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Vol. 3, Iss. 6
April 1, 2014
Declarations:
The Coverage Opinions Interview With Joe Jamail -- The Richest Practicing Lawyer In America
Turning One Beer Into $14 Billion;
Saying The Unprintable;
Doing The Wave;
Where Do You Sit When The Football Stadium Is Named For You? |
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Joe Jamail is the richest practicing lawyer in America. But it has nothing to do with the fact that Forbes recently listed his net worth at $1.6 billion. There’s more than one definition of the word “rich.” It can also mean deep in color. And there may be no lawyer – ever – that has more color than Joe Jamail. I suspect that many billionaires are deadly dull. Jamail sure isn’t one of them. He has a 100,000 seat football stadium named for him at the University of Texas. And there’s also the Lee and Joe Jamail Skatepark in Houston. Enough said.
Of course Jamail handles a lot of personal injury cases. You don’t make that kind of money billing by the hour – even at some obscene New York rates. And of course Jamail is from Texas. The most colorful lawyer ever couldn’t possibly be from anywhere but Texas.
Mr. Jamail was kind enough to speak with me from his Houston office a couple of weeks ago. I was pretty nervous about the call. Not because he’s rich and famous. I’d seen and read enough about Jamail in preparing for the call to know that he was going to be an affable guy. And he certainly was. My concern was that I don’t speak Texan that well. I was afraid that I wasn’t going to understand some things that he said. I missed a few words along the way but all in all I got it.
Here’s what I mean by Jamail being affable. One thing that I learned about Jamail from all of my preparation was that he’s quite capable of saying things that are unprintable in a family publication. But on my call I wasn’t getting any of this. This wasn’t Joe Jamail on the phone. It was Atticus Finch. So about seven minutes in I mentioned to Mr. Jamail that I felt like I was being short-changed because he hadn’t yet said anything unprintable. He saw my concern and immediately obliged by saying something unprintable. See what I mean – a completely affable guy.
There are many ways to measure a lawyer’s success. But there is usually one in particular that gets the most attention – especially when you are talking about personal injury lawyers. And in that category Jamail has succeeded in an unimaginable way. His tally of judgments and settlements over his career is about $14 billion. That’s more than the gross national product of Iceland. And just think how much more it could have been if Jamail didn’t flunk Torts in law school (really, he did).
When a lawyer is 88 years old and the 342nd richest person in America (Forbes), the obvious first question is how much longer he plans to keep going. Jamail told the ABA Journal in 2009 that he planned to continue trying cases for another decade or so and then slow down a bit. I asked him if that were still the case. Jamail didn’t put a timetable on it but he told me that as long as he’s mentally and physically able he wants to keep at it. He told me that he was trying a case on Christmas Eve just a few months ago.
A lot of pictures that I’ve seen of Jamail have one thing in common -- he has a glass in his hand. Scotch he told me. Or beer by the bay. I wasn’t too surprised when he told me that Heineken is his favorite. Heineken isn’t complicated. And keeping things simple is Jamail’s courtroom weapon of choice.
Speaking of beer, that’s how Jamail got his start in the courtroom. The story goes like this, as told by Jamail in his wonderfully entertaining and informative 2003 autobiography Lawyer: My Trials and Jubilations. Jamail had passed the bar exam before graduating from the University of Texas Law School (that’s a story all to itself). In the course of celebrating the exam he found himself in a bar when Dorothy, “the barmaid,” opened up a bottle of Pearl Beer and the top chipped, cutting her thumb. Jamail sued the Pearl Brewing Company for making a defective beer bottle. Six months before graduation Jamail found himself in an Austin courtroom about to try his first case.
Here’s how Jamail described the scene in My Trials and Jubilations: “The courtroom was packed with my law school chums, and they were trying hard to contain their excitement. I am just grateful that ‘the wave’ had not been invented yet.”
Despite all the support that Jamail had in the gallery, the judge quickly sized up that he had no idea what he was doing and mercifully orchestrated a $750 settlement. The only downside – Jamail had to buy the beer all night long.
I read this portion of My Trials and Jubilations while on the train. When I got to the part about Jamail’s description of his excited friends in the courtroom, and him being grateful that the “wave” had not yet been invented, I burst out loud laughing. Not a little laugh that only the guy next to me could hear. No, not that kind. This was a full-bodied guffaw that every person in the train car could hear. I told this story to Jamail and asked him if he remembered writing that ten years earlier. He did and we shared a healthy laugh about it.
That Joe Jamail ever even had a first trial is quite an amazing thing. Jamail started at the University of Texas as a pre-med student. The experience did not go well. Nor last long. He ended the first semester with five Fs. Jamail laments in My Trials and Jubilations that he regrets that he didn’t squeeze out just one D. Then he could have claimed that he spent too much time on one subject. At that point Jamail left school, forged his parents’ signatures on an enlistment form and joined the Marines, spending 27 months oversees during World War II. But even in an outfit as strict as the Marines, Jamail found ways to get into trouble. He spent time in the brig for violating the terms of a 48-hour leave during basic training. Then, just when he thought he was about to be discharged it was determined that he owed the Marines 30 more days – payment for getting drunk and driving a jeep into an officer’s barracks, not to mention doing so while on guard duty.
But Jamail can also thank the Marines for a lot. Those five Fs from his freshman year at Texas were going to be a deterrent to getting into law school. Jamail went to see a Dean at the University of Texas who had been a Major in the Army during the First World War. Jamail explained that he had left school to join the Marines. The Dean told him that his only nephew had been killed in the Marine Corps. The next thing Jamail knew, the Dean was signing five drop-slips that had been back-dated to 1942 and Jamail was soon enrolled in the University of Texas Law School.
Law school didn’t fare any better than the Marines in teaching Jamail to do as he was told. He finished school and went to work for the law firm that would become Fulbright and Jaworski. Jamail described his first day at the firm in My Trials and Jubilations: “This fierce-looking woman opened the office door and laid down a list of rules: ‘You will not sign any documents that leave this office. You will use this stamp. You will not this and you will not that.’” Jamail quit. His career there lasted twenty minutes.
After a brief stint in the Houston District Attorney’s office, Jamail went into private practice, describing himself as a “sore-back lawyer.” Of course, his cases went on to involve much more than sore backs. As I mentioned, Jamail has rung the bell for $14 billion in his career. According to My Trials and Jubilations, he has been lead counsel in over 200 personal injury cases where recovery by verdict or settlement was in excess of $1,000,000. And that statistic comes from a book that was published a decade ago. Jamail has tried over 500 cases. Three of his cases resulted in product recalls – Remington 660; Honda All Terrain Three-Wheel Vehicle; and prescription drug Parlodel. To be sure, Jamail is a trial lawyer. As he told the ABA Journal in 2009, “They invented this new term ‘litigator.’ What the &%$#@* is a litigator?”
What made Jamail a household name (even more than he was) was his 1985 verdict in Pennzoil Company v. Texaco, Inc. On its face it has the appearance of being a very complicated case. Pennzoil sued Texaco for fraudulently inducing Getty Oil to break a contract that would have given Pennzoil one billion barrels of oil reserves. The trial lasted five and one-half months and produced 25,000 pages of trial transcript. But Jamail made it easy to understand, turning it into a case with a simple theme – keeping your word. In the end the jury awarded Pennzoil $7.53 billion in compensatory damages and $3 billion in punitive damages. With interest the total ball of wax was $11.12 billion – the largest civil award in history. What’s even more staggering than $11 billion is that we’re talking here about 1985. That was back in the day when a billion dollars was so unusual that it was common to add the clarifier – that’s a billion with a B.
Jamail has been dubbed “The King of Torts” by The Washington Post, Chicago Tribune and others. I asked Jamail if he thinks it’s more difficult for him to try cases with his reputation because his adversary may work twice as hard to win as it would be a trophy to say that they beat Joe Jamail. His response was immediate. “I don’t think it. I know it!”
In the first part of My Trials and Jubilations, Jamail sets out vignettes – three, four, five pages each – about some of his cases. They generally involve ones where Jamail has represented people who have been seriously injured by a variety of causes. Some of them resulted in what were record verdicts at the time. But they have something else in common other than Jamail securing compensation for his clients. You can tell from Jamail’s descriptions of them that he had an emotional attachment to his client. Jamail told me that students are taught in law school not to become emotionally attached to their cases. “&%$#@*,” he said. He has been quoted as saying that if you are not emotionally involved, your client is not getting your best effort. Unless you are emotionally involved, Jamail told me, you can’t make the jury feel involved in the case. Along these lines, Jamail said that, as a trial lawyer, you must bring all of your life’s experiences to the courtroom. This is how you come to understand what motivates people and to get the jury to react a certain way.
Jamail makes clear in his book that he doesn’t set out to bankrupt companies. Although he was quick to point out to me that he has done it three times. All bankruptcy does is make it more complicated to collect a judgment he told me. That being so, much of Jamail’s clients’ money has surely been paid by insurers. I asked him what percentage of his $14 billion in judgments and settlements has come in the form of checks written by insurance companies. He went silent. I could hear him thinking over the phone. Finally, after this long pause, he proclaimed: “&%$#@*. I never thought about that.”
You can’t talk about Joe Jamail’s money without also talking about how much of it he has given away. A lot. Much of it to the University of Texas. According to an ESPN story from a couple of years ago, Jamail and his late wife, Lee, have given away $230 million. And while Jamail has a college football stadium named for him, athletic funding is just a small piece. He told ESPN that for every dollar he’s given to athletics, about 27 have been given to higher education or medical research.
It’s hard to keep track of it all, but there’s the Lee and Joe Jamail Texas Swimming Center, Joseph D. Jamail Center for Legal Research, Lee Hage Jamail Academic Room, Joseph D. Jamail Pavilion and thousands of students owe their University of Texas education to scholarship money provided by the Jamails. Also, according to the ESPN story, one-in-three graduate nursing students are on Jamail scholarships. And then there’s the University of Texas Law School, where the library has benefited from the Jamails’ generosity, as well as support helping to fund more than ten academic chairs, five professorships and several student scholarships. And somewhere along the way Rice, Texas Southern and skateboarders in Houston have benefitted from the Jamails’ philanthropy. [According to awesome-skateboard.com, the Lee and Joe Jamail Skatepark, built in 2008, is “huge and totally rad.” Jamail contributed $1.5 million toward the $2.7 million project.]
The University of Texas Longhorns football team plays its games in the Darrell K. Royal-Texas Memorial Stadium at Joe Jamail Field. When someone has a 100,000 seat football stadium named for them there is one question that has to be asked – where do you sit for games? Jamail told me that he has a suite on the 40 yard line, next to the athletic director and he can host 15 or 16 guests per game. It’s “quite nice” he said. And he also told me that he pays for it. After listening to his description of the suite I responded: “Mr. Jamail, I was expecting you to say ‘Anywhere I &%$#@* want.’” “Well I can,” he said. “But I’m not going to say that.”
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Vol. 3, Iss. 6
April 1, 2014
Randy Spencer’s Open Mic:
When Insurance Coverage Stinks
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Last week a California federal court held that no coverage was owed to Mixt Greens, a restaurant located in San Francisco, for damages that it allegedly caused to a neighboring restaurant, Murphy’s Deli. Murphy’s beef -- the offensive odor of Mixt Greens’s cooking oil was passing through the ventilation system and into Murphy’s. Travelers Prop. & Cas. Co. v. Mixt Greens, Inc., No. 13-957 (N.D. Cal. Mar. 25, 2014).
[Talk about the pot calling the kettle black. While I love the smell of a deli, not everyone compares the combined odor of corned beef and herring to the aroma of the fragrance counter at Nordstrom. In one of my all-time favorite coverage cases, in 2010, a federal court in New York made a judicial pronouncement about deli smells. The court held in Greengrass v. Lumbermans Mut. Cas. Co. that the pollution exclusion did not apply to odors emanating from the “King of Sturgeon’s” delicatessen. In support of its decision the court noted that, according to Zagat’s restaurant guide, “[t]he smells alone are worth the price of admission.” The Second Circuit affirmed.]
Back to Mixt Greens, where the court held that the odors emitted from the ducts into Murphy’s Deli should not be deemed a “loss of use of tangible property.” “Here, the Underlying Action does not involve any potential liability for damages on account of ‘property damage’ as that term is defined in the Mixt Greens policy. The only damages Cal–Murphy seeks from Mixt Greens in the Underlying Action are for economic losses. The fact that Cal–Murphy does not seek to recover the cost of repairing or replacing any tangible property, and that no part of its restaurant was ever closed because of the odors—not even for an hour—compels the conclusion that Cal–Murphy’s losses, which are purely economic, are not covered under the policy and Travelers is not obligated to defend Mixt Greens or Hines/NOP in the Underlying Action.” Mixt Greens got tossed.
Seeing the Mixt Greens decision immediately made me think of the granddaddy of all odor coverage cases: the 11th Circuit’s 2011 decision in Maxine Furs, Inc. v. Auto-Owners Insurance Company.
In Maxine Furs, the court held that the aroma of Indian food was a pollutant within the terms of a pollution exclusion. Despite its best effort to curry favor with the court, the policyholder was shown the tandoori. It is a decision that the policyholder will no doubt describe as papa-dumb. Of course, the insurer knew all along that the policyholder was going to vindallose. Let’s tikka look at why.
Maxine Furs is a fur shop located next door to an Indian restaurant. Because the two establishments shared air-conditioning ducts, Maxine’s furs soon began to smell like curry. Maxine had the affected furs cleaned and then made a claim with Auto-Owners Insurance Company. Auto-Owners denied coverage based on the absolute pollution exclusion clause in Maxine’s policy. Maxine sued. The district court concluded that coverage was excluded.
The parties disagreed whether curry aroma was a pollutant. The court looked to the policy’s definition of pollutant, in conjunction with the applicable standard for interpreting a policy, and concluded that it did “not think that a person of ordinary intelligence could reasonably conclude that curry aroma is not a contaminant under these circumstances.”
The court explained: “A contaminant is something that “soil[s], stain[s], corrupt[s], or infect[s] by contact or association.” Webster’s Third New International Dictionary 491 (1986). Indeed, what happened here is that the curry aroma soiled Maxine’s furs. Otherwise, they would not have needed cleaning. We do not think that a reasonable person could conclude otherwise. Accordingly, we conclude that curry aroma is a pollutant under the policy.” Lastly, the court concluded that the “wafting” of the curry aroma satisfied the “migrating, seeping, or escaping” requirement of the pollution exclusion.
Mumbai for now. See you next issue.
That’s my time. I’m Randy Spencer.
Contact Randy Spencer at Randy.Spencer@coverageopinions.info
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Vol. 3, Iss. 6
April 1, 2014
When April Fools’ Day Goes To Court
The Wall Street Journal And Harrods Go To War Over A Joke
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Most April Fools’ Day jokes end with a good natured laugh between the fooler and the foolee. But, this being the land where baseball and litigation are competing for title of National Pastime, you have to expect that some April Fools’ jokes do not end right there on the first of the month. When it comes to April Fools’ Day litigation, one type of case stands out as being particularly abundant – parodies appearing in newspapers. Some are student papers and some general circulation. In general, the target of the April Fools’ joke doesn’t find it funny and it’s off to the races for the lawyers. One newspaper case in particular led to an international dispute, with litigation filed on both sides of the Atlantic, involving complex constitutional and jurisdictional issues, and opinions issued by a federal district court and the Second Circuit.
But before getting to that, take a quick look at my favorite April Fools’ Day case involving a student newspaper. In Lange v. Diercks, 808 N.W.2d 754 (Iowa Ct. App. 2011), the court addressed whether articles in an April Fools’ Day edition of a high school student newspaper encouraged students to “potentially commit unlawful acts, violate school regulations, or cause material and substantial disruption to the orderly operation of the school.” It sounds like the parody edition of the newspaper was encouraging students to blow up the school -- and providing them with the materials. Well, not exactly. Consider this capital offense that the students committed. There was a quote from one student who said he would “like to go to a Chippendale’s tryout” after graduation. As the school principal saw it - the publication of the word “Chippendales” encouraged students to come into school and take off their clothes. And there were other jokes in the parody edition of the newspaper that were just as innocuous, yet just as ridiculously viewed by the school district as creating a risk of anarchy. Thankfully the students won and the newspaper’s faculty advisor had the reprimands removed from his file.
But not all April 1st newspaper parodies are this small scale. Consider what happened when the world’s most famous newspaper and the world’s most famous department store got into a tussle over an April Fools’ Day joke. This story comes from Dow Jones & Co., Inc. v. Harrods, Ltd., 237 F. Supp. 2d 394 (S.D.N.Y. 2002).
Harrods, the well-known department store in London, issued a press release on March 31, 2002 headlined “Al Fayed Reveals Plan to ‘Float’ Harrods.” “The release stated that Al Fayed, Harrods’ Chairman and effective owner, would issue on the following day an important announcement ‘about his future plans for the world-famous store,’ including a first-come-first-served share option offer. Journalists seeking further comment were directed to contact ‘Loof Lirpa’ at Harrods. In fact, ‘Loof Lirpa’ is ‘April Fool’ spelled backward. On April 1, 2002, the planned announcement posted on the designated website described Al Fayed’s decision to ‘float’ Harrods by building a ship version of the store to be moored in London on the embankment of the Thames River. The announcement included a limited offer of ‘shares in this exciting new venture.’ Persons who registered on the website by noon that day, ‘the first of April!’, were promised ‘a share certificate.’”
The Wall Street Journal got taken by the joke. It read the March 31 press release as purporting to announce that Harrods planned to ‘float shares,’ i.e., a public offering of stock. Rather than wait to see Harrods’ actual disclosure on the next day, it published an article, in the print editions of the Journal, and on the Journal’s website, reporting that Harrods would disclose plans that day to publicly list the company’s shares.
The story doesn’t end there. It’s just getting warmed up, in fact. “Upon learning that Harrods’ announcement had been an April Fools’ joke, the Journal published a correction so advising its readers in an item that appeared in its April 2, 2002 print editions in the United States as well as on WSJ.com. Three days later, Dow Jones countered with a story it asserts was intended as the Journal’s own brand of wry, light-hearted humor. . . . The Journal’s ‘Deals & Deal Makers: Bids & Offers’ column on April 5, 2002 published an item entitled ‘The Enron of Britain?’ The first sentence of the April 5 Article, which appeared in the Journal’s United States print edition and on WSJ.com, states that: ‘If Harrods, the British luxury retailer, ever goes public, investors would be wise to question its every disclosure.’ It then detailed the April Fool’s joke, which the story reported had been mistaken by ‘some news organizations’ as an announcement of a plan to sell Harrods shares publicly. Dubbing the prank ‘[n]ot exactly Monty Python-level stuff,’ the column questioned whether Harrods could ‘get in trouble for messing with the facts?’ by issuing the bogus press announcement.”
Enter the lawyers. Or, as the court put it so eloquently: “Promptly the face of comedy began to furrow and its smile to curl into what often becomes tragedy’s first sour frowns and snarls: incipient litigation.” Harrods did not see any humor in the Journal’s article, especially the part about linking Harrods, “a law abiding and historic British institution,” as it referred to itself, with Enron. Dow Jones and Harrods next engaged in back and forth letter writing in which they argued over the Journal’s article and whether it was defamatory. Dow Jones maintained that the mention of Enron merely reflected “tongue-in-cheek hyperbole.” Harrods called Dow Jones’s contention that the article was meant to be humorous as “simply an incredible, if not bizarre, assertion.” Harrods demanded a published apology. Dow Jones continued to maintain that the article contained only “non-actionable opinion” and it repeated a willingness to publish a letter to the editor if Harrods submitted one.
On May 24, 2002, Dow Jones commenced a declaratory judgment action against Harrods and Al Fayed in the Southern District of New York. Harrods instituted litigation in the High Court of Justice in London on May 29, 2002. To make a very long story short, the New York federal court addressed whether it had jurisdiction. In an opinion that is 59 Westlaw pages long (that’s monster-size in case you don’t use Westlaw), and as complex as it is long, the court held that it did not have jurisdiction. The Second Circuit, in a mere two Westlaw page opinion, affirmed.
So how did the story turn out? According to a February 17, 2004 article on UK newspaper The Guardian’s website, the case went to trial in England and the jury found for Dow Jones. Harrods was ordered to pay Dow Jones’s legal fees. According to the article, Mr. Fayed said in a statement: “I was not concerned with winning damages in this case; I simply wanted the Wall Street Journal to accept its comparison was unwarranted and to apologise to me and to Harrods. It seems that the Wall Street Journal does not have the simple good manners and grace to do this.”
It came out during the trial that there were only ten subscribers to the U.S. version of the Wall Street Journal in Britain and there had been only twelve hits on the article on the Journal website by September 2002. I’m guessing that Harrods does not carry the paper. |
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Vol. 3, Iss. 6
April 1, 2014 |
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Article: “The Ten Habits of Highly Effective Coverage Adjusters”
Kevin Quinley, of Quinley Risk Associates LLC, a claims consultant, trainer and expert witness, published “The Ten Habits of Highly Effective Coverage Adjusters” in the December 2013 issue of the CPCU Society’s Claims Quorum. It is a very worthwhile read. Check it out (republished here with the permission of The CPCU Society).Click Here
Court Holds That State Farm’s “Good Neighbor” Slogan Is Just Opinion Or Puffery
You gotta do what you gotta do to try to win a coverage case. But in Broadway v. State Farm, No. 13-628 (M.D. Ala. Mar. 19, 2014) an insured pushed it too hard. The court was woefully unimpressed with the insured’s efforts, even going so far as to say: “If arguments had feelings, this one would be embarrassed to be here.”
Joe Broadway [man what a cool name] attempted to bring a fraud claim against State Farm on the basis that the company advertises itself to its customers and potential customers as a “Good Neighbor.” Broadway Joe asserted that State Farm’s advertising slogan, “Like a good neighbor, State Farm is there,” induced him to purchase an auto insurance policy through State Farm. He alleged that the Good Neighbor slogan was a representation that State Farm treats its customers with respect to their insurance claims on a fair, reasonable and good faith basis. This, he alleged, did not happen with respect to State Farm not paying the limit of his UIM benefit.
The court was not persuaded, to say the least, holding: “The Court need go no further in its analysis of Broadway’s fraud claim because he can prove no set of facts in support of his claim that State Farm’s ‘Good Neighbor’ slogan is anything other than mere opinion or puffery, and, hence, not a statement of material fact.” In reaching this conclusion, the court cited to the Connecticut federal court’s 2010 decision in Loubier v. Allstate Ins. Co., where the court held that “any fraud claim premised on Allstate’s ‘good hands’ advertising slogan must be dismissed.” Really, I didn’t make that last part up.
Salisbury’s Blog Post: Alabama Supreme Court Joins The List Of High Courts To Re-think Construction Defect Coverage
On March 28, the Alabama Supreme Court addressed coverage for construction defects in Owner’s Ins. Co. v. Jim Carr Homebuilders. The court withdrew its September 20, 2013 opinion in the case and substituted its new one.
Here’s how Carl Salisbury described the Jim Carr Homebuilders II decision in his immediately posted entry on the Kilpatrick Townsend “Global Insurance Recovery Blog:” “The Alabama Supreme Court left the ranks of the outlier courts on Friday, holding that faulty workmanship can be a covered ‘occurrence’ under Commercial General Liability insurance policies. And it did so by the method that so many other courts used during the past twelve months to reach the same conclusion: It reconsidered and reversed a recent prior decision that had reached the opposite result. Is the trend among State Supreme Courts on this issue now officially a movement?”
I don’t know how Carl is doing in his NCAA Tournament pool, but he got this prediction right in the January 8, 2014 issue of Coverage Opinions, where he stated: “It is hard to remember the last time four state high courts reached the same conclusion on the same contentious question in four months -- doubly so when three of them overruled prior decisions to get there. The willingness of so many state Supreme Courts to revisit what was, for them, a settled issue, and to reverse themselves on the strength of the majority decisions of their sister courts, suggests that the remaining outliers – those courts that cling to the minority view that faulty workmanship can never be accidental – may yet see their own way clear to correcting prior erroneous precedent on this issue.”
Check out Carl post on his firm’s “Global Insurance Recovery Blog.”
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Vol. 3, Iss. 6
April 1, 2014
Brain Teaser:
Court Addresses Whether Damages Caused By A Slurpee Brain Freeze Are Covered
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Sometimes coverage cases are so crazy that they can’t possibly be true. That’s the only way I can describe the Florida court’s recent decision in Gator State Property Casualty Corp. v. 7-Eleven Franchise.
Skeeter Martin, an eleventh grader, was walking home from school in Tallahassee when he stopped into a 7-Eleven store to pick up a couple of Slim Jims. Skeeter waited in line at the cashier, which was located not far from the Slurpee machine. While usually not a Slurpee drinker, the machine grabbed his attention because any large Slurpee purchased came in a collectible Nascar cup. Being a Nascar fan Skeeter got out of line and filled a large plastic cup with a mango flavored Slurpee. He took a large sip and within seconds was overcome by a Slurpee Brain Freeze. [In general, a brain freeze is the painful effect of the rapid cooling and rewarming of the capillaries in the sinuses.]
As luck would have it, or, in this case, bad luck, the next day Skeeter was scheduled to take the SAT exam. He sat for the exam. The results came back and they were not good. Not at all. Skeeter did horribly. His score was lower, significantly lower, than every practice exam he had taken. The consequences were severe. Skeeter lost all hope of getting into Dartmouth.
Skeeter’s low score on the exam simply made no sense whatsoever. He struggled for an answer and then, finally, hit upon it. The day before the SAT he had had that Slurpee. And it resulted in a bad case of Slurpee Brain Freeze. So no wonder he did so poorly on the SAT – his brain had been frozen.
Skeeter sued 7-Eleven for the damages that he allegedly sustained on account of the Slurpee Brain Freeze. The case went to trial. His vocational expert testified that Skeeter’s loss of earnings, over a 45 year career, on account of attending a less prestigious university, would be $2.5 million. The jury awarded Skeeter $2.5 million plus pre-judgment interest.
The 7-Eleven franchise was insured under a commercial general liability policy issued by Gator State Property & Casualty Company. Gator State had defended 7-Eleven under a reservation of rights. The insurer now filed a declaratory judgment action against 7-Eleven seeking a determination that it had no duty to indemnify 7-Eleven for Skeeter’s judgment. Gator State’s argument was that 7-Eleven was aware that Slurpees can cause brain freeze so, therefore, Skeeter’s damages were not covered because they were expected or intended.
Gator State and 7-Eleven filed cross motions for summary judgment. I can’t possibly describe how the court resolved this brain teaser. To see who won check out the court’s opinion here.
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Vol. 3, Iss. 6
April 1, 2014
CGL And Data Breach:
Taking A Different Approach Than –
Is There Publication Of Material That Violates A Person’s Right Of Privacy?
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Lately the coverage world has been abuzz over the New York trial court’s decision in Zurich American Ins. Co. v. Sony Corp. of America -- the first decision to address in earnest whether a commercial general liability policy provides coverage for the loss of a company’s customers’ personally identifiable information on account of a hacking incident. Not since the Betamax has anything involving Sony generated this much interest.
Insurers generally argue that such hacking incidents are not covered under a CGL policy and policyholders should look to stand-alone Cyber Liability policies for redress. Policyholders say not so fast. They maintain that the loss of personally identifiable information qualifies for coverage under the “personal and advertising injury” section of a CGL policy because it is “oral or written publication, in any manner, of material that violates a person’s right of privacy.”
This issue has been debated at length and the Sony decision has been analyzed more than the Federalist Papers by counsel working in this area that are looking for any guidance on what impact the decision may have on the future landscape.
It is understandable that the Sony decision (actually, a lengthy argument transcript) is generating so much attention. The question whether a commercial general liability policy provides coverage, for the loss of personally identifiable information, on account of a data breach, is here to stay – at least for the moment. Data breaches are on the rise. The purchase rate of Cyber Liability policies is not high. And while ISO is soon to be introducing Data Breach exclusions as part of a CGL policy, it will take a little time before the impact of them is felt.
For all of these reasons, whether the loss of personally identifiable information, on account of a data breach, qualifies as “oral or written publication, in any manner, of material that violates a person’s right of privacy” is going to continue to generate interest. But what if there’s another way to address the issue? Take a look at National Union Fire Ins. Co. v. Coinstar, Inc., No. 13-1014 (W.D. Wash. Feb. 28, 2014).
While the Washington federal court’s decision in Coinstar is not a hacking coverage case, it does involve the release of a company’s customers’ personally identifiable information. And the court addressed the coverage issue without analyzing whether it was publication of material that violated a person’s right of privacy.
The case goes like this. “Redbox operates automated DVD-vending machines in various locations around the United States. In order to obtain a rental DVD, Blu-ray disc, or video game from a Redbox vending machine, customers input their personal information into the digital record system on the machines and pay via credit card.” Plaintiffs in an Underlying Action alleged that “Redbox maintains customers’ ‘personally identifiable information,’ including their name, billing and contact information, credit card numbers, and video rental history for indefinite periods of time after customers obtain rentals from Redbox kiosks. The [underlying] complaint further alleges that Redbox uses customers’ personal information for marketing purposes and discloses customers’ personal information to third parties without their express permission. Plaintiffs allege that this retention and disclosure of their personal information violates the [Video Privacy Protection Act].”
Redbox sought coverage under commercial general liability policies issued to Coinstar, Redbox’s parent. The court noted that the policies provided coverage for “oral or written publication, in any manner, of material that violates a person’s right of privacy.” However, the court did not address this aspect of the policy because it concluded that the exclusion for “Violation of Statutes in Connection with Sending, Transmitting, or Communicating Any Material Or Information” applied. This exclusion provided: “This insurance does not apply to any loss, injury, damage, claim, suit, cost or expense arising out of or resulting from, caused directly or indirectly, in whole or in part by, any act that violates any statute, ordinance or regulation of any federal, state or local government, including any amendment of or addition to such laws, that addresses or applies to the sending, transmitting or communicating of any material or information, by any means whatsoever.”
The court noted that “[t]he sole purpose of the VPPA is to protect consumers’ privacy by prohibiting the ‘sending, transmitting or communicating’ of their personal information ‘to any person’ except in specific, limited circumstances.” Thus, the court concluded, “any potential liability for Redbox would arise only from ‘act[s] that violate a[ ] statute that addresses or applies to the sending, transmitting or communicating of ... material or information.’” Therefore, the court held that, under the unambiguous terms of the exclusion, there was no basis for Redbox to obtain coverage.
How is this relevant to a data breach, on account of a hacking incident, that results in the loss of a company’s customers’ personally identifiable information? A data breach is likely to result in a claim that an insured violated a statute, ordinance or regulation that addresses or applies to the sending, transmitting or communicating of any material or information. There are certainty statutes on the books that could apply to loss of individuals’ personally identifiable information. At a minimum there are statutes that require the giving of timely notice to affected individuals. Indeed, such statutes are likely attractive to plaintiffs in data breach cases as they may include a provision that allows for an award of attorney’s fees.
Thus, the exclusion for “Violation of Statutes in Connection with Sending, Transmitting, or Communicating Any Material Or Information” could apply to a statutory claim related to the loss of a company’s customers’ personally identifiable information. But, you say, a hacking incident is different, because the hacker’s actions do not qualify as “sending, transmitting or communicating” of personally identifiable information. Why not? The exclusion does not state that it had to be the insured who did the sending, transmitting or communicating of material or information. Further, the exclusion states that the sending, transmitting or communicating of material or information could be “by any means whatsoever.” A hacker’s actions, that give rise to sending, transmitting or communicating, is by any means whatsoever. |
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Vol. 3, Iss. 6
April 1, 2014
Court Addresses “Publication” Of Personal Information – Possible Impact On The CGL-Data Breach Issue
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As discussed in the previous article, the potential availability of coverage, under a commercial general liability policy, for the loss of a company’s customers’ personally identifiable information, on account of a data breach, is the “It” issue these days. With very little case law on point, any decision that may shed even some light, or provide just some guidance – even if its factual underpinning is not a data breach -- is worthy of attention. One type of case that falls into this category is where the court addresses the meaning of the term “publication.” This is so because policyholders argue that the loss of personally identifiable information qualifies for coverage, under the “personal and advertising injury” section of a CGL policy, because it is “oral or written publication, in any manner, of material that violates a person’s right of privacy.”
For this reason, the Indiana federal court’s decision in Defender Security Company v. First Mercury Ins. Co., No. 13-245 (S.D. Ind. Mar. 14, 2014) is worthy of a look-see. This is especially so because Defender Security isn’t just any case that involves the definition of “publication.” It involves whether there has been publication of a person’s personal information.
At issue in the case was the availability of coverage for Defender Security for allegedly violating a California Penal Code section which prohibits the recording of confidential communications made by telephone without the consent of all parties to the communication. Specifically, it was alleged that Kami Brown “called the toll free telephone number for Protect Your Home printed on an advertisement for a promotional offer for ADT Security Services disseminated by Defender. During the call with Defender, Ms. Brown ‘shared personal information,’ including her full name and zip code, but was neither informed that the call would be recorded nor did she give her consent for such a recording. . . . According to the Brown Complaint, Defender used ‘Call Recording Technology’ that enabled it ‘to record all of its telephonic telephone conversations with consumers, and allowed them to store these recordings for various business purposes.’”
At you would expect, Defender Security sought coverage under the “personal and advertising injury” section of its commercial general liability policy, on the basis that the allegations against it qualified as “oral or written publication of material that violates a person’s right of privacy.”
In support of its position that there had been a “publication,” Defender Security argued that the Indiana Supreme Court has recognized that publication can consist of communication to just one individual. Defender Security also argued that the fact that the underlying complaint “alleged that Defender stores the recordings ‘for various business purposes’ implies that a third party will be listening to the recordings and that they are thus being produced for distribution to at least one person.”
The court was not persuaded and held that the claim was excluded: “This is at best a strained interpretation. Even accepting Defender’s definitions of ‘publication,’ the allegations contained in the Brown Complaint clearly do not fall within its terms. As First Mercury argues, the allegation that Ms. Brown shared personal information with Defender during her call establishes at most only that she published information about herself, not that Defender published information about her. Assuming the truth of Ms. Brown’s allegation that Defender utilized ‘Call Recording Technology’ to store the recording of her telephone call likewise shows merely that Defender maintained a record of the call, not that it communicated the content of the recording to anyone. Similarly, the allegation that Defender’s employees and representatives were trained and directed to record conversations with consumers establishes only that recordings of telephone calls occurred, not that the recorded information was distributed, sold, or shared with any other individual or entity.” (emphasis in original).
After its motion was fully briefed, Defender filed a notice of supplemental authority, based on the Southern District of Ohio’s decision in Encore Receivable Management, Inc. v. ACE Property and Casualty Insurance Company. Encore Receivable involved “insurance coverage disputes relating to two underlying lawsuits about call centers allegedly recording telephone conversations without customer consent and whether or not the underlying lawsuits fell within the Personal and Advertising Injury coverage provisions of the policies at issue. The Encore Court held that the underlying lawsuits did fall within the coverage provisions of the insurance policies at issue even though there was no allegation that the recordings were disseminated to the public because it determined that ‘publication’ occurred ‘at the very moment that the conversation is disseminated or transmitted to the recording device.’”
The Defender Security court declined to follow Encore Receivable. First, the court noted that the decision is currently on appeal to the Sixth Circuit. Second, the Defender Security court stated that it was not bound by Encore, not to mention that it just didn’t agree with it.
I addressed Encore Receivable in Coverage Opinions (July 24, 2014). There I concluded as follows: “[I]t is possible for a data breach, especially in a hacking situation, to result in no dissemination of customers’ personal identification information. At most, the information is exposed, or could be exposed, to the hacker, but it never reaches the general public at large. But that does not mean that the company will not be sued out the ying-yang. It will likely be alleged that the customers need to be provided with credit monitoring services, so they can be on the look-out for unauthorized use of their information. No doubt the suit will allege the violation of a statute that allows for an award of attorneys’ fees. In such cases, insurers can be expected to argue that “personal and advertising injury” coverage is not available because there has been no publication, in any manner, of material that violates a person’s right of privacy. However, the court in Encore Receivable held that, when it comes to secret information – which is what would likely be at issue in a data breach situation -- it does not have to be widely disseminated to constitute publication. Thus, while Encore has nothing at all to do with cyber liability or coverage, the court’s holding will likely provide an opportunity for it to be used by a company that has been hacked and now needs to put its square peg of a claim into the round role of its commercial general liability policy.”
This same analysis, but with the opposite conclusion, may apply here with respect to Defender Security Company v. First Mercury. In a hacking situation, where, at most, the only dissemination of customers’ personal identification information was that it was exposed, or could be exposed, to the hacker, but not to the general public at large, Defender Security supports an argument that there has been no “publication.”
Either way, this much can be said with certainty. With very little case law addressing the potential availability of coverage, under a commercial general liability policy, for the loss of personally identifiable information, on account of a data breach, any decision that addresses the meaning of the term “publication,” regardless of its facts, is going to be scrutinized for guidance on the issue. |
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Vol. 3, Iss. 6
April 1, 2014
The “True Facts” Exception To The Four Corners-Duty To Defend Rule
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By my count, about 35 or so states, give or take, allow for the consideration of extrinsic evidence, in one form or another, to determine an insurer’s duty to defend. In other words, they allow for the consideration of information, beyond what’s contained in the complaint itself, to determine if an insurer has a duty to defend. Such pronouncements are often stated as nice-sounding general rules; but there is a paucity of guidance about just how they operate. See Talen v. Employers Mut. Cas. Co., 703 N.W.2d 395, 406 (Iowa 2005) (“The scope of inquiry [for the duty to defend] . . . [includes] the pleadings of the injured party and any other admissible and relevant facts in the record.”); Am. Bumper & Mfg. Co. v. Hartford Fire Ins. Co., 550 N.W.2d 475, 481 (Mich. 1996) (“The insurer has the duty to look behind the third party’s allegations to analyze whether coverage is possible.”); Garvis v. Employers Mut. Cas. Co., 497 N.W.2d 254, 258 (Minn. 1993) (stating that the determination of the duty to defend includes consideration of facts of which the insurer is “aware”); Farmland Mut. Ins. Co. v. Scruggs, 886 So. 2d 714, 719 n.2 (Miss. 2004) (holding that, in determining whether an insurer has a duty to defend, an insurer may consider those “true facts [that] are inconsistent with the complaint,” the insured brought to the insurer’s attention); Peterson v. Ohio Cas. Group, 724 N.W.2d 765, 773–74 (Neb. 2006) (finding that a duty to defend exists where the “actual facts” reveal such a duty exists); Am. Gen. Fire & Cas. Co. v. Progressive Cas. Co., 799 P.2d 1113, 1116 (N.M. 1990) (“The duty of an insurer to defend arises from the allegations on the face of the complaint or from the known but unpleaded factual basis of the claim.”); State Farm Fire & Cas. Co. v. Harbert, 741 N.W.2d 228, 234 (S.D. 2007) (“[T]he issue of whether an insurer has a duty to defend is determined by . . . ‘other evidence of record.’”).
Mississippi is a state that allows for the consideration of extrinsic evidence to determine if an insurer has a duty to defend. In Nationwide Insurance v. Lexington Relocation Services, No. 12-181 (N.D. Miss. Mar. 24, 2014) the Mississippi federal court provided some guidance on how its extrinsic evidence rule works. The decision is lacking in some detail that could have made it even more helpful, but when it comes to this issue you take what you can get.
The Lexington Relocation court addressed whether an insurer had a duty to defend an insured in some sort of non-compete action arising out of one company hiring another company’s former employee. The insurer alleged that it had no duty to defend its insured. The court observed that, under Mississippi law, an insurer’s duty to defend hinges on the allegations in the underlying complaint. However, a “court may consider facts not contained in the underlying pleadings where the insurer is ‘presented with extrinsic facts, of which the insurer has knowledge or could obtain knowledge by means of a reasonable investigation, that trigger coverage under the policy.’ However, a ‘true facts’ analysis is a ‘narrow exception’ to the general rule.” The Lexington Relocation court stated that the “Mississippi Supreme Court has held that if an insured submits uncontroverted, competent evidence establishing the falsity of the pertinent allegations in the complaint, the insured has provided ‘true facts’ under the exception.”
So what constitutes “true facts” to be considered an exception to the rule that the duty to defend is limited to consideration of the allegations in the complaint? The Lexington Relocation court provided this answer: “[T]he insured cannot establish ‘true facts’ by merely denying the allegations in the underlying complaint. . . . The alleged ‘true facts’ under the ‘extrinsic facts’ exception must be supported by competent summary judgment evidence and must constitute a ‘fact,’ not merely a denial of liability. See Natchez Steam Laundry, 131 F.3d at 553 (rejecting as ‘true facts’ insured’s assertion to insurance company that actions alleged were unintentional and therefore covered by the insurance policy). As the Natchez Steam Laundry court explained, if courts deemed such an assertion to be sufficient under Mavar, every insured could simply deny the allegations in the underlying complaint and thereby ‘eviscerate Mississippi’s general rule—that an insurer can determine whether it has a duty to defend by comparing the complaint to the policy.’” |
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