Three 2020 Coverage Cases Clarify Coverage Availability

Three cases in 2020 clarified key issues of law, germane to policy holder goals in securing full reimbursement of moneys expended in underlying potentially covered lawsuits.

First, applying New York law, the Second Court overruled and rejected the district court’s ruling rejecting its view that an insured has no “standing” to secure full defense fee reimbursement simply because the underlying action was settled with insurer funding. A policy holder that retains some exposure to the defense attorneys who litigated the case for its benefit is entitled to reimbursement for essential to secure relief even after a dismissal. A settlement remains essentially defensive work to secure the party’s respective rights to operate in the market place where trademark issues are in controversy.

On remand the policy holders’ entitlement to coverage as well as fees, incurred under applicable New York law, for post-monetary settlement defense fees is at issue.

Second, Traveler’s aggressive construction of its intellectual property exclusion to bar a defense for policyholders, where intellectual property claims were pursued, but not defended was rejected by the Ninth Circuit. It concluded that was to bar the mere pursuit of intellectual property claims in an Amended Complaint did not trigger application of Travelers intellectual property exclusion.

On remand, My Choice is pursing claims for bad faith in a Motion for Summary Judgment due to Traveler’s misstatements of fact and law.

Third, the Delaware Commercial Court rejected repeated arguments by Underwriters that a stayed Los Angeles Superior Court lawsuit (the “LASC Action”) did not require a defense of Counter-Claims in an Employment Arbitration, even though they asserted the same fact allegations as the LASC Action. The Delaware Court determined that it did not matter that the stay was issued to permit pursuit of the Employment Arbitration against a former employee. Nor was it important that a whistle blower label was affixed to the Arbitration Counter-Claim where it was based on the same facts as the LASC Action fiduciary abuse claim.

On remand, Underwriters allocation of defense fees while Legion asserts that no allocation is necessary as all fees of strategically defensive of the stayed LASC Action.

360Heros, Inc. v. Mainstreet Am. Assur. Co.
Civil Action No. 17-1302-LPS-CJB, 816 Fed. Appx. 555 (2d Cir. (N.Y.) 2020)

Reversing what it characterized as an “erroneous” ruling, the panel concluded that 360Heros was entitled to recover attorneys’ fees incurred in the defense of the Underlying Action following a settlement funded by the insurer, MSA. The fees incurred arose when many additional months of litigation was required to resolve business issues in the Underlying Action appropriate co-existence following the resolution of a trademark infringement dispute. The insurer’s monetary payment did not compensate defense counsel for its legal work to secure post-lawsuit determination resolution of pending business issues.

“Under New York law, where an insured is represented by counsel of its own choosing, the insurance company’s duty to defend extends to the payment of reasonable fees and costs.” Id at 558.

MSA could not require that the compulsory counterclaim for patent infringement be dismissed, so it continues on.

My Choice Software, Ltd. Liab. Co. v. Travelers Cas. Ins. Co. of Am.
No. 19-56030, 2020 U.S. App. 823 F. App'x 510 (9th Cir. 2020)

Travelers asserted that its Intellectual Property exclusion barred a defense claims of trade secret misappropriation prosecuted in an amended complaint were soundly rejected by the Ninth Circuit which stated that:

The relevant provision of the IP exclusion stated that coverage under the policy does not apply to ‘Personal injury’ or ‘advertising injury’ arising out of any actual or alleged infringement or violation of any of the following rights or laws, or any other ‘personal injury’ or ‘advertising injury’ alleged in any claim or ‘suit’ that also alleges any such infringement or violation.’ . . . The district court stated that ‘My Choice’s First Amended Complaint against Trusted Tech asserted a trade secrets claim, which falls squarely within the IP Exception,’ and that ‘Trusted Tech’s counterclaims are thus in a ‘claim or “suit” that also alleges’ IP claims. Id at 512.

It observed that none of the cases Travelers cited or relied upon addressed circumstances like those here where the only asserted claim was by the insured, My Choice, when it amended its complaint to charge Trusted Tech, the defendant, and the cross-complaint whose defamation claims triggered a defense under Travelers policy. The court concluded that a reversal was required because:

The district court erred in concluding that the IP exclusion unambiguously barred coverage solely based on the allegations that My Choice, as the insured under the policy, asserted against Trusted Tech. . . . While a lawyer might interpret the term ‘suit’ to pertain to the entirety of claims contained within a proceeding, irrespective of the party asserting such claims, that is not necessarily the understanding of the term from the perspective of a layperson. Id at 513.

Legion Partners Asset Mgmt., LLC v. Underwriters at Lloyd's London
2020 Del. Super. LEXIS 2804 (Del. Super. Ct. September 25, 2020); (Order Adjudicating Duty to Defend) Legion Partners Asset Mgmt., LLC v. Underwriters at Lloyds London, 2020 Del. Super. LEXIS 2930, (Del. Super. Ct., Nov. 23, 2020) (Motion for Re-Argument Denied) Legion Partners Asset Mgmt., LLC v. Underwriters at Lloyds London, 2020 Del. Super. LEXIS 2859, (Del. Super. Ct., Oct. 29, 2020) (Order Denying Defendant’s Application for Certification of Interlocutory Appeal)

Looking beyond Albert's characterization of his claims, the Court reasonably can infer from the Counterclaim that Legion, acting through White and Kiper, allegedly acted against its investors' interests and violated federal laws and regulations by leaking material, nonpublic information. Such acts fall within the scope of ‘Wrongful Acts’ as contemplated by the Policy. Id at *23-24.

Rather, Wrongful Acts encompasses a broad array of specifically enumerated conduct . . . [and] is not limited to a ‘breach of the duty.’ Any conduct that is an ‘act,’ or an ‘error,’ or a ‘misstatement,’ or a ‘misleading statement,’ or ‘neglect,’ or an ‘omission’ could be a ‘Wrongful Act.’ Id at *20-21.

Albert’s makes factual allegations that Legion committed [‘]Wrongful Acts[’] in which controlling members, White and Kiper. Specifically, Albert alleges his counterclaim ‘stems from multiple breaches of fiduciary duty and violations of federal laws and regulations by two self-dealing hedge fund managers who abused their roles as fiduciaries to clients[.]’ Id at *21.

The Insurer shall pay, on behalf of the Insured Organization for Loss which the Insured Organization pays as indemnification to any Insured Person arising from a Claim for a Wrongful Act. Id at *25.

CONCLUSION

Policy-holders should explore recovery for “related proceedings” addressing covered claims, even though the labeled claims for relief would not appear to trigger a defense obligation. They should not accept, insurer constructions of exclusionary provisions that bear little relationship to the insurer’s rights to limit the scope of its coverage for liability claims against their policyholder. Pursuit of affirmative claims, which are unknown at the time a policy holder procures an insurance policy cannot limit recovery. Nor is the breath of “arising out of language” imbedded in an exclusion to be broadly construed in light of governing California Supreme Court authority.

The Insurer’s duty to defend does not end with the dismissal of the underlying lawsuit where unresolved business issues after an insurer funded monetary settlement. An insurer, cannot buy its way out of a lawsuit by leaving its policy holder at risk for unresolved traditional usage claims.

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