Gauntlett Law is a unique law firm with a dynamic global practice focused upon representing Fortune 1000 companies as well as smaller corporate policyholders in counseling, litigation and expert witness services for insurance coverage for intellectual property, antitrust/ unfair competition/ business litigation claims as well as employment liability. It also represents clients in business/intellectual property litigation where its referral source does not seek to do that work.
California Supreme Court Review of Insurance Case on Implied Disparagement Presents Opportunities for Coverage in Intellectual Property Litigation
In 2012 two published decisions from the California Court of Appeals and one unpublished decision from the Ninth Circuit shed new light on the contours of implicit disparagement coverage under California law.
The first such Court of Appeals decision, Charlotte Russe, clarified and reasserted the broad scope of implied disparagement coverage, a position the second Court of Appeals decision, Swift, distanced itself from. Subsequent to both decisions, the Ninth Circuit in Michael Taylor opted for the coverage-friendly approach of Charlotte Russe over Swift.
Under an implicit disparagement theory, IP claims may trigger non-excluded potential coverage requiring a duty to defend, even when the labeled causes of action are expressly excluded.
Travelers Prop. Cas. Co. of Am. v. Charlotte Russe Holding, Inc.,
207 Cal. App. 4th 969, 981 (2d Dist. (Div. 1) June 21, 2012)
Charlotte Russe addressed a retailer’s use of clothing tags and signs to promote significantly discounted goods, which were alleged to false imply that the claimant’s goods were not of high value (even though there was no direct statement denigrating its products).
Hartford Cas. Ins. Co. v. Swift Distribution, Inc.,
210 Cal. App. 4th 915 (2d Dist. (Div. 3) Oct. 29, 2012)
Swift concerned trademark infringement claims premised on use of the name “Ulti-Cart,” which allegedly misled by implying a reference to the competing “Multi-Cart” even though advertisements only explicitly named the Ulti-Cart. Under the dilution claim, the court drew a distinction between blurring, which was not covered as it alleged no more than palming off another’s goods as one’s own, and tarnishment, where implicit statements denigrating another’s product could be inferred.
Michael Taylor Designs, Inc. v. Travelers Prop. Cas. Co. of Am.,
No. 11-16052, 2012 WL 5385598 (9th Cir. (Cal.) Nov. 5, 2012)
The district court’s opinion in Michael Taylor was affirmed after Swift was decided and brought to the Ninth Circuit’s attention via 28(j) briefing. Nevertheless the Ninth Circuit elected not to address Swift in its opinion, which was not surprising as Swift specifically distinguished itself from a series of implicit disparagement coverage cases including the Michael Taylor district court opinion.
Swift distinguished its facts from the Michael Taylor district court opinion, but criticized Charlotte Russe. Charlotte Russe was more nuanced and relied upon coverage principles Swift did not take time to address. These included: (1) potential coverage existing where the pleadings may be amended to state a covered claim; (2) “disparagement” coverage not being limited to claims specifically for the tort of “trade libel”; and (3) California’s rejection of the “all elements” rule, concluding that aspects of disparagement such as falsity need not be expressly alleged.
The California Supreme Court denied the Petition for Review and Request for Depublication of Charlotte Russe on September 26, 2012, suggesting that it is valid law. In contrast, on February 13, 2013 the California Supreme Court granted review of Swift. Thus, while review is pending it is no longer an impediment for intellectual property practitioners to seek coverage under Charlotte Russe and Michael Taylor. Review also suggests that the Court is inclined to bring Swift in line with the other two cases and the longstanding principle that a defense is owed if a covered claim could “conceivably” be stated under the facts alleged.
Issues expected to be addressed in review of Swift are (1) whether a claimant’s goods, products, or services can be referenced by implication without being expressly named in the disparaging publication, and (2) whether a false affiliation with an inferior product or a reduction in price constitutes “disparagement” as used in a CGL policy’s definition of “personal and advertising injury.”
Implicit Disparagement Claim Ruling In Trade Dress Infringement Lawsuit Clarifies That Purported Conflict In California Law May Be Less Than Meets The Eye
In Michael Taylor Designs, Inc. v. Travelers Prop. Cas. Co. of Am., 761 F. Supp. 2d 904 (N.D. Cal. 2011), the district court determined that potential coverage arose in a trade dress infringement lawsuit where customers were steered to allegedly inferior, synthetic furniture products in a purported “bait and switch” scheme evidencing implicit disparagement.
In affirming the district court, the Ninth Circuit concluded that implicit disparagement liability arises wherever a false implication can be inferred from the fact allegations. Michael Taylor Designs, Inc. v. Travelers Property Cas. Co. of America, No. 11-16052, 2012 WL 5385598 (9th Cir. (Cal.) Nov, 5, 2012) pet. for reh. denied (Nov. 27, 2012), citing Travelers Prop. Cas. Co. of Am. v. Charlotte Russe Holding, Inc., 207 Cal. App. 4th 969, 144 Cal. Rptr. 3d 12 (2012), reh’g denied (July 31, 2012) rev’w denied (Sept. 21, 2012). Charlotte Russe, in turn, relied upon authority consistent with the Ninth Circuit’s decision in Hudson Ins. Co. v. Colony Ins. Co., 624 F.3d 1264, 1269-70 (9th Cir. (Cal.) 2010) that “the absence of an element of a properly pleaded cause of action is of no moment in determining [the] duty to defend.”
In their November 19, 2012, Petition for Rehearing, Travelers asked the Ninth Circuit Panel in Michael Taylor to address the impact of the Court of Appeals ruling in Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 210 Cal. App. 4th 915, 148 Cal. Rptr. 3d 679, 689 (2012). Travelers’ Petition for Rehearing ignored the fact that this same decision was cited by Travelers’ counsel (Horovitz & Levy) in its 28(j) letter that preceded the Panel’s November 5, 2012 ruling, affirming the district court. Travelers’ rehearing petition failed to advise the panel of Michael Taylor’s response to the 28(j) letter which called attention to Swift Express’ distinction of Michael Taylor, stating:
Rosequist’s complaint created a possibility of a covered claim for disparagement by alleging that defendant advertised Rosequist’s products, did not sell Rosequist’s products, and “steered” customers to imitation products. The term “steered” implied further statements by defendant’s personnel that the imitation products were the Rosequist furniture shown in defendant’s promotional materials.
The Swift Panel rejected arguments for disparagement coverage asserting that coverage under the “disparagement” offense “must specifically refer to the derogated property, business, goods, product, or services either by express mention or reference by reasonable implication.” Swift, 148 Cal. Rptr. 3d at 685. According to the Swift court, disparagement by implication did not arise because there was no specific reference to the competitor’s product, no false comparisons to the product and no false claims of ownership over proprietary or unique technology related to the product. Rather, false statements were made solely about Swift’s product.
Many commentators have championed Swift, claiming it necessarily undercuts the Charlotte Russe panel’s analysis. But its analysis avoids addressing whether any false implication could be inferred from statements about Swift’s product which potentially demeaned the claimant’s product. The Swift Panel did not explain why a claim for “disparagement” could not be inferred when Swift’s statements were viewed from the perspective of the claimants and in light of the potential for amendment of the pleading where the “disparagement” offense was not confined to any singular business tort, such as trade libel.
Critically, Swift did not address many of the legal underpinnings of Charlotte Russe’s analysis as it: (1) failed to evaluate the potential for coverage where the pleadings may be amended to state a covered claim (Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 654 (Cal. 2005)); (2) assumed that proof of the elements for product disparagement defines the complete scope of coverage for the “disparagement” offense; and (3) relied upon a faulty “all elements” rule rejected by a number of state appellate court decisions. See Career Systems Dev. Corp. v. Am. Home Assurance Co., No. C10-2679 B2, 2011 WL 4344578, at *2 (N.D. Cal. Sept. 14, 2011) (“Pursuant to Scottsdale and Barnett, it was also not necessary for [Claimants] . . . to trigger defendant’s duty to defend.”).
Subsequent decisions that rely upon the Charlotte Russe/Swift dichotomy should be careful to note Swift’s incomplete analysis and factor into their analysis the Ninth Circuit’s rejections of Travelers’ Petition for Rehearing in Michael Taylor Designs, Inc. v. Travelers Property Cas. Co. of America, No. 11-16052, 2012 WL 5385598 (9th Cir. (Cal.) Nov, 5, 2012) pet. for reh. denied (Nov. 27, 2012).
Coverage for Claims Asserted in a Wage & Hour Proceeding Under an Employment Practices Liability Insurance: The Beat Goes On
In a brief note posted to Agents of America (www.AgentsofAmerica.org), Joseph P. Monteleone, of Tressler, LLP commented on Gauntlett v. Illinois Union Ins. Co., No. 5:11-CV-00455 EJD, 2012 WL 4051218 (N.D. Cal. Sept. 13, 2012) (“Gauntlett II”) noting that Judge Davila refrained from an expansive interpretation of Illinois Union’s duty to defend. Review of that opinion, in concert with the earlier order which, Monteleone’s note does not address, Gauntlett v. Illinois Union Ins. Co., No. 5:CV 11-00455-EJD, 2011 WL 5191808 (N.D. Cal. Nov. 1, 2011) (“Gauntlett I”), reveals that the district court reconsidered its earlier, and more restrictive, interpretation of the policy’s provisions. Nevertheless, “Gauntlett II” (currently on appeal before the Ninth Circuit) too narrowly construed the duty to defend.
The allegations assert the deletion of 3,000 stored e-mail communications, changed settings on the computer to delete the stored e-mails, as well as manipulation of the settings. These contentions evidence a classic common law invasion of privacy claim for “intrusion upon seclusion.” Forensic review of those e-mails by a third party in connection with defense of that action, facts readily available to Illinois Union, could also be reasonably inferred from the conduct alleged. This extrinsic evidence implicated potential coverage for invasion of privacy under the “making private facts public” prong.
The district court failed to analyze the impact of the California Supreme Court’s seminal ruling in Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 654 (Cal. 2005) requiring review not only of allegations in the complaint, but facts reasonably inferable or otherwise known, as well as facts which reveal that the complaint could fairly be amended to state claims for covered liability. This applicable test was met because the claimant’s allegation raised a “potential for coverage” as the facts referenced, and inferences reasonably drawn from those facts, supported a claim for invasion of the right of privacy. See Pension Trust Fund v. Federal Ins. Co., 307 F.3d 944, 951 (9th Cir. (Cal.) 2002) (“[R]emote facts buried within causes of action that may potentially give rise to coverage are sufficient to invoke the defense duty[.]”).
The district court’s failure to acknowledge a potential claim under the “privacy invasion” offense is inconsistent with subsequent published authority, not considered by that decision, which addressed the analogous “personal injury” offense of “disparagement.” See Travelers Prop. Cas. Co. of Am. v. Charlotte Russe Holding, Inc., 207 Cal. App. 4th 969, 980 (2012), reh’g denied (July 31, 2012) rev’w denied (Sept. 21, 2012) (concluding that the policy language did not require pleading or poof of a trade libel tort, as the policy language “makes coverage for disparagement an alternative to coverage for libelous materials, not an element of that coverage.”).
Moreover, the court neither distinguished nor analyzed Netscape Communications Corp. v. Fed. Ins. Co., 343 F. App’x 271, 272 (9th Cir. (Cal.) 2009). It concluded that potential coverage arose for violation for right of privacy and affirmed a finding of potential coverage where “AOL had intercepted and internally disseminated private online communications.”
It is therefore premature for commentators to speculate upon what legal weight Judge Davila’s second unpublished order in the Gauntlett & Associates case may have as this unpublished order is subject to de novo review by the Ninth Circuit.
A Trifecta of Insurance Coverage Cases Addressing Implicit Disparagement Reveal Coverage Opportunities In Intellectual Property Litigation
Three recent decisions, two published from the California Court of Appeals, and one unpublished from the Ninth Circuit, address the boundaries of coverage for implicit disparagement claims under California law emphasizing both the limitations and opportunities for such claims.
For intellectual property practitioners, these cases highlight why a number of typically asserted IP claims may create coverage falling outside the scope of intellectual property exclusions, even when the labeled causes of action are expressly excluded from coverage.
Two Courts Of Appeal Tussled With The Scope Of The Doctrine Of Implicit Disparagement
Travelers Prop. Cas. Co. of Am. v. Charlotte Russe Holding, Inc.,
207 Cal. App. 4th 969, 981 (2012)
Charlotte Russe addressed the retailer Charlotte Russe’s use of hangtags and other visual displays to promote significantly discounted goods, that allegedly falsely implicated that the claimant’s goods were not of high value even though there was no direct statement denigrating its products.
Hartford Cas. Ins. Co. v. Swift Distribution, Inc.,
__ Cal. Rptr. 3d __, 2012 WL 5306248 (Cal. Ct. App. (2d Dist.) Oct. 29, 2012)
Analyzing trademark infringement claims premised on use of the name “Ulti-Cart” to mislead by implied reference to “Multi-Cart” where advertisements for Ulti-Cart only referred to the product, the court drew distinctions between claims of blurring which were not covered as they alleged no more than palming off another’s goods as one’s own, and tarnishment where implicit statements denigrating another’s product could be inferred.
Both Agree With Michael Taylor Designs, Inc. v. Travelers Property Cas. Co. of Am., No. 11-16052, 2012 WL 5385598 (9th Cir. (Cal.) Nov. 5, 2012)
Swift distinguished its facts from Michael Taylor, but criticized Charlotte Russe. Charlotte Russe was more nuanced. It relied alternatively upon analytical principles Swift did not address. These included the: (1) potential for coverage where the pleadings may be amended to state a covered claim; (2) “Disparagement” coverage was not limited to claims for “trade libel”; (3) California expressly rejected the “all elements” rule, concluding that aspects of disparagement such as falsity need not be expressly alleged.
Michael Taylor was affirmed post-dating Swift
Swift was brought to the Ninth Circuit panel’s attention via a 28(j) letter, but the Court elected not to address that decision. This was no surprise as it specifically distinguished a series of implicit disparagement coverage cases including the district court decision in Michael Taylor Designs, Inc. v. Travelers Property Casualty Co. of America, 761 F. Supp. 2d 904 (N.D. Cal. 2011). Both cases are consistent with the analysis in Michael Taylor.
Mr. Gauntlett will be hosting a FREE seminar on “Use of IP Litigation Insurance Policies” at his offices in Irvine, CA on February 2, 2012.
Date: Thursday, February 2, 2012 (RSVP Required)
Time: 5:15 p.m. – 6:45 p.m.
Admission: Free (Maximum of 2 guests per company/corporation, limited to 25 guests)
* * * Limited Space – Please RSVP as soon as possible! * * *
Applied for CLE Credit
Gauntlett & Associates 5:15-5:30 p.m. – Registration
18400 Von Karman, Suite 300 5:30-5:45 p.m. – Welcome/Introduction
Irvine, CA 92612 5:45-6:45 p.m. – Presentation and Q&A
(949) 553-1010 6:45-7:00 p.m. – Reception – Hors d’oeuvres, wine, beverages
David Gauntlett, Principal, Gauntlett & Associates
John Scherling, Partner, Sughrue Mion, PLLC
Chandran Iyer, Partner, Sughrue Mion, PLLC
William Lewis, Executive Vice President, Bolton & Company
Please RSVP by Tuesday, January 24, 2012:
By Phone: 949-553-1010 (ask for Richard Beserra, Lisa Dalka or Jennifer Corlett)
By Email: Richard Beserra, Marketing Coordinator: (email@example.com)
I. Patent Infringement Coverage
A typical patent infringement suit can cost at least $3.0 million through trial, exclusive of damages, costs and expenses. Being sued for infringement of patent, copyright trademark rights may be a catastrophic event for many companies, as funding the defense can easily drain available cash, exhaust lines of credit and even force a halt of business operations. Defending an infringement suit from a position of financial weakness must be avoided at all costs. IP insurance may provide the solution by giving your company the funds to make the legal system work for your company, whether defending a charge of infringement or bringing suit to protect its own intellectual property.
II. Insurance Coverage For Patent Infringement Claims Under Commercial General Liability
Opportunities where the lawsuit is ongoing and the litigations are competitors in the marketplace, or where the patent covers a business, includes an “advertising technique or methodology.” This section will point out new opportunities for insurance coverage in patent infringement suits analyzing DISH Network Corp. v. Arch Specialty Ins. Co., 659 F.3d 1010 (10th Cir. (Colo.) 2011) and Burgett, Inc. v. American Zurich Ins. Co., No. 2:11-cv-01554-MCE-JFM, 2011 WL 5884251 (E.D. Cal. Nov. 23, 2011). In addition, an analysis of the Burgett case may serve as a template to establish coverage in a number of pending patent infringement lawsuits where marketplace behaviour, equivalent to that in Burgett, may give rise to a defense fully outside any intellectual property exclusion.
III. Buried Treasure
Securing reimbursement for monies expended in past intellectual property lawsuits. Companies looking for extra money in these tough economic times may have an answer from the past. The vast majority of insurer denial letters for intellectual property lawsuits lack merit. Therefore, companies who have litigated intellectual property cases and expended significant monies in defense and settlement may be overlooking ready sources of cash through pursuit of coverage claims.
Following the program, a reception will be held for guests and presenters.
ABOUT THE PRESENTERS
David Gauntlett, Principal, Gauntlett & Associates. David A. Gauntlett is the principal of Gauntlett & Associates. He is a 1979 graduate of Boalt Hall School of Law, University of California at Berkeley, where he served as a member of the California Law Review. He received his B.A. from the University of California at Irvine, Magna Cum Laude, in 1976. Mr. Gauntlett is lead counsel in intellectual property antitrust coverage disputes pending in over 30 states throughout the United States and is also responsible for many precedent-making insurance coverage cases involving patent, trademark, and copyright infringement, as well as trade secret misappropriation and unfair competition claims. Mr. Gauntlett is a nationally recognized speaker and has spoken for C.L.E. credit to organizations which include the American Bar Association, Section of Business Law, Section of Intellectual Property; Section of Litigation, and Section of Tort and Insurance Practice; American Conference Institute; American Electronics Association of California and Arizona; California Bar Association, Intellectual Property Division; Eastern New York Patent Law Association; New York Patent Trademark and Copyright Association; Oregon Patent Law Association; Practicing Law Institute; University of Houston; University of Texas; Washington Patent Law Association; Washington D.C. Patent Law Association; and Wisconsin Intellectual Property Association. Mr. Gauntlett has also served as an adjunct professor at the University of California, Berkeley, School of Law, Boalt Hall, where he taught a class entitled Insurance Coverage for Intellectual Property, Antitrust and E Commerce. Mr. Gauntlett is also the author of numerous articles such as Plaintiff’s Rights to Use Coverage to Enhance Recovery in Intellectual Property and Antitrust Lawsuits, Journal of Insurance Coverage (Aspen Law & Business, Winter 2002), “Offer for Sale” Patent Infringement Lawsuits: New Opportunities For Insurance Coverage, New Controversies, Vol. 54, No. 4, SMU Law Review (2002), Tort Claims and Insurance in Cyberspace: Is Your Company Covered?, ACCA Docket, The Journal of the American Corporate Counsel Association, Vol. 19, No. 5 (May 2001), as well as Matthew Bender’s Intellectual Property Counseling and Litigation, Chapter 29, Vol. 2 ©1994; Business Insurance Law, Chapter 18, Insurance Coverage For Intellectual Property Lawsuits, ©1994; and his book published by Aspen Law & Business, entitled Insurance Coverage of Intellectual Property Assets, ©1999.
John Scherling, Partner, Sughrue Mion, PLLC. John Scherling is a Partner in the San Diego office of Sughrue Mion, PLLC, focusing on litigation and resolution of intellectual property disputes. He previously served as an Assistant United States Attorney in the Criminal and Civil Divisions of the United States Attorney’s Office in the Southern District of California, where he handled all aspects of litigation including jury trials, bench trials and appeals in the United States Court of Appeals for the Ninth Circuit. Mr. Scherling received numerous awards from the United States Department of Justice and the Department of State for his successful litigation on behalf of the United States. Mr. Scherling has a technical emphasis in chemistry, as well as biochemistry and microbiology, acquired during his undergraduate studies at Iowa State University (B.S. with Honors and Distinction). Mr. Scherling received his J.D. from Vanderbilt University, where he was Order of the Coif and Associate Articles Editor of the Vanderbilt Law Review. Following receipt of his J.D., Mr. Scherling served as a law clerk to the Honorable Judith N. Keep in the United States District Court for the Southern District of California.
Chandran Iyer, Partner, Sughrue Mion, PLLC. Chandran Iyer is a Partner in the Washington, DC office of Sughrue Mion, PLLC. Chandran practices in the area of patent law with a focus on patent litigation. A registered patent attorney, Chandran has extensive experience litigating before various federal and state courts. His experience includes patent infringement cases relating to pharmaceutical products, Internet technologies, computer software, and medical devices. He is the chair of the American Bar Association’s nanotechnology committee, and a member of the Chinese State Intellectual Property Office (SIPO) / U.S. Bar Liaison Council. Chandran also serves as a member of the National Conference of Lawyers & Scientists, a select committee that addresses legal, policy and ethical issues of concern to lawyers and scientists.
William Lewis (“Bill”), Executive Vice President, Bolton & Company. Bill is a Vice President of Bolton & Company, Bill is a graduate of California State University at Los Angeles and San Diego State University. Bill has been in the insurance industry since 1981 and has been with Bolton & Company since 1989. He has earned the Chartered Property and Casualty Underwriter and Certified Insurance Counselor designations. Bill is responsible for developing new clients for the company and providing Risk Management and insurance programs for his existing clients. His clients come from various industries, such as construction,, high-tech, biotech and other fields. Bill helps these clients with all coverage’s including difficult risks requiring Professional Liability coverage or those that fit in an alternative risk transfer mechanism such as captives, deductible plans and self insured solutions. Bill has contributed to the growth of Bolton & Company through his insurance expertise, specifically geared toward technology-based risks, such as software development and multimedia companies, biotechnology risks, Directors and Officers Liability, and Intellectual Property protection, including copyright and trademark exposures and patent infringement coverage. Bill has utilized this experience to assist in the development of local incubator and start up companies. In 2009 Bolton & Company has formally created a Technology Practice to take advantage of the expertise of the firm in the high tech and life science arenas. The group will work with such clients to develop and refine risk management programs and place coverage ranging from products and clinical trials liability to directors and officer’s coverage. Spurring the creation of this Technology Practice was the appointment of Bolton as the Southern California broker representative of Tech Assure, a national partnership of similar firms specializing in this industry. Bill leads this practice and takes advantage of Bolton’s memberships in groups such as the Southern California Biomedical Council and BIO.
GAUNTLETT & ASSOCIATES
Gauntlett & Associates specializes in policyholder insurance coverage and litigation regarding copyright, antitrust, patent, trademark, trade secret, business and general coverage disputes, including:
1. Insurance Coverage Litigation Focusing on IP, Antitrust and Business Tort Claims
2. Securities Fraud Litigation Insurance Coverage
3. IP Litigation, Representation in Arbitrations and Mediations
4. Mergers and Acquisitions Insurance Coverage Counsel and Advice
5. Expert Witness on Insurance Coverage Issues, Including Fee Disputes
6. Counsel to IP Case-in-Chief Counsel for Insurance Coverage, Including: Choice of Forum and Negotiation
7. Consultant to Corporations Regarding What Type of Policies to Purchase to Protect Against IP Litigation
If you have a topic you would like to see addressed in future issues, please feel free to contact us with your suggestions.
David A. Gauntlett, Editor • Telephone: (949) 553-1010 • Email: marketing@GauntlettLaw.com
Miranda v. California Capital Ins. Co., No. A126778, 2011 WL 1168064, *6 (Cal. App. (1st Dist.) March 29, 2011)
Cow breeders transferred inferior cows to the claimant misrepresenting to him and the insured that the cows were from the insured’s herd, so as to disrupt their relationship. These statements allegedly misrepresented “that the cows were the property of” [the insured] and from [the insured’s] herd. . . .” The claims were not only for palming off inferior cows but for creating the false impression that the insured’s cows of better quality than they were thereby impairing future sales when the truth of their inferior character came to light. “One accused of libel is responsible “for what is insinuated, as well as for what is stated explicitly.” (Bates v. Campbell (1931) 213 Cal. 438, 442.)” Id. at *6. Such statements were both defamatory of the insured and disparaging of its goods, i.e., the cows sold to the claimant by the insured.
California Capital limited its coverage inquiry to allegations of an untrue statement that would lead others not to deal with the insured and cause special damages. But the Court of Appeals found potentially covered claims could exist regardless of the technical legal cause of action pled.
DO “BURIED TREASURES” EXIST?
Part Three of a Three Part Series
Ascertaining Whether Buried Treasure Exists Requires a Five-Part Analysis
These issues include:
1. Did the company give notice to the insurers on risk as of the date of the first alleged “wrongful act” as well as all subsequent carriers and those at higher levels who may have a duty to pay any settlement reached.
2. If not, was the insurer on constructive notice of the lawsuit and/or settlement.
3. Has the statute of limitations run on their complaint.
4. Are facts beyond the complaint available to clarify potential coverage where the law applicable permits reference to such evidence.
5. Were the insurer or insurers notified of any settlement prior to its consummation where the insurer agreed to defend under a reservation of rights.
Notice is the key element in finding “buried treasure.” Without notice, there is no right to insurance coverage as it is a prerequisite to accessing policy benefits in every case. Notice should be promptly provided. The rule is “tender early, tender often.” Fears that notice may raise insurance premiums are ill-founded, inconsistent with the advice given by thoughtful brokers who know the insurance marketplace.
In the majority of jurisdictions, the “prejudice rule” applies. This means that unless an insurer can show the alleged late notice caused it prejudice, it must provide full policy benefits to its insured. Indeed, the Texas Supreme court made clear several years ago in a seminal decision that late notice applied to advertising injury/personal injury coverage claims, clarifying Texas law on this point. Nevertheless, late notice can still be a problem in some forums.
In Illinois, late notice is a condition precedent to coverage. Until the recent statutory change, New York made notice a condition precedent to procure coverage. In changing that rule, the New York legislature observed several years ago in changing the Draconian New York “late notice” rule is “a trap for the unwary.” In Florida, a prejudice standard applies, but the insured has the burden of proof.
If notice was provided, “buried treasure” pursuit may be available whether or not a denial letter was received so long as an insurer cannot claim it never learned of the suit. Constructive notice may be established by facts coming to the insurer’s attention from other policy renewals, communications by insurers through brokers to the insured, as well as public information provided to the insurer in connection with other policy applications.
Constructive notice can arise where there is evidence in public filings, such as 10Q and 10K statements discussing litigation which are then provided to insurers in connection with the renewal of policies. Policy renewal for D&O or E&O policies frequently require an answer to the following: “Are you involved presently or expected to be involved in the future with any form of litigation?” Answers to this question brought to a CGL/umbrella insurer’s attention may put it on constructive notice of the litigation. No formal tender need be made in such a circumstance.
The “No Harm, No Foul” Exception To Late Notice Challenges
A “voluntary payments” prohibition may not apply where an insurer would have denied a defense no matter when notice was provided on other grounds. Where an insurer denies a defense based on grounds other than notice, a frequent issue in intellectual property insurance coverage dispute, a number of jurisdictions have embraced the “no harm, no foul” rule. That principle addresses the problem that an insurer would have failed to defend even if receiving timely notice because the grounds for denial were far greater than merely lack of notice. These can include the failure of potential coverage because of the lack of fact allegations triggering it, applicable exclusions the insurer contends applies, the failure to meet other conditions and the like.
Statute of Limitations May Not Delimit The Scope of Recoverable Claims
The statute of limitation varies in many of the states. A state like Indiana is 20 years. Kentucky and Ohio is 15 years. Wyoming, Iowa, Illinois and Louisiana, 10 years. Montana is 8 years. But most of the states have either a 5 year statute of limitation or a 4-year statute of limitation. And some have as short as three years. Where your company is headquartered in states with a shorter statute of limitation (four years is typical) the statute may be tolled while the lawsuit is ongoing in the majority of forums until the litigation is resolved through appeal. Thus, there may be more time to pursue coverage claims than is readily appreciated in many cases.
Pertinent Policy Periods to Evaluate For Potential Coverage
Insurer obligations to defend include claims based on false, frivolous or fraudulent allegations. The merits of the underlying action are of no moment to insurance coverage analysis. In those jurisdictions that look only to the allegations of the complaint (some 20 in the United States), which include Texas and Illinois, as well as Florida, the four corners rule is followed. Under this “complaint allegations” rule it is not important whether the wrongful conduct alleged actually occurred. The allegations control in compelling a defense duty.
Typically, CGL/umbrella coverage is “occurrence,” not “claims made” based. The question is when the wrongful act occurred. It is not uncommon to look to a date as far back in time as 20 to 25 years ago when the alleged wrongful conduct allegedly occurred. In circumstances where fraudulent concealment is alleged the statute of limitations may be circumvented. Thus, the copyright statute of limitations is three years but its inception date is often difficult to fix.
Answering Questions Raised By the Policy That the Complaint Does Not Answer
In one case (an antitrust suit) an outside law firm, after providing notice and receiving a denial, did not advise an insurer when the complaint was amended to add a labeled claim for defamation the carrier would have been compelled to defend. As no notice was ever provided of the defamation claim, no policy benefits were ever obtained.
A jurisdiction that will permit facts beyond pleadings to be brought to an insured’s attention applies two different rules. One, facts must be “known to the insurer” or two, “available to the insurer.” In other jurisdictions, only facts known to the insurer may be evaluated. The better practice is to insure that the facts known standard is met in every jurisdiction.
To do so, active interaction between coverage counsel and defense counsel is key. Without an opportunity to not only inform the insurer of what facts have developed, but to ask questions germane to insurance coverage, in the underlying case, opportunities for coverage may be lost unnecessarily. It is critical that settlement communications be orchestrated with the assistance of coverage counsel to best secure reimbursement for such payments.
Statutes of limitation rarely bar pursuit of coverage action since they are tolled during litigation. Indeed, choice of forum in coverage suits is a valuable tool that policyholders can use to obtain favorable coverage results. Obtaining the most favorable prejudgment interest on monies paid in defense fees and/or settlement can also significantly enhance the recovery available to insureds.