Securing Insurance Coverage Benefits Under Homeowners' Policies for Partnership Disputes
Business Dissolutions Often Raise Defamation Claims that Implicate Insurance
Business dissolutions, especially of professional partnerships, range from law to accounting to medical and other similar ventures. These events often include communications to existing clients of an organization to secure continuing relationships following the dissolution. It is anticipated that a departing professional will explain that the dissolution arose, what organization or form of entity they will join, and with whom. Objective statements about the new organization, the benefits available there, and the character of the professional’s practice going forward are all appropriate and cannot be a basis for asserted tortious conduct. However, it is not uncommon in these scenarios for professionals to express unflattering views about equity participants in the now-dissolved prior organizations.
While many of these communications may be within the scope of business activities, some go beyond that limit, and thereby implicate possible coverage under umbrella homeowners’ policies or other structures within a Personal Umbrella Liability Policy (”PULP”).[1] Where the Commercial General Liability (“CGL”) policy has more particular requirements for an oral or written publication of material to trigger defamation coverage for libel or slander, or the same for privacy invasion, the PULP may be the most viable policy to evaluate and for tender of a claim. Anecdotally, our firm has represented policyholders security coverage for a variety of business dissolutions in this context with these resources.
In a typical scenario, a Managing Partner of a law firm was alleged to have disparaged the firm to other employees and attempted to recruit the others to leave the firm with her. The complaint alleged that the Managing Partner had claimed, falsely, that the firm faced imminent financial collapse, leading to the firm’s loss of attorneys and staff.
Where the Managing Partner’s CGL policy presented coverage challenges for such a dispute, her homeowners policy provided that “If a suit is brought against any insured for damages because of a loss to which this policy applies, we will provide a defense for you.” It provided a two-part test for coverage: (1) “personal injury,” arising out of (2) “libel, slander, [or] defamation of character.”
The Technical Label of the Cause of Action Is Not Significant in Determining Coverage
As the Ninth Circuit has clarified, “The technical label on a cause of action does not dictate the duty to defend whether the claimed cause of action was omitted out of negligence or ‘for strategic adversarial reasons.[2] Facts, not labels, determine the potential for coverage.[3] Offense-based coverage does not focus on injury, which need only arise out of the offense.[4]
How the Elements Are Satisfied
In our example case, the complaint alleged publication by the Managing Partner of statements that were false and harmful to her former partner, which readily satisfied the “injury arising out of” element required by the policy.
As for the defamation element, the policy did not define “slander.” But slander is defined in the California Civil Code as follows:
Slander is a false and unprivileged publication, orally uttered, and also communications by radio or any mechanical or other means which… [imputes a] general disqualification in those respects which the office or other occupation peculiarly requires, or by imputing something... that has a natural tendency to lessen its profits…[5]
First, defamation may be actionable where the denigrating impact of a statement readily can be inferred from the context in which it was stated.
[I]t is the implication arising from the statement and the context in which it was made, not the statement itself, which forms the basis of West’s claim. Accordingly, this is a defamation-by-implication claim. . . . [W]ords innocent on their face may, when explained in context, convey a defamatory meaning.[6]
Second, slander depends on implied as well as express statements that denigrate another.[7]
To determine whether a representation was libelous, [courts] look to what is explicitly stated as well as what insinuation and implication can be reasonably drawn from the communication.[8]
Third, actionable statements may include opinions as well as statements of fact. A statement couched in terms of opinion may still be actionable if it implies knowledge of defamatory facts as the basis of the opinion.[9]
To establish potential coverage for slander fact allegations, all that need be alleged is “publication to third parties and [that] the content of the statements were allegedly disparaging.”[10] “[C]lassic defamation . . . concerns damage to reputation.[11]
The Complaint in Question Alleged Defamation
All elements of the torts of libel or slander need not be factually asserted. The allegedly offensive and misleading statements regarding the former partner’s precarious financial condition and being “on the verge of collapse” allegedly defamed the partner by suggesting that he would no longer be able to adequately service clients or pay the attorneys and employees, causing them to leave for other firms.
Because more than a mere inference of harm was alleged, the defamation element was readily satisfied. It alleged that the Managing Partner attempted to divert or steer attorneys, employees, and clients away to other firms.
Because of these factors, the defamation element of was met and the homeowner’s policy required a duty to defend.
Why Business Activity Exclusions Do Not Apply
Case law suggests that the “business pursuits” exclusion will be narrowly construed where there is a possible motive for conduct alleged to give rise to claims for defamation that is not profit-based. In Springer,[12] the complaint alleged that “Defendants . . . distribute negative content about J.G. Wentworth to actual and potential customers, as well as to the public at large, in order to purposefully and dramatically damage J.G. Wentworth’s online brand and business reputation and discourage customers from doing business with J.G. Wentworth.”
The policy in Springer contained language almost identical to that in our example case, with an exclusion for personal injury “arising out of business pursuits of anyone we protect.” In construing the “business pursuits” exclusion, the court cited Appleman on Insurance, which states:
Courts will frequently utilize a two-pronged test in deciding whether an activity qualifies as a “business pursuit:” whether the insured has (1) continuity, that is, a continued or regular activity for the purpose of earning a livelihood; and (2) a profit motive, or the showing that the activity is undertaken for a monetary gain. Moreover, the “usual non-business pursuits” provision “focuses on the objective nature of the activity itself rather than on the motivation of the policy holder.”[13]
Disrupting a partner’s relationships with attorneys, employees, and clients does not constitute pursuit of a business interest for these purposes, which would require serving a client as a lawyer or advertising or promotion of business. Where the conduct includes non-business activity, engaged in on a handful of occasions, without expectation of immediately generating business, a “business activities” exclusion will not prevent coverage for a defamation-based claim.
Additional Issues Regarding the Insured’s Status May Arise
Many young adults have left their parents’ residence to start businesses or engage in social interactions with peers away from their homes, but still maintain a quasi-resident status, which may be sufficient under the undefined term “resident” in their parents’ PULP policy to grant them the benefits of umbrella policy coverage, especially where a driver’s license is issued identifying the parents’ residence as that of their children. They may qualify based on these connections to assert that they are residents, and as such an entitled insured under the policy.
Conclusion
Participants in business dissolutions should broadly address all possible forms of insurance coverage that may aid them. These include PULP as well as CGL, Errors & Omissions (E&O), Directors & Officers (D&O) (although there may be limitations on coverage for libel and slander, as well as invasion of privacy, between insureds in the majority of policies—this is less true in the nonprofit arena). Media Liability policies, which vary in policy language, may in appropriate context be a viable resource in this space.
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*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. He also serves as an expert witness on insurance coverage issues and represents policyholders and their counsel on a range of fee dispute issues with their insurers. Mr. Gauntlett can be reached at dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] A typical example is State Farm’s FP-7955 Policy.
[2] Hudson Ins. Co. v. Colony Ins. Co., 624 F.3d 1264, 1269 (9th Cir. (Cal.) 2010).
[3] Atl. Mut. Ins. Co. v. Lamb, Inc., 100 Cal. App. 4th 1017, 1034 (2002).
[4] Id. at 1035 (“[Offense-based coverage] is not determined by the nature of the damages sought in the action against the insured, but by the nature of the claims made against the insured in that action. . . . [C]overage . . . is triggered by the offense, not the injury or damage which a plaintiff suffers.”)
[5] Cal. Civ. Code § 46.
[6] West v. Thomson Newspapers, 872 P.2d 999, 1011 n.18 (Utah 1994).
[7] Id. at 1013.
[8] Cort v. St. Paul Fire & Marine Ins. Cos., Inc., 311 F.3d 979, 986 (9th Cir. (Cal.) 2002).
[9] Milkovich v. Lorain Journal Co., 497 U.S. 1, 19 (1990).
[10] Barnett v. Fireman’s Fund. Ins. Co., 90 Cal. App. 4th 500, 511 n.5 (2001).
[11] UMG Recordings, Inc. v. Am. Home Assur. Co., 321 Fed. Appx. 553, 555 (9th Cir. (Cal.) 2008).
[12] Springer v. Erie Ins. Exch., 94 A.3d 75, 90-91 (Md. 2014); see Construction and Application of “Business Pursuits” Exclusion Provision in General Liability Policy, 35 A.L.R.5th 375.
[13] New Appleman on Insurance Law Library Edition § 53.06[2][d][i].