June 14 was Flag Day.  I published a fun article in The Wall Street Journal that looks at litigation over the years between condo owners who wish to fly the American flag, and condo boards that object, citing by-laws that limit how old glory can be displayed.
 
I hope you can check it out.
 
https://www.coverageopinions.info/WSJBanners.pdf

 

I previously offered to put on my “Top 10 Duty To Defend Issues” webinar as training for insurer claims departments.  The response was great and I’m going to have a busy Fall talking all things duty to defend with lots of insurers.  The subject matter will be serious, of course, but I’ll make it fun.

There are only so many of these that my schedule allows.  I have just a few spots left.  If you are interested, drop me a note and we can set something up. 

The issues to the discussed:

The duty to defend standard: Sure, it’s broad, but it is not limitless.

Four corners of extrinsic evidence?: Forty-six (46) states – yes, that many -- have the possible consideration of extrinsic evidence to determine the duty to defend.  

Pre-tender defense costs: Late notice can be difficult to satisfy; but it can be a much different story with pre-tender defense costs. 

The “artfully pleaded” complaint: C’mon man, there’s no duty to defend under these facts.  I know the complaint was drafted that way just to trigger a defense.

Independent counsel: In about 26 states (give or take), a reservation of rights may give rise to the insured’s right to independent counsel.

Rates for independent counsel: Not an easy issue. What do the courts have to say about it?

Choice of law: Are the rules different for duty to defend?

Breach of the duty to defend: You got it wrong.  Now what?

Reimbursement of defense costs: This issue has been getting a lot of activity lately.

Restatement of Liability Insurance: What does the new ALI Restatement have to say about these issues?

Michael Young

In the last issue of Coverage Opinions I introduced a new column: “Leading Coverage Lawyers Share ‘If I Knew Then What I Know Now.’” The idea is to reach out to some of the nation’s leading coverage lawyers and ask them to share with readers lessons that they have learned over the years or things they wish they knew earlier on.  In essence, the column is designed to give younger lawyers the benefit of wisdom -- without their need to spend decades figuring it out for themselves. I asked Ron Schiller and Dan Layden, shareholders at Philadelphia’s Hangley Aronchick Segal Pudlin & Schiller, to be the first to take the plunge.  Ron and Dan kindly agreed and did a wonderful job.  The two set a high bar. For the follow-up, Michael Young, of HeplerBroom, LLC in St. Louis, was gracious enough to put pen to paper with his thoughts.

Sadly, Jack Weinstein, the legendary Brooklyn federal court judge, died on Tuesday at age 99.  Weinstein retired in 2000 after 53 years on the bench.  I had the privilege of interviewing the iconoclastic jurist in late 2018.  The 30 minutes that I spent with him in his chambers is an experience that I will never forget. 

I hope you can check out the interview.  You’ll see why he was truly a one-of-a-kind judge. 

https://www.coverageopinions.info/Vol8Issue1/Declarations.html

 

 

The news has been abuzz about the billions of cicadas that are emerging from the ground after their 17-year subterranean existence.  They will bring with them a thunderous sound.  Reports are that the insects will appear in about 15 states, principally on the East Coast.  [Meanwhile, much to my dismay, I have not seen a single one yet.] Credit their loud noise to the mating call of males.  So the story goes, the cicadas will do their thing, die shortly thereafter and their offspring will begin their own 17-year get-away.   

Here at Coverage Opinions, where I’ll stop at nothing to bring you interesting legal tidbits and fascinating and hard to believe judicial decisions, it turns out that cicadas were once front and center before the New York Appellate Division.  I kid you not.  You can look it up: Petriano v. Southgate at Bar Harbour Home Owners Association, 640 N.Y.S.2d 614 (App. Div. 1996 (2nd Dept.)).

In Petriano, the New York appeals court concluded that Josephine Petriano could not recover damages from Southgate at Bar Harbour Home Owners Association for injuries that she sustained, while playing tennis, when she slipped and fell on dead cicadas that had collected on the court. 

The problem for Ms. Petriano was that she admitted in her deposition to having observed the dead cicadas on the court before starting to play.  This was all the Appellate Division needed for game, set, match for the homeowner’s association: “By electing to play tennis on a court known to contain dead cicada bugs, the injured plaintiff assumed the risk inherent in the game, thereby limiting the defendant’s duty to make the conditions as safe as they appeared to be.”

 

In a move hailed by animal rights activists, and objected to by insurers, earlier this month Nevada Democratic Governor Steve Sisolak signed into law Senate Bill 103, which prohibits insurers from using a dog’s breed to deny coverage or charge a higher premium.  In legal speak, the law, applicable to homeowner’s, renters, mobile home and umbrella policies “[p]rohibits an insurer from refusing to issue, canceling, refusing to renew or increasing the premium or rate for certain policies of insurance on the sole basis of the specific breed or mixture of breeds of a dog.”

In one media report, Ledy VanKavage, the senior legislative attorney for animal group Best Friends, stated that “breed is not a factor in bites.”  In that same report, Mark Sektnan, vice president of the American Property-Casualty Insurance Association, saw it differently: “Insurance companies must be able to properly underwrite and rate risk.  If insurers are forced to insure those homeowners with an increased risk, whether that’s a leaky roof and inadequate stove or an aggressive dog, they must be able to charge an adequate rate.”

However, insurers can still ask applicants if a dog, located on the to-be-insured property, is known to be dangerous or vicious, and, if so, refuse the risk or price accordingly for it.

 

With summer here, I had to do something tying insurance coverage to the dog days ahead. And what a case I found. Amazing. In 1937, the Alabama Supreme Court addressed coverage, under a liability policy, for a retail store that caused a customer to be sunburned. Really, you can look it up: Loveman, Joseph & Loeb v. New Amsterdam Casualty Co., 233 Ala. 518 (1937). It is just remarkable how lucky you are to get a newsletter (and free, free, free, I remind you) that provides such fascinating information.  It’s actually a very interesting decision – and probably had the policyholder bar up in arms.  

On July 20, 1934, a Mrs. Thuss visited Loveman, Joseph & Loeb to purchase a product to protect her skin from sunburn. A store employee recommended Ardena Sun Tan Oil. Mrs. Thuss bought a bottle. However, the store clerk mistakenly gave Mrs. Thuss a bottle of Ardena Bronze, a product used to simulate a sun tan and not protect the user from sunburn. Who knew they sold bronzer in 1934? You can see where this is going.

Mrs. Thuss traveled 40 miles away to a river, used Ardena Bronze and after 20 minutes in the sun was severely burned.

Mrs. Thuss made a claim against the store for damages. New Amsterdam Casualty Co. refused to defend the store under a public liability policy. Mrs. Thuss and the store settled the matter for $1,500 (about $30,000 today). 

Coverage litigation ensued. At issue before the Alabama Supreme Court was the applicability of the following exclusion asserted by the insurer: “This policy does not cover any accident; * * * (1) caused directly or indirectly by the possession, consumption, handling or use, elsewhere than upon the premises described in the schedule of statements, of any goods, article or produce, manufactured, handled or distributed by the assured unless covered hereunder by written permit endorsed on this policy.” (emphasis added).

The insurer maintained that, based on this exclusion, no coverage was owed to the store because the accident did not occur on the premises of the insured. Rather, Mrs. Thuss was sunburned when she used the bronzer 40 miles away from the store. The Alabama high court agreed with the insurer, rejecting the insured’s argument that the accident took place in the store – when the clerk mistakenly sold Mrs. Thuss bronzer instead of a sun protection product.    

The court held: “We can readily agree that a mistake was made by the clerk on the premises of the assured, as described in the schedule of statements, but we cannot subscribe to appellant’s further proposition that the accident, the happening of the event which produced the injuries, must be regarded, in law, as having occurred on the assured premises, when as a matter of fact the occurrence actually took place some forty miles away.”

Needless to say, the exclusion provided a significant limitation on coverage for the store’s products. For contaminated food, there is only coverage if the person ate the food while in the store. And the court was not unmindful of this limitation: “We approve, as of course, the rule that insurance contracts may be and often are made with very limited coverage, the small premium fixed on careful calculation of the hazard assumed; and they should be enforced, not a new or enlarged contract made for the parties.”

 

I do not know the exact date, but we are pleased to announce that the 5th Edition of “General Liability Insurance Coverage: Key Issues In Every State” is coming this summer. Work is progressing nicely and, mercifully, we can see the light at the end of the tunnel. The new edition of “Insurance Key Issues” is going to be a monster -- with many, many hundreds of new cases that have come down since early 2017. That’s a long time and the number of new cases is significant.  

We are really looking forward to bringing this updated edition of “Insurance Key Issues” to the book’s loyal readers – for whom we are very grateful. 
 
I’ll keep you posted.

 

There have been many legal challenges to government restrictions on public gatherings on account of the coronavirus.  It turns out that that’s not so novel.

A hundred years ago, in the wake of the Spanish flu, lawyers also took up cases for individuals who believed that pandemic restrictions violated their rights.         

Last month I published an article about this for the ABA Journal website. I hope you can check it out.

https://www.abajournal.com/columns/article/legal-battles-over-coronavirus-restrictions-arent-as-novel-as-the-virusjust-look-back-100-years

 

I couldn’t help but find this snippy lawyer comment amusing.  It was wrong and uncalled for.  But, unfortunately, it happens in this business. 

At issue in State Farm v. Palomares, No. 20-392 (D. Idaho May 21, 2021) was coverage for a claim involving an individual killed by an escaped bull.  State Farm filed a declaratory judgment action.  Things happened in the underlying action that State Farm believed justified dismissal of its D.J. action.  But counsel for State Farm could not get the insureds’ counsel to stipulate to a dismissal. 

Instead, the insureds’ counsel had this to say to State Farm’s counsel: “I’ve asked my associate to look into a filing seeking fees for what strikes me as a frivolous wasteful filing by State Farm. We have to do some research.”

State Farm responded with a length reply.  I need to set it out here, in its entirety, as its length is relevant to the punchline.

“Mr. Holzer, I want to make sure I am understanding you correctly. Are you saying the declaratory judgment action was frivolous? That argument does not hold water. Your clients brought a lawsuit against Ms. Pedroza and her brothers. Each of them tendered that lawsuit to State Farm. State Farm did not believe a defense or indemnity was owed by the policy. Therefore, there was a disagreement ripe for declaratory judgment between State Farm and Ms. Pedroza, Raul and Mario. If your clients obtain a judgment against an insured of State Farm, and no judgment barred them from doing so, then your clients would have been able to seek that judgment directly from State Farm. Therefore, because State Farm contested Raul's and Mario's insured status and thus contested any obligation to indemnify them, and because State Farm contested whether there could be indemnity coverage for Ms. Pedroza regarding a potential judgment against her in the underlying case, there was a disagreement with your clients regarding coverage, and this disagreement was ripe for decision in a declaratory judgment action. See 22 U.S. Code § 2201(a) ‘In a case of actual controversy within its jurisdiction ... any court of the United States ... may declare the rights and other legal relations of any interested party seeking such declaration’. If your clients did not disagree with State Farm regarding possible indemnity coverage, then that would have been reflected in the Answer you filed on their behalf. Instead, in their Answer, the Bartees requested that the Court ‘declare, under the terms of the policy of insurance at issue herein, Plaintiff [State Farm] has a duty to indemnify the Defendants in the Underlying Lawsuit for any damages said Defendants are legally obligated to pay.’ The disagreements referenced were the basis of the declaratory judgment action. Those disagreements are no longer ripe because (1) your clients dismissed Ms. Pedroza from the underlying lawsuit with prejudice, meaning there can be no further request by Ms. Pedroza for defense or indemnity from State Farm; (2) the Court ruled that Mario and Raul are not insureds on the State Farm policy meaning there can be no further request by Mario or Raul for defense or indemnity from State Farm; and (3) because your clients can no longer seek to collect on any potential judgment from State Farm due to reasons (1) and (2), there is no longer any dispute with your clients. State Farm is attempting to cut off any fees that your clients could have to expend in this action at the earliest possible moment, it is you who are keeping this action alive after all questions are resolved. Therefore, if you are not willing to stipulate to the dismissal, State Farm will move ahead with a motion to dismiss and we may seek from your clients the fees and costs that will be incurred due to your frivolous obstruction. Please let me know how you plan to proceed.”
 
Following this lengthy discourse by the insurer’s counsel, the insureds’ counsel came back with this succinct response: “Thank you so much the lecture is wonderfully helpful. Is there CLE credit available?”

 

There are certain factors that make an insurer-loss potentially significant.  These include a decision that (1) involves an issue with potentially broad applicability and frequency, i.e., it is not tied to a narrow set of facts and can arise under various types of liability policies; (2) goes against a generally accepted insurer position on an issue; and (3) comes from a state high court.

The recent decision, in Sapienza v. Liberty Mutual Insurance Company, No. 29000 (S.D. June 2, 2021), has all of these.  The South Dakota Supreme Court held that coverage was owed to an insured, under a liability policy, for its cost to comply with an injunction.  The court held that such costs qualified as covered “damages.”

In my experience, insurers generally do not treat an insured’s obligation, to comply with an injunction, as covered “damages.”  While I believe that Sapienza was wrongly decided – as did two of the five justices – the decision provides an opportunity for policyholders to make the argument, that was successful before the South Dakota high court, to secure coverage for injunctive relief.

Sapienza involved a battle royale between neighbors.  The Sapienzas obtained a building permit to raze their existing home and build a new one.  The McDowells lived next door, in a home listed on the state and national register of historic places.  You know where this is going.

After the Sapienzas home was completed, the McDowells filed suit, alleging illegalities in its construction and problems that it caused for the McDowells:

• Only seven feet of space between their home and the Sapienzas’ home, which violated applicable administrative regulations governing height, mass, and scale;

• McDowells prohibited from using their fireplace because of the close proximity and height of the Sapienzas’ home.

• Sapienzas’ home detrimentally affected the historic and sentimental value of their home, blocked a substantial amount of natural sunlight from the south, and invaded the privacy of their home by having windows that overlook the McDowells’ windows (including the window into the bathroom and bedroom of their daughter)

The McDowells’ complaint sought, in addition to injunctive relief, “compensatory, general, special, consequential and punitive damages in an amount to be determined to compensate [the McDowells] for all injuries sustained as a result of the conduct of [the Sapienzas.]”

The Sapienzas’ homeowner’s insurer, Liberty Mutual, undertook their defense.  A bench trial was held and the court granted the McDowells a permanent injunction. The Sapienzas were ordered to either bring their residence into compliance with the applicable regulations or rebuild it.

The Sapienzas appealed – Liberty Mutual continued to defend – and the South Dakota Supreme Court affirmed.  The case went back to the Sioux Falls Board of Historic Preservation to cure and remedy the violations.  It did not get worked out and the Sapienzas had their home demolished and allegedly incurred $60,000 in complying with the permanent injunction.

The Coverage Case

Liberty Mutual denied coverage for these costs and the Sapienzas filed suit against Liberty in federal court.  The insurer argued that the insuring agreement, of the liability potion of the policy, had not been satisfied, on the basis that the Sapienzas were not legally obligated to pay “damages.”  In other words, as the insurer saw it, there were no damages awarded to the McDowells, but, rather, the Sapienzas were ordered to modify or tear down their own home.

The federal court certified the following question to the South Dakota Supreme Court: “Do the costs incurred by the Sapienzas to comply with the injunction constitute covered ‘damages’ under the Policies such that Liberty Mutual must indemnify the Sapienzas for these costs?”

The competing positions went like this.  The Sapienzas argued the term “damages” is unambiguous and “encompasses both money paid to compensate for harm as well as any expenses, costs, charges, or loss incurred to remedy a harm.”  They argued that “damages” includes “any economic outlay compelled by law to rectify or mitigate damage caused by the insured’s acts or omissions.”  Of course, the Sapienzas also argued that the term “damages” is ambiguous if it has more than one meaning.

Liberty argued that “the nature of liability insurance contemplates an obligation to pay the damages to another party for which the insured is legally liable. . . .[B]ecause there were no damages awarded to the McDowells and the court instead required the Sapienzas to modify or tear down their own home, the Sapienzas did not become legally liable for damages to the McDowells because of property damage.”

The high court sided with the Sapienzas for various reasons – principally based on a dictionary definition of damages: “[A]pplying the definition of ‘damages’ that includes not only reparation in money as a form of compensation, but also a ‘satisfaction imposed by law for a wrong or injury caused by a violation of a legal right,’ the costs the Sapienzas incurred to comply with the injunction are covered ‘damages’ under Liberty Mutual’s policies. The Sapienzas paid these costs to ‘satisfy the wrong or injury’ they caused to the McDowells’ property—an injury for which they were ultimately held legally liable.”  The court described “damages” as “costs predicated on [the Sapienzas] legal liability for what would otherwise be assessed as money damages had the court determined that a monetary payment to the McDowells would have been adequate to remedy the harm.”

Of note, the court did make an important point that insurers will likely point to in response to arguments for coverage: “[I]t is important to recognize that the nature of the injunctive relief governs whether sums paid for such would be covered under policy provisions of the sort here.  Not all injunctions have the same purpose. . . . [C]osts associated with injunctive relief ordered to prevent property damage that has yet to occur “are not ‘damages because of property damage’” and, as a result, may not fall within coverage provisions.”

Two dissenting justices -- after criticizing the majority for being too quick to find ambiguity, just because of multiple dictionary definitions of an undefined term – saw the issue this way: “[W]e now know that the Sapienzas complied with the injunction by razing their house which, in turn, had the effect of removing the impediment to the McDowells’ fireplace and allowed more sunlight back into their home. But that result was not required or assured by the circuit court’s mandatory injunction, which directed only compliance with regulations governing construction in historic districts and was not specifically crafted to remedy the McDowells’ property damage claims. The plain fact that the McDowells’ concerns were ultimately alleviated does not mean that the Sapienzas were ordered to remedy the McDowells’ property damage claims relating to the lost use of their fireplace and diminished sunlight.”

The dissent also observed that the decision turned the liability policy into a first-party policy: “[A]applying the rule the Sapienzas and the Court suggest alters the Liberty Mutual liability insurance agreements, straining the text of the policies well beyond their limits and effectively converting the liability provisions into something more akin to first-party insurance by requiring ostensible liability coverage for property owned by the insured.”

 

Last month’s decision, from the Georgia Court of Appeals in White v. Cheek, No. A21A0212 (Ga. Ct. App. May 21, 2021), let stand a plaintiff’s bad faith set-up of an insurer.  The terms of the plaintiff’s settlement offer were set out in a 22-page, single-spaced letter, with 16 footnotes thrown in for good measure.  The court concluded that, despite the insurer’s stated acceptance of the offer, a settlement was not in fact reached.  Thus, the table is now set for the pursuit of bad faith damages, and the insurer’s potential exposure being well-beyond the $25,000 policy limit that had been demanded.
 
A concurring judge reached the same conclusion, albeit for a different reason.  But, in doing so, the jurist called out the plaintiff’s tactic for what it was -- and made clear that something needs to be done about the situation.   

At issue in White v. Cheek was the defendant’s effort to enforce a settlement that it believed had been reached with the plaintiff.  As is often the case in these situations – but not always – the matter arose from an auto claim under a low-limits policy. 

Walter Cheek was a passenger in a vehicle driven by Stephen White.  White lost control of the vehicle, a collision ensued and Cheek sustained injuries.  White was insured by GEICO.   

Cheek’s counsel sent GEICO an offer of compromise letter governed by a Georgia statute --  O.C.G.A. § 9-11-67.1 -- that set out the required terms of a settlement offer, such as the time period for acceptance, monetary amount, party(ies) released, type of release and claims released.  The statute also sets out requirements governing acceptance and addresses a few other issues concerning settlements.

The concurring opinion noted that the letter was 22 single-spaced pages and had 16 footnotes. The opinion does not say much about all this verbiage, but notes, importantly, that it included the following: “All communications to this firm initiated by or on behalf of your insurance company or your insured relating to this offer of compromise must be made in writing. If a communication to this firm relating to this offer of compromise is initiated by or on behalf of your insurance company or your insured in any form other than writing, that will be a rejection of this offer of compromise. . . .”  The letter also stated: “[I]n the unlikely event that GEICO needs any additional information regarding liability or damages to complete its evaluation of this claim, please contact me in writing to let me know. I will do my best to answer any questions you could possibly have.”

Despite this requirement for a writing, GEICO responded to Cheek’s counsel with a voicemail:

“Hey this is … with GEICO insurance, I was calling regarding your client … Cheek. Just wanted to let you know that I was the new bodily injury adjuster, it looks like there is a question of liability on our insured driver … White. I am just calling to see if you guys will be able, if you would allow, recorded statements for Mr. Cheek. My phone number is … , claim number is … Thank you.”

With no response, five days later GEICO’s adjuster left a similar voice mail.

Cheek’s counsel sent a letter to GEICO acknowledging receipt of the voicemail and added: “Obviously, your call makes it clear that GEICO has chosen to reject Mr. Cheek’s offer of compromise.”

Less than a month later GEICO sent a letter accepting the offer and included a check for $25,000 payable to Cheek.  Cheek’s counsel responded that there was no settlement, as the offer had been rejected, and the check was returned

White filed a motion to enforce the settlement.  The trial court denied the motion, concluding that there was no settlement, as GEICO failed to comply with the condition that communications be in writing.

The Georgia appeals court, without much effort, affirmed.  The court concluded that, under the statute, GEICO was entitled to seek clarification of the offer.  However, Cheek’s counsel had been entitled to require that such request for clarification be in writing.  By leaving voicemails to request additional clarification, GEICO violated this requirement of the offer.  Therefore, no settlement had been reached.  Cheek can now proceed with a bad faith claim.

Chief Judge McFadden concurred in the result, but for a different reason, concluding that the voicemails were not a counter-offer.  GEICO was entitled to seek reasonable clarification of the offer and Cheek’s counsel could not treat certain types of attempts as counteroffers.    

However, the Chief Judge still concluded that GEICO did not accept the offer as “GEICO delivered a proposed release that differed from the offer’s requirements in certain respects. For example, Cheek’s offer provided that the release could not contain ‘denials of liability’ or ‘non-admissions of liability,’ but the proposed release delivered by GEICO stated that it ‘in no way prejudices the rights of [White] to deny liability’ and that it ‘is not an admission of liability by [White].’ Under this court’s decision in Pritchard v. Mendoza, 357 Ga. App. 283, 288-289 (850 SE2d 472) (2020), GEICO’s failure to deliver a fully compliant release meant that GEICO did not accept the offer.”

The matter before the court was resolved, but the Chief Judge wasn’t finished, taking the opportunity to address the abuse of bad faith set-ups by plaintiff’s counsel.  As he saw it, the onerous requirements, of the nearly two-dozen page offer letter, was “compelling, if not dispositive, evidence of a lack of intent to settle the claim.”  Thus, the offer was not made in good faith and “per force it is not bad faith to reject an offer made in bad faith.”

The law gives plaintiffs a lot of leeway when it comes to crafting their offers and the requirements for acceptance.  So the opportunity for a bad faith set-up exists.  So perhaps the way to address the problem is the one suggested by Chief Judge McFadden.  If the terms of the offer are so onerous, it is evidence that the plaintiff really had no intent to settle in the first place.  And “it is not bad faith to reject an offer made in bad faith.”

 

Scottsdale Ins. Co. v. Thrower, No. 20-376 (Ark. Ct. App. June 2, 2021) involves the tragic case of a 3-year-old boy who died from choking on a hot dog at a daycare in Arkansas.  The insurer for the daycare settled the underling claim for the policy limit of $1,000,000.  However, the insurer wanted to limit its payment to $995,000, on the basis that it had already paid out $5,000 under the medical expense coverage.  Thus, as the insurer saw it, since the claim was a single occurrence, its maximum liability, collectively, was the policy’s $1,000,000 occurrence limit.

The trial court disagreed, concluding that the policy was ambiguous.  The Arkansas Court of Appeals agreed. 

The opinion is brief and I’ll spare all of the policy language here – which is, in any event, not unfamiliar.  In general, the court concluded that, despite there being just one “occurrence” at issue, the policy’s $2,000,000 general aggregate applied.  Thus, the insurer could be liable here for $1,005,000, under a policy with a $1,000,000 “occurrence” limit.   Try as it might, the insurer could not convince the court that the general aggregate limit only applies if there is more than one “occurrence.”  As the court saw it, the policy language did not say that the general aggregate limit only applied if there was more than one “occurrence.”    

The court got it wrong.  The policy language here clearly supports the argument that the claim involves a single “occurrence” and the insurer’s maximum liability is $1,000,000 collectively under coverage A (“bodily injury”) and coverage C (medical expenses). 

In fact, the decision is so wrong that I can’t imagine it being followed by other courts.  But it’s not an ideal situation for insurers to have an appellate decision stating that a portion of the Limits of Liability section of the ISO commercial general liability form – which is not exactly the provision about sidetrack agreements -- is ambiguous

 

Insurers sometimes lose cases because they don’t have the facts needed to support a coverage defense.  Other times they have the facts, but the court determines that the policy language does not mean what the insurer says it does. 

And, of course, there are other reasons, including the one in First Mercury Ins. Co. v. Triple Location, LLC, No. 19CV2395 (N.D. Ill. April 29, 2021).  Here, even if the insurer had the right facts and policy language, it would have still lost.  The problem for the insurer: the policy language, that may have applied, was inconsistent with other policy language.

At issue in Triple Location was coverage for Club O, a gentlemen’s club, for a suit brought by professional models who alleged that the club used their photographs on Facebook and Instagram, without consent, to promote the club.  The models alleged that the club “create[d] the false impression that [they] ha[d] consented or agreed to promote, advertise, market, and/or endorse Club O,” which caused them to “sustain[] injury to their images, brands, and marketability by [their] shear affiliation with ... a strip club.”  They further alleged that the club “totally and completely destroyed” any “copyright that existed in their photos by morphing, editing, or otherwise altering the original photographs.”

Club O sought “personal and advertising” coverage under liability policies issued by First Mercury.  As you would expect, the relevant provisions, concerning the potential availability of coverage, were for (1) 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; (2) “oral or written publication, in any manner, of material that violates a person’s right of privacy; and (3) infringing upon another’s copyright, trade dress or slogan in the insured’s advertisement.

Not important for discussion here, the court concluded that, for duty to defend purposes, certain “personal and advertising” exclusions did not apply.  In general, these exclusions were tied to the insured’s intentional conduct and the court concluded that the complaint alleged negligent conduct.  This is not an usual outcome in a situation like this.

First Mercury also asserted a “Field of Entertainment” exclusion:

This insurance does not apply to ... “personal and advertising injury” ... actually or allegedly arising out of, related to, caused by or attributed to by any of the following, but only as each applies to the “Business of The Insured in The Field of Entertainment.”

a. Invasion of the right to privacy;

b. Infringement of copyright, whether under statutory or common law; libel, slander or other forms of defamation; ...

“Business of The Insured in The Field of Entertainment” is defined to include “[t]he ownership, licensing, operation maintenance or use of merchandising programs, advertising or publicity material or paraphernalia, characters or ideas, whether or not on premises of the insured or in possession of the insured at the time of the alleged offense or 'occurrence[.]’”

While the court expressed doubt about the exclusion’s applicability, the insurer never had the chance to argue otherwise.  The court concluded that the Field of Entertainment exclusion was inconsistent with the grant of coverage for “personal and advertising” injury:

“Adopting First Mercury’s position that the endorsement negates its duty to defend Triple Location in the underlying suit would mean that the policies cover ‘personal and advertising injury’ caused by negligence associated with privacy right or copyright infringement in ‘[the insured’s] ‘advertisement[s]’’ or with ‘[t]he use of another’s advertising idea in [the insured’s] ‘advertisement[s],’ yet exclude the very same injury if it arises out of the insured’s ‘advertising.’ . . . Given the stark incompatibility of these dueling provisions, the endorsement creates an ambiguity about the scope of coverage that, at least for purposes of the duty to defend, must be resolved in Triple Location's favor.”  (emphasis in original)     
   
The moral of the story, for policy drafting, is clear.

 

As discussed above, insurers sometimes lose cases because they don’t have the facts needed to support a coverage defense.  Other times they have the facts, but the court determines that the policy language does not mean what the insurer says it does. 

In First Mercury Ins. Co. v. Triple Location, LLC, discussed above, the insurer lost because its policy contained an internal inconsistency.  Coverage specifically provided for “personal and advertising” injury was removed by an exclusion. The court’s conclusion: based on these “dueling provisions, the endorsement creates an ambiguity about the scope of coverage that, at least for purposes of the duty to defend, must be resolved in [the insurer’s] favor.”
 
In Verto Medical Solutions v. Allied World Specialty Insurance Co., No. 19-3511 (8th Cir. May 11, 2021), the insurer came out on the losing side on account of an error in its policy drafting.

At issue was coverage, under a D&O policy, for an asset purchase agreement that went south and gave rise to various claims for which coverage was sought.  The facts of the deal, and what went wrong, are not important for purposes of discussion here.

What is relevant is that the policy contained a “contractual liability” exclusion [exclusion D.], which the insurer maintained precluded coverage.  The court called this “original D.”  But the policy also contained endorsement 11, which “delet[ed] Exclusion D. in its entirety and replac[ed] it with” a new contractual-liability exclusion, also labeled “D.”  The court called this “new D.” 

So far there is nothing unusual here.  The policy itself started out with a contractual liability exclusion (labeled exclusion D.) and then replaced it with a different contractual liability exclusion – also called exclusion D.  In fact, it would have been a bad idea to have called new exclusion D anything other than “exclusion D.”  

But here’s were the train went off the tracks.  Enter endorsement 13, which provided: “Exclusions A., B., C. and D. . . . are deleted in their entirety and replaced” with a list of three new exclusions labeled “A,” “B,” and “C.”  None of these exclusions directly addressed contractual liability.

So now, what to make of Exclusion D?  That was the issue before the court.  The appeals court, reversing the trial court, saw the situation as ambiguous and found for the insured.

The insurer’s position was that exclusion D., in endorsement 11, excluded coverage.  Presumably its position was that exclusion 13, since it didn’t mention replacing exclusion D., had no impact on exclusion D. as set out in endorsement 11.
 
The court saw it differently: “If the insurance policy seems unclear, it is. Endorsement 13 injected ‘uncertainty’ by deleting Exclusion D, but then failing to specify which one: original D, new D, or both. . . . We cannot rule out the possibility, in other words, that the endorsements deleted and replaced original D and new D, leaving the policy without a contractual-liability exclusion.”

Having found ambiguity, you know how this now turned out.  On remand, the insurer was free to assert the applicability of other exclusions, just not D.

The moral of the story, for policy drafting, is clear.