Why Policyholders Should Retain Insurance Coverage Savvy Counsel

Why Policyholders Should Retain Insurance Coverage Savvy Counsel

By David A. Gauntlett[*]

Be Careful What You Sue for—the Microsoft Story

First, an anecdotal story. Many years ago, Microsoft hired a competent intellectual property lawyer to pursue claims against a copyright infringer. In Federal Ins. Co. v. Microsoft Corp.,[2] the underlying action resulted in a judgement to Microsoft against the infringer for liability and damages. Thereafter, that attorney referred the case to another attorney who focused on insurance coverage issues. That second attorney pursued coverage claims against the defendant who had no other resources. He could not secure a judgement against the insurer. The judgement against the policyholder only proved copyright infringement but not “copyright infringement in your ‘advertisement,’” which was required for coverage under the relevant policy. 

The defendant in that lawsuit’s sole promotional activity was internet advertising. The coverage attorney’s task would have been greatly simplified if the complaint and judgement focused on those facts. Thereafter, Microsoft terminated its relationship with the plaintiff’s attorney who had failed to secure a judgement that was capable of being pursued against the defendant’s insurer. It subsequently retained coverage-savvy IP litigation counsel. Microsoft now routinely alleges conduct falling within insurance coverage policy provisions. 

Moreover, upon filing lawsuits, Microsoft often delays litigation activity until the insurers for the defendant have been identified, their representatives contacted, and negotiations pursued to determine whether coverage is available to respond to the asserted claims. This switch in litigation tactics flowed from Microsoft’s recognition that its interests were best served in pursuing insurance funded settlements promptly rather than expending monies in litigating against defenses with limited resources. 

Maximizing Litigation Benefits by Questioning Overbroad Policy Exclusions

Second, in My Choice Software, LLC v. Travelers Cas. Ins. Co. of Am.,[3] the court explained 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.[4]

The My Choice appellate court distinguished Spandex House, Inc. v. Hartford Fire Ins. Co.,[5] evidencing that careful review of exclusionary provisions in policies is essential to procure broader insurance coverage reasoning that: 

It is therefore reasonable for an insured under the policy to interpret the exclusionary provision as applying only to allegations asserted against it in the absence of explicit language stating otherwise. As an example, the relevant exclusionary clause in Spandex House, Inc v. Hartford Fire Insurance Company, 407 F Supp. 3d 242 (S.D.N.Y. 2019), contained additional language that explicitly contemplated the scenario raised in this appeal.[6]

The Second Circuit in Spandex House, Inc. v. Hartford Fire Ins. Co.[7] rejected a number of arguments about grammatical construction of this provision, the quoted material, and alleged failure to provide notice to the insured of the restrictions in this coverage. The litigants, however, did not raise a key issue which California law has expansively construed which might lead to a different result assuming the application of California law. That issue has yet to be resolved.

Questioning Precedent by Revisiting Its Foundational Logic

In My Choice Software, LLC v. Travelers Cas. Ins. Co. of Am.,[8] the court reached an alternative holding addressing Travelers argument that its IP exclusion applied to the amended complaint allegations including IP claims. Although the court was aware of the analytical approach of district court decisions citing published Ninth Circuit cases, it elected to follow the applicable California Supreme Court authority. 

In James River Ins. Co. v. Rawlings Sporting Goods Co.[9], the court noted that “California courts have ‘consistently given a broad interpretation to the clause “arising from” in an insurance contract.’ [Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 14 (1995)] (citing (Los Angeles Lakers, Inc. v. Fed. Ins. Co., 869 F.3d 795, 801 (9th Cir. 2017)).” It elected not to follow the My Choice pathway which it may not have known existed even though it was aware that: “‘arising out of’ exclusionary language ‘is interpreted broadly so as to afford the greatest possible protection to the insured, [whereas] . . . exclusionary clauses are interpreted narrowly against the insurer.’”[10]

On March 17, 2021 Judge Selna, on remand in My Choice, reasoned:

The Court agrees with MyChoice that its affirmative claims were predominantly defensive. . . . MyChoice argues, in order to defend itself against these claims [that MyChoice’s false accusations of illicit acts with respect to software keys damaged Trusted Tech’s reputations in the marketplace] it had to prove the truth of the statements, meaning that My  Choice’s affirmative claims were necessarily defensive to Trusted Tech’s covered cross-complaint allegations by seeking to prove that the statements of misappropriation, theft, and sale of illicit software keys were true.”[11]

The court properly put the burden on the insurer to prove that any contested defense expenses were unreasonable or unnecessary,[12] but the insurer failed to do so. The court thus awarded “all post-notice litigation expenses, because its affirmative claims were inextricably tied up with its defense.”[13]

This award clarifies why insurer denials of defense fees where the rate payable to independent defense counsel is not in dispute can be resolved by a Motion for Partial Summary Judgment without the need for the expense and delay of a trial.

Conclusion

Securing the aid of savvy insurance coverage counsel is essential to secure policy benefits in light of the increasingly restrictive provisions that CGL policies offer policyholders sued for business tort claims. At Gauntlett & Associates, we assist IP litigators and policyholders nationwide in helping structure robust insurance programs that address not only preferred forms of CGL coverage but also add Media/Cyber/D&O IP policies where appropriate to provide more comprehensive IP insurance coverage. The representation includes Claimants as well as clarification activities that bring into alignment insurance coverage opportunities and the pursuit of litigation goals through coverage-savvy litigation.

If you enjoy this content, you can find my full list of blogs here: https://docs.google.com/document/d/1N3YsMmn0Ii1GqHWSBEE1pPzh1jQbU6htkJZ2e55Y2eM/edit?usp=sharing

[*] 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. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[2] No. C92-610D, 1994 U.S Dist. LEXIS 21073 (W. D. Wa. April 15, 1994).

[3] 823 F. App'x 510 (9th Cir. (Cal.) 2020).

[4] Id. at 511.

[5] 407 F. Supp. 3d 242 (S.D.N.Y. 2019).

[6] My Choice, 823 F. App’x at 511.

[7] 816 F. App’x 611 (2d Cir. (N.Y.) 2020).

[8] No. SACV 19-680 JVS (KESx), 2021 U.S. Dist. LEXIS 59763 (C.D. Cal. Mar. 17, 2021).

[9] CV 19-6658-GW-MAAx, 2021 U. S Dist. LEXIS 20970, *12 (C.D. January 25, 2021)

[10] My Choice, 823 F. App’x at 512 (quoting MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 648 (2003)); see also My Choice Software, LLC v. Travelers Cas. Ins. Co. of Am., No. SACV 19-680 JVS (KESx), 2021 U.S. Dist. LEXIS 59763, *20 (C.D. Cal. Mar. 17, 2021) (“The Court agrees with MyChoice and finds that the genuine dispute doctrine is inapplicable in third party cases such as this one because a third party insurer, such as Travelers, ‘must defend a suit which potentially seeks damages within the coverage of the policy.’ [citing Gray at 275]”); Teleflex Med. Inc. v. Nat’l Union Fire Ins. Co., 851 F.3d 976, 988, n.3 (9th Cir. 2017) (“[O]ur court and several California appellate courts have expressed skepticism about [the “genuine dispute” doctrine’s] applicability to ‘third party claim’ cases like this one.”). In Public Serv. Mut. Ins. Co. v. Liberty Surplus Ins. Corp., 205 F. Supp.3d 1161, 1175 (E.D. Cal. 2016), the court found: (“There are material differences in the purposes of first party insurance policies (that obligate the insurer to pay damages claimed by the insured itself) and third party insurance policies (that obligate the insurer to defend, settle and pay damages claimed by a third party against the insured).” Howard v. American Nat'l Fire Ins. Co.,187 Cal. App. 4th 498, 530 (2010). Courts have consequently found against applying the "genuine dispute" doctrine in a third party duty case like the instant matter. See, e.g., Mt. Hawley Ins. Co. v. Lopez, 215 Cal. App. 4th 1385 (2013). This is because a third party insurer ‘must defend a suit which potentially seeks damages within the coverage of the policy.’ Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 275 (1966).)

[11] My Choice, 2021 U.S. Dist. LEXIS 59763 at *23–24.

[12] Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal. 4th 38, 65-66 (1997) (“[I]n the exceptional case, wherein the [insurer] has breached its duty to defend, it is the [policyholder] that must carry the burden of proof on the existence and amount of the [litigation-related] expenses, which are then presumed to be reasonable and necessary as defense costs, and it is the [insurer] that must carry the burden of proof that they are in fact unreasonable or unnecessary.”)

[13] Id. at *25.