Inconsistent Applications of Coverage Law

Inconsistent Applications of Coverage Law

By David A. Gauntlett*

Introduction

This blog examines some recent coverage cases across the country to highlight the inconsistency with which courts apply principles of coverage law that may appear to be long since settled. Many ideologically conservative judges refuse to embrace modern trends that benefit policyholders. It is an unfortunate truth that the prevailing party in an insurance suit is often dictated as much by the judge assigned as by the actual facts of the case.

Misapplication of California Law by Ninth Circuit

In AutoDistributors, Inc. v. Nationwide E&S Specialty,[1] the Ninth Circuit rejected several coverage theories advanced by the policyholder claiming that the underlying action fell within the policy’s standard “personal and advertising injury” coverage provisions. The court’s opinion starts on solid footing by denying coverage for trademark infringement as falling outside the scope of “personal and advertising injury.”[2] That footing becomes more precarious in rejecting the theory of coverage under offense “e” for “[i]nfringing upon another's . . . slogan in your ‘advertisement’”:

[The underlying complaint alleged] “use and display of the Sixt Marks or any items associated with the SIXT® ... slogans in connection with the operation of the Used Car Sales Business” caused consumer confusion. But AutoDistributors points to no allegation in Sixt's Complaint describing AutoDistributors’ use of items associated with Sixt's slogans, as opposed to Sixt's trademarks, nor has it explained why the use of an item associated with a slogan would qualify as infringement of a slogan within the meaning of the policy.[3]

The first sentence quotes an allegation of slogan use, but then the court claims no such use is alleged. This apparent contradiction could mean the court is assuming the “SIXT®” slogans are also trademarks, thereby making them not covered. This would be inconsistent with California law requiring that only the element of an allegation implicating potential coverage be considered in a court’s analysis.[4]

Finally, the court completely abandons California law in rejecting coverage under offense “f” for “[t]he use of another's advertising idea in your ‘advertisement’”:

AutoDistributors cites a declaration from Steven Schneider stating that AutoDistributors adopted Sixt's advertising and marketing materials, including by creating “an electric scooter to rent and sell to [AutoDistributors’] customers, which utilized Sixt's distinctive orange and black color scheme and one of its slogans—‘Feel the Motion.’ ” But those facts are nowhere in the Sixt Complaint, and AutoDistributors has not explained why they would have been “otherwise known” to Scottsdale. An insured “may not trigger the duty to defend by speculating about extraneous ‘facts’ regarding potential liability or ways in which the third party claimant might amend its complaint at some future date.”

The court’s first mistake is claiming that facts implicating coverage must be “known” by an insurer. Not so. California law dictates that the duty to defend analysis is based on facts “available” to the insurer.[5] The court then incorrectly denies the “potential for amendment” doctrine embraced by California law.[6]

“Arising out of” Misinterpretation

Every jurisdiction in America embraces two concepts in interpreting insurance policies: (1) exclusions should be narrowly construed against the insurer and (2) the term “arising out of” should be interpreted broadly. So what happens when “arising out of” is used in an exclusion? This clash of principles has generally been resolved in favor of policyholders.[7] A recent New Jersey case, however, demonstrates that the debate is not yet over.

In Watford Specialty Ins. Co. v. MDF 92 River St., LLC,[8] the court considered whether an “Assault and Battery” exclusion[9] applied to preclude potential coverage. In the underlying action, a bar patron was forcefully removed by employees and sustained injuries during the confrontation. In the resulting lawsuit, the patron asserted causes of action for Assault and Battery as well as Wrongful Eviction. The bar sought coverage for the latter under its insurance policy’s coverage for “‘bodily injury’, arising out of . . . [t]he wrongful eviction from . . . a room, dwelling or premises that a person occupies[.]”[10]

The court rejected this argument, relying on a broad interpretation of the relevant exclusion:

The critical phrase “arising out of,” which frequently appears in insurance policies, has been interpreted expansively by New Jersey courts in insurance coverage litigation. “The phrase ‘arising out of’ has been defined broadly in other insurance coverage decisions to mean conduct ‘originating from,’ ‘growing out of’ or having a ‘substantial nexus’ with the activity for which coverage is provided.”[11]

Neither the Watford court nor the American Motorists court that it quoted addressed the inherent conflict of expansively interpreting “arising out of” when used in an exclusion. In fact, the Watford court never even acknowledged the obligation to read exclusions narrowly in its recitation of interpretive principles under New Jersey law.[12]

Conclusion

Most policyholders understand that the application of coverage law principles will be influenced by jurisdiction. Often overlooked, however, are factors that ideally should not influence the outcome of a case, such as state vs. federal court and the judge assigned to a case.

*David A. Gauntlett is a principal of Gauntlett & Associates 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 & Associates at www.gauntlettlaw.com.

[1] AutoDistributors, Inc. v. Nationwide E&S Specialty, No. 22-16445, 2023 WL 7981821, at *2 (9th Cir. (Cal.) Nov. 17, 2023).

[2] Id.

[3] Id.

[4] Waller v. Truck Ins. Exch., 11 Cal. 4th 1, 16 (1995) (“Before ‘even considering exclusions, a court must examine the coverage provisions to determine whether a claim falls within [the policy terms].’”)

[5] Nelson v. West Am. Ins. Co., No. B143838, 2004 Cal. App. Unpub. LEXIS 5606, *15–16, *27–28 (Cal. Ct. App. June 14, 2004) (“[T]he insurer is ‘charge[d] with notice of all those facts which [it] might have ascertained had [it] diligently pursued the requisite inquiry.’  (California Shoppers, Inc. v. Royal Globe Ins. Co., supra, 175 Cal.App.3d at p. 37, 221 Cal.Rptr. 171; see KPFF, Inc. v. California Union Ins. Co., supra, 56 Cal.App.4th at p. 974, 66 Cal.Rptr.2d 36; State Farm Mut. Auto. Ins. Co. v. Martinez-Lozano (E.D.Cal.1996) 916 F.Supp. 996, 1005.)  Accordingly, ‘[t]he risk that an insurer takes when it denies coverage without investigation is that the insured may later be able to prove that a reasonable investigation would have uncovered evidence to establish coverage or a potential for coverage.’  (American Internat. Bank v. Fidelity & Deposit Co. (1996) 49 Cal.App.4th 1558, 1571, 57 Cal.Rptr.2d 567.) . . . [A]n insurer is required to provide a defense against unpled claims that fall within policy coverage, provided that facts – whether extrinsic or alleged – available to the insurer sufficiently indicate that the third party could assert such claims.”)

[6] See David A. Gauntlett, Coverage Based on Potential for Amendment of Underlying Pleadings, https://www.gauntlettlaw.com/news/ltstlvxs1vwlifa3rni6btlbkoqkap (Sep. 3, 2023).

[7] See, e.g., My Choice Software, LLC v. Travelers Cas. Ins. Co. of Am., 823 Fed. Appx. 510, 512 (9th Cir. (Cal.) Aug. 19, 2020) (“Applying the ‘arising out of’ exclusionary language to the allegations asserted in the Trusted Tech cross-complaint runs counter to the principle that. . . exclusionary clauses are interpreted narrowly against the insurer.")

[8] Watford Specialty Ins. Co. v. MDF 92 River St., LLC, No. A-3505-21, 2023 WL 8868419 (N.J. Super. Ct. App. Div. Dec. 22, 2023).

[9] The exclusion applied to “‘bodily injury’ . . . directly or indirectly, actually or allegedly, arising out of or related to any: assault, battery . . . .” Id. at *1.

[10] Id. at *2.

[11] Id. at *10 (quoting Am. Motorists Ins. Co. v. L-C-A Sales Co., 155 N.J. 29, 35 (1998)).

[12] Id. at *6–7; but see Princeton Ins. Co. v. Chunmuang, 151 N.J. 80, 95 (1997) (“[I]nsurance policy exclusions must be narrowly construed; the burden is on the insurer to bring the case within the exclusion.”)