Insurance Coverage for Wrongful Incarceration Cases in New Jersey

By and on November 21, 2016

The third jurisdiction we address pertaining to wrongful incarceration coverage issues is New Jersey, which has three relevant cases. New Jersey courts have held that for purposes of determining the existence of insurance coverage under a general liability policy, in the absence of any applicable exclusion, the triggering event occurs on the date when the underlying criminal complaint is filed against the claimant. However, when determining coverage for a municipal insured’s obligation to indemnify its employee for fees incurred in defending against criminal charges, as required by specific statutes, the triggering event is not the filing of criminal charges against the employee, but rather the acquittal or dismissal of those charges against the employee.

The first of the malicious prosecution cases is Muller Fuel Oil Co. v. Ins. Co. of North America, 232 A.2d 168 (N.J. Super. Ct. App. Div. 1967), in which the insured, Muller Fuel Oil Company (“Muller”), unsuccessfully filed a criminal complaint against Thomas Policastro (“Policastro”) for issuing a worthless check. Policastro was arrested in November 1961 and indicted in May 1962.  In December 1962, Muller purchased a CGL policy from Insurance Company of North America (“INA”). Thereafter, in March 1963, Policastro was acquitted of the criminal charges and quickly filed a malicious prosecution and false arrest suit against Muller.

Muller sought coverage from INA, claiming that Policastro’s lawsuit against it did not fully ripen until his acquittal in March 1963, and thus constituted an “occurrence” during INA’s policy period of December 1, 1962 to December 1, 1965. INA, on the other hand, denied coverage for Muller’s claim, contending that the criminal complaint that was the basis for Policastro’s malicious prosecution suit was filed by Muller prior to inception of the INA policy. Muller then sought a declaratory judgment that coverage existed under the policy.

On appeal from a New Jersey Superior Court ruling dismissing Muller’s complaint against INA, the Appellate Division affirmed the decision, finding that “[i]n a claim based on malicious prosecution the damage begins to flow from the very commencement of the tortious conduct – the making of the criminal complaint.” According to the Appellate Division, the allegedly tortious conduct and injury to the accused as a result of the malicious prosecution (arrest on November 1961) antedated the issuance of the policy (December 1, 1962) by more than year. As a result, there was no coverage under the INA policy.

The second malicious prosecution case is Paterson Tallow Co. v. Royal Globe Ins. Co. 89 N.J. 24, 444 A.2d 579 (1981). In Paterson, the New Jersey Supreme Court affirmed the judgment of the lower court that insurer Royal Globe Insurance Company (“Royal Globe”) was not obligated to defend the insured, Paterson Tallow Company (“Paterson”), because the complaint that resulted in the malicious prosecution action against Paterson was filed before the effective date of Royal Globe’s policy.

In Paterson, Paterson filed criminal charges in June 1969 against a former employee, James Brown (“Brown”), for theft. In October 1970, while the criminal charges were pending, Paterson purchased a CGL policy that provided coverage for bodily injury, property damage, and personal injury, including coverage for malicious prosecution. In March 1971, Brown was acquitted of all charges against him. Brown filed suit against Paterson in January 1977 alleging malicious prosecution, and Paterson tendered the claim to Royal Globe seeking coverage. Royal Globe denied coverage for the claim, in part, because “all the acts that were alleged to constitute malicious prosecution took place before the policy was issued in 1970.” In a subsequent declaratory judgment action, Paterson and Royal filed cross motions for summary judgment and Paterson asserted that it was entitled to coverage for the action because a crucial component of the malicious prosecution offense, specifically, termination of the criminal charges against Brown, occurred during Royal Globe’s policy period.

The trial court found the appellate court’s ruling in Muller (discussed above) dispositive and granted summary judgment in favor of Royal Globe. On appeal, the New Jersey Supreme Court held that “for the purpose of determining the existence of coverage under this type of policy, in the absence of any qualifying exclusion or exception the offense of malicious prosecution occurs on the date when the underlying [criminal] complaint is filed. Inasmuch as the [criminal complaint] in this case was filed before the effective date of the policy, we affirm the judgment of the Appellate Division denying coverage.”

The third case is slightly different in that it addressed coverage for an insured’s obligation to indemnify its employee for fees and costs the employee incurred defending against criminal charges against him that were ultimately found to be meritless. In Board of Education v. Utica Mut. Ins. Co., 798 A.2d 605 (N.J. 2002), the New Jersey Supreme Court was tasked with deciding whether it was the filing of criminal charges against an employee of a board of education, or the acquittal of dismissal of those charges, that triggered coverage under an insurance policy issued to satisfy the board’s statutory obligation to indemnify such employee. The trial court found that the triggering event was the acquittal or dismissal while the appellate court reversed and decided that the triggering event was the filing of criminal charges. On appeal, the New Jersey Supreme Court held that the triggering event is the acquittal or other disposition of the criminal charges in favor of the employee of the board of education.

This case involved a teacher, David Ford (“Ford”), employed by the Borough of Florham Park Board of Education (“Board”), who was arrested and charged with sexual assault and reckless endangerment of four of his students in June 1996. In March 1999, a jury acquitted Ford of all charges. Soon after, he demanded that the Board reimburse him nearly $500,000 in legal fees and expenses for successfully defending the criminal action pursuant to various New Jersey statutes that “…obligate a board of education to defray all costs incurred by an … employee of the board in defending criminal charges filed against the person whose charges: … (2) resulted in a final disposition in favor of such person.” The statute also authorized a board to purchase insurance to cover all such damages, losses and expenses the board may be obligated to pay.

The Board sought coverage from Selective Insurance Company (“Selective”) and Utica Mutual Insurance Company (“Utica”) for its indemnity obligation to Ford. At the time of Ford’s arrest, the Board was insured by Selective under a policy that provided coverage from July 1, 1993 to July 1, 1996. By endorsement, the Selective policy provided that “this Coverage Part shall conform to the terms of the New Jersey compiled statutes” discussed above. Utica insured the Board from July 1, 1996 to July 1, 1999, and contained a nearly identical endorsement provision as the Selective policy, incorporating the pertinent New Jersey statutes. Utica denied coverage to the Board because its policy was not in effect when Ford was criminally charged in June 1996. Selective denied coverage for any legal expenses that were incurred after its policy expired on July 1, 1996, and reserved the right to deny all coverage. The Board filed a declaratory judgment action against Selective and Utica.

The trigger issue was appealed to the New Jersey Supreme Court. The Court noted that both the Selective and Utica policies incorporated by reference the statutory language, which specified that an employee’s right to reimbursement accrues when “the criminal charges result in an acquittal or otherwise are dismissed.” The Court also noted that indemnification obligations generally accrue “only on an event fixing liability, rather than on preliminary events that eventually may lead to liability but have not yet occurred.” The Court held that the triggering event for coverage was the favorable disposition of all criminal charges against Ford. As a result, Utica’s policy was triggered since Ford incurred no reimbursable expenses prior to his acquittal. On the other hand, Selective had no coverage obligation as the Selective policy had expired by the time of Ford’s acquittal.

The Court distinguished its holding in Paterson and explained that when an insured seeks coverage related to its own conduct of initiating criminal charges against its employee, it is reasonable to use the conduct of the insured in filing the criminal charges as the “triggering event” to assess coverage for malicious prosecution. But in a statutory indemnification case, the “essence” of the claim is not the filing of the criminal charges.” Rather, the Board’s liability “is triggered by the event specified in the statutes, namely a final disposition of those charges in favor of the Board’s employee.”

In light of the cases discussed above, the New Jersey courts are fairly clear that the trigger of coverage in malicious prosecution and wrongful arrest cases is the filing of charges against the claimant. However, in cases involving coverage for statutory indemnification of fees and costs incurred in defending against a criminal prosecution case, the trigger of coverage is not filing of charges, but rather, acquittal of such charges. As is always the case, it is important to carefully review the applicable policy and understand the scope of coverage provided.

The next installment will review the law in Georgia. In the meantime, if there are any questions about another jurisdiction, please contact us (sallykim@gordonrees.com or sries@gordonrees.com) and we can address your questions directly.

Filed under California Insurance Code, Duty to Defend, Personal and Advertising Injury, Trigger of Coverage

Insurance Coverage for Wrongful Incarceration Cases in California

By and on October 11, 2016
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The second jurisdiction we will discuss pertaining to coverage issues arising out of claims for wrongful incarceration is California, which, like New York, has two pertinent decisions involving coverage for malicious prosecution cases. Unlike New York, however, the case law in California stems from civil cases, not criminal cases. Nonetheless, the Court of Appeal in California held that it makes no difference whether the case is civil or criminal in determining whether a claim for malicious prosecution implicates insurance coverage.

The first case is Harbor Insurance Company v. Central National Insurance Company, 165 Cal. App.3d 1029, 211 Cal. Rptr. 902 (1985), in which the insured, A.J. Industries, Inc. (“A.J.”) unsuccessfully prosecuted an action between 1971 and 1978 against its former president and chairman. When A.J. filed the action, it was insured by Zurich Insurance Company (“Zurich”) for a limit of $300,000 and by Harbor Insurance Company (“Harbor”) for $5,000,000. While the malicious action was pending (and until April 1, 1975), A.J. switched insurers and had primary insurance with Argonaut Insurance Company (“Argonaut”) and excess insurance with Midland Insurance Company (“Midland”).

On April 16, 1976, the former president and chairman filed an action against A.J. for malicious prosecution. By that point in time, A.J. was insured by Central National Insurance Company (“Central National”). A.J. nonetheless tendered its defense to Zurich.  Zurich accepted the tender and turned the matter for handling to Harbor, the concurrent excess carrier. Harbor defended the malicious prosecution action under reservation of rights, and also tendered the claim to Central National, Midland and Argonaut. After those insurers denied coverage, Harbor filed suit.

The issue addressed by the California Court of Appeal, Second Appellate District, was whether Argonaut’s or Midland’s policies provided coverage for the malicious prosecution lawsuit against A.J.

Argonaut’s policy provided coverage for damages because of “personal injury” sustained by any person arising out of an offense committed in the conduct of the named insured’s business.  The term “offense” included false arrest, detention or imprisonment, or malicious prosecution, if such offense is committed during the policy period. The Court of Appeal ruled that the “offense” of malicious prosecution is “committed” upon institution of the malicious action against the defendant. The court noted that the “gist of the tort is committed when the malicious action is commenced and the defendant is subjected to process or other injurious impact by the action.” In other words, “from both the tortfeasor’s and the victim’s standpoint the ‘offense’ is ‘committed’ upon initial prosecution of that action. At that point the tortfeasor has invoked the judicial process against the victim maliciously and without probable cause, and the victim has thereby suffered damage.” Because the malicious action was commenced before the Argonaut policy came into effect, the court held that there was no coverage under the policy.

The court rejected Harbor’s argument that the offense of malicious prosecution is a “continuing occurrence,” which is “committed” throughout the prosecution of the malicious action because it continues to cause damage until the action is terminated. The Court of Appeal noted that such an argument was a theoretical misunderstanding of the elements of the tort in that “[a]lthough continued proceedings after commencement of the action will increase and aggravate the defendant’s damages, the initial wrong and consequent harm have been committed upon commencement of the action and the initial impact thereof on the defendant.”

The Court then addressed the two Midland policies, one of which agreed to indemnify A.J. against such ultimate net loss in excess of the primary limits by reason of liability for damages because of personal injury caused by an occurrence. This excess policy defined “personal injury” as “injury arising out of false arrest, false imprisonment, wrongful eviction, detention, malicious prosecution, … which occurs during the policy period.” The Court of Appeal held that the definition of “personal injury” required the malicious prosecution to “occur” during the policy period. For the reasons discussed pertaining to the Argonaut policy, the Court of Appeal held that malicious prosecution did not “occur” during this Midland policy, so Midland had no obligations under the policy.

The second Midland policy agreed to indemnify A.J. for all sums that it became obligated to pay by reason of liability for damages on account of “personal injuries” caused by an “occurrence.” The term “personal injuries” was defined, in part, as malicious prosecution, and the term “occurrence” was defined as “an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury or property damage neither expected nor intended from the standpoint of the Insured.” In order to avoid a self-defeating construction of the policy that would render “personal injuries” being excluded from coverage, the court deemed as an oversight the use of the term “bodily injury” in the definition of “occurrence” and inserted “personal injuries” in the place of “bodily injury” in the definition.

So construed, however, the policy yet remains limited in coverage to “occurrences” which result in personal injury (here, i.e., malicious prosecution), or property damage, within the policy period. The upshot of this “occurrence” limitation is that the instant incident of malicious prosecution was not subject to this policy. As discussed above, A.J.’s malicious prosecution “occurred” before the policy term began, when the malicious action was commenced against [the former president and chairman] in 1971. The gist of the wrong then was inflicted and complete.

The Court found no coverage under this Midland policy.

The second California case is Zurich Ins. Co. v. Peterson, 188 Cal. App.3d 438, 232 Cal. Rptr. 807 (1986), which involved a lawsuit filed by Tri-Tool against its president to rescind an employment contract. When the complaint was filed, Tri-Tool was insured by Home Insurance Company (“Home”). The Home policy agreed to indemnify Tri-Tool for damages because of injury arising out of the offenses of false arrest, detention, or imprisonment, or malicious prosecution, if such offense is committed during the policy period.

In February of 1980, the Home policy was replaced by a primary policy issued by American Guarantee and Liability Insurance Company (“AGLIC”) and an excess policy issued by Zurich Insurance Company (“Zurich”). The AGLIC policy agreed to pay all sums that the insured becomes legally obligated to pay as damages because of “personal injury,” which, in turn, was defined as an “injury arising out of one or more of the following offenses committed during the policy period” and listed false arrest, detention, imprisonment or malicious prosecution as the offenses. The Zurich policy also provided coverage for personal injury, including “injury resulting from false arrest, detention or imprisonment, … malicious prosecution ….” The policy defined an “occurrence” of malicious prosecution as “an act or series of acts of the same or similar nature, committed during this policy period which causes such personal injury.”

The Court of Appeal, Third Appellate District, noted that a favorable termination of the malicious action might be a prerequisite to the filing a malicious prosecution action, but it was not determinative of coverage because the policies at issue did not contain any reference to a particular date. Rather, to implicate coverage, the policies required the act or offense of malicious prosecution to have been committed during the policy period. The court then reviewed the Harbor Insurance Company case and noted that the Harbor court rejected the continuing occurrence concept and determined that the critical date was the filing of the complaint. The Court ruled,

It makes little difference whether the state or an individual controls the maliciously prosecuted action: an individual is first injured upon the filing of a complaint with malice and without probable cause. While some of the adverse consequences to the injured party will depend on whether a criminal prosecution is begun or a civil suit prosecuted, in each case a party’s reputation is injured and legal expenses are incurred at the initiation of the malicious complaint. The fact that damages increase as the prosecution continues does not transform malicious prosecution into a continuing occurrence. We join the reasoned decisions of the majority in holding that for purposes of an insurance policy which measures coverage by the period within which the “offense is committed,” the tort of malicious prosecution occurs upon the filing of the complaint.

Because the policies issued by Zurich and American came into effect after the date Tri-Tool filed its complaint against the president, neither insurer had an obligation to defend or indemnify Tri-Tool.

The interesting thing about California is the interplay between wrongful incarceration cases and California Insurance Code Section 533 (“Section 533”), which states, in part, that an “insurer is not liable for a loss caused by the willful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured’s agents or others.” In short, Section 533 precludes insurance coverage, or indemnity, for a “willful act,” but Section 533 does not apply to the duty to defend or to vicarious liability.

In Downey Venture, et al. v. LMI Ins. Co., 66 Cal. App. 4th 478, 78 Cal. Rptr.2d 143 (1998), the California Court of Appeal, Second Appellate District, held that Section 533 precluded coverage for malicious prosecution, even though such coverage was expressly provided in the policy, because malice is an element for establishing a claim for malicious prosecution. The Court of Appeal noted that in California, “the commission of the tort of malicious prosecution requires a showing of an unsuccessful prosecution of a criminal or civil action, which any reasonable attorney would regard as totally and completely without merit, for the intentionally wrongful purpose of injuring another person.” Id. at 154. The Court of Appeal ultimately held that because the commission of the tort of malicious prosecution constitutes a willful act within the meaning of Section 533, LMI was not obligated to indemnify the insured for such claim.

Ultimately, under California law, an insurer may have a defense obligation in wrongful incarceration cases, but there is a good chance that the insurer will not have an indemnity obligation to the extent that the liability of the insured(s) is based on “willful acts” of malicious prosecution.

The next installment will review the law in New Jersey, a jurisdiction that may have the oldest case law pertaining to insurance coverage for malicious prosecution cases. Again, if there are any questions about another jurisdiction, please contact us (sallykim@gordonrees.com or sries@gordonrees.com) and we can address your questions directly.

Filed under California Insurance Code, Duty to Defend, Personal and Advertising Injury, Trigger of Coverage

Insurers Not Bound By Four Corners of Complaint When Determining Duty to Defend Under Illinois Law

By on September 28, 2016
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In Landmark American Insurance Company v. Peter Hilger, the Seventh Circuit, applying Illinois law, recently clarified that an insurer may introduce extrinsic evidence in a declaratory judgment action regarding the insurer’s duty to defend. 2016 U.S. App. LEXIS 17343 (7th Cir. Sept. 22, 2016). Hilger was sued in two separate lawsuits alleging that he and others had mislead credit unions to fund loans by overstating the life-insurance policies that served as collateral. Hilger tendered his defense to Landmark under a professional liability policy held by a co-defendant. Hilger alleged that he qualified as an insured under the policy as, although he was not named in the policy, the policy provided coverage for “independent contractors” of the named insured provided the liability was related to professional services rendered for the named insured.

Landmark denied coverage for Hilger’s claim and filed a declaratory judgment action. The District Court granted Hilger’s motion for judgment on the pleadings reasoning that the underlying complaints left the relationship between Hilger and Landmark’s insured ambiguous, and that ambiguity had to be resolved in Hilger’s favor.

The Seventh Circuit reversed, stating that Landmark was entitled to conduct discovery into the relationship between Hilger and Landmark’s insured, and to use information obtained to demonstrate that Landmark owed no duty to defend. The Court noted that the District Court was correct that a duty-to-defend analysis was confined to the allegations of the underlying complaint where the insurer denies coverage without seeking a declaratory judgment or defending under a reservation of rights. In contrast, where the insurer has filed a declaratory judgment (or if an insurer was proceeding under a reservations of rights), the insurer may present evidence beyond that in the underlying complaint, as long as that evidence does not determine an ultimate issue in the underlying proceeding. In this instance, the Court found that because Landmark had sought a declaratory judgment, it could offer evidence outside the complaints showing that Hilger did not render the professional services as an independent contractor for Landmark’s insured, so long as that evidence would not decide an ‘ultimate issue’ in the underlying action — and the Court found no indication that it would. Thus the Court reversed and remanded, holding Illinois law “permits Landmark to offer evidence outside the. . .complaints that Hilger isn’t covered as an independent contractor under [the Landmark] policy.”

Filed under Duty to Defend

California Appeals Court Rules that “Escape” “Other Insurance” Clause Contained in Coverage Portion of Primary CGL Policy Not Enforceable in Equitable Contribution Action

By and on April 15, 2016
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In Certain Underwriters at Lloyds, London v. Arch Specialty Insurance Co., a California appeals court held that an “other insurance” clause in a primary commercial general liability policy would not, as a matter of public policy, allow the insurer to avoid having to share defense costs.

Certain Underwriters at Lloyds, London (“Underwriters”) and Arch Specialty Insurance Company (“Arch”) were both primary insurers of Framecon, Inc. over successive policy years. Framecon was sued by a real estate developer for framing and carpentry work it performed on residential homes in three separate homeowner actions. Framecon tendered the claims to both Underwriters and Arch. Underwriters agreed to defend Framecon, while Arch denied any defense obligation based on the “other insurance” language contained in the insuring agreement and in the conditions section of its policy.

The underlying claims against Framecon were eventually settled with both Underwriters and Arch agreeing to indemnify Framecon for damages on a “time on the risk” basis. Underwriters then sued Arch for declaratory relief and equitable contribution for defense costs incurred in the underlying litigation. In cross-motions for summary judgment, Arch argued that its “other insurance” provisions relieved it of any duty to defend. The trial court found in favor of Arch, and relied on a prior California case which held that the placement of the “other insurance” clause in the insuring agreement of the policy, as opposed to in the conditions section, makes it an enforceable exception from coverage for defense costs rather than a disfavored “escape” clause.

On appeal, the Court of Appeal noted that the original purpose of “other insurance” clauses was to prevent multiple recovery by insureds in cases of overlapping policies providing coverage for the same loss, but that public policy disfavored “escape” clauses. The court explained that “escape” clauses are so named because they permit an insurer to make a seemingly ironclad guarantee of coverage, only to withdraw that coverage – and thus “escape” liability – in the presence of other insurance. The Court of Appeal rejected Arch’s argument that its “other insurance” clause was enforceable because it was located in both the insuring agreement and in the conditions section of the policy, and found that the “modern trend” is to distrust “escape” “other insurance” clauses that attempt to shift the burden away from a primary insurer. The court also stated that reliance on location of the “other insurance” clause in the coverage section as determinative “would tend to encourage insurers to jockey for best position in choosing where to locate ‘other insurance’ language, needlessly complicating the drafting of policies, inducing wasteful litigation among insurers, and delaying settlements – all ultimately to the detriment of the insurance-buying public.”

The Court of Appeal concluded that Underwriters was entitled to receive equitable contribution from Arch as the “other insurance” clause contained in Arch policy was not enforceable based on public policy considerations.

Filed under Commercial General Liability, Contribution, Duty to Defend, Other Insurance

Alaska Supreme Court Rules that Insurer Have No Right to Reimbursement of Defense Fees and Costs

By and on April 6, 2016
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For many years, the prevailing view of Alaska law was that an insurer could obtain reimbursement of defense costs from an insured if it specifically reserved the right to seek reimbursement and subsequently obtained a determination of no coverage. This understanding was based on Unionamerica Inc. Co., Ltd. v. General Star Indem. Co., 2005 WL 757386 (D. Alaska 2005), in which the Alaska federal district court predicted that the Alaska Supreme Court would allow insurers to recover defense costs. It turns out, however, that the district court’s prediction was incorrect.

In Attorneys Liability Protection Society, Inc. v. Ingaldson Fitzgerald, P.C., No. 7095 (March 25, 2016), the Alaska Supreme Court ruled that a policy provision entitling an insurer to reimbursement of fees and costs incurred by the insurer defending under a reservation of rights is unenforceable, even if (1) the insurer explicitly reserves the right to seek reimbursement in its offer to provide a defense by an independent counsel, (2) the insured accepts the defense subject to the reservation of rights, and (3) the claims are subsequently determined to be excluded from coverage under the policy.

Attorneys Liability Protection Society, Inc. (“ALPS”) issued a malpractice insurance policy to Ingaldson & Fitzgerald, P.C. (“IF”) from April 29, 2007 to April 29, 2008. The policy contained a provision that entitled ALPS to seek reimbursement for amounts paid by ALPS in defending non-covered claims.

During the policy period, IF reported to ALPS a lawsuit against it alleging, among other things, restitution, disgorgement, and conversion for recovery of a retainer that had been paid to IF. ALPS accepted IF’s tender but reserved rights because the policy excluded coverage for claims arising from conversion or fee disputes. ALPS retained independent counsel to defend IF and paid all defense costs in full, as required by AS 21.96.100.

In the underlying case, summary judgment was rendered against IF on claims of restitution, disgorgement and conversion, all of which were specifically excluded under the malpractice policy. Thereafter, ALPS commenced a declaratory judgment action against IF and moved for partial summary judgment on the reimbursement of defense costs issue. In denying the motion, the district court declined to follow the Unionamerica case and held that Alaska law prohibits the inclusion of a right to reimbursement in insurance policies under AS 21.89.100(d), which states, in part, that in providing independent counsel, an insurer “shall be responsible only for the fees and costs to defend those allegations for which the insurer either reserves its position as to coverage or accepts coverage.”

ALPS appealed to the Ninth Circuit Court of Appeals. The Ninth Circuit noted that while AS 21.96.100(d) requires the insurer to pay defense costs if it either covers the claims against its insured or defends pursuant to a reservation of rights, the statute is not clear as to whether the insurer can later seek reimbursement of fees assumed under a reservation of rights under these circumstances. Therefore, the Ninth Circuit certified two questions to the Alaska Supreme Court:

  1. Does Alaska law prohibit enforcement of a policy provision entitling an insurer to reimbursement of fees and costs incurred by the insurer defending claims under a reservation of rights, where (1) the insurer explicitly reserved the right to seek such reimbursement in its offer to tender a defense provided by independent counsel, (2) the insured accepted the defense subject to the reservation of rights, and (3) the claims are later determined to be excluded from coverage under the policy?
  2. If the answer to Question 1 is “Yes,” does Alaska law prohibit enforcement of a policy provision entitling an insurer to reimbursement of fees and costs incurred by the insurer defending claims under a reservation of rights, where (1) the insurer explicitly reserved the right to seek such reimbursement in its offer to tender a defense provided by independent counsel, (2) the insured accepted the defense subject to the reservation of rights, and (3) it is later determined that the duty to defend never arose under the policy because there was no possibility of coverage?

In answering both questions with “YES,” the Alaska Supreme Court ruled that AS 21.96.100 renders any defense costs reimbursement provisions in insurance policies unenforceable.

The Alaska Supreme Court first acknowledged that under Alaska case law, an insured has a right to demand an unconditional defense. To meet this right, the insurer has three options: (1) affirm the policy and defend unconditionally; (2) repudiate the policy and withdraw from the defense; or (3) offer its insured the right to retain independent counsel to conduct the defense and agree to pay all the necessary costs of that defense. CHI of Alaska, Inc. v. Employers Reinsurance Corp., 844 P.2d 1113 (1993); Continental Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281 (1980). The Court continued that AS 21.96.100 is the codification of such requirements.

In examining the statutory text, the Alaska Supreme Court noted that the subsections (a) through (d) focus on the mandatory requirement that insurers pay for the cost of independent counsel. The Court noted that the statute clearly allocates to the insurer the responsibility to pay the fees and costs when an insurer provides independent counsel to the insured. Therefore, any effort to shift such expenses to an insured would violate the allocation that the statute requires and would be invalid. In short, there is nothing in AS 21.96.100 that permits reimbursement, so the Court concluded that the statutory scheme prohibits reimbursement. The Court held that “reimbursement is prohibited, and because there is no evidence of contrary legislative purpose or intent, we conclude that the statute prohibits reimbursement provisions.”

In ruling that reimbursement provisions are unenforceable, the Alaska Supreme Court declined to follow the California case of Buss v. Superior Court, 939 P.2d 766 (1997). First, the Court noted that the California statute does not contain language similar to that in AS 21.96.100(d). Second, the California statute actually provides a section on reimbursement, which states that “[t]his subdivision does not invalidate other different or additional policy provisions pertaining to attorney’s fees or providing for methods of settlement of disputes concerning those fees.”

The Court further noted that the legislative history supports its conclusion that the statute allocates responsibility to pay for independent counsel to the insurer when the insurer defends under a reservation of rights. Finally, the Court acknowledged that even though the Division of Insurance had approved the policies containing the reimbursement provision, the Division’s past practice is not dispositive. More importantly, however, the Division had disavowed its past practice in its amicus brief with a more “considered interpretation” that “under AS 21.96.100, if an insurer has a duty to defend and elects to reserve its rights on an issue, it is obligated to provide and pay for independent counsel.”

So insurers beware – reimbursement of defense costs provisions are prohibited and unenforceable in Alaska.

Filed under Duty to Defend, Professional Liability

Cumis Counsel Rule Adopted by Nevada Supreme Court

By on October 6, 2015
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In response to certified questions from the U.S. District Court for the District of Nevada, the Nevada Supreme Court has adopted the Cumis independent counsel rule established by California courts requiring an insurer to provide independent counsel for its insured when a conflict of interest arises between the insurer and insured. State Farm Mut. Auto Ins. Co. v. Hansen, 131 Nev. Adv. Op. 74 (Sept. 24, 2015). The court also rejected application of a standard that creates a per se conflict of interest to every case in which there is a reservation of rights. Instead, Nevada courts must ask, on a case-by-case basis, whether an actual conflict exists.

In the underlying litigation, State Farm’s insured was sued for negligence and various intentional torts following an altercation at a house party and subsequent auto collision. State Farm agreed to defend under a reservation of rights, but did not agree to provide independent counsel to its insured. In subsequent coverage litigation, the federal district court initially found that State Farm breached its contractual duty to defend because it had not provided independent counsel to its insured.  The court then reconsidered and asked the Nevada Supreme Court to resolve questions concerning the state’s conflict of interest rules in insurance litigation.

Recognizing that Nevada, like California, is a dual-representation state – meaning that insurer appointed counsel represents both the insurer and insured – the Nevada Supreme court held that “counsel may not represent both the insurer and the insured when their interests conflict and no special exception applies.” This justified application of the Cumis rule in Nevada.

The Court then considered what circumstances created a conflict of interest and, in particular, whether a reservation of rights created a per se right to independent counsel. The Court concluded that even when there is a reservation of rights and insurer-appointed counsel has control over an issue in the case that will also decide the coverage issue, courts must still determine whether there is an actual conflict of interest. Relying on Nevada’s Rule of Professional Conduct 1.7, the Court explained, “[t]his means that there is no conflict if the reservation of rights is based on coverage issues that are only extrinsic or ancillary to the issues actually litigated in the underlying action.”

The decision provides useful guidance to Nevada litigants and trial courts for resolving conflict of interests in insurance litigation. However, the opinion leaves unaddressed other Cumis-type issues such as the reasonable amount of fees for independent defense counsel. As such, more litigation and possible legislation to clarify the rule should be expected.

Filed under Attorneys’ Fees, Duty to Defend, Independent Counsel, Reservation of Rights

California Appeals Court Rules that Defending Insurer Is Not Bound by Stipulated Judgment to Which It Did Not Consent

By and on September 18, 2015
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In 21st Century Insurance Company v. Superior Court (Tapia), a California appeals court held that an insurance company that is defending its insured cannot be bound by a stipulated judgment entered into by its insured without a trial and judgment after verdict.

The insured, Cy Tapia, was a teenager living with his aunt and grandmother. Tapia was driving with Cory Driscoll in a vehicle owned by Tapia’s grandfather when he was involved in an accident that left Driscoll severely injured. Tapia had $100,000 in liability coverage under an automobile insurance policy issued by defendant 21st Century Insurance Company.

Driscoll and his mother sued Tapia. 21st Century agreed to provide a defense to this suit. Plaintiffs rejected 21st Century’s settlement offer of the $100,000 policy limit as they believed that Tapia might be covered under 21st Century policies issued to Tapia’s aunt and grandmother, each providing $25,000 in coverage.

21st Century offered $150,000 to settle the case against Tapia which plaintiffs declined as they demanded $3 million for Driscoll and $1.15 million for his mother. 21st Century warned Tapia that it would not agree to be bound if Tapia accepted the offer. Tapia ignored this warning, agreed to the entry of a stipulated judgment and assigned any rights he had against 21st Century. Plaintiffs filed a bad faith action against 21st Century, and 21st Century moved for summary judgment which was denied. This denial was reversed on appeal.

The Court of Appeal cited Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, 730 for the rule that “a defending insurer cannot be bound be a settlement made without its participation and without any actual commitment on its insured’s part to pay the judgment.” The crucial element in the Hamilton ruling was the lack of a judgment rendered after an adversarial trial given the potential for collusion. The Court stated that if the situation involved an insurer that refused to defend, then the insured was free to enter into a stipulated judgment at any time.

The Court of Appeal rejected plaintiffs’ arguments that 21st Century breached its duty to defend because it did not acknowledge coverage or a duty to defend under the policies issued to Tapia’s aunt and grandmother.  The Court also found that the undisputed evidence demonstrated that 21st Century did not have a duty to defend Tapia under either of the policies issued to his aunt or grandmother.

Filed under Bad Faith, Duty to Defend

Insurer May Seek Reimbursement from Independent Counsel of Excessive Defense Expenses Given Trial Court’s Duty to Defend Order

By and on August 20, 2015
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Hartford Cas. Ins. Co. v. J.R. Marketing, L.L.C. (2015) ___ Cal. ___.

The California Supreme Court held an insurer can recover allegedly excessive and unnecessary defense expenses directly from its insureds’ independent counsel. The Court reversed a Court of Appeal decision affirming the trial court’s grant of a demurrer. The trial court had concluded the insurer’s right to reimbursement, if any, was from its insureds, not their independent counsel. The Supreme Court disagreed. The insurer was obligated under an enforcement order to pay the insureds’ defense expenses subject to a right to seek reimbursement for “unreasonable and unnecessary” charges after the fact. On the particular facts, and based on principles of restitution and unjust enrichment, the Court concluded the insurer could pursue reimbursement from the law firm.

Hartford Casualty Insurance Company provided liability insurance to J.R. Marketing, L.L.C. and Noble Locks Enterprises, Inc. covering business-related defamation and disparagement claims, among other risks. In 2005, the insureds were named as defendants in lawsuits in California and elsewhere based on alleged defamation and interference with business relationships. The insureds tendered the California action to Hartford, which refused to defend.

After the insureds (through their counsel, Squire Sanders) filed a coverage action against Hartford, Hartford agreed to defend the California action subject to a reservation of rights. Hartford declined to pay already-incurred defense expenses or provide independent counsel under San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 (codified at Civil Code section 2860). But the trial court in the coverage action granted the insureds summary adjudication that Hartford owed a duty to defend from the date of tender. The court also concluded Hartford was obligated to provide independent counsel, and the insureds retained Squire Sanders.

The trial court in the coverage action subsequently issued an enforcement order (which Squire Sanders drafted) stating Hartford had breached its duty to defend by failing to pay defense invoices in a timely fashion. The enforcement order precluded Hartford from invoking the rate limitations in Civil Code section 2860, and required Hartford to pay submitted expenses subject to a right to seek reimbursement at the end of the California action of any “unreasonable or unnecessary” expenses.

The California action was resolved in 2009, and Hartford filed a cross-complaint in the coverage action. On a theory of unjust enrichment, Hartford asserted a right to recoup a significant portion of roughly $13.5 million paid to Squire Sanders under the enforcement order. The trial court sustained Squire Sanders’ demurrer to Hartford’s cross-complaint, concluding Hartford only could seek reimbursement from its insureds, not their independent counsel. The Court of Appeal affirmed.

The California Supreme Court granted review to address the narrow question whether an insurer can seek reimbursement of defense expenses directly from independent counsel where the insurer has paid expenses under a court order expressly preserving the insurer’s post-litigation right to recoup “unreasonable and unnecessary” amounts charged.

The Court began with an analysis of its holding in Buss v. Superior Court (1997) 16 Cal.4th 35, which requires an insurer to provide a complete defense to a lawsuit alleging both covered and non-covered claims, subject to the insurer’s right to seek reimbursement of expenses solely allocable to non-covered claims. In such a case, the insured would be unjustly enriched if the insurer had no reimbursement right. But Buss did not consider who is unjustly enriched if independent counsel is allowed to retain payments that were unreasonable or unnecessary to the insureds’ defense.

The Court concluded that, in light of the trial court’s enforcement order, Hartford could pursue Squire Sanders for reimbursement. Assuming Hartford’s position has merit, the firm is the unjust beneficiary of the disputed sums. Nevertheless, the Court emphasized that its conclusion is limited to the unusual facts at issue.

Squire Sanders asserted various objections based on contract law principles, public policy and procedure, all of which the Court rejected. The Court concluded Squire Sanders is not an incidental beneficiary of Hartford’s duty to defend its insureds, with no duty to make restitution. Hartford’s obligation under the enforcement order Squire Sanders prepared was to pay reasonable expenses, subject to an express right to seek reimbursement of unreasonable expenses later. Hartford never agreed to pay whatever Squire Sanders billed, no matter how excessive.

The Court concluded Hartford’s unjust enrichment claim did not interfere with the attorney-client privilege between the insureds and its independent counsel, or with counsel’s right to control the defense. Civil Code section 2860 contemplates that independent counsel will be called upon to justify their fees, and privileged information can be redacted. The Court also rejected the notion that, rather than seeking reimbursement from independent counsel, Hartford should pursue its unsophisticated insureds for allegedly failing to monitor and control their counsel’s fees.

Nor would an unjust enrichment claim against independent counsel violate California’s prohibition against assignment of legal malpractice claims. Hartford seeks to recover overpayments for allegedly excessive and unnecessary work by Squire Sanders, not damages due to the firm’s alleged breach of any duty owed to the insureds.

Click here for the opinion.

This opinion is not final. It may be modified on rehearing or review may be granted by the United States Supreme Court. These events would render the opinion unavailable for use as legal authority.

Filed under Duty to Defend, Independent Counsel

Pennsylvania High Court Allows Policyholder to Recover Voluntary Settlements Paid without Insurer Consent Even Absent Insurer Bad Faith

By on July 28, 2015
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On July 21, 2015 a sharply divided (and short-handed) Pennsylvania Supreme Court ruled 3-2 that an insurer defending an insured subject to a reservation of rights may be required to reimburse its insured for any “fair and reasonable” settlement its insured enters into even when the insurer does not consent to the settlement, and even where the insurer has not acted in bad faith. Babcock & Wilcox Co., et al. v. American Nuclear Insurers, et al., 2015 Pa. LEXIS 1551, No. 2 WAP 2014. The Court, however, did not give carte blanche to insureds to settle without insurer consent. Instead, the Court held that such a right is “limited to those cases where an insured accepts a settlement offer after an insurer breaches its duty by refusing the fair and reasonable settlement while maintaining its reservation of rights and, thus, subjects an insured to potential responsibility for the judgment in a case where the policy is ultimately deemed to cover the relevant claims.” In other words, the Court held that an insurer defending under a reservation of rights either must (1) consent to and pay a fair and reasonable settlement offer presented to its insured, (2) withdraw any reservation of rights, or (3) risk having to reimburse its insured who settles without consent if the claim is found to have been covered under the policy. As the dissent emphasized, the Court’s ruling represents a substantial abrogation of the contractual rights of insurers under Pennsylvania law, which previously permitted policyholders to circumvent the “voluntary payments” provisions of typical liability policies only where their insurers were guilty of having acted in bad faith conduct in failing to settle the underlying claim.

Babcock & Wilcox (“B&W”), along with ARCO, had been sued in a long-running class action involving over 500 plaintiffs claiming bodily injury and property damage from alleged emissions from the defendants’ nuclear faculties. B&W’s insurer, ANI, had provided an aggressive defense, subject to a reservation of rights, expending more than $40 million over the course of two decades, pursuant to a policy with $320 million in limits (which were eroded by defense costs). The policy contained a standard consent to settlement/cooperation clause that provided, inter alia, that “[t]he insured shall not, except at his own cost, make any payments, assume any obligations or incur any expense.”

Believing that there was a strong likelihood of a obtaining a complete defense judgment, and seeking to discourage potential “copycat” claims, ANI rejected all settlement offers presented. B&W, which for some time had been pressuring ANI to settle, entered into an $80 million settlement (well within the $280 million remaining policy limits) without ANI’s consent. B&W then sued ANI in state court for reimbursement of the settlement amount.

In the trial court, ANI contended that it had no obligation to reimburse Babcock & Wilcox because B&W breached the policy’s consent to settle requirement. Relying upon Cowden v. Aetna Cas. and Sur. Co., 134 A.2d 223 (Pa. 1957) (holding that “an insurer must pay a judgment in excess of policy limits for its bad faith failure to settle below policy limits”), ANI argued that, under Pennsylvania law, an insurer could only be required to reimburse its insured for a settlement reached without its consent if the insurer acted in bad faith in refusing to settle. By contrast, B&W, framing the argument as one of first impression in Pennsylvania, and relying on case authority from other states, argued that an insurer is obligated to reimburse its insured for any fair and reasonable settlement entered into in good faith, regardless of a cooperation clause.

The trial court eventually held that “an insurer, defending subject to a reservation of rights, is required to reimburse an insured for a settlement reached in violation of the consent to settle clause where coverage is found to exist and the settlement is ‘fair and reasonable’ and made in ‘good faith and without collusion.’” Applying this standard, a jury found that the settlement reached between B&W and the underlying plaintiffs was reasonable and, accordingly, ANI was obliged to reimburse B&W.

ANI appealed and the Pennsylvania Superior Court reversed and adopted Florida’s “insured’s choice” test where an insured can either: 1) accept a defense pursuant to a reservation of rights and be bound by a consent to settlement provision provided that the insurer does not act in bad faith; or 2) reject a defense pursuant to a reservation of rights and, if coverage is found, hold the insurer liable for defenses costs and the costs of any reasonable settlement.

The Supreme Court, in turn, reversed the Superior Court’s decision, holding that the “insured’s choice” test is irreconcilable with Pennsylvania law because an insured’s rejection of a defense under a reservation of rights relieves an insurer of its coverage obligation. Further, the Court criticized the “insured’s choice” as being largely illusory because many, if not most, insureds lack resources to fund an adequate defense. The Justices, however, diverged sharply as to what the applicable test should be for “determining whether an insurer is liable under its insurance policy for a settlement made by its insured without securing the insurer’s consent, when the insurer is defending the claim subject to a reservation of rights.” After reviewing the policy arguments proffered by the parties and their amici, and examining how courts in other jurisdictions have approached the issue, the Court held that “where an insurer defends subject to a reservation of rights and breaches its duty to settle . . . an insured may accept a settlement over the insurer’s refusal where the settlement is fair, reasonable, and non-collusive.” The Court’s holding was limited to situations when an insurer is defending under a reservation of rights and – because of the nature of the particular reservation of rights – its interests diverge from those of its insured. In such a situation, the “determination of whether the settlement is fair and reasonable necessarily entails consideration of the terms of the settlement, the strength of the insured’s defense against the asserted claims, and whether there is any evidence of fraud or collusion on the part of the insured.” Here, the Court held that its new standard had been satisfied and reinstated the trial court’s judgment requiring ANI to reimburse B&W for the $80 million settlement.

In dissent, Justice Eakin, joined by Chief Justice Saylor, vociferously criticized the majority’s adoption of the “fair and reasonable” standard.  In the dissenting Justices’ view, this was not a case of first impression at all. Rather, the dissenters insisted that the outcome of the case clearly was governed by the holding of Cowden, imposing liability for an excess verdict where the insurer’s failure to settle within policy limits was in bad faith. In the dissenters’ view, so long as ANI’s decision to continue defending rather than settling the underlying litigation was made in good faith, ANI was within its right to do so. The dissenting Justices criticized the new standard adopted by the Majority:

[The “fair and reasonable” standard] allows an insured to breach the contract’s requirement that the insurer must consent to any settlement when the insured anticipates an excess future verdict and, as a practical matter, permits the insured to determine for itself (in the first instance) that the insurer acted unreasonably in refusing to settle.

The majority repeatedly emphasized that not all reservations of rights are created equal, and that whether an insurers’ refusal to settle or give up its reservation of rights constitutes a policy breach must be examined on a case-by-case basis. The Court also admonished that settlements be closely vetted to ensure that they are in fact reasonable under the circumstances and non-collusive. Despite these cautionary notes, policyholders will doubtless argue that this decision gives them a broad license to settle over insurer objection, ultimately with an insurer’s money, whenever an insurer is defending subject to a reservation of rights that might defeat or limit coverage. Moreover, this decision, together with the Court’s ruling in December 2014 in Allstate Property and Cas. Ins. Co. v. Wolfe, 90 A.3d 699 (Pa. 2014), that statutory insurance bad faith claims are assignable, threaten to seriously undermine the insurer’s bargained-for rights to control the defense and settlement of claims against their policyholders.

Filed under Bad Faith, Commercial General Liability, Consent to Settle/Unreasonable Settlements, Duty to Cooperate, Duty to Defend, Reservation of Rights

Intellectual Property Exclusion Bars Coverage for Right of Publicity Claims

By and on April 3, 2015
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In Alterra Excess and Surplus Insurance Company v. Jaime Snyder (2015) 234 Cal.App.4th 1390, Gordon & Rees Partner Arthur Schwartz and Senior Counsel Randall Berdan obtained affirmance of a trial court judgment in the California Court of Appeal, First Appellate District. The court held an exclusion for “Infringement of Copyright, Patent, Trademark or Trade Secret” applied to preclude coverage for claims based on the right of publicity. While the court’s ruling absolved Alterra of its alleged duty to defend or indemnify, the procedural wrangling behind the scenes provides a cautionary tale for insurers.

In 2009, Maxfield & Oberton Holdings, LLC began manufacturing and distributing a desk toy, “Buckyballs”, and similar products. They all incorporated the name “Bucky” which was based on the architectural engineer and inventor, R. Buckminster Fuller. Fuller died in 1983 and, in 1985, Fuller’s Estate registered its claim as Fuller’s successor with the California Secretary of State. The Estate licensed the right to use Fuller’s name and likeness on numerous occasions, including to Apple Computer which used Fuller’s image, and others, in its “Think Different” advertising campaign. In 2004, the U.S. Postal Service licensed the rights to Fuller’s image for a postage stamp.

The Estate sued Maxfield in federal district court in Northern California alleging Maxfield had been using the Bucky name without the Estate’s consent or paying royalties to the Estate. The Estate alleged claims for (1) Unfair Competition, (2) Invasion of Privacy (Misappropriation of Name and Likeness), (3) Unauthorized Use of Name and Likeness in Violation of § 3344.1, and (4) Violation of various Business and Professions Code statutes.

Alterra’s predecessor issued a CGL insurance policy to Maxfield in 2010. Alterra provided a defense to Maxfield in the federal action under a reservation of rights and filed a declaratory relief action in San Francisco Superior Court seeking a declaration of non-coverage. Alterra named the Estate in the coverage action but later stipulated to dismiss it in return for the Estate’s agreement to be bound by the outcome.

While the federal action was pending, Maxfield dissolved. This was precipitated by the United States Consumer Product Safety Commission’s filing of an administrative complaint due to safety concerns over Buckyballs. The dissolution created several issues.

First, as a dissolved entity, Maxfield could no longer defend itself in the federal infringement action and its retained defense counsel filed a motion to withdraw. Second, following the appointment of a Trustee to administer pending and future claims against Maxfield, the Fuller Estate entered into an agreement with the Trustee that released Maxfield from liability in the federal action. But, it also purported to allow the Estate to continue to pursue the infringement action so that the Estate could obtain a judgment against Maxfield for collection from Alterra. The Estate also obtained an assignment from the Trustee to allow the Estate to pursue Maxfield’s rights against Alterra.

So the stage was set. The Estate had made it clear that, despite its release of Maxfield in the federal action, it would pursue a judgment against Maxfield, an unrepresented party that could not defend itself, for eventual collection against Alterra. Although Alterra continued to believe no coverage existed, the stakes had now increased substantially by the possible exposure to Maxfield on an uncontested judgment.

To protect itself, Alterra intervened in the federal action and asserted defenses on the merits, including the very real defense the Estate had settled and released all claims against Maxfield and the infringement action had become a sham proceeding.

The Estate then sought to re-insert itself into the San Francisco coverage action despite its prior agreement to be dismissed. The court allowed the Estate to join after which the Estate attempted to prove Alterra owed coverage to Maxfield for the federal action. In the meantime, the federal action was stayed to allow the coverage issues to be resolved. Of course, if Alterra were to prevail on coverage, the Estate’s plan would collapse.

Alterra moved for judgment on the pleadings in the coverage action on three grounds: the policy’s Intellectual Property and First Publication Exclusions, and the Estate’s settlement with the Trustee. As to the latter, Alterra contended the Estate’s deal with Maxfield’s trustee, made without Alterra’s consent, violated the policy’s “no action clause” barring any coverage obligation. Alterra cited the fundamental principle, recognized by the California Supreme Court, that a claimant may not manufacture a payday by entering into an agreement with an insured to the defending insurer’s detriment or without its consent.

The trial court granted Alterra’s motion for judgment finding the Intellectual Property Exclusion barred all coverage as a matter of law. It did not reach Alterra’s other issues. The Court of Appeal subsequently affirmed on this ground.

On appeal, the Estate contended the exclusion could not reasonably be understood to apply to “intellectual property rights” because it is not conspicuous, plain and clear. Coverage exclusions and limitations must meet two separate tests, (1) “the limitation must be ‘conspicuous’ with regard to placement and visibility,” and (2) the language must be “plain and clear.” The court explained the Intellectual Property Exclusion is on an Insurance Services Office (ISO) industry form, appears under a bold-faced heading “Exclusions,” with each exclusion’s title also bold-faced. The court found these factors satisfy the first test.

The court also concluded the Intellectual Property Exclusion plainly and clearly applies to bar coverage. The Estate argued the exclusion entitled “Infringement of Copyright, Patent, Trademark or Trade Secret” shouldn’t even be called the Intellectual Property Exclusion. But the court noted that, not only have prior courts uniformly referred to this exclusion as the “Intellectual Property Exclusion,” the Estate repeatedly referred to it in just this manner in trial court filings.

Alterra’s exclusion encompasses not only copyright, patent, trademark and trade secrets but also “other intellectual property rights,” sufficient to extend to invasion of privacy and right of publicity claims. A similar exclusion was addressed by a 2011 California appellate ruling, Aroa Marketing, Inc. v. Hartford Ins. Co. of the Midwest (2011) 198 Cal.App.4th 781. In Aroa, the court held the exclusion there barred claims based on the unauthorized use of a model’s image and likeness.

The Alterra court found the “other intellectual property rights” language in Alterra’s policy is effectively identical to the Hartford policy’s “any intellectual property rights” in Aroa. These nonexclusive listings are broad enough to encompass invasion of privacy or right of publicity claims. Even if Aroa were not on the books, the Alterra court added, it would apply the exclusion to the Estate’s claims.

The tale is not yet over. The federal action must now be dismissed. Also, the Court of Appeal’s opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. But, as things stand, Alterra’s rights have been vindicated and the Estate’s plan to collect an uncontested judgment thwarted.

Filed under Appellate, Duty to Defend, Intellectual Property Exclusion, Reservation of Rights, Right of Publicity

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