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

The court distinguished that Act from the TCPA fax ad claim at issue in the Valley Forge Ins. Co. v. Swiderski Electronics, Inc., 223 Ill. 2d 352, 860 N.E.2d 307 (Ill. 2006) suit from the Illinois Supreme Court, where the court analogized a violation of privacy law to the violation of seclusion implicit in a TCPA fax ad claim. The court, however, ignored the fact that the CFA specifically provides a remedy to a consumer who is injured by disparaging comments made by one merchant against another which impacts that consumer. Thus, the same argument that the court found persuasive in Swiderski applies here. The court simply failed to analyze this aspect of the CFA. The court claims:

[T]he CFA allows consumers to recover damages for the economic injuries they suffer. It does not directly advance the interest another business has in preserving the reputation of its products that a disparagement action protects.
Id. at *8.

However, this is a distinction without a difference since, if a form of unfair trade practice is implicated, and a consumer has a damage remedy where a competitor damages another competitor, this is no different from when the seclusion interest in a statutory scheme is implicated by a blast fax and a class action claimant seeks relief for this indirect injury.

The true basis for the court’s opinion is a reluctance to find coverage under tort-based concepts where the gravamen of the cause of action is for other distinct statutory violations. To wit:

It seems extremely unlikely to us that the parties intended antitrust and racketeering claims to be covered – or even potentially covered – by a policy definition that sounds in libel, slander, and disparagement.
Id. at *9.

The court did not take into account the fact that many insurers are presently writing broad forms of unfair competition and reputational injury coverage in multi-media and cyberspace policies, which include express antitrust exclusions, an express acknowledgment that but for such an exclusion coverage might otherwise arise in that context. The court simply added exclusionary language not present in the policy to aid the insurer under the guise of discerning the parties’ mutual intent.
Intent, however, is derived from an objective review of policy language, not vague notions of what would be in the best interests of consumers long-term. Thus, the court also notes:

Reading an insurance policy’s coverage provisions as expansively as BASF desires would be a precarious proposition: it might sweep within the breadth of the policy risks that the insurer did not and would not contract to cover – risks that were not considered when setting the premiums for the policy.
Id. at *8.

If the consideration of risks, i.e., that omniscience of underwriters of insurance policies was a consideration, then there would never be any practical coverage under offense-based policies issued to cover forms of “advertising injury” and “personal injury”. This for the simple reason that no underwriting effort was undertaken to ascertain what risks might fall within the scope of their coverage. Insurers simply adopted a form of advertising liability policy and excluded advertisers from it by exclusion.

The court’s analytic approach is inconsistent with that adopted by the majority of courts, including the Supreme Court of Illinois. It is likely that the same fate may await this opinion as has American States Ins. Co. v. Capital Assocs. of Jackson County, Inc., 392 F.3d 939 (7th Cir.2004) rejected by the majority of courts but still followed where undefined policy offenses are redefined to fit within the narrowest common law tort that can be imagined.

Compare and contrast Terra Nova Ins. Co. v. Fray-Witzer, 449 Mass. 406, 869 N.E.2d 565 (Mass. 2007) (applying New Jersey law) which noted:

We note in passing that the significance of American States Ins. Co. v. Capital Assocs. of Jackson County, Inc., 392 F.3d 939 (7th Cir.2004), was undermined significantly by Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 223 Ill.2d 352, 307 Ill. Dec. 653, 860 N.E.2d 307 (2006), which was released after the judge made his decision here. The American States decision was governed by Illinois law.

Id. at 415 n.9.

Articulating the logic in accord with the Swiderski approach but more succinctly, the Massachusetts Court stated:

The insurers' reasoning that the content of the material, rather than its mere existence, must violate the right of privacy is unpersuasive. In effect, the insurers argue that the policy's definition of injury should be read to say “[o]ral or written publication of material, the content of which violates a person's right of privacy.” But New Jersey law is clear that when construing an ambiguous phrase in an insurance policy, courts should “consider whether clearer draftsmanship by the insurer ‘would have put the matter beyond reasonable question.’ ” Progressive Ins. Co. v. Hurley, 166 N.J. 260, 274, 765 A.2d 195 (2001), quoting Doto v. Russo, 140 N.J. 544, 557, 659 A.2d 1371 (1995). In other words, had Terra Nova and Royal wished their policies to pertain only to violations of privacy created by the content of material, it was incumbent on them to draft explicit policies to that effect.

Id. at *417-418.

Notably, this shift of the burden to the insured to be more appropriate in its choice of policy language is key. Under the BASF approach, the Seventh Circuit seeks to guess what an insurer might have meant by the policy it drafted in light of how its economic interest may have been furthered. In effect, this is post claims underwriting which is properly been rejected by virtually every court to encounter it. It also seeks to assess the subjective intent of the parties given credence to what their intentions might have been at the time of drafting even though not clearly expressed by their policy language. This is contrary to proper analytic principals recognized nationwide. Havstad v. Fidelity National Title Ins. Co., 58 Cal.App.4th 654, 68 Cal.Rptr.2d 487, 490 (Cal.App. (1 Dist.) 1997) (An insured’s subjective intent or expectation regarding the policies of coverage is irrelevant and cannot be used to construe the meaning of the policy’s language.)

A subsequent New Jersey case parted company with the Fray Witzer decision because different policy language was issued by St. Paul in the case it analyzed to wit “advertising injury” offense means “making known twenty person organization covered material that violates a person’s right of privacy”. This policy language is more like that in Resource Bankshares Corp. v. St. Paul Mercury Ins. Co., 407 F.3d 631 (4th Cir. (Va.) 2005) which the Terra Nova court distinguished. Even more problematic is Ace Mortg. Funding, Inc. v. Travelers Indem. Co. of America, No. 1:05-cv-1631-DFH-TAB, 2008 WL 686953 (S.D.Ind., March 10, 2008) therein Judge Hamilton parted company with the Swiderski approach even though Indiana often applies and follows Illinois law.

Conceding that the language as issue was more like that in Capital Associates than Resource Bankshares, nevertheless, the court followed the Capital Associates because of an earlier decision by a different Indiana judge had done so in Erie Ins. Exch. v. Kevin T. Watts, Inc., No. 1:05-CV-867-JDT-TAB, 2006 WL 1547109 (S.D. Ind. May 30, 2006). While the Erie Ins. Exch. decision was on appeal, it settled and the district court elected to follow his fellow judge in Indiana rather than the more recent views expressed by the Supreme Court of Illinois in Swiderski without explanation, saying “Courts have already spilled a great deal of ink over this issue. Without adding new insights to the debate, this court agrees with Judge Tinder's prediction of Indiana law in Erie Insurance Exchange . . .” Id. at 3. Notably, the court does not cite Fray Witzer or seek to distinguish it as the most recent articulation by a state’s Supreme Court in addressing this issue. Hopefully this decision will be appealed to the Seventh Circuit which will predict Indiana’s Supreme Court authority in a way more consistent with the Illinois Supreme Court. However, as that court is the Seventh Circuit, this remains to be seen.

Another, even more troubling aspect of the BASF court’s opinion, is the gratuitous observation that “[i]t seems extremely unlikely to us that the parties intended antitrust and racketeering claims to be covered-or even potentially covered-by a policy definition that sounds in libel, slander, and disparagement. See Riso, 479 F.3d at 162.” Id. at *9. In addition to rewriting the policy for the insurer’s benefit introducing subjective considerations, it also fails to note the plethora of case authority that has readily found antitrust claims do indeed potentially trigger coverage where the fact allegations trigger coverage under the pertinent offenses at issue.

See American Contract Bridge League v. Nationwide Mutual Fire Ins. Co., 752 F.2d 71, 75 (3d Cir. (Pa.) 1985) (claim of monopoly power and antitrust violations); Bankwest v. Fidelity and Deposit Co., 63 F.3d 974, 981 (10th Cir. (Kan.) 1995) (claim for interference with bank lines of credit); Curtis-Universal, Inc. v. Sheboygan Emerg. Med. Servs., Inc., 43 F.3d 1119 (7th Cir. (Wis.) 1994) (claim of conspiracy to exclude competing ambulance service from market entrance); Federal Ins. Co. v. Stroh Brewing Co., 127 F.3d 563 (7th Cir. (Ind.) 1997) (discriminatory pricing practices in beer distribution); Lime Tree Village Community Club Ass’n v. State Farm Gen. Ins. Co., 980 F.2d 1402, 1406-07 (11th Cir. (Fla.) 1993) (claims of discrimination, slander of title and unreasonable restraint on trade); Ruder & Finn, Inc. v. Seaboard Cas. Co., 422 N.E.2d 518 (N.Y. 1981) (claims of conspiracy to circulate anti-aerosol publicity intended to result in an aerosol product boycott); St. Paul Fire & Marine Ins. Co. v. Medical X-Ray Center, PC, 146 F.3d 593, 594-95 (8th Cir. (Minn.) 1998) (antitrust and interference claims by competing radiologists).

This view is inconsistent with the majority of case law nationally, as well as the earlier federal court opinions authored by Judge Posner which the present panel gives lip service to but does not follow. In effect the court suggests that the insured should have bought express coverage for antitrust violations despite the fact that such coverage is rarely available and thereby places the burden on the insured to find coverage that references labels of causes of action rather than the actual fact allegations within pleadings.

Such an approach also substitutes a focus on injury and damages which is inappropriate in analyzing offense-based policies. See Curtis-Universal, Inc. v. Sheboygan Emerg. Med. Servs., Inc., 43 F.3d 1119, 1122 (7th Cir. (Wis.) 1994) (“The plaintiff’s complaint, upon which the insurer’s duty depends, need not even set forth the plaintiff’s legal theories. What is important is not the legal label that the plaintiff attaches to the defendant’s (that is, the insured’s) conduct, but whether that conduct as alleged in the complaint is at least arguably within one or more of the categories of wrongdoing that the policy covers.” (emphasis added; internal quotation marks omitted).

Noting why the character of offense-based coverage requires a different analytic approach from that adopted by the court here, Judge Croskey, a noted insurance coverage scholar and legal writer as well as jurist, noted in Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1032, 123 Cal. Rptr. 2d 256, 267 (2002), “Coverage . . . is not determined by the nature of the damages sought in the action against the insured, but by the nature of the claims made against the insured in that action. . . . ‘[c]overage ... is triggered by the offense, not the injury or damage which a plaintiff suffers.’”

A recent state court opinion followed the modern trend enunciated by Judge Castillo in Knoll Pharm. Co. v. Automobile Ins. Co., 210 F. Supp. 2d 1017, 1025-28 (N.D. Ill. 2002). In an April 7, 2008 decision in Medmarc Casualty Ins. Co. v. C. R. Bard, Inc., the Superior Court of New Jersey, Union County: Law Division, Docket No. UNN-L-2435-05 (April 7, 2008), a New Jersey State Court Judge denied summary judgment to Medmarc Casualty Ins. Co. finding that C.R. Bard, Inc. was entitled to a defense for fact allegations of disparagement under pertinent “personal injury” coverage that were indirectly asserted against it in the context of an antitrust lawsuit.

Following principles of New Jersey law that are fully in accord with those in recognized by the Illinois Supreme Court in Swiderski, the court reasoned:

Although the disparagement alleged in the Southeast Missouri Hospital complaint is not of the hospital’s own products, Medmarc has cited no portion of the Policies that limits the coverage provided to claims made by the party whose products have been disparaged. Instead, the Policies speak of injuries “arising out of” such conduct.

“Arising out of” is a “critical phrase” in the interpretation of the insurance contract[s] and is given an expansive interpretation in both coverage and exclusion provisions. It has been “defined broadly . . . to mean conduct ‘originating from,’ ‘growing out of’ or having a ‘substantial nexus’ with the activity for which coverage is provided . . . .”

Here, the insurance policies provide coverage for injuries “arising out of” conduct “that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.” The Southeast Missouri Hospital amended complaint alleges a number of causes of action that can fairly be characterized as “originating from,” “growing out of” or having a “substantial nexus with” Bard’s alleged disparagement of Rochester’s products.”

This thoughtful exposition of New Jersey law is fully in accord with the logic of Fray Witzer and represents the better reasoned “policy language centric” view of this issue.

Ace Mortgage Funding, Inc. v. Travelers Indem. Co. of Am., No. 1:05-cv-1631-DFH-TAB, 2008 WL 686953 (S.D. Ind. March 10, 2008)

In a blast fax case embraced a minority view articulated by Judge Easterbrook in American States Ins. Co. v. Capital Associates of Jackson County, Inc., 392 F.3d 939, 942-943, (C.A.7 (Ill.) 2004) which predicted this would follow the logic of Capital Associates in accord with the views of another district judge in Indiana. See Fury Insurance Exchange v. Kevin T. Watts Inc., No. 1:05-CV-867-JDT-TAP, 2006 WL 1547109 (S.D.Ind. May 30, 2006).  This despite the fact that the Supreme Court of Illinois as well as the majority of subsequent cases nationwide have rejected its analytic approach. See Terra Nova Ins. Co. v. Fray-Witzer, 869 N.E.2d 565, 574 (Mass. 2007) (applying New Jersey law).

In effect, the insurers argue that the policy's definition of injury should be read to say “[o]ral or written publication of material, the content of which violates a person's right of privacy.” But New Jersey law is clear that when construing an ambiguous phrase in an insurance policy, courts should “consider whether clearer draftsmanship by the insurer ‘would have put the matter beyond reasonable question.’. . . In other words, had Terra Nova and Royal wished their policies to pertain only to violations of privacy created by the content of material, it was incumbent on them to draft explicit policies to that effect.

The Seventh Circuit found the policies “advertising injury” coverage for “invasion of privacy” refers to injury caused by publication only for intrusions on secrecy. It thereby imported words of limitation not set forth in the policy. There is no part of the policy that requires that the content of the message be that which invades privacy. The “general analytical principals” in Capital Associates ignore proper construction of the policy against the insurer who could have chosen more precise language to achieve an end which the court should not adopt under the guise of interpretation.

National Fire Ins. Co. of Hartford v. NWM-Oklahoma, LLC, Inc., Case No. CIV-07-545-F, 2008 WL 697298 (W.D. Okla. March 12, 2008)

The insured, a weight loss management company, was sued for “invasion of privacy” when it permitted a supervisorial employee, Susanna Reed, to “listen in” on conversations between plaintiff Hammers and customers for training purposes. The publication was disseminated through a baby monitoring system used to keep tabs on a particular employee. The court noted that even if publication required communication of information to third parties other than the corporate participants, that was potentially available since any of the defendant’s customers could overhear the conversations.

The court found, however, that the “willful violation of a penal statute or ordinance committed by or with the consent of the insured” exclusion applied since federal wiretap act, 18 U.S.C. § 2510 were found to fall within the scope of that exclusion.

There was, in the court’s view, no evidence of “implied consent”, nor did the claimants have an expectation that their oral communications would not be intercepted. The court reasoned that “if, as a factual matter, the claims for injury asserted in the civil suit as to which insurance coverage is sought arise from acts that amount to a ‘willful violation of penal statute,’ the exclusion is triggered . . .” Id. at *9. The court’s application of this exclusion to bar a defense prejudged the merits.

The court’s order does not consider the possibility that until there is an adjudication against the insured and liability could arise for mere tort of “invasion of privacy” but not for violation of federal wiretapping law, a potentially covered “offense” would trigger a defense that would not implicate the penal acts exclusion.