage dispute is not ‘legitimate’ unless it is founded on a basis that is reasonable under all the circumstances.”)

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Procuring an early neutral evaluation can offer parties a reality check on the viability of their legal positions. In an era of increased litigation expense, where one party believes it is more likely to prevail than the other, selecting an early neutral evaluator is a sign of strength. It requires the other party to submit its position to dispassionate neutral analysis and be prepared to explain any shortcomings of its case to its client before it makes the investment to go forward to trial or continue expensive litigation.

For more information regarding ENE, see John S. Blackman’s article, Neutral Evaluation – An Adr Technique Whose Time Has Come, http://library.findlaw.com/1999/Sep/1/128447.html.

The Benefits of Early Neutral Evaluation of Insurance Coverage Disputes of Complex Business Litigation Matters

I have had occasion to serve as an expert witness and consultant in a number of coverage actions where the underlying lawsuits arose out of intellectual property or antitrust/business tort disputes. Knowledge of both the underlying tort and its intersection with insurance coverage generally offers a number of pertinent insights beyond the experience of many courts who do not routinely address such coverage issues...

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I. INTRODUCTION

The international insurance market is grappling with the challenge of creating a policy that adequately addresses the number of risks posed by new technologies and Internet activities in particular. Currently, there is no industry standard policy form. A recent panel of brokers and insurance coverage counsel seeking to evaluate policies offered in the marketplace failed to identify a single best policy form given the wide variance in the coverage that applies. The group recommended that each business examine its particular needs and determine which companies’ products best address such needs.

There is another solution, however: craft a “best practices” policy form from which the majority of businesses may benefit. The concept is much like that which inspired the creation of the Commercial General Liability policy, which was itself a response to the number of variant policy forms issued by carriers – some broker-influenced, others not.

II. “BEST PRACTICES” INSURANCE COVERAGE

ACE: ACE DigiTech Digital Technology & Professional Liability Insurance Policy; ACE Digital DNA Network Risk Insurance Program for Business Interruption Coverage

ACE net Advantage Complete: Internet Media Liability, Internet Professional Services Liability, Cyber Extortion, Information Asset, Business Interruption, Criminal Reward Fund, Crisis Expense

Chubb: Information and Network Technology Errors or Omissions and Endorsements Reputation Injury and Communications Liability Coverage (separate part of GL coverage)

Travelers CyberTech: Technology Errors and Omissions Liability Communications and Media Liability Network and Information Security Liability (CyberTech & General Provisions)

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In a “hard market” many brokers and risk managers suggest that policyholders would be better off not giving notice to their insurers of claims, even if they are potentially covered, so as to avoid higher renewal costs. There are a number of problems with this approach. Five concerns are addressed hereafter.

First, if the policy has a “voluntary payments” provision, the failure to provide notice will bar recovery of pre-notice attorneys’ fees and may preclude a right to recover any policy benefits if the notice is delayed until trial is imminent This result may attend even in the majority of jurisdictions that require an insurer to prove prejudice to avoid policy benefits. If the policy is “claims made” (i.e., E&O/D&O) as opposed to “occurrence” based (i.e., CGL/Umbrella), the failure to provide notice of ongoing litigation during the policy period could impact the ability to obtain any coverage.

Second, in the event that the suit leads to a damages award or a sizeable settlement, and these exposures are not covered by insurance because no proper or timely notice was given, such a corporate loss could create a basis for a shareholders’ derivative action against the corporation for “waste” of the insurance policy asset.

Third, many insurers learn about ongoing litigation because it is reported on 10Q or 10K forms filed by the corporation as public records or because all outstanding litigation is reported in D&O renewal applications. Many insurers will already have taken these claims into account and adjusted insurance premiums accordingly. Thus, policyholders will suffer the consequences of reported litigation without obtaining any of the policy benefits which prompt notice would have secured.

Fourth, insurers typically assert that they want notice of all litigation against the company to better assess its risk profile. Brokers and risk managers who suggest that notice to the carrier will raise rates are often speculating. A loss, not a mere claim, is the event typically tracked by most insurers in fixing higher premiums. A risk manager would be hard pressed in a “waste” action to explain why it believed premiums would be higher where there is no tangible evidence that such would be the case. Reliance on a broker’s oral statements to that effect, where that broker did not investigate to see precisely what premium increases would have arisen if notice were provided, is not competent evidence. Even favorable testimony from the broker as to its reasonable expectation that higher premiums would result may provide little comfort to such a corporate policyholder, especially where more diligent inquiry would have revealed even broader replacement insurance coverage at an equivalent or even more favorable price point.

Fifth, in virtually every case, the recoupment of significant fees incurred in intellectual property/antitrust/unfair competition actions significantly outweighs the premium costs that may arise from procuring insurance to cover future claims.

For these and other reasons, unless the policyholder has only one insurance market where it can procure, on an “occurrence” basis, acceptable insurance coverage, there are rarely circumstances where the failure to give notice makes economic sense.

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I. INTRODUCTION

Policyholder counsel may be on the verge of a new gold rush in California. Case law in three significant areas has taken a recently favorable turn for policyholders in California, making it both a more attractive jurisdiction for pursuit of coverage claims as well as one in which greater benefits may arise for policyholders. These developments arise in three distinct areas: First, new case law makes the applicability of California coverage more likely. Second, it clarifies that in a number of business tort cases, the right to independent counsel in California has been expanded from previously perceived limits. Third, the California Supreme Court has clarified the “genuine dispute doctrine” so that an insurer’s disagreement with the insured over the application of coverage law is not sufficient in and of itself to avoid bad faith exposure unless its position is reasonable in light of applicable law.

II. THE APPLICABILITY OF CALIFORNIA COVERAGE LAW UNDER CALIFORNIA CHOICE OF LAW RULES

California will rarely recognize a conflict of interest unless the policy issues behind the distinct rule would necessarily create a different result. Western Int’l Syndication Corp. v. Gulf Ins. Co., 222 Fed. Appx. 589, 594 (9th Cir. (Cal.) 2007) highlights California’s preference for application of its own law. Therein, the court conceded that the late notice rule in New York – the other possible forum – made late notice a condition precedent to limit recovery under the policy, where as California applied the “notice prejudice rule.” The issue was not simply whether the law of the other forum is distinct from that of California, but whether, under the facts applicable in the case, the policy reasons behind the law applied by a distant forum were implicated so as to create a conflict. Thus, the Ninth Circuit reasoned:

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I. INTRODUCTION

Most Directors & Officers policies include a number of new exclusions. The most troublesome is the “severance” clause which precludes innocent directors and officers from procuring policy benefits where other directors and officers are found liable for wrongful acts in shareholder derivative lawsuits or governmental lawsuits.

Directors and officers, however, need not put their own personal assets at risk. New forms of insurance, like that offered by ACE through its CODA program, offer individual directors independent insurance opportunities that are far more comprehensive in coverage than that offered through the corporation.

These policies should be procured by directors and officers as part of their compensation for taking on the risks associated with serving as an officer or director of public corporations in the new hostile environment. This is especially the case where the Sarbanes-Oxley provisions make procedural compliance critical and where directors, even those highly informed about the company’s operations, may not be able to assure proper procedures are followed in each and every situation. Protection against exposure from these risks is essential, especially for directors who sit on audit committees.

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I. DEFENSE FEE REIMBURSEMENT

A. Recovery of Pre-Tender Defense Fees in the Underlying Action

Some states addressing pre-tender fee recovery issues allow policyholders to recover fees expended prior to notifying their insurer of the claim. Recovery will be limited, however, by factors, such as an insurer's proof that its vital interests were prejudiced by the late notice, due to the voluntary payment provisions, lack of timely notice, and rules regarding waiver.

Courts favoring recovery of pre-tender fees have cited the reasonableness of a policyholder's response to the suit against them and the lack of prejudicial harm to the insurer caused by the lack of notice of the claim while the fees were being incurred. When policyholders have acted reasonably in spite of their late notice, and an insurer does not incur a larger burden because of the delay in notification, pre-tender fee recovery has been granted as part of an insurer's obligation to defend the policyholder.

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The Ohio Casualty Insurance Company v. Biotech Pharmacy, Inc. et al. adv.
U.S.D.C., District of Nevada, Case No. 2:05-CV-1214, RLH-PAL (D. NEV. 4-2-2008)

In the first decision nationally to expressly address an issue of Texas law, the Court predicted that the Texas Supreme Court would, consistent with its prior precedent, find that “a unilateral reservation of rights letter cannot create rights not contained in the insurance policy which include the right to seek reimbursement of defense fees where there was no potential for coverage”. In previous cases, the Texas Supreme Court, following Shoshone First Bank v. Pacific Employers Ins. Co., 2 P.3d 510, 515-16 (Wyo. 2000) found that a unilateral reservation of rights letter cannot create a right for an right for an insurer to seek reimbursement of settlement costs based on the logic of the Shoshone case which had expressly found that right extended to seek reimbursement of defense costs.

The Texas Supreme Court reaffirmed its earlier ruling in Matagorda finding in Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., No. 02-0730, ___S.W.3d___ ,2008 WL 274878, (Tex., Feb., 2008) that in Texas the same rule applied in a excess policy context.

The court denied a concurrent motion for reconsideration under FRCP rule 69 as moot in light of its finding vis-à-vis reimbursement. It had previously concluded that a 56(f) right to conduct discovery arose in determining whether a copyright infringement claim was based sufficiently on advertising to fall within the pertinent “advertising injury” coverage. 

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On occasion people have asked me why I named our firm newsletter “The Policy Holder Advocate”. For a simple reason; there is a ‘missing’ in the equation of insurance product delivery that threatens the rights of policy holders, especially in the context of third party litigation against companies where a range of business tort claims are asserted. Distinctions between various forms of Commercial General Liability Media/Cybernet/Intellectual Property Defense policies are rarely understood by the broker community. There are few resources to distinguish which policies offer the best coverage for the majority of insureds or for the particular insured who is seeking insurance. Underwriters often write policies without appreciating how litigation activity will implicate coverage there under. When information is fed back to underwriters from the claims department, it is often so particularized that the overview to understand the broader complications of the policy language may not readily be appreciated.

Risk management focuses on a range of different topics and the particularized distinctions between various versions of Commercial General Liability Umbrella policy language and how it might intersect with a range of business torts, antitrust, and intellectual property claims and is not a specific focus of the review of policies. While more emphasis is placed on claims made Directors & Officers insurance, which is of keen interest to corporate officers and directors, less attention to the precise language of commercial liability policies tends to be paid. This is unfortunate because such policies often contain opportunities to cover a range of business torts because of the fact allegations in specific complaints, as clarified through discovery responses, may implicate potential coverage triggering at minimum, a duty to defend, or in certain policies, reimbursement of defense fees.

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1. COMPANIES DO NOT TENDER INSURANCE CLAIMS FOR INTELLECTUAL PROPERTY OR ANTITRUST. THESE ARE THE MOST UNDER-TENDERED CLAIMS IN AMERICA

Unless a policyholder knows the claim is not covered and can definitively opine why, it is typically in its interest to promptly give notice of a claim. This is for five reasons:

First, policy provisions require it.

Second, where insurers learn of lawsuits that are not reported, they may claim that subsequent policy applications are inaccurate for failing to disclose same.

Third, cancellation for mere claim reporting may be bad faith in many jurisdictions.

Fourth, the mere reporting of the claim is not a loss, and may never be a loss, unless the insurer is required to pay sums owed to the insured under the policy.

Fifth, if insurance is never used, there is little point in having it in place.

If notice can be established, the benefits to pursuit of claims that the insurer was apprized of can be significant. A number of states have written contract statutes of limitations of significant length: Alaska, California, Rhode Island, Texas and Vermont (four years); Florida, Kansas and Idaho (five years); Wisconsin, Washington, Utah, Pennsylvania, Oregon, New York, New Jersey, Nevada, New Mexico, Minnesota, Michigan, Massachusetts, Maine, Arizona, Alabama and Hawaii (six years); Iowa, Illinois, Louisiana and Wyoming (ten years). Indiana, at 20 years, holds the record, with Kentucky a close second at 15 years.

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Legal pleadings in antitrust litigation do not typically answer key questions asked by an insurance policy. Fact development and clarification of grounds for relief are essential for insurance coverage to be invoked. Our involvement in representing insurance policyholders reveals that the earlier we are involved, the greater the likelihood that we can obtain reimbursement of defense fees and other expenses, including judgments incurred in such litigation. Where the insurer has denied paying the legal fees for a defense, greater benefits may accrue while awaiting completion of the underlying action, so long as pertinent clarifying facts are regularly directed to the insurer during the pendency of the antitrust litigation.

Many courts have upheld coverage under “personal injury” and “advertising injury” provisions in commercial liability policies in a wide range of settings for antitrust claims and other nested alleged business torts. These decisions show how critical it is to investigate this insurance asset and determine if pursuit of claims thereunder is proper. The decisions include:

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I. INTRODUCTION

Various international commercial general liability insurance policies may cover a broad range of offenses, including patent infringement lawsuits by virtue of their inclusion of the “piracy”offense. A number of courts have found, based on dictionary definitions, as well as the usage of that term, in patent law cases, that “piracy” may encompass patent infringement lawsuits, so long as they are advertising-based and injury arises out of the offense charged.

II. THE 1976 ISO POLICY MAY EMBRACE COVERAGE FOR PATENT INFRINGEMENT LAWSUITS

The 1976 Insurance Services Office (“ISO”) Policy form provides coverage for the offense of “piracy,” for seven distinct reasons:

First, the “offense” of “piracy” is not a defined tort and employs generic language. As any dictionary definition will evidence, it includes patent infringement. RANDOM HOUSE UNABRIDGED DICTIONARY 1475 (2d ed. 1993) (“piracy . . . 2. the unauthorized reproduction or use of a copyrighted book, recording, television program, patented invention, trademarked product, etc.: The record industry is beset with piracy.” (emphasis added)); BLACK’S LAW DICTIONARY 1169 (7th ed. 1999) (“piracy” means: “The unauthorized and illegal reproduction or distribution of materials protected by copyright, patent, or trademark law.” (emphasis added)); WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY OF THE ENGLISH LANGUAGE UNABRIDGED (1986) (defines “piracy” as “an unauthorized appropriation and reproduction of another’s production, invention or conception . . . .”).

Second, courts often speak of “piracy” as denoting a form of patent infringement in discussing that tort, as well as analyzing insurance coverage for patent infringement lawsuits. Union Ins. Co. v. Land & Sky, Inc., 529 N.W.2d 773, 776-77 (Neb. 1995) (emphasis added):

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Commercial General Liability policies from 1976 on provide coverage for “advertising injury” and “property damage” which include “advertising injury” as well as “personal injury” coverage for “invasion of a person’s right of privacy.” The “advertising injury” coverage requires that it be in the course of advertising.

The TCPA, at 47 U.S.C. § 227(b)(3), states, “A person or entity may . . . bring . . . (B) an action to recover for actual monetary loss from such a [unsolicited fax advertisement] violation, or to receive $500 in damages for each such violation, whichever is greater . . . . If the court finds that the defendant willfully or knowingly violated this subsection or the regulations prescribed under this subsection, the court may, in its discretion, increase the amount of the award to an amount equal to not more than 3 times the amount available under subparagraph (B) of this paragraph.”

An Illinois appellate court recently addressed whether this language covers a claimed TCPA violation, applying Illinois coverage law, in Valley Forge Ins. Co. v. Swiderski Electronics, Inc., 834 N.E.2d 562 (Ill. App. Ct. (2d Dist.) 2005). The appellate court found that, while federal courts are not in agreement as to whether such claims are covered under the advertising injury provisions of a CGL policy, “insurance-policy construction in Illinois compels us to find a duty to defend in this case.” Swiderski, 834 N.E.2d at 571. The appellate court construed the language of the policy, which language is identical to that in most issued policies. The court found that the terms “publication” and “privacy” must be given their plain, ordinary and popular meanings which would reasonably be understood to include the alleged transmission of an unsolicited fax advertisement in violation of the TCPA. Id. at 573.

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I. INTRODUCTION

Issues spawned by this complex inter-weaving of elements, as well as by underwriters’ attempts to migrate restrictive language recently developed from commercial liability policies to homeowners policies, has created the need for vigilance in homeowner renewals. Brokers, who are typically a policyholder’s agent, not an insurer’s, may be incapable of appreciating the complexities involved, when advising on the likely impact of policy language.

Again, policy procuring counsel may be the only appropriate resource to clarify these issues.

II. MUST HOMEOWNERS SEEK REVALUATIONS OF REBUILDING COSTS ANNUALLY TO ASSURE THAT THEY PROCURE THE HOMEOWNERS INSURANCE PROMISED THEM?

A. Initial Valuation Followed by Insurer Inspection and Periodic Revaluation Gauged to the Insurer’s Internal Formula Is the Norm

The standard practice in the personal lines industry is that once an initial value is obtained and inspection conducted to assure that it is an appropriate amount, thereafter increases in home valuation are tied to the inflation rate that each individual carrier uses. That rate may be far less than the building replacement cost in light of market conditions.

B. Types of Homeowners Policies Available in California

California attempts to gauge what form of homeowners insurance is being provided by using general categories to describe same.

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I. INTRODUCTION

Express personal liability coverage for the offenses of defamation and malicious prosecution should not be impaired by an “intentional acts” exclusion that permits an insurer to bar coverage for the insured’s intentional acts.

Business owners and executives of corporations who are likely recipients of this Newsletter may share in common one defining characteristic: they are likely to be homeowners. Where the residence is in California or other high-value metropolitan locations throughout the United States, that residence may represent a substantial asset. Protecting it can be as significant to the individual fortunes of policyholders as a derivative interest in businesses where they either have ownership stakes or are employees.

This article will explore, in two parts, two problems, using California as an example, and focusing on the products from three principal insurers in that market – AIG, Chubb, and Fireman’s Fund:

First, where “personal injury” liability coverage is expressly extended to the offenses of defamation and malicious prosecution, what rights to a defense and/or indemnity exist where an express “intentional acts” exclusion is also included in the policy?

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I. INTRODUCTION

Ten key forums will be examined in this article. Each has addressed late notice issues – some more recently than others – in a way that clarifies distinctions between them. Critically, in New York and Texas, late notice of a claim falling within “advertising injury” or “personal injury” coverage, i.e., business tort claims, is likely to be covered by a rigorous forfeiture rule, while Illinois employs a “reasonableness” test that permits prejudice to be an element but does not vary the right of the insured to obtain policy benefits if the date of notice is not itself reasonable. Prejudice is the test in the remaining forums – California, Pennsylvania, Michigan and Massachusetts – while a minority place the burden of showing no prejudice on the insured – Connecticut, Florida and Ohio.

II. LATE NOTICE RULES

A. Survey of Key Jurisdictions’ Late Notice Rules

California: Root v. American Equity Specialty Ins. Co., 130 Cal. App. 4th 926, 30 Cal. Rptr. 3d 631 (2005) (“Under ‘notice-prejudice rule,’ unless an insurer can demonstrate actual prejudice from late notice of a claim, the insured’s failure to provide timely notice will not defeat coverage.”).

Connecticut: National Pub. Co., Inc. v. Hartford Fire Ins. Co., 892 A.2d 261, 285-86 (Conn. App. Ct. 2006) (“ ‘In this state, an insurance policyholder who fails to give an insurer timely notice of an insurable loss does not forfeit his insurance coverage if he can prove that his delay did not prejudice his insurer.’. . . ‘[O]ur Supreme Court held that an insured might be relieved from his contractual obligation to give [its] insurer timely notice of the occurrence of a loss if the insured could show that [its] delay in giving notice did not prejudice the insurer . . . .’ ”).

Florida: Robinson v. Auto Owners Ins. Co., 718 So. 2d 1283, 1284 (Fla. Dist. Ct. App. 1998) (“An insured’s delay in notifying her insurer of an accident gives rise to a presumption that the insurer has been prejudiced. But that presumption may be rebutted by the insured’s demonstration that the insurer was not prejudiced by the late notice.”).

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I. INTRODUCTION

Insurance coverage might arise within a patent infringement context even if the policy at issue has express patent infringement exclusions so long as the policy (like virtually all CGL policies) includes “personal injury” coverage for “defamation” (assuming that courts at issue recognize that companies can defame one another and that this conduct can be true libel as well as trade libel). Under such circumstances, a defense may be triggered where disputes accompany patent infringement litigation.

II. CASE LAW IN CALIFORNIA AND ILLINOIS

A. Aurafin-OroAmerica

In a recent decision by the Ninth Circuit Court of Appeals, Aurafin-Oroamerica, LLC v. Federal Insurance Co., No. 04-56681, 2006 WL 1880088 (9th Cir. (Cal.) June 26, 2006), an appellate panel reversed federal Judge Matz’s denial of a defense which he had reaffirmed after Aurafin’s motion for reconsideration. The Ninth Circuit held that both a business reputation and product might be injured where an insured makes statements to third parties accusing someone of intellectual property infringement. The panel, which included Judge Schwarzer (sitting by designation), reasoned:

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(1) Parkham Industrial Distributors, Inc. v. Cincinnati Ins. Co.
No. 3:06CV-533-S, 2008 WL 451023 (W.D. Ky. Feb. 15, 2008)

? At issue were alleged buried fact allegations of disparagement triggering coverage under a 1998 ISO CGL policy provision covering personal and advertising injury arising out of “oral ord 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.”

? The court found fact allegations, which have been deemed sufficient by a number of courts to evidence a disparagement claim, insufficient on the facts before it, applying Kentucky law. Judge Simpson stated:

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(1) West Bend Mut. Ins. Co. v. Rosemont Exposition Servs., Inc.
880 N.E.2d 640, 316 Ill. Dec. 904 (Ill. App. Ct. (1st Dist.) 2007)

? Former employees brought a suit for defamation and retaliatory discharge. The appellate court held that the defamation claim was excluded from coverage so the insured did not have a duty to defend, affirming the trial court opinion. The court reasoned:

The sole defamatory statement alleged in the Bagnalls’ complaint was that they were involved in a fraudulent workers’ compensation claim. That alleged defamation was perpetrated to provide the grounds for RES’s termination of the Bagnalls’ employment and can, therefore, only be construed as being employment-related. The complaint makes no additional allegations of defamation that could ultimately bring the case beyond the scope of the ERP exclusion.

Id. at 652.

? The ERP exclusion states:

“This insurance does not apply to:
‘Personal and advertising injury’ to
(1) A person arising out of any:
. . . .
(b) Termination of that person’s employment; or
(c) Employment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, discipline, reassignment, defamation, harassment, humiliation or discrimination directed at that person; . . . .”

Id. at 643.

? The court cited and reviewed a number of cases, principally out of state, and most typically from California, in reaching its determination.

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

At issue was tortious interference with contract claims. The court found, under a number of different policies, no duty to defend. The court found that Exclusion h to the American Home Assurance policy entitled “Directors, Officers and Private Company Liability Insurance Policy” precluded a defense. It excepts 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 *6.

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.

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.

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.

Finding no defense, no bad faith also was pertinent in the court’s view. The court found that there was no right to a Rule 12(b) sanction for bringing the action against the insurer, however, because the illegal contentions were not necessarily frivolous, and there was legal support for the primary contention that the insurance contract exclusion provision should be read broadly to favor the insured.

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(1) General Cas Co. of Wisconsin v. Wozniak Travel, Inc.
No. 07-3515 RHK/AJB, 2008 WL 440747 (D. Minn. Feb. 14, 2008)

The court determined there was a split of authority between an unpublished court of appeal decision – Williamson v. N. Star Cos., No. C3-96-1139, 1997 WL 53029 (Minn. Ct. App. Feb. 11, 1997), review denied (Apr. 15, 1997), and the Eighth Circuit Court of Appeal applying Minnesota law in Callas Enters., Inc. v. Travelers Indem. Co. of Am., 193 F.3d 952 (8th Cir. (Minn.) 1999). The court certified to the Minnesota Supreme Court the issues of:

1) Does trademark infringement fall within the scope of “misappropriation of advertising ideas or style of doing business” or constitute “infringement of copyright, title or slogan” as set forth in the CGL policy?

2) Is a trademark an “advertising idea” or does trademark infringement constitute “infringing upon another’s copyright, trade dress or slogan” as set forth in the CUL Policy?

Id. at *6.

The court noted that the Supreme Court might re-formulate questions of law as stated. See Minn. Stat. § 480.065, subd. 6(a)(3).

The court noted that a number of decisions had failed to follow the approach of the Sixth Circuit, including state court opinions in Michigan, and was not disposed to reach an opinion inconsistent with Sixth Circuit authority absent published Minnesota state case law to support such an approach.

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