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

Coverage Opportunities Under Policies Issued to Affiliated Companies May Be Broader Than Those Available to the Company

While major corporations may find that access to insurance is limited by their self-insured retention, there are nevertheless many situations where a major corporation having acquired a smaller corporation otherwise succeeded to its legal rights, including those to pursue insurance under its policies, may provide broader and lower attachment point coverage than the corporation. The following questions should be asked to assess whether this opportunity exists in any litigation matter, where a corporation is sued along with its recently acquired subsidiary or new subsidiaries as co-defendants.

These scenarios should be reviewed:

● Umbrella policies may define a policy term (joint venturer) so as to include the acquiring company in a suit where both parties are named as a defendant.

● “Occurrence” coverage under policies of acquired companies; this coverage may be broader than that available to the acquiring company.

● (International Insurance Policies)

A number of insurers, including Cigna and Chubb, have issued policies through the mid-1990s that define the scope of coverage in a way that would render these policies as broad as a domestic policy providing CGL coverage.

A Case Study -- How Cigna’s International Coverage Required it to Defend Antitrust Counterclaims in a U.S. Lawsuit

In Hewlett-Packard Co. v. CIGNA Property and Casualty Ins. Co., No. 99-20207 SW, 1999 U.S. Dist. LEXIS 20655 (N.D. Cal. Aug. 24, 1999), the court analyzed an international policy whose territory was defined as “worldwide for claim or suit resulting from an occurrence outside the United States of America . . . .” The court found that a claim for damages which emanated from conduct outside the United States for an action pending within the United States triggered a defense.

As Judge Williams found:

HP argues that the Nu-kote Counterclaim alleges activities that fall within the territorial limitations of the Policy because HP distributed in foreign markets package inserts intimating that the HP cartridges are not refillable.
. . . .
CIGNA contends that any [fear, uncertainty and doubt] allegedly suffered by consumers and distributors in foreign markets is irrelevant because there is no allegation or evidence that Nu-kote sold inkjet refill products outside of the United States during the Policy period.
. . . .
However, in the realm of advertising injury, the locus of the misrepresentation and the site of the resulting injury could easily be disjointed. For example, it is conceivable that a false statement in Maine could diminish a competitor’s sales in Florida. . . . The territorial limitation in the Cigna Policy emphasizes the location of the occurrence, not the location of the resulting damages. . . . Because Nu-kote could possibly claim damages to domestic business based, at least in part, on HP’s extraterritorial acts, the Court finds that the Policy Territory requirement is satisfied.

Id. at *10-13.

This follows because as long as an advertising activity occurs outside the United States which could create liability, it matters not whether the lawsuit itself was within the U.S. It takes little imagination to conceive of a number of IP litigation matters where advertising conduct which may be identical to that within the U.S. but takes place in a number of foreign countries, often in translated versions of the same advertisements emanating from U.S. sources, creates potential coverage.

On May 14, 2008 a judgment of over $51,000,000 was entered in HP’s favor, including nearly all of its post-tender defense fees at rates of up to $600 per hour plus in-house counsel fees and pre-judgment interest at 10% per annum from date of invoice.

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Discover What Insurance Your Litigation Opponent Possesses

Insurance coverage is a two-way street. Where you are litigating against a competitor of similar size and economic resources, it is likely that its insurance portfolio will mirror yours because of market conditions. Pursuant to Federal Rule of Civil Procedure 26(c), you can readily ascertain policies issued to it which may respond to claims asserted in your lawsuit. Parties that contend there is no coverage because their own review of their policies reveals no coverage or due to their receipt of a denial letter from their insurer must be tested. Your opponent’s views on the scope of its coverage can be tested in litigation.

It is important, in this effort, to not limit analysis to Commercial General Liability policies but to pursue umbrella and excess coverage, Errors and Omissions policies, Directors and Officers policies, as well as new forms of multimedia, cyberspace, and net security policies. While your opponent may object that this information is privileged, some level of inquiry is required to clarify whether a Rule 26(c) disclosure has been properly made.
Modify the Relief Sought in Litigation to Factor in the Availability of Insurance Coverage

One of the benefits of obtaining information about your adversary’s insurance coverage is that, in a number of jurisdictions, you can name the insurer as a party to the lawsuit you are pursuing and participate actively in the coverage dispute by clarifying what claims are being asserted and in so doing potentially impact the coverage available to the defendant.

For example, virtually every form of insurance policy requires that a form of damages be sought to entitle the defendant to a defense. While this may be limited merely to a quest for attorneys’ fees, pure claims for injunctive relief without the “such other and further relief” clause included in the complaint may not trigger a defense. Whether this is so will depend on what jurisdiction’s coverage laws apply. In a state such as Texas, where the “eight corners” rule is pertinent, pleadings define the scope of claims for insurance purposes. Thus, even if you seek further relief beyond an injunction, until that further relief becomes part of a formal pleading, no defense may be triggered. Feed Store, Inc. v. Reliance Ins. Co., 774 S.W.2d 73 (Tex. Ct. App. 1989), reh’g denied July 27, 1989; Reller (applying Florida law).

You may, however, wish to trigger coverage by your opponent, especially where it is a sizable company with significant resources and the availability of insurance coverage will not markedly enhance its ability to sustain the litigation, the benefit of coverage can well be to force its insurer to contribute at an earlier phase in the lawsuit and to fund its resolution. Similarly, where you believe damage claims are likely and the character of the damages sought may fall within the defendant’s coverage, having an insurer forced to pay that sum will make it easier to settle the case. Intellectual property cases, of course, often seek primarily nonmonetary relief.

What Insurance Coverage Will Litigation Against Your Company Trigger That Benefits Its Interests

Using Insurance Proceeds to Settle Litigation While Achieving Business Goals

Where the business issues predominate, as is often the case in trademark infringement litigation, procuring a judgment may be less significant than eliminating the competitor’s improper use of your trademarks. Nevertheless, where the monetary aspects of the dispute can be addressed by insurance coverage, so that recapturing litigation costs from the competitor need not come out of its company proceeds, resolving nonmonetary disputes may be simplified.

Each scenario is fact-driven, but assessing insurance as a tool for dispute resolution gives your company the benefit of being an insurance coverage-savvy litigator. Nor should outside counsel be expected to have full knowledge of the intricate interrelationship between insurance coverage and IP claims.

The Role of Policyholder Insurance Counsel in Enhancing the Value of IP Assets – The Insurance Coverage Audit

Outside coverage counsel’s expertise can effectively bridge the gaps in knowledge of these issues, facilitate insurer involvement in defense, reimbursement, and settlement, and create better continuity between defense firms entitled to reimbursement of fees who will not be perceived by an insurer as adversarial to their interests. Where the disputes over amounts due are between the company and its coverage counsel, and not the outside lawyers, coverage counsel who represent the insured can be the intermediary between the company and its insurers who advocates the company’s interests. This role for coverage counsel is especially useful where the outside law firm may occasionally represent insurers so it either has direct or at least business conflicts, as is the case for many major general practice litigation firms. In such a case, an independent coverage firm is ideally positioned to champion the company’s right to reimbursement for outside fees incurred without placing outside counsel in any conflict with insurers whom they must deal with on a business basis for other matters.

Special Opportunities and Pitfalls Posed by Insurance Coverage When Pursuing a Smaller Company

Where the defendant is a small company and where damage liability may be difficult to establish, and even if successfully done, may not create a return equal to the attorneys’ fees to obtain it, focusing only on recovery that is essential to the company’s mission may minimize expenses and assure that the defendant does not procure insurance coverage. Once the character of that coverage is ascertained through discovery, the company may elect to broaden its claims, including seeking damages which it may have heretofore eschewed, where it knows that that activity will not trigger a right to a defense funded by an insurer.

There is nothing more disconcerting for a company than to find that it is the only party paying litigation expenses in a bitterly fought dispute. There are numerous examples of small companies who have ended up funding their competitor’s counterclaim litigation expenses by pleading into coverage.

Thus a small company named Verteq who was a plaintiff in an intellectual property matter against a larger competitor received a counterclaim which triggered coverage. Given the fact that proof that the counterclaim was not viable involved the same legal action necessary to win its suit as plaintiff for violation of intellectual property rights, its competitor helped fund the litigation against it. Indeed, when a dispute arose over the rate of reimbursement, which was resolved in an arbitration under California law, the insurer’s unwillingness to pay the full rate was found to be improper.

Verteq received reimbursement for all attorneys’ fees expended at the full rate, pre-judgment interest from date of invoice, and the attorneys’ fees incurred in the arbitration to prove same. The latter fees were recoverable because the court found that Northbrook Insurance Co.’s reimbursement of counsel at a rate of only $150/hr. for litigation pending through 1994 was improper and constituted a breach of the covenant of good faith and fair dealing. While this result may not attend in every case, the net result was that the competitor ended up funding, via its ill-considered counterclaim, the entire cost of a successful litigation against it, without requiring the plaintiff to meet the standard for recovery of its attorneys’ fees under the underlying intellectual property statute under which it sought relief.

This same result was repeated by HP in a case where it pursued affirmative claims for relief against a patent infringer but drew a counterclaim for trade libel nested within various antitrust counts that ultimately led to a $51 million damage award in HP’s favor for 100% of attorneys’ fees expended at rates of up to $600 per hour and pre-judgment interest at 10% per annum from the date of invoice.

Recommendations for IP Owners Serving as Defendants/Counterdefendants

Based on these cases, the following observations are in order.

First, under the law of some jurisdictions, an insurer will be obligated to completely fund any non-collusive and reasonable settlement following its denial of a defense.

Second, in other jurisdictions that require a showing that all claims must fall within coverage, the standard for establishing a defense and for establishing indemnity under settlement may not be equivalent. Thus, facts beyond those in the pleadings and settlement agreement may be pertinent.

Third, because of these factors, coverage counsel should participate in the structuring of a settlement, as well as monitoring of a case as it proceeds to trial, since jury instructions, special verdicts, and interrogatories may address fact issues that determine coverage for any judgment that could arise in the underlying action.

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The following seven propositions illustrate important issues which intellectual property owners need to be aware of to maximize the value of those assets. They include:

1. What claims you assert in litigation your opponents right to a defense and indemnity under their insurance coverage.

2. What insurance coverage will litigation against your company trigger that benefits its interests?

3. What new forms of insurance coverage are available to IPOs that will expand opportunities to transfer litigation costs to its insurers?

4. Can an insurance coverage audit reveal hidden opportunities to recapture monies paid for defense fees/settlements and/or judgments under existing insurance policies and, given the exposure revealed by a review of past coverage opportunities, is the present insurance portfolio properly attuned to risks your company now confronts.

5. Does the company’s history of acquisitions, joint venture relationships and other forms of corporate interaction expand the coverage opportunities available to it in a manner that requires revisitation of the potential for coverage under previously filed and existent lawsuits?

6. Can knowledge of insurance coverage help corporations reallocate risks arising from licensing activities to better assure against problems posed by defaulting or underperforming licensees?

7. Is the company’s existing coverage for corporate counsel adequate, and can new efforts be taken to track corporate litigation monitoring costs to better preserve their recapture as part of their insurers defense obligations?

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