Worrying Trend: Ninth Circuit Expansively Interpreting Exclusions
By David A. Gauntlett*
Introduction
In previous blogs, we have discussed several rulings by federal courts in New York that improperly deviated from standards of coverage law established by state decisions.[1] In recent years, several Ninth Circuit panels have fallen victim to this same poor practice. Three decisions in the span of just over a year evidence a pattern of flawed analysis that is depriving California policyholders of the full protection that should be afforded under the terms of their insurance agreements.
Primary Color Sys. Corp. v. Hiscox Ins. Co. Inc.
In Primary Color,[2] the underlying dispute focused on claims made by an individual (Randazzo) against his former employer (Primary Color). Randazzo claimed Primary Color had falsely represented Randazzo would receive an equity interest in the company if he remained as an employee.
An arbitration between the parties was resolved by a determination that used the term “fraud,” but actually determined only that Randazzo was entitled to “$450,000.00 representing the salary [Randazzo] lost by not accepting the offer from Orora, based upon the misrepresentations made by Primary Color.” The panel determined there was no potential coverage based on an exclusion for any claim “arising out of, based upon or attributable to the committing of any deliberate criminal or deliberate fraudulent act if any final adjudication establishes that such deliberate criminal or deliberate fraudulent act was committed.”[3]
The panel’s decision ignored the broad coverage for “employment-related misrepresentations,” which was defined to include all misrepresentations “whether committed directly, indirectly, intentionally or unintentionally.”[4] The panel did not explain how it determined a deliberate fraudulent act occurred merely because of an off-hand use of the word “fraud” without clarification as to whether it was a deliberate fraud, which must be something more than the “employment-related misrepresentations” covered under the policy.
The panel’s focus on the label of “fraud” is contrary to fundamental coverage law principles.[5] The Ninth Circuit panel also ignored the revisions in subsequent judicial confirmation of the Arbitration Award.[6]
Aram Logistics v. United States Liab. Ins. Co.
In Aram Logistics,[7] the panel accepted the validity of extrinsic evidence ignored by the district court, but it concluded potential coverage was precluded by the “Knowing Violation” exclusion. The exclusion applies to claims “caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury.’” The panel provided only one conclusory sentence to explain the exclusion’s applicability:
The only extrinsic evidence upon which Aram relies to establish a duty to defend on the part of USLI also indicates that Aram must have knowingly copied Diakon’s advertising materials because the infringing officer at Aram was once at Diakon and was certainly familiar with its advertising information.[8]
The panel failed to address the fact that Aram’s “knowledge” was a contested issue of fact in the underlying litigation. By accepting it as true, the panel ignored the wealth of case law establishing that an insurer cannot rely on contested assertions of scienter to justify application of a “Knowing Violation” exclusion. In KM Strategic Mgmt., LLC v. Am. Cas. Co. of Reading PA, the court rejected its application based on an allegation that the policyholder “engaged in knowingly false and intentional conduct in an effort to prevent Prime Partners from contracting with other IPAs.”[9] This is analogous to the unproven allegations against Aram that it “intentionally attempted to disrupt many of Diakon’s customer relationships by . . . unlawfully using Diakon’s proprietary . . . information.”
The panel’s decision even deviates from prior Ninth Circuit cases holding that scienter-based exclusions should not be applied where the allegations of intent are contested:
Killer Music's actions were not proven to be “willful” as a matter of law. While Zurich characterizes Killer Music's infringement as “knowing,” Killer Music's president Hicklin, by sworn affidavit, indicated that he did not know that any of Pfeifer's work was being used in the music library and that he “never intended to engage in any unauthorized use of any work owned in whole or in part by Pfeifer.”[10]
This practice also fails to account for the logic of Dobrin v. Allstate Ins. Co., 897 F. Supp. 442, 444 (C.D. Cal. 1995), which recognized that a party might strategically plead “specifically so that there [will] be no coverage” to deny their opponent an insurer-funded defense[11]
United Talent Agency, LLC v. Markel Am. Ins. Co.
In United Talent Agency, LLC,[12] the panel determined coverage was precluded by Cal. Ins. Code § 533, a statutory exclusion implied in every insurance contract that states “[a]n insurer is not liable for a loss caused by the wilful act of the insured.” In the underlying case, United Talent Agency was accused of illegally conspiring to steal employees and clients from CAA, a rival organization. The panel’s decision conceded that “most of CAA's claims required proof of UTA's ‘wilful’ conduct.”[13] It also explicitly acknowledged that its analysis focused on the “gravamen of CAA's complaint.”[14]
This does not meet the standard for application of any exclusion, including Cal. Ins. Code § 533.[15] Under California law, “an insurer that wishes to rely on an exclusion has the burden of proving, through conclusive evidence, that the exclusion applies in all possible worlds.”[16] This is as true for § 533 as it is for any exclusion. Office Depot, Inc. v. AIG Specialty Ins. Co., 722 F. App'x 745, 746 (9th Cir. (Cal.) 2018)) (“Because section 533 is considered under California [law] to be an exclusionary clause, the insurer has the burden of proving that the requested claims are matters uninsurable under the law.”)
The panel also failed to acknowledge the many cases determining that § 533 requires a heightened level of scienter beyond that of ordinary intent. “Insurance Code section 533 clearly excludes coverage for those ‘wilful’ acts committed with the specific intent to injure, but not those nonmalicious acts committed with the sole intent to do the act which caused the harm.” California Shoppers, Inc. v. Royal Globe Ins. Co. 175 Cal. App. 3d 1, 33 (1985). United Talent’s Opening Brief addressed each of the eight causes of action in the underlying complaint and cited authority concluding that the subjective intent required for § 533 was not a required element for liability.[17] The panel even recognized some causes of action only required “knowledge that damage [was] highly probable or substantially certain to result.”[18] It offered no analysis to bridge the gap between that acknowledged potential liability under lesser scienter and the “wilful” requirement of § 533.
Conclusion
Looking at the growing list of cases with improperly restrictive conclusions regarding potential coverage, one cannot help but notice a pattern. In each case, the policyholder is portrayed as a “bad actor.” Judges are not supposed to consider such things, particularly in determining a duty to defend where liability is yet to be established.[19] That said, judges are still human. While this may seem like a boon for plaintiffs, the reality is pleading into exclusions often means there will be no money available at the end of a lawsuit. For this reason, expert policyholder counsel is necessary for both plaintiffs and defendants to ensure pleadings fall within the scope of coverage.
*David A. Gauntlett is a principal of Gauntlett Law 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) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett Law at www.gauntlettlaw.com.
[1] See, e.g., David A. Gauntlett, Second Circuit Takes Limited View of Implicit Disparagement under New York Law, https://www.gauntlettlaw.com/blogs/second-circuit-takes-limited-view-of-implicit-disparagement-under-new-york-law (Apr. 4, 2024).
[2] Primary Color Sys. Corp. v. Hiscox Ins. Co. Inc., No. 23-55199, 2024 WL 489171 (9th Cir. (Cal.) Feb. 8, 2024). Panel consisted of Judges Owens, Bumatay, and Medoza.
[3] Primary Color Sys. Corp. v. Hiscox Ins. Co., Inc., 654 F. Supp. 3d 982, 985 (C.D. Cal. 2023).
[4] Id.
[5] Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1032 (2002) (“Coverage for personal injury 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. Under the personal injury policy provision, ‘[c]overage . . . is triggered by the offense, not the injury or damage which a plaintiff suffers.’”)
[6] See Primary Color Sys. Corp. v. Hiscox Ins. Co. Inc., No. 23-55199, Primary Color’s Petition for Rehearing, Docket No. 42-1 (filed Feb. 22, 2024).
[7] Aram Logistics v. United States Liab. Ins. Co., No. 24-1046, 2025 WL 470888 (9th Cir. (Cal.) Feb. 12, 2025). Panel consisted of Judges Gould, Friedland, and Bennett.
[8] Aram Logistics, 2025 WL 470888 at *1.
[9] See, e.g., KM Strategic Mgmt., LLC v. Am. Cas. Co. of Reading PA, 156 F. Supp. 3d 1154, 1170 (C.D. Cal. 2015) (“An insurer does not meet its burden of establishing an exclusion's application by pointing to unproven and disputed allegations in the very complaint it is called upon to defend.”); Arch Specialty Ins. Co. v. Beacon Healthcare Servs., Inc., No. 822CV00305MCSDFM, 2023 WL 2347396, at *4–5 (C.D. Cal. Jan. 18, 2023) (dispute over consensual nature of sexual relationship precluded use of “Abuse or Molestation” exclusion).
[10] Zurich Ins. Co. (U.S. Branch) v. Killer Music, Inc., 998 F.2d 674, 678 (9th Cir. (Cal.) 1993).
[11] See also Hudson Ins. Co. v. Colony Ins. Co., 624 F.3d 1264, 1296 (9th Cir. (Cal.) 2010) (recognizing plaintiffs may omit valid negligence counts “for strategic adversarial reasons”).
[12] United Talent Agency, LLC v. Markel Am. Ins. Co., No. 23-3168, 2025 WL 869213 (9th Cir. (Cal.) Mar. 20, 2025). Panel consisted of Judges Schroeder, Miller, and Desai.
[13] Id. at *1 (emphasis added).
[14] Id. at *2.
[15] Pension Trust Fund v. Fed. Ins. Co., 307 F.3d 944, 951 (9th Cir. (Cal.) 2002) (“[R]emote facts buried within causes of action that may potentially give rise to coverage are sufficient to invoke the defense duty.”)
[16] Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1034 (emphasis added).
[17] United Talent Agency, LLC, 2025 WL 869213, Dkt. 12.1, pp. 31–33/40.
[18] United Talent Agency, LLC, 2025 WL 869213 at *1.
[19] Aurafin-OroAmerica, LLC v. Federal Ins. Co., 188 Fed. Appx. 565 (9th Cir. (Cal.) 2006) (“[T]he district court erred when it relieved Federal of its duty to defend based on the merits of D & W’s underlying defamation claim.”)