Turning Ambiguous Draftsmanship Against the Insurer

Turning Ambiguous Draftsmanship Against the Insurer

By David A. Gauntlett*

Insurance policies are notoriously difficult to understand. Many policyholders fail to realize that this applies to insurance brokers and adjusters as much as it does to anyone else. Even on the rare occasions that an insurance worker is fully informed of all the legal contours of a policy’s coverage provisions, they obviously have a bias clouding their view of how it would apply to a costly claim.

Advertising Offenses Are Inherently Ambiguous

There has been debate over the ambiguity of some of the “Advertising Injury” offenses[1] in standard Insurance Services Office (“ISO”) policies for decades.  Those courts that confront the multiple reasonable meanings which courts have found for these terms, as well as the fact that they need to be redefined to apply, have readily found ambiguity.[2]  As the California Supreme Court noted:

“[A]mbiguous terms are resolved in the insureds’ favor, consistent with the insureds’ reasonable expectations.”  (Kazi v. State Farm Fire & Casualty Co. (2001) 24 Cal. 4th 871, 879.) . . . An insured should not be expected to know the subtle legal distinctions between the concepts of ordinary negligence and gross negligence.[3]

Nor can courts limit the meaning of ambiguous offenses to a particular tort which is distinct from the actual offense (i.e., limiting misappropriation of advertising ideas or style of doing business[4] to common law misappropriation).

Speaking of an analogous drafting omission by insurers, the California Supreme Court stated:

Insurers commonly insert an exclusion for criminal acts in their liability policies.  Because Safeco chose not to have a criminal act exclusion, instead opting for an illegal act exclusion, we cannot read into the policy what Safeco has omitted.  To do so would violate the fundamental principle that in interpreting contracts, including insurance contracts, courts are not to insert what has been omitted.[5]

Insurers Underestimate the Scope of Their Own Policies

The drafter’s failure to include a given tort like trade dress or patent infringement does not mean that the offense excludes claims falling within those legal labels.  Insurance policy drafters must be required to say what they mean.  If the suggestion is that it was not their intent to provide such coverage, then the history of the policy’s drafting must be fairly examined and the evidence of objective manifestation of intent reviewed.  The predecessor 1976 ISO offenses of “piracy” and “unfair competition” have been found to encompass such claims as patent infringement, publication of trade secrets, and interference with prospective economic advantage.[6]  As the 1986 ISO form was adopted by ISO accompanied by the express pronouncement that “no change in scope” of the new coverage was intended, reading the new offenses at least as broadly as the prior offenses is sensible.[7]

A further issue arises if a policy uses older ISO forms which used “misappropriation of advertising ideas or style of doing business” in place of the modern offense (f). In that case, a court must determine the definition of “misappropriation.”  Insurers urge it is necessarily limited to a wrongful taking;[8] policyholders contend that it can include misuse or wrongful use.[9] Dictionary definitions which address its common meaning as understood by lay persons support the latter view.[10]

Understanding Extent of a Policy Is Important for Plaintiffs as Well

Winning a judgment is not always the end of a legal battle. There remains the issue of collection. Because defendants without assets have no real incentive to seek indemnity, they often leave flimsy denials unchallenged. Thus, the burden of contesting the insurer’s decision falls to the original plaintiff. Statutory provisions in many states permit direct action against insurers in such circumstances.[11]

Plaintiffs can also aid their cause of collecting insurance money by securing an amendment to their pleadings clarifying how the action fits within a policy’s coverage. In Am. Inst. of Intradermal Cosmetics, Inc. v. Soc'y of Permanent Cosmetic Professionals,[12] the plaintiff was able to do just that after the defendant turned over its insurance policies during discovery. The court granted leave to amend a Lanham Act claim, noting that a delayed amendment is justified when defendants are slow to provide insurance policies.[13]

Conclusion

Regardless of whether you find yourself as the defendant or a plaintiff, you can turn an insurer’s confusing and vague wording to your favor. Use of “offenses” rather than specific torts in drafting coverage provisions leaves the door open for many claims that may seem to fall outside the scope of a policy. For this reason, it is important to tender all potential claims and seek the guidance of expert coverage counsel before accepting any denial of coverage.

*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] ISO Policy Form CG 00 01 12 07 (“injury . . . arising out of . . . d. Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services; . . . [or] f. The use of another’s advertising idea in your ‘advertisement’.”)

[2] Winklevoss Consultants, Inc. v. Federal Ins. Co., 991 F. Supp. 1024, 1037 (N.D. Ill. 1998).

[3] Safeco Ins. Co. v. Robert S., 26 Cal. 4th 758, 763 (2001). Where there are multiple reasonable definitions in context, and courts have had to redefine policy language in plain English to apply it to given factual scenarios, the phrase is ambiguous.

[4] Advance Watch Co. v. Kemper Nat’l Ins. Co., 99 F.3d 795 (6th Cir. (Mich.) 1996).  This case has been severely criticized for doing precisely that.  Lebas Fashion Imps. of USA, Inc. v. ITT Hartford Ins. Grp., 50 Cal. App. 4th 548, 567 (1996); American States Ins. Co. v. Hayes Specialties, Inc., No. 97-020037 CK4, 1998 WL 1740968 (Mich. Mar. 5, 1998).

[5] Safeco Ins. Co., 26 Cal. 4th at 763–64 (citations omitted).

[6] See Intex Plastics Sales Co. v. United National Ins. Co., 18 U.S.P.Q. 1567 (C.D. Cal. 1990) (finding that allegations of patent infringement fell within “piracy” offense), reversed on other grounds, 23 F. 3d 254 (9th Cir. 1994); Rymal v. Woodcock, 896 F. Supp. 637, 638 (W.D. La. 1995); Attorney’s Title Guarantee Fund v. Maryland Cas. Co., 1991 U.S. Dist. LEXIS 11909 (N.D. Ill. August 23, 1991) (claim for interference with prospective advantage).

[7] This exercise is always avoided by insurers as the drafting history does not aid their claims.  DAVID A. GAUNTLETT, INSURANCE COVERAGE FOR INTELLECTUAL PROPERTY ASSETS, Ch. 9, § 9.03[C]-[D], pp. 9-35 - 9-42(Aspen Law and Business Division of Aspen Publishers, Inc., Gaithersburg, NY, 1999) (2001-02 Supplement).

[8] EKCO Group v. Travelers Indemnity Co., 2000 DNH 249 (D. N.H. 2000), reversed, 2001 U.S. App. LEXIS 26295 (1st Cir. Dec. 10, 2001).

[9] Applied Bolting Technology Products, Inc. v. United States Fidelity & Guar. Co., 942 F. Supp. 1029, 1033 (E.D. Pa. 1996).

[10] The common dictionary definition of the term “misappropriate” supports the policyholder argument that the offense must be construed broadly in order to reflect the reasonable insured’s expectations of coverage. As defined by Random House, misappropriate simply means “1. To put to wrong use.  2. To apply wrongfully or dishonestly, as funds entrusted to one’s care.” RANDOM HOUSE UNABRIDGED DICTIONARY 1228 (2d ed. 1999).

[11] E.g., Cal. Ins. Code § 11580 (“[W]henever judgment is secured against the insured or the executor or administrator of a deceased insured in an action based upon bodily injury, death, or property damage, then an action may be brought against the insurer on the policy and subject to its terms and limitations, by such judgment creditor to recover on the judgment.”)

[12] Am. Inst. of Intradermal Cosmetics, Inc. v. Soc'y of Permanent Cosmetic Professionals, No. CV 12-06887 GAF (JCx), 2014 U.S. Dist. LEXIS 160395 (C.D. Cal. Nov. 14, 2014).

[13] Id. at *7 (Defendants concede that they have been aware of the facts that would support the amended pleading, and the Court has granted the parties additional time to conduct discovery, which eliminates that as an issue. Moreover, Defendants have no one but themselves to blame for any delay in the production of insurance policies. It is noteworthy that, at the time of Plaintiff's motion, ‘[c]ertain Defendants [were] still refusing to produce responsive insurance policies . . . .’ (Mem. at 3.) Thus, Defendants have, at the very least, contributed to the late nature of Plaintiff's request. (Id.) Plaintiff has not been dilatory and has shown good cause to amend the scheduling order to permit filing the Third Amended Complaint.”)