No Discovery Is Appropriate in Addressing Coverage for IP Disputes

No Discovery Is Appropriate in Addressing Coverage for IP Disputes

By David A. Gauntlett*

Introduction

Three distinct approaches are implicated in determining what the facts are for purposes of insurance coverage analysis:  the “complaint allegations,” “facts known to the insurer,” or “facts available to the insurer” rules.  Forum selection, which will require adoption of one rule over another, may be result-determinative in a coverage dispute where facts beyond the pleadings are essential to either establish or eviscerate potential coverage.

“Complaint Allegations” Rule

The “four corners” or “eight corners” rule in Texas, also known as the “complaint allegations” rule, continues to be the law in a number of jurisdictions. An Illinois federal district court made explicit the tension which exists in analyzing a defense under the “complaint allegations” rule, in effect finding that, contrary to much stated national precedent, indemnity may be broader than the defense duty.[1] The court also concluded that it could find the absence of indemnity where no defense could arise, though the converse was not true; and in the latter instance the duty of indemnity was not ripe until liability had been adjudged in the underlying suit.[2]

In 1996 a New Jersey federal district court[3] declined to allow an insurance company to take discovery with respect to the duty to defend, noting that “the Court must resolve this issue based on the four corners of the complaint . . . .”  If an insurance company contends that factual issues exist that might eventually lead to a denial of coverage for a settlement or judgment, then in New Jersey the appropriate course is for the carrier to defend the underlying case under a reservation of rights.[4]

 “Known Facts” Rule

While some cases have articulated a “known facts” rule since, on the facts of those cases, that principle was all the court needed to address to determine whether the extrinsic evidence adduced created a duty to defend, many courts citing this doctrine are not actually adopting a “known facts” rule but only addressing the claims before them.  Such cases are not inconsistent with the broad duty to investigate enunciated in cases such as Egan,[5] a seminal California Supreme Court opinion.

Either an insurer knows of facts at the time of its denial because they are “intrinsic” to the complaint, or it does not.  Discovery cannot expand the universe of what was discoverable.

“Facts Available” Rule

While one of the underlying rationales for this rule is the broad scope of the duty to investigate, first articulated by the California Supreme Court in Egan, the doctrine has been readily applied in the third-party context.[6]  Indeed, a number of cases have found that facts available to a non-defending insurer may implicate a defense, even though the insurer is apprised of the salient facts after the resolution of the underlying action.

A number of courts have found that affidavits and interrogatory answers by the underlying claimant can invoke an insurer’s duty to defend even where the complaint’s allegations are inadequate to do so.[7] These states treat notice as a covenant rather than a condition precedent to the recovery of attorneys’ fees.[8]

Some courts have permitted discovery which an insurer could have obtained if it had investigated the duty of defense owed.[9] This discovery, however, cannot include the context in which claims were asserted against the insured because all possible contexts must be considered by the insurer before denying a defense, so the particular context the claimant focused on is irrelevant. Indeed, the insurer must “defend the insured against any claim ‘potentially covered by the policy.’”[10]

[A]n insurer may only defeat an existing potential for coverage by undisputed facts that conclusively negate such coverage.  This is particularly true where the insurer seeks to defeat coverage by reliance on an exclusion.  An insurer may rely on an exclusion to deny coverage only if it provides conclusive evidence demonstrating that the exclusion applies. . . . Thus, an insurer that wishes to rely on an exclusion has the burden of proving, through conclusive evidence, that the exclusion applies in all possible worlds.[11]

Conclusion

Insurers who cannot prove that no coverage arises in all possible worlds in light of the allegations of the complaint may properly be held to owe a defense duty.  A prompt motion for partial summary judgment filed in conjunction with a complaint often causes insurers to cry “foul,” claiming they have had no time to analyze coverage, even though they have previously (and often repeatedly) denied a defense.  Insurers who cannot make a showing under Rule 56(f) in light of the facts asserted in the insured’s motion are not entitled to a continuance before adjudication of defense issues.  Plainly speaking, a party has no right to discovery prior to the hearing of a partial summary judgment motion but rather must make an affirmative showing that the requested discovery will provide facts necessary to defeat the motion.[12]  “[The] nonmovant may not simply rely on vague assertions that discovery will produce needed, but unspecified, facts.”[13]

*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[1] Houston General Ins. Corp. v. BSM Corp., 843 F. Supp. 1264 (N.D. Ill. 1994). 

[2] Crum & Forster Managers Corp. v. Resolution Trust Corp., 620 N.E.2d 1073, 1081 (Ill. 1993).

[3] NL lndustries, Inc. v. Commercial Union Ins. Co., 926 F. Supp. 446, 459 (D.N.J. 1996) (Walls, U.S.D.J.).

[4] Burd v. Sussex Mut. Ins. Co., 56 N.J. 383, 389 (1970) (“[O]rdinarily a carrier who defends unsuccessfully may not later deny coverage, absent an express agreement with the insured reserving a right to deny coverage.”)

[5] See Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809 (1979) (a first-party disability policy case).

[6] 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.”)

[7] See, e.g., Teletronics Int’l, Inc. v. CNA Ins. Co., 302 F. Supp. 2d 442, 448, 449 (D. Md. 2004), aff’d, 120 F. App’x 440 (4th Cir. (Md.) 2005).

[8] Insurance Co. of State of Pa. v. Associated Int’l Ins. Co., 922 F.2d 516, 523–24 (9th Cir. (Cal.) 1990) (“Research . . . indicates that, absent a clear and unambiguous expression by the parties . . . that they intended the notice provision to be a condition precedent, the provision will not be construed as a condition precedent.”)

[9] Amerisure Mut. Ins. Co. v. Superior Constr. Corp., No. 3:07-cr-00276-W, 2008 U.S. Dist. LEXIS 62458, *12 (W.D.N.C. Aug. 15, 2008) (“Plaintiff . . . contends that it was not made aware of the nature of the damage to the condos until it received an interrogatory response dated May 12, 2008, more than a year after Defendant had resolved the Underlying Litigation. Plaintiff admits, however, that it had a duty to conduct a ‘reasonable’ investigation notwithstanding the information its insured (Defendant here) may provide.”)

[10] Pueblo Sante Fe Townhomes Owners’ Ass’n v. Transcontinental Ins. Co., 178 P.3d 485, 491 (Ariz. Ct. App. 2008), quoting United Servs. Auto. Ass’n v. Morris, 741 P.2d 246, 250 (Ariz. 1987).

[11] Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1038–39 (2002) (bold emphasis added).

[12] First Nat’l Bank of Arizona v. Cities Serv. Co., 391 U.S. 253, 298–99 (1968) (holding that district court’s limitations on general pretrial discovery and denial of Rule 56(f) discovery were not improper); Paul Kadair, Inc. v. Sony Corp. of Am., 694 F.2d 1017, 1029–30 (5th Cir. (La.) 1983) (holding that opposing party’s Rule 56(f) request was properly denied because additional discovery was unlikely to produce necessary facts); Contemporary Mission, Inc. v. United States Postal Serv., 648 F.2d 97, 107 (2d Cir. (N.Y.) 1981) (motion for continuance denied because request for discovery was unnecessary to determine summary judgment issues).

[13] Washington v. Allstate Ins. Co., 901 F.2d 1281, 1285 (5th Cir. (La.) 1990).