In This Issue:
Three Wins and A New Rule
In this edition of the Manatt newsletter, we take a look at several new cases that examine an array of important insurance issues. First, though, we report an important victory for policyholders faced with massive tort liabilities. After over nine years of litigation, Quigley Company, Inc., a subsidiary of Pfizer Inc., won confirmation of its bankruptcy plan in the Bankruptcy Court for the Southern District of New York. Quigley faced over $1 billion in asbestos-related liabilities, and was able to fund a bankruptcy plan through a combination of insurance and contributions from its parent. During the course of the bankruptcy, Pfizer and Quigley won a landmark ruling limiting the standing of a debtor’s insurers to object to the debtor’s bankruptcy plan, and secured hundreds of millions of dollars in insurance to fund Quigley’s plan. See In re Quigley Company, Inc., 391 B.R. 695 (Bankr. S.D.N.Y. 2008).
In the first case examined, MGA Entertainment sought coverage from several umbrella and other insurers for its defense costs in an already dismissed copyright infringement suit stemming from one of several significant lawsuits involving Bratz dolls. MGA scored a partial victory in New York federal court, which granted in part the company’s summary judgment arguments concerning the duty to defend. The court held that the allegations in the underlying complaint – broadly read and construed with reasonable inferences – alleged covered advertising injury claims. Although the court pared down coverage from certain insurers, MGA won defense cost coverage.
Second, the Florida Supreme Court came down strongly on the side of policyholders on a key question of interpretation of ambiguous insurance policy terms. The court announced that “under Florida law applicable to construction of insurance policies, because the policy is ambiguous it must be construed against the insurer and in favor of coverage without resort to consideration of extrinsic evidence.”
Third, an Ohio federal court held that advertising injury coverage that applied to a “publication,” which the policy did not define, applied to recordings of customer calls to a call center that allegedly were shared internally. The insurer argued that internal dissemination did not constitute publication, and further that if it did there was no coverage under a prior publication exclusion. Not so, the court said – each call was new material. Rejecting a number of other arguments from the insurer, the court said the policyholder was entitled to an immediate defense.
Finally, a Pennsylvania appellate court addressed a question of first impression in the state, announcing the options a policyholder has when its insurer offers a defense only subject to a reservation of rights. Recognizing the divergent interests that creates, the court gave policyholders a choice: accept a defense and cede control of settlement to the insurer, or say “no thanks” and maintain control of the underlying litigation, including settlement decisions, and sue the insurer for coverage.
MGA Wins Coverage for Bratz Suit Over Ad Injury Exclusion, Prior Publication Arguments
MGA Entertainment Inc. is entitled to defense coverage from its umbrella insurers National Union Fire Insurance Co. and Chartis Specialty Insurance Co. in a lawsuit over the oft litigated Bratz dolls, a New York federal court judge has ruled.
The underlying suit was brought by photographer Bernard Belair, who created an ad campaign for Steve Madden in the late 1990s with a series of female images featuring “large heads, large oval eyes, small bodies and large feet.” Belair alleged that his copyrighted images formed the basis for MGA’s line of Bratz toys and dolls, and MGA apparently admitted that his work served as an inspiration in its design.
MGA sought coverage from its primary and umbrella carriers, but some policies plainly did not apply due to coverage exclusions. The opinion, by District Court Judge Shira A. Scheindlin, thus focused on umbrella coverage provided by National Union and Chartis in the years 2001 and 2002. These policies provided advertising injury coverage specifically excluded by the underlying primary policies.
National Union and Chartis argued that Belair’s complaint did not assert a claim for damages arising out of an advertising injury and alternatively, if it did, coverage was precluded by the prior publication exclusion. Taking a broad reading of Belair’s complaint – which was dismissed at the summary judgment stage – and applying California law, Judge Scheindlin disagreed.
Although the complaint did not expressly base its copyright infringement claim on the theory that MGA’s advertising infringed Belair’s rights, the “plain language alleges facts sufficient to raise the possibility of a potentially covered claim.” “The underlying complaint, as written, imposed potential liability on MGA for an advertising injury since, had Belair’s suit been successful, MGA would have infringed the Belair copyrights every time it published or broadcast a Bratz advertisement.”
The court explained that “the potential liability for damages based on an advertising injury is not based on speculative potential facts or on claims that were conspicuously and intentionally never pled; rather, it stems from the underlying complaint’s sweeping allegations that the entire Bratz line infringed Belair’s copyrights; the reasonable inference that such alleged infringement would have been committed in MGA’s advertising; and the possibility that Belair could have amended his complaint by adding one word to bring it indisputably within the coverage of the policies.”
The court further found the prior publication exclusion inapplicable because there was a factual dispute as to whether the first date of publication occurred during the policy period. The court held that the fact that the date was in dispute alone established that National Union and Chartis must defend. The court found, however, that later insurers were excused from coverage under prior publication exclusions.
To read the decision in Lexington Insurance Co. v. MGA Entertainment, click here.
Why it matters: Judge Scheindlin’s decision reinforces an insurer’s broad duty to defend where the insured can show even “remote facts, … any reasonable inferences drawn from those facts, and potential (but not farfetched) amendments” that could be made to the underlying complaint warranting coverage. The court’s broad reading of the underlying complaint and consideration of a potential amendment reinforces the breadth of the duty to defend where there is a reasonable potential for coverage.
Scale Tips For Policyholders Where Ambiguity Exists, Says Florida Supreme Court
The Florida Supreme Court held that lower courts and federal district courts in the state had erred by allowing insurers to introduce extrinsic evidence to explain an ambiguity in their contract language. Instead, when an insurance policy is ambiguous, the policy must be interpreted in the policyholder’s favor without consideration of extrinsic evidence, the court declared in a 4-3 decision.
The court answered a certified question from the 11th Circuit in a dispute, arising from less than clear policy language, as to whether certain home health care benefits automatically increased in certain situations.
A federal district court found the policy ambiguous, and the 11th Circuit agreed. But the federal appellate panel then struggled with the legal consequences of a policy ambiguity. Finding that Florida law was unclear, the 11th Circuit certified a series of questions to the state’s highest court.
The majority of the Florida Supreme Court concurred that the policy was ambiguous, with each party’s argument constituting a reasonable interpretation of the language. Faced with such an ambiguity, the court held that courts must resolve the ambiguity in favor of the policyholder and against the insurer that drafted the ambiguous language:
“[W]here the provisions of an insurance policy are at issue, any ambiguity which remains after reading each policy as a whole and endeavoring to give every provision its full meaning and operative effect must be liberally construed in favor of coverage and strictly against the insurer.”
Further, extrinsic evidence should not be considered, the court clarified, notwithstanding prior state and federal case law to the contrary. “Under Florida law, because the policy is ambiguous it must be construed against the insurer and in favor of coverage without resort to consideration of extrinsic evidence,” the court held.
To read the decision in Washington National Insurance Corp. v. Ruderman, click here.
Why it matters: Policyholders in Florida received a valuable boost with the court’s decision in Washington National. Insurers must use clear policy terms, and if they don’t policyholders are entitled to a favorable construction of the ambiguous terms without incurring the expense of discovery into extrinsic evidence and its incumbent risks. This certainty creates appropriate incentives for insurers to be more careful in policy drafting and, when disputes arise, provides the parties with greater certainty so that a resolution can be reached more efficiently.
This Call May Be Recorded For Insurance Coverage Purposes
Adopting a broad definition of the term “publication,” which was not defined in the policies, a federal district judge in Ohio required ACE Property & Casualty Ins. Co. to immediately begin providing a defense to Convergys Corp. for class actions alleging that customer calls were illegally recorded.
Convergys provided customer service for Hyundai Motor Corp. A pair of lawsuits was filed – one against Convergys and a subsidiary, Encore Receivable Management, and a second against Hyundai – alleging that the call centers recorded telephone conversations between Hyundai customers and customer service representatives without obtaining customer consent. The recordings were then shared internally for training and quality control purposes, the plaintiffs said, violating their privacy rights.
ACE declined to provide a defense under an umbrella policy issued to Convergys, arguing that the claims did not involve any “publication,” as required for coverage as an advertising injury. Although the policy did not define the term, ACE contended that the ordinary meaning of “publication” required distribution beyond the insured. The underlying complaints claimed only that the recordings were shared among employees of Hyundai, Encore and Convergys.
The court found that “a transmittal or a further dissemination of secret information satisfies publication.” As such, “the initial dissemination of the conversation constitutes a publication at the very moment that the conversation is disseminated or transmitted to the recording device.” In any event, the court found that the underlying complaints alleged that the recorded calls were shared with other employees who were not participants in the original calls, which is arguably a public dissemination, triggering a duty to defend.
The court also rejected ACE’s argument that there was no coverage due to a prior publication exclusion because the policy of recording calls began before the ACE policies incepted. The court stated that each individual telephone call was published for the first time when it was recorded and shared. Because “the underlying complaints would allow proof of publication of new material during the policy period, the insurer may not avoid its duty to defend simply because the publications were part of a ‘continuing course of conduct.’”
The court also ruled that Convergys was entitled to a defense even though it was not named in one of the underlying complaints, because it was “expressly defending the matter” as a Doe defendant, with counsel actively defending the case.
Further, the court ruled that Convergys could select which insurer was responsible for the defense. Because there was a continuing course of conduct that “spans multiple policy periods, ‘the insured is entitled to secure coverage from a single policy of its choice that covers ‘all sums’ incurred as damages ‘during the policy period,’ subject to that policy’s limit of coverage.’”
The court also found that a criminal acts exclusion did not apply, even though the underlying claims asserted a violation of the California Penal Code. Under Ohio law, broad policy exclusions “must not be read to exclude coverage for merely negligent acts that have been criminalized.” Moreover, as to defense costs, because there had been no finding that the policyholders in fact had engaged in criminal conduct, the insured were entitled to a defense.
Accordingly, the court ruled that “ACE shall immediately undertake the defense of these potentially covered actions until such time as it is able to establish as a matter of law that there is no possibility of coverage, which showing ACE has not yet achieved in the present case.”
To read the decision in Encore Receivable Management Inc. et al. v. ACE Property & Casualty Insurance Co., click here.
Why it matters: The court adopted an expansive view of insurers’ defense obligations. It construed an undefined policy term in favor of coverage, held that a single triggered policy can be held responsible for the entire defense, and refused to apply exclusions based on alleged facts that had not been established.
Pennsylvania Court Gives Policyholders Options For Settlement Coverage
When an insurer provides a defense to a policyholder subject to a reservation of its rights to dispute coverage, who controls the terms of a settlement of the underlying claims?
An appellate court in Pennsylvania recently weighed in on this question, giving policyholders two options: (1) reject the insurer’s defense due to the reservation of rights, front its own defense costs, and then sue for reimbursement, all while controlling the defense and settlement; or (2) accept the defense and give the insurer total control over the defense and settlement, subject only to review for potential breach of fiduciary duty.
The not uncommon scenario arose when Babcock & Wilcox Company and B&W Nuclear Environmental Services faced hundreds of personal injury lawsuits alleging exposure to radiation. B&W turned to American Nuclear Insurers and Mutual Atomic Energy Liability Underwriters for coverage. Although the insurers provided a defense, they did so while also filing a declaratory judgment seeking to limit or avoid their coverage obligations.
Acting independently of its insurers, B&W reached an $80 million settlement with the plaintiffs, which also included prejudgment interest of more than $15 million. The insurers objected to the settlement. A trial court ordered the insurers to cover the settlement after a jury found that the settlement was “fair, reasonable, and non-collusive.”
The appellate court recognized that when an insurer reserves the right to deny coverage, the parties’ interests may diverge. When an insurer reserves its rights subject to a duty to defend, “the interests of the insurer and the insured may be antagonistic: If an insurer is exposed only to liability up to the limit of its policy, and any settlement would be at or near that level, then even a modest chance of obtaining a defense verdict might be sufficient in a self-interest cost-benefit analysis to convince an insurer to litigate despite the prospect of a verdict in excess of the policy limits,” the court explained.
The court announced a rule for navigating that situation, diverging from what it saw as the majority rule (permitting the insured to reject a defense offered under a reservation of rights, forcing the insurer either to defend unconditionally or to refuse to defend at its peril) as well as one minority rule (allowing insurers to retain full authority under a consent to settlement provision with the imposition of a heightened good faith requirement).
The court adopted a version of another minority approach, following cases from Florida and Missouri (which also were similar to, with variations, cases in Colorado, Kentucky, New Jersey and South Dakota). Under this approach, the insured has “the option to decline a defense tendered subject to a reservation of rights,” but the insurer retains the “right to control the defense when it is accepted by the insured.” “By granting the insured a basis upon which to eliminate the risk of a conflict of interest at the outset of a claim, it does not consign the insured solely to the protection of our strictly-construed bad faith standard. At the same time, our approach protects an insurer’s right to control litigation when it provides a defense,” the court said.
Whoever then defends the suit “retain[s] the unqualified prerogative to proceed in the way that it determines is best.” The court noted that policyholders will remain protected as insurers continue to be bound by their fiduciary obligation to represent the insured’s interests and have the good faith obligation to settle cases when appropriate.
Because the trial court applied a different standard, the appellate court vacated the prior ruling and instructed the trial court to apply this new standard.
To read the decision in Babcock & Wilcox Company v. American Nuclear Insurers, click here.
Why it matters: The standard adopted by the Pennsylvania appellate court attempts to reconcile the competing interests of insureds and insurers in cases where an insurer provides a defense only subject to a reservation of rights. Courts across the nation have adopted very different rules for this situation, so policyholders and insurers alike must be mindful of the governing law. In Pennsylvania and other jurisdictions with similar rules, insureds must carefully assess their interests and risks before making the election required by the Babcock & Wilcox decision. Of course, if the insured cannot afford to front its own defense, this standard leaves them with little choice; larger companies will have the opportunity to be more strategic.