Confusing and Deceitful Insurer Exclusions Invite Challenge

Confusing and Deceitful Insurer Exclusions Invite Challenge

By David A. Gauntlett*

Introduction

A recurring theme in Commercial General Liability (“CGL”) policy forms is that there has been an ongoing narrowing of “personal injury”/ “advertising injury” coverage provisions. The 1976 ISO CGL form broadly defined “advertising injury” as “any injury arising out of an offense committed during the policy period occurring in the course of the named policyholder’s advertising activities, if such injury arises out of such libel, slander, defamation, violation of right of privacy, piracy, unfair competition or infringement of copyright title or slogan.” Updates to the ISO forms in 1986 and 1998 resulted in the modern offenses that remain in policies to this day.

Since then, reductions in coverage have come not through altering the coverage grants themselves (as would be more readily understood by the average policyholder) but rather through increasingly robust and convoluted exclusions. This leads to more frequent insurer denials based exclusions rather than an absence of initial coverage. Though some courts still fail to understand the significance of that distinction, the nationwide trend favors a narrow reading of these exclusions, which often leaves potential coverage for claims beyond the scope of what the insurer may have envisioned.

“Arising out of” Does Not Overcome Required Narrow Reading of Exclusions

The most prominent case to directly address this issue is My Choice Software, LLC v. Travelers Casualty Insurance Co. of America.[1] The My Choice court overturned a district court decision that broadly interpreted “arising out of” language connected to an IP Exclusion.[2]

The My Choice decision only directly cites MacKinnon[3] and Capurro,[4] but Partridge[5] was the ultimate source for the Ninth Circuit’s conclusion that “arising out of” in an exclusion must be construed narrowly like all other language in exclusions. There, the California Supreme Court stated:

The insurer, pointing to the exclusionary clause of the homeowner's policy which denies coverage for injuries “arising out of the ... use ... of a motor vehicle,” contends that since, as we have just determined, the instant accident “arose out of the use” of the vehicle for purposes of the automobile policy, the homeowner's policy necessarily excludes the accident. Emphasizing that the language of the homeowner's exclusionary clause is nearly identical to the language of the automobile policy's coverage clause, and that the same insurer drafted and issued both policies, State Farm argues that the policies were intended to be mutually exclusive and that no overlapping coverage can be permitted. For the reasons discussed below, we cannot agree.

Initially we point out that the insurer overlooks the fact that although the language in the two policies is substantially similar, past authorities have made it abundantly clear that an entirely different rule of construction applies to exclusionary clauses as distinguished from coverage clauses. [footnote] Whereas coverage clauses are interpreted broadly so as to afford the greatest possible protection to the insured [citations], exclusionary clauses are interpreted narrowly against the insurer. . . .

In view of the above approach the fact that an accident has been found to “arise out of the use” of a vehicle for purposes of an automobile policy is not necessarily determinative of the question of whether that same accident falls within a similarly worded exclusionary clause of a homeowner's policy.[6] 

Despite this insurmountable authority, some California courts persist in mistakenly applying a broad construction to exclusions that use “arising out of.” Practice Fusion, Inc. v. Freedom Specialty Ins. Co.[7] is one such case. The court stated that “‘California courts have consistently given a broad interpretation . . . in various kinds of insurance provisions,’ including policy exclusions.”[8] Critically, the court’s assertion that this principle is applicable to exclusions is not part of the quotation from Medill, which actually offers no support for the court’s improper assertion.

Other Jurisdictions Are in Agreement

Despite the stubbornness of some judges refusing to adopt this understanding of how best to resolve the inherent conflict between “arising out of” in an exclusion, the national trend is one of acceptance.[9] Most recently, this principle has been reaffirmed under New York law in Xerox Corp. v. Travelers Cas. & Sur. Co. of Am.[10] There, the policy contained a “Prior Acts” exclusion that precluded potential coverage for any “Claim . . . based upon, arising from, or in consequence of any fact, circumstance or Wrongful Act committed, attempted, or allegedly committed or attempted in whole or in part prior to January 1, 2017.”[11]

Travelers asserted that the exclusion was implicated because the underlying complaints contained allegations related to joint venture agreements between Xerox and Fujifilm that were entered into decades earlier, leaving no obligation to provide coverage.[12] The Appellate Division court disagreed:

To determine the applicability of an “arising out of” exclusion, such as the one at bar, the Court of Appeals has adopted a “but for” test, meaning that “none of the causes of action that [the underlying plaintiff, i.e. Deason] asserts could exist but for the existence of the excluded activity” [citation]. . . . The acts giving rise to liability in the underlying cases consisted of the 2017–2018 negotiation and approval of an allegedly disadvantageous transaction with Fuji and Xerox's 2018 denial of a request for a waiver of a deadline for advance notice of director nominations. The complaints in the two Deason actions allege that Xerox's former CEO and certain directors breached fiduciary duties by agreeing to a rushed and unfavorable transaction in their own self-interest. These causes of action could be viable even if Xerox had not previously entered into the joint venture with Fuji [citations].[13]

A New Form of Exclusion – Redefinition Via Endorsement

Perhaps recognizing the spread of this view among the majority of courts, insurers have recently begun reducing coverage by eliminating coverage provisions via endorsement. In Princeton Excess & Surplus Lines Insurance Co. v. A.H.D. Houston, Inc.,[14] the Fifth Circuit overturned the district court’s holding that coverage was made illusory by an exclusion that removed coverage under offenses (d) through (g) (the “advertising” offenses of “personal and advertising injury”) while leaving intact coverage for offenses (a) through (c). It rejected the district court’s use of the traditional separation of “personal injury” and “advertising injury.” A dissenting opinion by Judge James C. Ho neatly summarized the flaw in the majority’s reasoning:

Why would Texas law treat coverage as illusory, but only if the excluded coverage happens to be structured as an “umbrella” provision—and not if it's drafted as a mere “subcategory” of coverage? It's not clear to me why these principles of Texas law would turn on a drafting quirk.[15]

Better reasoned cases have examined identical fact patterns and concluded coverage was illusory. In Princeton Excess & Surplus Lines Ins. Co. v. R.I. Cranston Ent. Inc.,[16] the court noted that the “exact [same] fact pattern and Policy language” were at issue.[17] The court rejected the Fifth Circuit’s reasoning as well as that advocated by the insurer’s counsel and concluded that the policy contained “contradictory terms and is thus ambiguous.”[18] Because the broad exclusion would preclude “coverage [for advertising injury] in almost any circumstance,” the court determined the policy presented illusory coverage.[19]

Conclusion

As insurers develop new ways to reduce coverage, it becomes increasingly important to ensure you receive every benefit you are owed. As seen in some of the cases cited above, even judges can be fooled into thinking a policy offers less coverage than it truly does. Only through retaining expert coverage counsel can you be certain you are not shortchanged.

*David A. Gauntlett is a principal of Gauntlett Law and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett Law at www.gauntlettlaw.com.

[1] My Choice Software, LLC v. Travelers Casualty Insurance Co. of America, 823 F. App’x 510, 512 (9th Cir. (Cal.) 2020).

[2] The My Choice decision itself has been more thoroughly discussed in prior blogs. E.g., David A. Gauntlett, Why Policyholders Should Retain Insurance Coverage Savvy Counsel, https://www.gauntlettlaw.com/news/why-policyholders-should-retain-insurance-coverage-savvy-counsel (Jan. 5, 2023).

[3] MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 648 (2003).

[4] Tower Ins. Co. of N.Y. v. Capurro Enters. Inc., No. C 11-03806, 2012 WL 1109998, *9–10 (N.D. Cal. Apr. 2, 2012).

[5] State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal. 3d 94 (1973).

[6] Id. at 101–02.

[7] Prac. Fusion, Inc. v. Freedom Specialty Ins. Co., No. A167130, 2024 WL 3078283, at *5 (Cal. Ct. App. June 21, 2024).

[8] Id. (quoting Medill v. Westport Ins. Corp., 143 Cal. App. 4th 819, 830 (2006)).

[9] See, e.g., State Farm Fire & Cas. Co. v. First Fin. of Charleston, Inc., No. CV 2:23-263-RMG, 2023 WL 8850889, *5 (D.S.C. Dec. 21, 2023).

[10] Xerox Corp. v. Travelers Cas. & Sur. Co. of Am., 205 N.Y.S.3d 387, 388 (App. Div. 2024); see also Schlather, Stumbar, Parks & Salk, LLP v. OneBeacon Insurance Co., No. 5:10-CV-0167 NPM/DEP, 2011 WL 6756971, *7 (N.D.N.Y. Dec. 22, 2011).

[11] Id.

[12] Id. at 389.

[13] Id. at 390.

[14] Princeton Excess & Surplus Lines Ins. Co. v. A.H.D. Houston, Inc., 84 F.4th 274, 285–86 (5th Cir. (Tex.) 2023).

[15] Id. at 288 (J. Ho, dissenting).

[16] Princeton Excess & Surplus Lines Ins. Co. v. R.I. Cranston Ent. Inc., No. CV 21-63-JJM-PAS, 2024 WL 1285631 (D.R.I. Mar. 26, 2024).

[17] Id. at *5.

[18] Id. at *6.

[19] Id.