Assuring Coverage Counsel’s Proactive Assistance Requires Early Intervention
Currently, eleven states (and the District of Columbia) still adhere to the draconian “eight corners” analysis for the duty to defend. Under this policy, a court can only consider the policy language and the pleadings of the underlying case to determine whether the insurer’s duty is triggered. The modern trend, embraced by the remaining jurisdictions, is to consider additional “extrinsic evidence” in making the determination. Those states are split, however, in whether the duty is determined by facts known to the insurer or facts available to the insurer. The distinction being that the former requires the policyholder to proactively notify the insurer of any facts that implicate the duty to defend before the insurer’s obligations are activated. The burden is on the policyholder to supply the insurer with the information, even if the relevant facts are publicly available.
N.Y. Magistrate Narrowly Construes “Conducted Against Liability” Doctrine
The New Year starts off with a long awaited decision by a New York Federal Magistrate Judge which implicitly concluded that New York’s construction of the “conducted against liability” doctrine was limited to the “mirror image” cross-complaints in the same pending action. In so concluding, the court necessarily rejected the strategically defensive legal action such as the pending ITC action while the Federal Court Action asserting trade dress claims was stayed. The court failed to conduct the requisite choice of law analysis which would have recognized that under New York choice of law rules, California coverage law applied and a defense of the ITC action was compelled.
Personal and Advertising Coverage – A Year in Review
For our final blog of 2023, we wanted to look back at some of the prominent coverage cases and discuss emerging trends in insurance litigation.
“Slander of Title” Coverage under E&O Policy Unearthed by Ninth Circuit
“Slander of Title” is a commonly added cause of action in lawsuits addressing disputes over real property. Historically, such claims have had a limited intersection with insurance coverage. The principle exception is where the targeted defendant procured a Title Insurance policy providing directly applicable coverage. A recent decision by the Ninth Circuit analyzing potential coverage under an Errors & Omissions (“E&O”) Management Liability policy, however, has finally acknowledged the potential for coverage under more general policies. The decision’s rationale allows policyholders to reap policy benefits from both a Commercial General Liability (CGL”) policy as well as a Title Insurance policy if both are implicated by the fact dispute.
Securing Insurer Funded Resolution of Securities Lawsuits
Whether government investigations by the Securities Exchange Commission (“SEC”), Department of Justice (“DOJ”), another federal or state entity, or unanticipated drops in Company stock value precipitate shareholder litigation, securing the best possible insurance coverage to address the asserted claims is critical. The entity then evaluates whether actionable conduct has arisen that allows a government agency to pursue a claim. Such investigations create significant potential exposure for policyholders in investigation costs. Additionally, in responding to government subpoenas or demands for information, even before the start of an investigation, policyholders often expend significant amounts of time and money securing the information required. Luckily, reimbursement may be attained through a policyholder’s “Directors and Officers (“D&O”), Errors & Omissions (“E&O”), or Commercial General Liability (“CGL”) policy.
Pursuit and Defense of Patent Infringement at Insurer’s Expense
Patent infringement litigation fees constantly escalate. According to a 2023 American Intellectual Property Law Association (“AIPLA”) survey, the median cost of litigating a patent lawsuit through trial ranges from $600k when the amount in controversy is less than $1M to $3.625M when the amount is over $25M. Patent holders have secured significant settlements and judgments premised on reasonable royalty awards. These recoveries have led patent litigation entities such as Burford to finance this litigation. Cross-licensing of patents also factors into resolutions of these lawsuits. Companies that do not have a significant patent portfolio cannot exchange licensing rights with competitors to resolve infringement disputes. Therefore, the inability to afford costly patent litigation may cause the abandonment of key market advantages that are central to the company’s strategy.
Why Words of Limitation Cannot Be Added Under the Guise of Policy Construction
A growing trend in insurance denials (and subsequent litigation) is arguing that policies should be interpreted in a manner belied by the actual language. This runs contrary to governing law, which actually allows policyholders to attack restrictive interpretations by demonstrating that alternative language would have readily achieved the insurer’s preferred reading. A policyholder’s burden is not to promote the most reasonable interpretation. A court must accept any reasonable construction promoted by the policyholder.
Mistaken Denial of Coverage for Trademark Dilution Claims
A typical trademark suit will assert various causes of action with names familiar to the average person, including the well-known trademark “infringement.” Unfortunately for policyholders, these claims are typically excluded by a policy’s IP exclusion. Though less known, trademark “dilution” is also common and can often be leveraged to attain coverage for the entire suit. This path to coverage is rarely recognized by insurance claims handlers, leading to a quick denial. Luckily, experienced coverage counsel can explain that mistake and secure coverage despite an initial denial.
Coverage Based on Potential for Amendment of Underlying Pleadings
Policyholders and even general counsel often overlook the potential for coverage by only considering the causes of action in a Complaint. In truth, it is the factual allegations that govern, not the labeled causes of action. And in many jurisdictions, the original form of a Complaint is only the starting point, as insurers must consider the potential for clarifying amendments that would nudge the allegations of a poorly drafted Complaint to within the scope of potential coverage.
Enforceability of “Voluntary Payments” Provisions
Standard Commercial General Liability (“CGL”) policies contain a “Voluntary Payments” clause, which states the insurer must not “voluntarily make a payment, assume any obligation, or incur any expense for damages [or] loss[.]” Courts have recognized that this language cannot be enforced literally as it is written. Litigation over these provisions typically focuses on the actions of the policyholder, but, interpreted broadly, these provisions could allow insurers to bypass state laws requiring prejudice for late notice. Furthermore, they may incentivize insurers to delay their decisions of whether to defend in the hope that the underlying lawsuit will resolve itself. Neither of these practices should be tolerated by the courts.
Insurer’s Obligation to Pay Reasonable Settlement When It Refuses to Defend
Despite their legal obligations to defend any claims with even a potential for coverage under a policy, insurers often fail to abide by that standard, looking for any excuse to deny a defense. Litigating to obtain policy benefits can take years in some cases, so the underlying action is often resolved before the battle for coverage comes to a close. When that underlying action is resolved via settlement, the denying insurer is obligated to reimburse the policyholder, even if the claim would not have met the standard for indemnity coverage. A number of cases in jurisdictions across the country have addressed this issue and reached the same conclusion.
When Timely Notice Isn’t Enough and When It Isn’t Even Necessary
Policyholders must be diligent in providing notice of potential claims to their insurers. Many policyholders, and even insurance brokers, make the mistake of assuming there will be no coverage for a particular matter and fail to do so. This is a mistake. Another mistake can be made by failing to provide notice according to the procedure required by the policy. Though ultimately resolved in favor of the policyholder, one Illinois case had to be litigated up to the state’s Supreme Court to secure coverage, all of which could have been avoided by providing notice according to the terms of the policy.
Lawsuits Filed Prior to Policy Inception May Still Be Covered
Many policyholders operate under a mistaken belief that a lawsuit filed prior to acquiring insurance can never be covered by that policy. Insurers would be quick to assure them they are correct in that assumption. The truth, however, is more nuanced. Insurance Services Office (“ISO”) Commercial General Liability (“CGL”) policies provide coverage for claims asserting continuous tortious conduct, and general principles of insurance law allow that coverage to extend even to claims where the conduct began before inception of an “occurrence” based policy.
Challenges in Securing Coverage for Antitrust Litigation
Aside from insurance policies secured by a larger corporation that directly address antitrust litigation exposure, there is no express coverage for “antitrust litigation” in Commercial General Liability (“CGL”), Umbrella, Excess, Errors and Omissions (“E&O”), or Directors and Officers (“D&O”) policies. Rather, coverage extends to “categories of wrongdoing,” which includes a list of offenses under “personal and advertising injury” coverage. This offense-based coverage is often implicated by the allegations accompanying business tort claims. It is of no moment that the conduct alleged is intentional as the offenses covered in such CGL policies expressly include intentional conduct such as malicious prosecution, disparagement, and defamation.
Insurer’s Rights and Obligations Surrounding Settlement Negotiations
The vast majority of civil litigation in America ends with a settlement rather than a judgment. As the most likely endgame for any given claim, policyholders should understand their rights during the settlement process. It is almost important to know how those rights are affected both by an insurer’s acceptance of its duty to defend and by a denial of coverage.
No Discovery Is Appropriate in Addressing Coverage for IP Disputes
Three distinct approaches are implicated in determining what the facts are for purposes of insurance coverage analysis: the “complaint allegations,” “facts known to the insurer,” or “facts available to the insurer” rules. Forum selection, which will require adoption of one rule over another, may be result-determinative in a coverage dispute where facts beyond the pleadings are essential to either establish or eviscerate potential coverage.
Insurers’ Failure to Research Applicable Law Is a Failure to Investigate
Upon signing an insurance agreement, insurers take on a duty to investigate claims reported to them. In the case of first-party claims (i.e., claims in which the policyholder suffers injury), that duty requires the insurer to investigate the factual circumstances of the claim. For third-party claims (i.e., claims in which the policyholder caused another party to suffer injury), the duty extends to investigating the latest legal authorities to determine whether the insurer has a duty to defend or indemnify its insured. Many insurers, however, fail in this duty, relying on outdated or inapplicable case law to support to denials. This is especially true in the context of “advertising injury” policies, which turn many of the general rules for coverage law on their head.
California Courts Cannot Base Coverage Analysis on Arbitration Results
In most states, an arbitrator’s conclusions can be used by insurers as the basis of a coverage denial. California, however, represents an exception to that general rule. In Vandenberg v. Superior Court, 21 Cal. 4th 815, 836–37 (1999), the California Supreme Court determined that arbitration results should not be usable by non-parties unless both arbitrating parties specifically agree otherwise. The impact of this decision should not be underestimated, particularly in the context of Employment Practices Liability Insurance (“EPLI”) coverage where employer-employee disputes so often turn to arbitration as a first option for a resolution.
First-Party Bad Faith under California’s “Genuine Dispute” Doctrine
Policyholders are generally eager to include a bad faith count along with breach of contract whenever a dispute with an insurer rises to the level of litigation. This is understandable as a successful bad faith claim can open the door to much greater recovery, including some forms not otherwise obtainable for simple breach of contract. The most viable for opportunity for recovery is typically limited to Brandt fees, which cover only the portion of fees incurred by counsel to establish the insurer’s obligations under the contract.
Insurers Escaping Duty to Defend Mixed Actions with New Exclusion Language
Many cases address some claims that are potentially covered by insurance and some that are clearly outside coverage. The rule in California (and generally throughout the country) is that these “mixed actions” must be defended in their entirety. Some jurisdictions allow the insurer to recover defense expenses associated with the non-covered claims. In order to avoid these obligations, however, some insurers incorporated expansive exclusions that eliminate any coverage for an entire suit if any claims asserted fall within a stated exclusion.