February 18, 2007
Does a Court's (Reversed) Disparagement of the Policyholder's Coverage Claim Alone Eviscerate Its Bad-Faith Claim?
A common enough scenario in a liability-insurance case: the parties file cross-motions for summary judgment, with the insurer arguing it has no duty to defend. In Acme United Corp. v. St. Paul Fire & Marine Ins. Co. (7th Cir. Jan. 9, 2007), the question presented was whether an advertising injury liability insurance policy provided coverage for a suit against the insured for product disparagement. In Acme, the district court accepted the argument of the insurer, thus cutting off the ability of the policyholder to obtain recovery of the defense costs it had run up. Where, as here, the appellate court reverses and finds coverage, does the district court's now-reversed ruling effectively impale the policyholder's bad-faith claim?
Acme manufacturers scissors and paper trimming products and advertised that its products were better because they contained titanium. The question naturally arises -- “better”? "better" than what? Fiskars, another scissors manufacturer, believed that Acme was dissing its products, and Fiskars sued on the ground that there really wasn’t titanium in Acme’s products or that it was negligible or not on the blade or didn’t keep Acme’s scissors extra sharp when tested against Fiskars' products that used only stainless steel. Acme turned to St. Paul and asked for a defense, which St. Paul denied.
St. Paul's policy provided coverage for “advertising injury offense” which was defined in part to be “[m]aking known . . . . material that disparages the . . . products of others.” The district court agreed with Acme that its promotional materials constituted advertising and were disparaging of stainless-steel blades, but granted summary judgment to St. Paul on the ground that the disparagement was not of Fiskars’ products specifically.
The Seventh Circuit agreed that the advertising by Acme was disparaging, finding that disparagement results when a “false comparison” is made or when advertising “bring[s] reproach . . . by comparing with something inferior.’” Slip op. at 6 (citing dictionaries). In looking at Fiskars’ complaint against Acme, the appeals court reasoned that “[w]hile Fiskars did not allege that Acme actually named Fiskars’ products in the text of its advertisement, Fiskars’ underlying complaint specifically alleged that Acme’s advertisements were directed at Fiskars’ products and that Fiskars lost sales to Acme as a result.” Slip op. at 7. Accordingly, “Acme disparaged Fiskars products through a false comparison between its products and [implicitly] Fiskars’ products.” Id. As a result, even assuming that the policy requires a specific “other” in the disparaging of “products of others,” the complaint alleged sufficient facts to indicate the disparagement was of Fiskars even without Fiskars being named. As a result, the Seventh Circuit reversed the grant of summary judgment in favor of St. Paul and directed that summary judgment on the duty to defend be instead granted to Acme. (Any further argument that the Acme's ads were not sufficiently focused on Fiskars instead of the broad class of paper-cutting devices presumably should be advanced in the underlying case that should be being defended by the insurer.)
When St. Paul won at the trial court on its motion for summary judgment, we can assume that the district judge endevored to construe the facts in the light most favorable to the nonmoving party, Acme, construed any uncertain or ambiguous policy language in favor of the insured, Acme, but concluded that St. Paul was entitled to judgment as a matter of law. The Seventh Circuit disagreed and not only found that summary judgment should not be granted in favor of St. Paul (such that the matter should be remanded for trial), but in reversing the district court ruling it directed that summary judgment should be entered in favor of Acme.
Yet, the question arises whether St. Paul is inoculated against a bad-faith claim on the ground that even though its coverage determination was wrong it was at least a reasonable one – given that the district court judge agreed with it and entered summary judgment in its favor. Putting the question more broadly, if an insurer wins a summary judgment ruling on coverage does it simultaneously show that there are no circumstances that would support the policyholder's bad-faith claim (with respect to the coverage decision itself).
In general, insurers face first-party bad-faith liability only if they deny a claim unreasonably and without proper cause. Here, St. Paul may argue that the district court’s decision in its favor perforce shows that its decision was reasonable. Accordingly, so the argument would go, it cannot be held liable for bad faith.
The California Court of Appeal has addressed the question whether a trial-court victory by an insurer insulates its from bad-faith liability on the ground that the decision alone demonstrates that there was a genuine issue as to coverage (and thus the insurer’s denial of coverage even if erroneously was reasonable). In Filippo Industries, Inc. v. Sun Ins. Co., 74 Cal.App.4th 1429 (Cal. App. 1999), the insurer argued that the trial-court ruling in its favor – though reversed on appeal – established that its interpretation had a sufficient basis as to evidence a genuine-issue as to whether coverage applied. In effect, the carrier argued that a trial court ruling in its favor alone precludes bad faith as a matter of law.
The California appellate court rejected this proposition, reasoning:
“We certainly have great faith in the sagacity and reasonableness of trial judges but we decline to impute infallibility to any court, trial or appellate. . . . . Mistakes happen, but . . . that mistake should [not] automatically result in depriving an insured of [its bad-faith claim].”
Insurers are required to construe uncertain policy language or unclear facts in favor of coverage; consequently, they may not rely on ambiguous policy language to argue there is a legitimate dispute and thus no bad faith. Employees Benefit Ass’n v. Grissett, 732 So.2d 968, 976 (Ala. 1998) (“[I]n a ‘normal’ case, the insurer cannot use ambiguity in the contracts as a basis for claiming a debatable reason not to pay the claim.”); Mixson, Inc. v. Am. Loyalty Ins. Co., 562 S.E.2d 659 (S.C. App. 2002) (Although no legal precedent on point, common meaning of disputed term indicated that insurer’s contrary construction was unreasonable.); Lucas v. State Farm Fire & Cas. Co., 963 P.2d 357 (Idaho 1998) (uncertain or disputed factual record insufficient to preclude bad faith claim).
A trial court’s erroneous ruling on the question of coverage is not sufficient to show that the insurer’s original coverage denial was reasonable at the time it was made. See generally Sobley v. S. Natural Gas Co., 210 F.3d 561 (5th Cir. 2000). Indeed, at trial of the bad-faith claim, the court should preclude the insurer even from offering into evidence the erroneous trial court ruling for a number of reasons, including: (i) because the court’s decision post-dates the coverage determination the decision itself is irrelevant as a matter of law; (ii) an erroneous ruling by a trial court does not establish the reasonableness of the carrier’s initial erroneous coverage determination; and (iii) it would be prejudicial to admit the ruling into evidence because it threatens to displace the role of the jury or risks the jurors overweighting the overruled decision.
Posted by Marc Mayerson at 11:02 PM | Comments (2) | TrackBack
Does a Court's (Reversed) Disparagement of the Policyholder's Coverage Claim Alone Eviscerate Its Bad-Faith Claim?
A common enough scenario in a liability-insurance case: the parties file cross-motions for summary judgment, with the insurer arguing it has no duty to defend. In Acme United Corp. v. St. Paul Fire & Marine Ins. Co. (7th Cir. Jan. 9, 2007), the question presented was whether an advertising injury liability insurance policy provided coverage for a suit against the insured for product disparagement. In Acme, the district court accepted the argument of the insurer, thus cutting off the ability of the policyholder to obtain recovery of the defense costs it had run up. Where, as here, the appellate court reverses and finds coverage, does the district court's now-reversed ruling effectively impale the policyholder's bad-faith claim?
Acme manufacturers scissors and paper trimming products and advertised that its products were better because they contained titanium. The question naturally arises -- “better”? "better" than what? Fiskars, another scissors manufacturer, believed that Acme was dissing its products, and Fiskars sued on the ground that there really wasn’t titanium in Acme’s products or that it was negligible or not on the blade or didn’t keep Acme’s scissors extra sharp when tested against Fiskars' products that used only stainless steel. Acme turned to St. Paul and asked for a defense, which St. Paul denied.
St. Paul's policy provided coverage for “advertising injury offense” which was defined in part to be “[m]aking known . . . . material that disparages the . . . products of others.” The district court agreed with Acme that its promotional materials constituted advertising and were disparaging of stainless-steel blades, but granted summary judgment to St. Paul on the ground that the disparagement was not of Fiskars’ products specifically.
The Seventh Circuit agreed that the advertising by Acme was disparaging, finding that disparagement results when a “false comparison” is made or when advertising “bring[s] reproach . . . by comparing with something inferior.’” Slip op. at 6 (citing dictionaries). In looking at Fiskars’ complaint against Acme, the appeals court reasoned that “[w]hile Fiskars did not allege that Acme actually named Fiskars’ products in the text of its advertisement, Fiskars’ underlying complaint specifically alleged that Acme’s advertisements were directed at Fiskars’ products and that Fiskars lost sales to Acme as a result.” Slip op. at 7. Accordingly, “Acme disparaged Fiskars products through a false comparison between its products and [implicitly] Fiskars’ products.” Id. As a result, even assuming that the policy requires a specific “other” in the disparaging of “products of others,” the complaint alleged sufficient facts to indicate the disparagement was of Fiskars even without Fiskars being named. As a result, the Seventh Circuit reversed the grant of summary judgment in favor of St. Paul and directed that summary judgment on the duty to defend be instead granted to Acme. (Any further argument that the Acme's ads were not sufficiently focused on Fiskars instead of the broad class of paper-cutting devices presumably should be advanced in the underlying case that should be being defended by the insurer.)
When St. Paul won at the trial court on its motion for summary judgment, we can assume that the district judge endevored to construe the facts in the light most favorable to the nonmoving party, Acme, construed any uncertain or ambiguous policy language in favor of the insured, Acme, but concluded that St. Paul was entitled to judgment as a matter of law. The Seventh Circuit disagreed and not only found that summary judgment should not be granted in favor of St. Paul (such that the matter should be remanded for trial), but in reversing the district court ruling it directed that summary judgment should be entered in favor of Acme.
Yet, the question arises whether St. Paul is inoculated against a bad-faith claim on the ground that even though its coverage determination was wrong it was at least a reasonable one – given that the district court judge agreed with it and entered summary judgment in its favor. Putting the question more broadly, if an insurer wins a summary judgment ruling on coverage does it simultaneously show that there are no circumstances that would support the policyholder's bad-faith claim (with respect to the coverage decision itself).
In general, insurers face first-party bad-faith liability only if they deny a claim unreasonably and without proper cause. Here, St. Paul may argue that the district court’s decision in its favor perforce shows that its decision was reasonable. Accordingly, so the argument would go, it cannot be held liable for bad faith.
The California Court of Appeal has addressed the question whether a trial-court victory by an insurer insulates its from bad-faith liability on the ground that the decision alone demonstrates that there was a genuine issue as to coverage (and thus the insurer’s denial of coverage even if erroneously was reasonable). In Filippo Industries, Inc. v. Sun Ins. Co., 74 Cal.App.4th 1429 (Cal. App. 1999), the insurer argued that the trial-court ruling in its favor – though reversed on appeal – established that its interpretation had a sufficient basis as to evidence a genuine-issue as to whether coverage applied. In effect, the carrier argued that a trial court ruling in its favor alone precludes bad faith as a matter of law.
The California appellate court rejected this proposition, reasoning:
“We certainly have great faith in the sagacity and reasonableness of trial judges but we decline to impute infallibility to any court, trial or appellate. . . . . Mistakes happen, but . . . that mistake should [not] automatically result in depriving an insured of [its bad-faith claim].”
Insurers are required to construe uncertain policy language or unclear facts in favor of coverage; consequently, they may not rely on ambiguous policy language to argue there is a legitimate dispute and thus no bad faith. Employees Benefit Ass’n v. Grissett, 732 So.2d 968, 976 (Ala. 1998) (“[I]n a ‘normal’ case, the insurer cannot use ambiguity in the contracts as a basis for claiming a debatable reason not to pay the claim.”); Mixson, Inc. v. Am. Loyalty Ins. Co., 562 S.E.2d 659 (S.C. App. 2002) (Although no legal precedent on point, common meaning of disputed term indicated that insurer’s contrary construction was unreasonable.); Lucas v. State Farm Fire & Cas. Co., 963 P.2d 357 (Idaho 1998) (uncertain or disputed factual record insufficient to preclude bad faith claim).
A trial court’s erroneous ruling on the question of coverage is not sufficient to show that the insurer’s original coverage denial was reasonable at the time it was made. See generally Sobley v. S. Natural Gas Co., 210 F.3d 561 (5th Cir. 2000). Indeed, at trial of the bad-faith claim, the court should preclude the insurer even from offering into evidence the erroneous trial court ruling for a number of reasons, including: (i) because the court’s decision post-dates the coverage determination the decision itself is irrelevant as a matter of law; (ii) an erroneous ruling by a trial court does not establish the reasonableness of the carrier’s initial erroneous coverage determination; and (iii) it would be prejudicial to admit the ruling into evidence because it threatens to displace the role of the jury or risks the jurors overweighting the overruled decision.
Posted by Marc Mayerson at 11:02 PM | Comments (2) | TrackBack
April 5, 2006
What You See Is Not What You Get: Renewal Policies
One aspect of insurance practice that I like is the seemingly unlimited number of nooks and crannies in insurance law. But like a tree falling in the forest, the existence of one pro-policyholder rule or another in a given state has little impact on human behavior -- or trial outcomes -- unless that rule is called upon. One such rule is the "renewal rule."
When a policyholder renews an insurance policy with its carrier, the insurer must provide prior notice to the insured if it intends to reduce coverage under the newly issued policy. In one of my cases, a corporate client had purchased a primary-layer CGL policy from one insurer in 1969, renewed it in 1970, and then renewed it again. The sudden-and-accidental pollution exclusion was introduced in early 1970 (see Mayerson, Affording Coverage for Gradual Property Damage Under Standard Liability Insurance Policies: A History, 8 Coverage 3 (Sept./Oct. 1998)), so for the final policy the insurer issued its then-standard CGL form and stapled to it the pollution exclusion. The question presented was whether the pollution exclusion in this last policy -- which had been provided to the policyholder, a large multinational chemical company -- was to be given effect.
For a first policy with an insured, the insurer does not have the same duty to point out a limitation on the coverage. Generally speaking, insureds are charged with knowledge of the content of their insurance policies, even if it is undisputed that the insured never actually read the policy at the time it was issued. See generally Western World Ins. Co. v. Stack Oil. Co., 922 F.2d 118, 122 (2d Cir. 1990); Metzger v. Aetna Ins. Co.,, 125 N.E. 814, 816 (N.Y. 1920). (By the way, did you read the insurance policy issued to you before completing the purchase?) But this general rule that insureds are charged with knowledge of the terms of their policies does not overcome the application of the more particular rule regarding renewal of insurance policies. If this were not so, then the well-established notice-of-reduction rule would be without effect. See Davis v. USAA, 273 Cal. Rptr .224, 227 (1990); Magness Constr. Co. v. Ohio Farmers Ins. Co., 261 A.2d 537, 539 (Del. Super. 1969); Walton v. Sterling Fire Ins. Co., 197 N.Y.S.2d 277, 280 (N.Y. App. 1960) ("Implicit in such renewal is that the terms of the existing policy are to be contained in he absence of a contrary intention.").
The renewal rule is not a matter of reformation, see 91 ALR 2d 546, 549 & n.10, or fraud in the factum, and is not subject to a contractual limitations period. The insured may defend against the effort to enforce a coverage-reduction in a renewal policy without pleading and proving the elements of reformation; instead, the (purported) coverage reduction is of no effect. The insurer must prove that in renewal it gave notice before the policy took effect of the desired coverage restriction (and it is not enough for the insurer to send along a notice enclosed with a copy of the renewal -- the insured must be given the opportunity ex ante to object to its inclusion, negotiate its elimination, or take its business elsewhere).
Insureds are under no obligation to disabuse the carrier of a belief that its limitation or exclusion was effective. There is no authority of which I am aware that holds that, when a carrier attempts to reduce coverage in a renewal policy without notice, the insured can be prevented from objecting to enforcement of the unauthorized reduction. Otherwise, an insured would be required to be forever vigilant, guarding against the risk that its carrier might slip an unannounced new exclusion into the renewed policy.
In the case I handled mentioned above, we were litigating the question more than two decades later (the 20-year-old policy nevertheless having been triggered), and no peep was ever made by the insured or its broker at the time. No matter, though. Neither contemporaneous objection nor (detrimental) reliance by the insured is an element of this legal doctrine. In my case, because in the renewal process the insurer did not provide specific advance notice of the reduction in coverage the court had little trouble in concluding that the exclusion -- physically a part of the policy -- was of no legal effect.
Given the state of the law, the outcome we obtained was hardly surprising (to me at least, I'm not so sure about how the insurer thought about it). A more difficult question was presented in a Sixth Circuit case decided in 2003 where a follow-form excess insurer sought to rely on a coverage restriction that was included in the underlying policy, which in turn was a renewal. See Amway Distributors Benefits Ass'n v. Northfield Ins. Co. (6th Cir. 2003). By way of definition, a following-form insurer issues a couple-page policy that principally adopts the terms of the underlying wording and incorporates it as its own. Coca-Cola Bottling Co. v. Columbia Cas. Ins. Co., 11 CA 4th 1176,1182-83, 14 Cal. Rptr. 2d 643, 647 (1992) ("Following form policies 'are typically written on the same terms and conditions as the coverage provided by the underlying primary coverage. They are generally short, consisting of one or two pages, with an endorsement or provision that incorporates by reference the underlying policy coverages, except for the premium, the liability limits, and the obligation to investigate, defend, or pay costs of defense'."); Monsanto Co. v. American Centennial Ins. Co., 1991 WL 35714 (Del. Super. Ct. Feb. 20, 1991); Ford Motor Co. v. Northbrook Ins. Co., 838 F.2d 828 (9th Cir. 1988); following-form carriers may add additional terms and coverage restrictions per other endorsements in the policies they issue. See Home Ins. Co. v. American Home Products, 902 F.2d 1111, 1113 (2d Cir. 1990).
In Amway, here's how the court framed the dispute:
The real question, then, is whether an excess carrier . . . is bound as a matter of law by the underlying carrier's failure to comply with the renewal rule. We believe that the answer is "yes," because the "follow form" linkage between an excess insurer and the primary insurer should logically apply to procedural as well as substantive obligations to their common insured. In effect, an excess insurer who lives by the sword must die by the sword.
Id. The majority rejected the insurer's implicit argument that the insured's position was really the invention of its lawyers and that the coverage -- which would otherwise be barred for the particular claims being fought over -- were not all that important to the insured at the time it bought the policy. Seeming to the relish being confronted with this unusual insurance-law rule, the court states:
This type of extra-contractual argument, if successful, would require those purchasing insurance to affirmatively validate the importance of each and every coverage purchased. We find no authority supporting such an obligation. Furthermore, we suspect that any such obligation would turn the world of insurance upside down, since one has to be either super-diligent or a masochist to read an insurance policy with a fine-toothed comb.
Id. Furthermore, the Sixth Circuit rejected the argument that the presence of a broker as an intermediary on behalf of the insured negates application of the renewal rule. See id. (Kennedy, J., dissenting) ("Where brokers are involved in negotiating the terms of the policy, the rationale for a 'renewal rule' such as Michigan's is diminished, since there would be less need to protect unknowing insureds from the passive misrepresentations of their insurers."). The rejection of the insurer's argument that the renewal rule does not apply if a broker is involved means that just because the insured and its agents are "sophisticated" or possess "bargaining power" does not negative application of the rule, nor is it relevant that the brokers may know (as in the case I handled) that the new exclusionary language was "in the air" as it were, being discussed in trade publications, speeches, industry-form-drafting-organization [now, ISO] press releases, and other vectors of inculcation.
Both the majority and the dissent agreed further that, if an excess insurer was to be bound by the misdeeds of the primary that failed to provide notice of the reduction in coverage, the excess insurer would have recourse against the primary. As the court explained,
This triangular relationship between the primary insurer, the excess insurer, and the insured presents the classic problem of which one of the two relatively "innocent" parties must suffer when the "wrongdoer" causes a loss. IN the present situation, we believe that . . . the excess insurer ] was in a much better position than the insureds to analyze unannounced changes in the underlying policy that it had agreed to follow. As between [the excess insurer] and the insureds, therefore, [the excess insurer] should be bound to provide the greater coverage and be the one to seek indemnity back against the [primary].
This assumption -- which serves as what I tend to call an existential escape valve for the court -- may not be so straightforward; the question whether a primary insurer owes any legal duties directly to excess insurers and the theory under which such a claim is pursued is highly controverted, with much of the judicial commentary falling into obiter dicta rather than ratio decidendi. The nature of the duty and its limits may not be so clear. E.g., Continental Casualty Co. v. Reserve Ins. Co., 307 Minn. 5,10 239 N.W. 2d 862,865 (1976); Certain Underwriters at Lloyd's v. The Fidelity and Casualty Ins. Co. of N.Y., 4 F.3d 541, 547 (7th Cir. 1993). One can imagine such an action being pursued as an equitable contribution or indemnity claim by the excess insurer, but I have not puzzled through how that outcome would be resolved in a well-presented case by both sides. (In turn, the tagged excess or primary might make an claim under its insurance company professional-liability or errors-and-omissions (E&O) coverage or its reinsurance under, in particular, a follow-the-fortunes clause (and then be greeted with negligent underwriting claims as in Bonner v. Cox., known as the Aon 77 case).)
The focus here, of course, from the perspective of the policyholder lawyer, is the renewal doctrine, or the rule that in renewal policies that coverage restrictions are not effective if the insured had no prior notice from the insurer itself of their inclusion. In the case I handled, a chemical company presented with a standard-form CGL policy in 1970 that had a pollution exclusion included. That exclusion was "accepted" by the broker and the insured without objection -- no one ever pointed out any error or confusion about the terms of the coverage. Yet, two different courts looked at the same facts (why two courts is a different story) and each concluded independently that the renewal rule unquestionably applied, and so a primary policy with defense (in additional to limits) coverage was found to apply to several major environmental-liability, site clean-up, natural-resources damages, and toxic-tort administrative and court proceedings, liabilities the carrier would have skated out of (it claimed) if this particular exclusion applied. What we saw -- what both sides saw -- in the file as the actual, bona fide copy of the policy was indeed what we ended up with -- sans an outcome-determinative exclusion.
While the notice-of-reduction-in-a-renewal-policy rule is a favorable one that policyholders should press when presenting or litigating claims against their insurance company, it cannot do so unless the policyholder's counsel is aware of this particular rule; if not, then the insured's lawyer better be an insured lawyer.
Tags: Insurance, Blawg, Renewal Policy, Reduction in Renewal Policy, New Exclusions, Insurance Litigation, Insurance Coverage, Policyholder Lawyer
Posted by Marc Mayerson at 12:11 AM | Comments (3) | TrackBack
What You See Is Not What You Get: Renewal Policies
One aspect of insurance practice that I like is the seemingly unlimited number of nooks and crannies in insurance law. But like a tree falling in the forest, the existence of one pro-policyholder rule or another in a given state has little impact on human behavior -- or trial outcomes -- unless that rule is called upon. One such rule is the "renewal rule."
When a policyholder renews an insurance policy with its carrier, the insurer must provide prior notice to the insured if it intends to reduce coverage under the newly issued policy. In one of my cases, a corporate client had purchased a primary-layer CGL policy from one insurer in 1969, renewed it in 1970, and then renewed it again. The sudden-and-accidental pollution exclusion was introduced in early 1970 (see Mayerson, Affording Coverage for Gradual Property Damage Under Standard Liability Insurance Policies: A History, 8 Coverage 3 (Sept./Oct. 1998)), so for the final policy the insurer issued its then-standard CGL form and stapled to it the pollution exclusion. The question presented was whether the pollution exclusion in this last policy -- which had been provided to the policyholder, a large multinational chemical company -- was to be given effect.
For a first policy with an insured, the insurer does not have the same duty to point out a limitation on the coverage. Generally speaking, insureds are charged with knowledge of the content of their insurance policies, even if it is undisputed that the insured never actually read the policy at the time it was issued. See generally Western World Ins. Co. v. Stack Oil. Co., 922 F.2d 118, 122 (2d Cir. 1990); Metzger v. Aetna Ins. Co.,, 125 N.E. 814, 816 (N.Y. 1920). (By the way, did you read the insurance policy issued to you before completing the purchase?) But this general rule that insureds are charged with knowledge of the terms of their policies does not overcome the application of the more particular rule regarding renewal of insurance policies. If this were not so, then the well-established notice-of-reduction rule would be without effect. See Davis v. USAA, 273 Cal. Rptr .224, 227 (1990); Magness Constr. Co. v. Ohio Farmers Ins. Co., 261 A.2d 537, 539 (Del. Super. 1969); Walton v. Sterling Fire Ins. Co., 197 N.Y.S.2d 277, 280 (N.Y. App. 1960) ("Implicit in such renewal is that the terms of the existing policy are to be contained in he absence of a contrary intention.").
The renewal rule is not a matter of reformation, see 91 ALR 2d 546, 549 & n.10, or fraud in the factum, and is not subject to a contractual limitations period. The insured may defend against the effort to enforce a coverage-reduction in a renewal policy without pleading and proving the elements of reformation; instead, the (purported) coverage reduction is of no effect. The insurer must prove that in renewal it gave notice before the policy took effect of the desired coverage restriction (and it is not enough for the insurer to send along a notice enclosed with a copy of the renewal -- the insured must be given the opportunity ex ante to object to its inclusion, negotiate its elimination, or take its business elsewhere).
Insureds are under no obligation to disabuse the carrier of a belief that its limitation or exclusion was effective. There is no authority of which I am aware that holds that, when a carrier attempts to reduce coverage in a renewal policy without notice, the insured can be prevented from objecting to enforcement of the unauthorized reduction. Otherwise, an insured would be required to be forever vigilant, guarding against the risk that its carrier might slip an unannounced new exclusion into the renewed policy.
In the case I handled mentioned above, we were litigating the question more than two decades later (the 20-year-old policy nevertheless having been triggered), and no peep was ever made by the insured or its broker at the time. No matter, though. Neither contemporaneous objection nor (detrimental) reliance by the insured is an element of this legal doctrine. In my case, because in the renewal process the insurer did not provide specific advance notice of the reduction in coverage the court had little trouble in concluding that the exclusion -- physically a part of the policy -- was of no legal effect.
Given the state of the law, the outcome we obtained was hardly surprising (to me at least, I'm not so sure about how the insurer thought about it). A more difficult question was presented in a Sixth Circuit case decided in 2003 where a follow-form excess insurer sought to rely on a coverage restriction that was included in the underlying policy, which in turn was a renewal. See Amway Distributors Benefits Ass'n v. Northfield Ins. Co. (6th Cir. 2003). By way of definition, a following-form insurer issues a couple-page policy that principally adopts the terms of the underlying wording and incorporates it as its own. Coca-Cola Bottling Co. v. Columbia Cas. Ins. Co., 11 CA 4th 1176,1182-83, 14 Cal. Rptr. 2d 643, 647 (1992) ("Following form policies 'are typically written on the same terms and conditions as the coverage provided by the underlying primary coverage. They are generally short, consisting of one or two pages, with an endorsement or provision that incorporates by reference the underlying policy coverages, except for the premium, the liability limits, and the obligation to investigate, defend, or pay costs of defense'."); Monsanto Co. v. American Centennial Ins. Co., 1991 WL 35714 (Del. Super. Ct. Feb. 20, 1991); Ford Motor Co. v. Northbrook Ins. Co., 838 F.2d 828 (9th Cir. 1988); following-form carriers may add additional terms and coverage restrictions per other endorsements in the policies they issue. See Home Ins. Co. v. American Home Products, 902 F.2d 1111, 1113 (2d Cir. 1990).
In Amway, here's how the court framed the dispute:
The real question, then, is whether an excess carrier . . . is bound as a matter of law by the underlying carrier's failure to comply with the renewal rule. We believe that the answer is "yes," because the "follow form" linkage between an excess insurer and the primary insurer should logically apply to procedural as well as substantive obligations to their common insured. In effect, an excess insurer who lives by the sword must die by the sword.
Id. The majority rejected the insurer's implicit argument that the insured's position was really the invention of its lawyers and that the coverage -- which would otherwise be barred for the particular claims being fought over -- were not all that important to the insured at the time it bought the policy. Seeming to the relish being confronted with this unusual insurance-law rule, the court states:
This type of extra-contractual argument, if successful, would require those purchasing insurance to affirmatively validate the importance of each and every coverage purchased. We find no authority supporting such an obligation. Furthermore, we suspect that any such obligation would turn the world of insurance upside down, since one has to be either super-diligent or a masochist to read an insurance policy with a fine-toothed comb.
Id. Furthermore, the Sixth Circuit rejected the argument that the presence of a broker as an intermediary on behalf of the insured negates application of the renewal rule. See id. (Kennedy, J., dissenting) ("Where brokers are involved in negotiating the terms of the policy, the rationale for a 'renewal rule' such as Michigan's is diminished, since there would be less need to protect unknowing insureds from the passive misrepresentations of their insurers."). The rejection of the insurer's argument that the renewal rule does not apply if a broker is involved means that just because the insured and its agents are "sophisticated" or possess "bargaining power" does not negative application of the rule, nor is it relevant that the brokers may know (as in the case I handled) that the new exclusionary language was "in the air" as it were, being discussed in trade publications, speeches, industry-form-drafting-organization [now, ISO] press releases, and other vectors of inculcation.
Both the majority and the dissent agreed further that, if an excess insurer was to be bound by the misdeeds of the primary that failed to provide notice of the reduction in coverage, the excess insurer would have recourse against the primary. As the court explained,
This triangular relationship between the primary insurer, the excess insurer, and the insured presents the classic problem of which one of the two relatively "innocent" parties must suffer when the "wrongdoer" causes a loss. IN the present situation, we believe that . . . the excess insurer ] was in a much better position than the insureds to analyze unannounced changes in the underlying policy that it had agreed to follow. As between [the excess insurer] and the insureds, therefore, [the excess insurer] should be bound to provide the greater coverage and be the one to seek indemnity back against the [primary].
This assumption -- which serves as what I tend to call an existential escape valve for the court -- may not be so straightforward; the question whether a primary insurer owes any legal duties directly to excess insurers and the theory under which such a claim is pursued is highly controverted, with much of the judicial commentary falling into obiter dicta rather than ratio decidendi. The nature of the duty and its limits may not be so clear. E.g., Continental Casualty Co. v. Reserve Ins. Co., 307 Minn. 5,10 239 N.W. 2d 862,865 (1976); Certain Underwriters at Lloyd's v. The Fidelity and Casualty Ins. Co. of N.Y., 4 F.3d 541, 547 (7th Cir. 1993). One can imagine such an action being pursued as an equitable contribution or indemnity claim by the excess insurer, but I have not puzzled through how that outcome would be resolved in a well-presented case by both sides. (In turn, the tagged excess or primary might make an claim under its insurance company professional-liability or errors-and-omissions (E&O) coverage or its reinsurance under, in particular, a follow-the-fortunes clause (and then be greeted with negligent underwriting claims as in Bonner v. Cox., known as the Aon 77 case).)
The focus here, of course, from the perspective of the policyholder lawyer, is the renewal doctrine, or the rule that in renewal policies that coverage restrictions are not effective if the insured had no prior notice from the insurer itself of their inclusion. In the case I handled, a chemical company presented with a standard-form CGL policy in 1970 that had a pollution exclusion included. That exclusion was "accepted" by the broker and the insured without objection -- no one ever pointed out any error or confusion about the terms of the coverage. Yet, two different courts looked at the same facts (why two courts is a different story) and each concluded independently that the renewal rule unquestionably applied, and so a primary policy with defense (in additional to limits) coverage was found to apply to several major environmental-liability, site clean-up, natural-resources damages, and toxic-tort administrative and court proceedings, liabilities the carrier would have skated out of (it claimed) if this particular exclusion applied. What we saw -- what both sides saw -- in the file as the actual, bona fide copy of the policy was indeed what we ended up with -- sans an outcome-determinative exclusion.
While the notice-of-reduction-in-a-renewal-policy rule is a favorable one that policyholders should press when presenting or litigating claims against their insurance company, it cannot do so unless the policyholder's counsel is aware of this particular rule; if not, then the insured's lawyer better be an insured lawyer.
Tags: Insurance, Blawg, Renewal Policy, Reduction in Renewal Policy, New Exclusions, Insurance Litigation, Insurance Coverage, Policyholder Lawyer
Posted by Marc Mayerson at 12:11 AM | Comments (3) | TrackBack
March 29, 2006
Blast Fax -- Policyholders Continue to Obtain Defense Coverage
The ongoing fights over coverage for junk faxes continue, with the trend favoring policyholders, most recently in the form of a US Court of Appeals for the Tenth Circuit decision, Park University Enterprises, Inc. v. American Cas. Co. (10th Cir. March 27, 2006).
A year ago at this time, policyholders began to feel more confident following an Eighth Circuit opinion that refused to follow negative decisions from the Seventh and Fourth Circuits; since then, the trend has continued to swing toward policyholders, at least insofar as they seek defense coverage to class actions alleging violations of the Telephone Consumer Protection Act (TCPA), 47 U.S.C. 227.
Most recently, the Tenth Circuit found that there was coverage under both the property-damage and the advertising-injury coverage. With respect to property damage, the court focused in part on what I term "prong 2" property damage, that is, loss of use of tangible property that has not been physically injured. Here, the court considered the loss of use of the fax machine during transmission to be the loss-of-use property damage. The court implicitly considered the waste of paper and ink to be "prong 1" property damage, that is, physical injury to tangible property. See Park University, slip op. at 8.
The Park University court rejected the argument that the property damage was expected or intended from the standpoint of the insured or was so unfortuitous as not to be covered. Instead, the court focused on the denial of liability of the insured in the TCPA action wherein it alleged (subject to Fed. R. Civ. P. 11) that it believed it had permission to send the offending fax. Id. at 14 n.3. "Hence, from its standpoint, any resulting use of [the recipient's] fax machine, paper, and toner could not have resulted in injury because Park University thought the fax was welcome." Id. at 11.
As to advertising-injury coverage, the Tenth Circuit rejected the argument that coverage was limited only to injury to "seclusion," the theory espoused by the Seventh Circuit (per Judge Easterbrook), concluding that the policy, "defined by a reasonable person in the position of the insured, provides coverage for TCPA violations." Slip op. at 17. Ultimately, the Park University court found that accepting the advertising-injury coverage arguments of the insurer would be to "construe the language of the contract from the vantage of an insurer or an attorney, rather than the insured." Slip op. at 20.
Accordingly, "[t]he transmission of an allegedly unsolicited fax can constitute a [covered] publishing act, while receiving the same can result in a[ covered] invasion of privacy." Slip op. at 22. Furthermore, the nature of insurers' responses to these claims likely will vest in the policyholder the right to select the counsel it wishes to defend it against the TCPA liaiblities.
Note that the increased success of policyholders in obtaining defense and indemnity coverage for these cases pressures insurers not to offer this type of coverage at all, a development I have previously described.
Posted by Marc Mayerson at 11:57 AM | Comments (0) | TrackBack
Blast Fax -- Policyholders Continue to Obtain Defense Coverage
The ongoing fights over coverage for junk faxes continue, with the trend favoring policyholders, most recently in the form of a US Court of Appeals for the Tenth Circuit decision, Park University Enterprises, Inc. v. American Cas. Co. (10th Cir. March 27, 2006).
A year ago at this time, policyholders began to feel more confident following an Eighth Circuit opinion that refused to follow negative decisions from the Seventh and Fourth Circuits; since then, the trend has continued to swing toward policyholders, at least insofar as they seek defense coverage to class actions alleging violations of the Telephone Consumer Protection Act (TCPA), 47 U.S.C. 227.
Most recently, the Tenth Circuit found that there was coverage under both the property-damage and the advertising-injury coverage. With respect to property damage, the court focused in part on what I term "prong 2" property damage, that is, loss of use of tangible property that has not been physically injured. Here, the court considered the loss of use of the fax machine during transmission to be the loss-of-use property damage. The court implicitly considered the waste of paper and ink to be "prong 1" property damage, that is, physical injury to tangible property. See Park University, slip op. at 8.
The Park University court rejected the argument that the property damage was expected or intended from the standpoint of the insured or was so unfortuitous as not to be covered. Instead, the court focused on the denial of liability of the insured in the TCPA action wherein it alleged (subject to Fed. R. Civ. P. 11) that it believed it had permission to send the offending fax. Id. at 14 n.3. "Hence, from its standpoint, any resulting use of [the recipient's] fax machine, paper, and toner could not have resulted in injury because Park University thought the fax was welcome." Id. at 11.
As to advertising-injury coverage, the Tenth Circuit rejected the argument that coverage was limited only to injury to "seclusion," the theory espoused by the Seventh Circuit (per Judge Easterbrook), concluding that the policy, "defined by a reasonable person in the position of the insured, provides coverage for TCPA violations." Slip op. at 17. Ultimately, the Park University court found that accepting the advertising-injury coverage arguments of the insurer would be to "construe the language of the contract from the vantage of an insurer or an attorney, rather than the insured." Slip op. at 20.
Accordingly, "[t]he transmission of an allegedly unsolicited fax can constitute a [covered] publishing act, while receiving the same can result in a[ covered] invasion of privacy." Slip op. at 22. Furthermore, the nature of insurers' responses to these claims likely will vest in the policyholder the right to select the counsel it wishes to defend it against the TCPA liaiblities.
Note that the increased success of policyholders in obtaining defense and indemnity coverage for these cases pressures insurers not to offer this type of coverage at all, a development I have previously described.
Posted by Marc Mayerson at 11:57 AM | Comments (0) | TrackBack
September 1, 2005
Update on Coverage for Blast Faxes
The Appellate Court of Illinois has rejected the reasoning of two key recent federal appellate decisions from the Seventh and Fourth Circuits that barred coverage for an insured's liability for blast faxes under the TCPA (Telephone Consumer Protection Act). Instead, the appellate court found the carrier to have a duty to defend under its coverage for advertising injury.
In Valley Forge Ins. Co. v. Swiderski Electronics Inc. (Ill. App. Aug. 17. 2005), the Illinois court addressed all of the issues discussed in the cases I addressed in my entry, Just the Fax. The Seventh Circuit opinion, written by Judge Easterbrook, not only rejects the policyholder's claim but in fact belittles it. In part because the prior Seventh Circuit decision, purporting to apply Illinois law, was so comprehensive and sweeping, the Illinois appellate decision is important because it categorically rejects it.
Posted by Marc Mayerson at 4:51 PM | Comments (3)
Update on Coverage for Blast Faxes
The Appellate Court of Illinois has rejected the reasoning of two key recent federal appellate decisions from the Seventh and Fourth Circuits that barred coverage for an insured's liability for blast faxes under the TCPA (Telephone Consumer Protection Act). Instead, the appellate court found the carrier to have a duty to defend under its coverage for advertising injury.
In Valley Forge Ins. Co. v. Swiderski Electronics Inc. (Ill. App. Aug. 17. 2005), the Illinois court addressed all of the issues discussed in the cases I addressed in my entry, Just the Fax. The Seventh Circuit opinion, written by Judge Easterbrook, not only rejects the policyholder's claim but in fact belittles it. In part because the prior Seventh Circuit decision, purporting to apply Illinois law, was so comprehensive and sweeping, the Illinois appellate decision is important because it categorically rejects it.
Posted by Marc Mayerson at 4:51 PM | Comments (3)
June 9, 2005
Just the Fax: Coverage for Unsolicited Faxes under the TCPA
It wasn’t long ago when junk faxes were the spam about which legislators were concerned. Congress responded in part by passing the Telephone Consumer Protection Act, 47 U.S.C. § 227 (“TCPA”), a statute that has spawned its own cottage industry of lawsuits because of the mandatory liquidated damages provision of $500 per violation and the marketing technique of “blast” faxing, where a vendor sends advertisements by fax to thousands. Lawyers have brought class actions seeking $500 a pop for each unsolicited fax sent by companies, typically local businesses who have contracted with blast-fax advertising companies. E.g., http://www.law.com/jsp/printerfriendly.jsp?c=LawArticle&t =PrinterFriendlyArticle&cid=1076428446748
Once TCPA liability claims began to be asserted, defendants started to look towards their insurance coverage. In this context, the United States Court of Appeals for the Eighth Circuit recently addressed a policy covering “private nuisance [and] invasion of rights of privacy or possession of personal property.” See Universal Underwriters Ins. Co. v. Lou Fusz Automotive Network, Inc., http://www.ca8.uscourts.gov/opndir/05/03/041497P.pdf (8th Cir. March 21, 2005). The court recognized that Congress made clear its intent to establish liability for unsolicited faxes inasmuch as they were “intrusive invasion[s] of privacy” and were “intrusive, nuisance calls” that affected “the privacy of individuals” and constitute “a nuisance [and] an invasion of privacy.” Slip op at 8-9 (quoting notes to 47 U.S.C. § 227). The Eighth Circuit further found that the statutory damages were covered amounts under the policy, rejecting the argument that they were uncovered civil penalties. Consequently, the court found the insurer had a duty to defend.
In reaching its conclusion, the Eighth Circuit distinguished the decision of the United States Court of Appeals for the Seventh Circuit in American States Ins. Co. v. Capital Associates of Jackson County, Inc., http://www.ca7.uscourts.gov/tmp/IH0KQK7M.pdf (7th Cir. Dec. 23, 2004), which held broadly that there was no coverage under the “advertising injury” coverage at issue. The policy there covered “[o]ral or written publication of material that violates a person’s right of privacy.” The court found that the covered “right of privacy” extends only to invasions affecting the interest in secrecy rather than in “seclusion.” Focusing on common-law torts dealing with ‘false light' and publication of private facts, the Seventh Circuit found the policy to dovetail (only) with common-law liability. Assuming that the policy covered only interests in seclusion, the court then examined whether a corporation can suffer such injury from a fax's coming in over its phone lines. Id. at 6. The court further found that coverage hinged not on publication to someone but effectively only publication about someone. Thus, while Congress prohibited junk faxes as a means of publication, the court found that the insurance contract did not apply because of the advertising injury coverage applies or not based on content. Id. at 7.
The Capital Associates court further addressed whether coverage exists for “property damage” liability and ruled that coverage did not apply because it found, as a matter of law, any resulting property damage was “expected or intended” from the standpoint of the insured. Id. at 8. The court reasoned that the property damage would be the depletion of the printer’s ink and paper and that senders of uninvited faxes necessarily anticipate that damage. As a result, the Seventh Circuit found there was no possibility of coverage under the general-liability property-damage coverage. Accord Resource Bankshares Corp. v. St. Paul Mercury Ins. Co., 323 F. Supp. 2d. 709 (E.D. Va. 2004), aff’d (4th Cir. May 11, 2005) (http://caselaw.lp.findlaw.com/data2/circs/4th/041946p.pdf) .
Finding the issues not to be “close,” id. at 8, the Seventh Circuit further expressed offense that the insured sought punitive damages against the insurer who was defending under a reservation of rights and chided the district court for failing to summarily reject the bad-faith claim. Id. at 2. The court said that the insurer “has not acted vexatiously; this suit represents an effort to clear up an interpretative disagreement. Presenting a dispute to a court for resolution is hardly a reason to award punitive damages!” Id.
There seems to be little doubt that the Seventh Circuit thought it was blocking coverage for TCPA on a wholesale basis. And another federal appellate court got that message in following Capital Associates and distinguishing – or in reality not following – Lou Fusz. The Fourth Circuit ruled in Resource Bankshares Inc. v. St. Paul Mercury Ins. Co., http://caselaw.lp.findlaw.com/data2/circs/4th/041946p.pdf (4th Cir. May 11, 2005) that coverage was not shown under either the property-damage or advertising-injury components. The Fourth Circuit stated that the policyholder had the burden of showing that the loss arose from an accident and held that the policyholder’s speculation that the faxes had been sent to people who approved of receiving them was insufficient to meet its burden on summary judgment. Id. at 12. The Resource Bankshares court furthermore embraced the reasoning of the Seventh Circuit regarding the “privacy” coverage, thus rejecting the policyholder’s claim. As the court explained: “Unfortunately for Resource, it did not buy insurance policies for seclusion damages; instead, it insured against, among other things, damages arising from violations of content-based privacy. This reasonable, non-technical distinction precludes coverage for an advertising injury offense." Id. at 19.
Yet, as the Eighth Circuit properly recognized in distinguishing Capital Associates and as the Fourth Circuit did in distinguishing Lou Fusz, questions of coverage turn on the language of the policy at issue. Many courts that have addressed TCPA liability have recognized at least a possibility of coverage triggering the duty to defend. Park Univ. Enterprises, Inc. v. Am Cas. Co. of Reading PA, 314 F. Supp. 2d. 1094 (D. Kan. 2004); Registry Dallas Assoc. v. Wausau Bus. Ins. Ins., 2004 WL 614836 (N.D. Tex. Feb 26, 2004); TIG Ins. Co. v. Dallas Basketball, Ltd., 129 S.W.3d 232 (Tex. App. 2004); Hooters of Augusta, Inc. v. Am. Global Ins. Co., 272 F. Supp. 2d. 1365 (S.D. Ga. 2003); Western Rim Investment Advisors, Inc. v. Gulf Ins. Co., 269 F. Supp. 2d. 836 (N.D. Tex. 2003), aff ’d, 96 Fed. Appx. 960 (5th Cir. 2004); Merchant’s & Businessmen’s Mut. Ins. Co. v. A.P.O. Health Co., Inc., 228 N.Y.L.J. 22 (N.Y. Sup.Ct. Aug. 29, 2002); Prime TV, LLC v. Travelers Ins. Co. Co., 223 F. Supp. 2d. 744 (M.D. N.C. 2002). While the combined weight of the Seventh and Fourth Circuit decisions lend considerable aid to insurance companies that would seek to deny coverage, the Eighth Circuit’s decision underscores that a detailed analysis of the policy provisions is required in order to assure that coverage properly should be denied (even assuming arguendo the correctness of Capital Associates and Resource Bankshares).
Rather than requiring the parsing of particular of policy language, however, the insurance industry’s drafting organization has responded by introducing a new exclusion governing “Methods of Sending Material or Information.” This exclusion reads:
2. Exclusions
This insurance does not apply to:
DISTRIBUTION OF MATERIAL IN VIOLATION
OF STATUTES
“Personal and advertising injury” arising directly
or indirectly out of any action or omission
that violates or is alleged to violate:
a. The Telephone Consumer Protection
Act (TCPA), including any amendment
of or addition to such law; or
b. The CAN-SPAM Act of 2003 including
any amendment of or addition to such
law; or
c. Any statute, ordinance or regulation,
other than the TCPA or CAN-SPAM
Act of 2003, that prohibits or limits the
sending, transmitting, communicating or
distribution of material or information.
Posted by Marc Mayerson at 4:17 PM | Comments (0) | TrackBack
Just the Fax: Coverage for Unsolicited Faxes under the TCPA
It wasn’t long ago when junk faxes were the spam about which legislators were concerned. Congress responded in part by passing the Telephone Consumer Protection Act, 47 U.S.C. § 227 (“TCPA”), a statute that has spawned its own cottage industry of lawsuits because of the mandatory liquidated damages provision of $500 per violation and the marketing technique of “blast” faxing, where a vendor sends advertisements by fax to thousands. Lawyers have brought class actions seeking $500 a pop for each unsolicited fax sent by companies, typically local businesses who have contracted with blast-fax advertising companies. E.g., http://www.law.com/jsp/printerfriendly.jsp?c=LawArticle&t =PrinterFriendlyArticle&cid=1076428446748
Once TCPA liability claims began to be asserted, defendants started to look towards their insurance coverage. In this context, the United States Court of Appeals for the Eighth Circuit recently addressed a policy covering “private nuisance [and] invasion of rights of privacy or possession of personal property.” See Universal Underwriters Ins. Co. v. Lou Fusz Automotive Network, Inc., http://www.ca8.uscourts.gov/opndir/05/03/041497P.pdf (8th Cir. March 21, 2005). The court recognized that Congress made clear its intent to establish liability for unsolicited faxes inasmuch as they were “intrusive invasion[s] of privacy” and were “intrusive, nuisance calls” that affected “the privacy of individuals” and constitute “a nuisance [and] an invasion of privacy.” Slip op at 8-9 (quoting notes to 47 U.S.C. § 227). The Eighth Circuit further found that the statutory damages were covered amounts under the policy, rejecting the argument that they were uncovered civil penalties. Consequently, the court found the insurer had a duty to defend.
In reaching its conclusion, the Eighth Circuit distinguished the decision of the United States Court of Appeals for the Seventh Circuit in American States Ins. Co. v. Capital Associates of Jackson County, Inc., http://www.ca7.uscourts.gov/tmp/IH0KQK7M.pdf (7th Cir. Dec. 23, 2004), which held broadly that there was no coverage under the “advertising injury” coverage at issue. The policy there covered “[o]ral or written publication of material that violates a person’s right of privacy.” The court found that the covered “right of privacy” extends only to invasions affecting the interest in secrecy rather than in “seclusion.” Focusing on common-law torts dealing with ‘false light' and publication of private facts, the Seventh Circuit found the policy to dovetail (only) with common-law liability. Assuming that the policy covered only interests in seclusion, the court then examined whether a corporation can suffer such injury from a fax's coming in over its phone lines. Id. at 6. The court further found that coverage hinged not on publication to someone but effectively only publication about someone. Thus, while Congress prohibited junk faxes as a means of publication, the court found that the insurance contract did not apply because of the advertising injury coverage applies or not based on content. Id. at 7.
The Capital Associates court further addressed whether coverage exists for “property damage” liability and ruled that coverage did not apply because it found, as a matter of law, any resulting property damage was “expected or intended” from the standpoint of the insured. Id. at 8. The court reasoned that the property damage would be the depletion of the printer’s ink and paper and that senders of uninvited faxes necessarily anticipate that damage. As a result, the Seventh Circuit found there was no possibility of coverage under the general-liability property-damage coverage. Accord Resource Bankshares Corp. v. St. Paul Mercury Ins. Co., 323 F. Supp. 2d. 709 (E.D. Va. 2004), aff’d (4th Cir. May 11, 2005) (http://caselaw.lp.findlaw.com/data2/circs/4th/041946p.pdf) .
Finding the issues not to be “close,” id. at 8, the Seventh Circuit further expressed offense that the insured sought punitive damages against the insurer who was defending under a reservation of rights and chided the district court for failing to summarily reject the bad-faith claim. Id. at 2. The court said that the insurer “has not acted vexatiously; this suit represents an effort to clear up an interpretative disagreement. Presenting a dispute to a court for resolution is hardly a reason to award punitive damages!” Id.
There seems to be little doubt that the Seventh Circuit thought it was blocking coverage for TCPA on a wholesale basis. And another federal appellate court got that message in following Capital Associates and distinguishing – or in reality not following – Lou Fusz. The Fourth Circuit ruled in Resource Bankshares Inc. v. St. Paul Mercury Ins. Co., http://caselaw.lp.findlaw.com/data2/circs/4th/041946p.pdf (4th Cir. May 11, 2005) that coverage was not shown under either the property-damage or advertising-injury components. The Fourth Circuit stated that the policyholder had the burden of showing that the loss arose from an accident and held that the policyholder’s speculation that the faxes had been sent to people who approved of receiving them was insufficient to meet its burden on summary judgment. Id. at 12. The Resource Bankshares court furthermore embraced the reasoning of the Seventh Circuit regarding the “privacy” coverage, thus rejecting the policyholder’s claim. As the court explained: “Unfortunately for Resource, it did not buy insurance policies for seclusion damages; instead, it insured against, among other things, damages arising from violations of content-based privacy. This reasonable, non-technical distinction precludes coverage for an advertising injury offense." Id. at 19.
Yet, as the Eighth Circuit properly recognized in distinguishing Capital Associates and as the Fourth Circuit did in distinguishing Lou Fusz, questions of coverage turn on the language of the policy at issue. Many courts that have addressed TCPA liability have recognized at least a possibility of coverage triggering the duty to defend. Park Univ. Enterprises, Inc. v. Am Cas. Co. of Reading PA, 314 F. Supp. 2d. 1094 (D. Kan. 2004); Registry Dallas Assoc. v. Wausau Bus. Ins. Ins., 2004 WL 614836 (N.D. Tex. Feb 26, 2004); TIG Ins. Co. v. Dallas Basketball, Ltd., 129 S.W.3d 232 (Tex. App. 2004); Hooters of Augusta, Inc. v. Am. Global Ins. Co., 272 F. Supp. 2d. 1365 (S.D. Ga. 2003); Western Rim Investment Advisors, Inc. v. Gulf Ins. Co., 269 F. Supp. 2d. 836 (N.D. Tex. 2003), aff ’d, 96 Fed. Appx. 960 (5th Cir. 2004); Merchant’s & Businessmen’s Mut. Ins. Co. v. A.P.O. Health Co., Inc., 228 N.Y.L.J. 22 (N.Y. Sup.Ct. Aug. 29, 2002); Prime TV, LLC v. Travelers Ins. Co. Co., 223 F. Supp. 2d. 744 (M.D. N.C. 2002). While the combined weight of the Seventh and Fourth Circuit decisions lend considerable aid to insurance companies that would seek to deny coverage, the Eighth Circuit’s decision underscores that a detailed analysis of the policy provisions is required in order to assure that coverage properly should be denied (even assuming arguendo the correctness of Capital Associates and Resource Bankshares).
Rather than requiring the parsing of particular of policy language, however, the insurance industry’s drafting organization has responded by introducing a new exclusion governing “Methods of Sending Material or Information.” This exclusion reads:
2. Exclusions
This insurance does not apply to:
DISTRIBUTION OF MATERIAL IN VIOLATION
OF STATUTES
“Personal and advertising injury” arising directly
or indirectly out of any action or omission
that violates or is alleged to violate:
a. The Telephone Consumer Protection
Act (TCPA), including any amendment
of or addition to such law; or
b. The CAN-SPAM Act of 2003 including
any amendment of or addition to such
law; or
c. Any statute, ordinance or regulation,
other than the TCPA or CAN-SPAM
Act of 2003, that prohibits or limits the
sending, transmitting, communicating or
distribution of material or information.
Posted by Marc Mayerson at 4:17 PM | Comments (0) | TrackBack