What Insurers Do Not Want You to Know About the Policies They Sell

What Insurers Do Not Want You to Know About the Policies They Sell

By David A. Gauntlett[*]

Introduction

Insurance policies are difficult to read at the best of times. This is a calculated move by the insurance providers in the hopes that policyholders will not avail themselves of all the protections contained therein. On occasion, however, the insurers’ tactics can be turned upon them. The twisting, complicated language can sometimes open the door for policyholders to argue for coverage in areas the insurer may not have intended to provide it. Careful lawyering and receptive judges have codified several of these expanded coverage areas over the years, and a few such examples are presented below.

“Social Engineering Fraud” Is Best Covered in Crime Policies

“Social engineering fraud” is insurer-speak for scams. While the coverage for them is typically low, modern scams involving hacks or other breaches of cyber security may also be covered by provisions with higher liability limits.[2] You might think a cyber policy would be required for such situations, but a recent Ninth Circuit decision held that ordinary crime policies are better suited to the task.

In Ernst & Haas Management Co. v. Hiscox, Inc.,[3] the court rejected the insurer’s argument that an employee had “authorized” a wire transfer by initiating a request to the bank after receiving fraudulent instructions.[4] Because there was no authorization, both the Computer Fraud[5] and Fund Transfer Fraud[6] provisions were held to cover the resulting loss.

Homeowner’s Policies Can Provide Business Coverage

Homeowners policies often include a “Business Pursuits” exclusion that will prevent coverage for claims arising out of “business pursuits” of the insured. In Springer v. Erie Insurance Exchange,[7] the court had to determine whether the exclusion precluded coverage when the insured “had used two websites, jgw-sucks.com and jgwentworth-scam.com, to spread defamatory and false light information in an attempt to lure customers away from J.G. Wentworth.”[8] 

The court concluded that the exclusion did not apply because the insurer was obligated to consider the lack of “continuity” and “profit motive.”[9] The policyholder prevailed by arguing that there was no “continuity” because “[n]o evidence demonstrated that Springer was acting within his ‘customary engagement’ or ‘stated occupation’ when he engaged in the alleged defamation. Rather, . . . Springer was previously in the business of structured settlements in connection with [Sovereign Funding Group] . . . .”[10] Nor was there any “profit motive” because “[t]he only evidence before Erie when it denied coverage was that Springer was not engaged in business pursuits related to structured settlements or [Sovereign Funding Group]. Thus, Springer would have had no profit motive to engage in the alleged defamation.”[11]

This result suggests that as long as a statement, spurious and self-inflating as it may be, targets another without hope of proprietary gain, the defamation might fall outside the business purposes limitation on homeowner’s policies. This enables Umbrella policies issued to homeowners policies (the best value any policyholder can procure) to cover business activities so long as the “occurrence” creating liability arises outside the course and scope of activities performed to secure a pecuniary gain.

IP Infringement Coverage Arise in Policies with IP Exclusions

CGL

Standard Commercial General Liability (“CGL”) policies[12] typically include an exclusion that prevents coverage for the most well-known IP claims: copyright, trademark, trade secret, and patent infringement. However, the exclusion comes with a built-in exception that allows coverage for infringement of copyright, trade dress, or slogan in your “advertisement,” with the term “advertisement” broadly defined.”[13] Those who write the policies have even acknowledged the gradual expansion of IP coverage in standard forms as they have been revised over the years.[14]

Policyholders should wary of insurers who modify the ISO policy forms to eliminate this IP coverage. For example, Travelers, Hartford, and Great American are all guilty of this practice. In some cases, such as Jar Laboratories LLC v. Great American E&S Insurance Co.,[15] some creative lawyering is able to achieve coverage despite the modifications, but it is much better to simply avoid those carriers and avoid the hassle of requiring litigation to get coverage other insurers readily provide.

D&O

Directors & Officers (“D&O”) policies, in contrast to CGL, do not typically include the built-in exception to the IP exclusion. In many instances, however, an endorsement to the policy may open the door to coverage for IP claims. In Woodspring Hotels LLC v. National Union Fire Insurance Co.,[16] the insured was accused of unlawfully accessing a competitor’s protected computer system, resulting in damage related to copying and communicating the competitor’s information. The court concluded that the IP exclusion did not bar coverage because the policy included “Endorsement 10,” which stated “that Securities Claims are not excluded from coverage” regarding IP rights.[17]

Furthermore, many D&O policies do not include an IP exclusion at all, which means the policyholder need only prove the IP infringement meets the definitions of “Wrongful Act”[18] while dodging generic exclusions.[19]

Media

Like D&O policies, Media policies usually provide coverage for Wrongful Acts. In many Media policies, this even explicitly includes some forms of IP infringement.[20] While certainly more expansive than most CGL policies, a Media policy’s coverage is unlikely to explicitly include coverage for patent infringement, and courts are hesitant to read such coverage into the contracts.[21]

Conclusion

While some coverage may be buried deep within the pages of a policy, it is no less binding than words in bold print on page one. The insurance companies have experts dedicated to locating exclusions to deny coverage, so it is essential that you have your own expert who can shine a light on the hidden treasures like those discussed above. You pay premiums for the entire policy, so it would be a waste to not get every part of it to work for you.

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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 (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[2] In policy form 14-02-21134 from Chubb, “Social Engineering Fraud” is defined as “the intentional misleading of an Employee, through misrepresentation of a material fact which is relied upon by an Employee, believing it be genuine,” and it carries a limit of $250,000. In that same policy, “Computer Fraud” is defined as “the unlawful taking of Money, Securities or Property resulting from a Computer Violation,” and it carries a limit of $3,000,000.

[3] 23 F.4th 1195 (U.S. 9th Cir. 2022).

[4] Id. at 1201 (“By relying on Pestmaster to reach this conclusion, the district court endorsed a faulty circular premise—that Allen "authorized" a transfer of $200,000, curing any prior fraud, when she initiated a transfer of $200,000 based on fraud. That reasoning—that this fraud became "authorized" precisely when it succeeded—cannot be the correct reading of the contract.”)

[5] Id. at 1202 (“Here, the computer fraud provision provides that Ernst's loss must "result directly" from the fraud. In other words, like ATC, Ernst must suffer a direct loss. And like ATC, Ernst immediately lost its funds when those funds were transferred to Zang as directed by the fraudulent email. There was no intervening event—Allen acting pursuant to the fraudulent instruction "directly" caused the loss of the funds.”)

[6] Id. at 1202 (“The district court erred when it reasoned that Ernst's alleged loss did not result directly from fraudulent instructions because Fake David's "communications did not direct [Ernst's] bank to transfer the $200,000 [Ernst] now seeks to recover," but instead directed Allen to direct Ernst's bank to transfer the money.”)

[7] 439 Md. 142 (2014).

[8] Id. at 146.

[9] Id. at 168.

[10] Id. at 157.

[11] Id.

[12] Insurance Services Office (“ISO”) Form No. CG 00 01 04 13.

[13] See David A. Gauntlett, Searching for a Unicorn: Unearthing Buried Trade Dress Claims, https://www.gauntlettlaw.com/news/searching-for-a-unicorn-unearthing-buried-trade-dress-claims (June 23, 2022).

[14] One Insurance Services Office (“ISO”) Drafter (i.e., one of the very few people who draft the standard policy forms used by insurers across the country) attested to the following in an affidavit: “Some of the issues dealt with in this revision, such as various types of intellectual property, and specifically trade dress, are emerging issues that were not fully developed when the original advertising injury coverage was conceived.  We have, in this revision, specifically chosen to provide coverage for ‘trade dress’ while deleting the terms ‘style of doing business’ and ‘title.’”

[15] 945 F. Supp. 2d 937 (N.D. Ill. 2013).

[16] 2018 Del. Super. LEXIS 186, *15, *31-32 (Del. Sup. Ct., New Castle May 2, 2018).

[17] Id. at *9.

[18] Typically defined as “with respect to any Executive or Employee or a Company, any breach of duty, neglect, error, misstatement, misleading statement, omission or act by such Executive or Employee in their respective capacities as such.”

[19] Two examples include exclusions for “any actual or alleged gaining of profit or advantage to which any Insured is not legally entitled” and “[reimbursement of any settlement for] past or future use of a valuable technology in the course of its business” barred coverage.”

[20] See, e.g., Beazley Form BICMT00021005 (providing coverages for “7. Infringement of copyright; 8. infringement of trade dress, domain name, title or slogan, or the dilution or infringement of trademark or service mark; 9. negligence regarding the content of any Media Communication, including harm caused through any reliance or failure to rely upon such content; and 10. misappropriation of trade secret.”)

[21] See, e.g., Transcore, LP v. Caliber One Indem. Co., 972 A.2d 1205, 1208-09 (Pa. Super. Ct. 2009) (“Inducement of patent infringement . . . is an intentional act. . . . . [and] must be intentional and therefore is specifically excluded from coverage.”).