Policyholders Fight To Preserve Precedent


Originally Published in the Daily Journal - January 13, 2014.

In a case pending before the state Supreme Court, Hartford Casualty Ins. Co. v. Swift Distribution Inc., S207172, it seems the entire insurance industry has lined up in an effort to convince the high court that the rules should change. The Supreme Court accepted review of an appeal of a ruling that reversed years of precedent, excusing Hartford from defending an infringement suit even though the suit included facts supporting a potentially covered implied disparagement or trade libel claim. Hoping to use this case as a vehicle for change, the insurance industry has gone all out, lining up amicus in an epic battle.

But their arguments are flawed.

The predominant issue is simply whether an insurer need only rely on the causes of action pled to determine whether there is a duty to defend. The so-called "four corners rule" - that coverage determinations are made only on the basis of comparing the complaint to the policy - has not been the law in California for more than 40 years. Ever since a groundbreaking decision in 1966, the law in California has been that, when determining whether to defend under a liability policy, insurers must look into available or known extrinsic evidence as well as the facts pled in the complaint. Where facts exist supporting the potential for coverage, insurers must defend, even if all the elements of a covered claim are not explicitly pled. Gray v. Zurich, 65 Cal. 2d 263 (1966). The duty to defend is determined at the outset of a suit and based on the facts known by the insurer, or even those facts available to the insurer. See Montrose Chem Co. v. Superior Court (Canadian Universal Ins. Co.), 6 Cal. 4th 287, 295 (1993); CNA v. Seaboard Surety, 176 Cal. App. 3d 598, 610 (1986).

Indeed as the insured emphasized in its briefing, "California courts have repeatedly found that remote facts buried within causes of action may potentially give rise to coverage and are sufficient to invoke the defense duty." Pension Trust Fund v. Federal Ins., 307 F. 3d 944, 951 (9th Cir. 2002). What Hartford is trying to do was actually called out in an earlier case: "An insurer, however, cannot construct a formal fortress of the third party's pleadings and retreat behind its walls. The pleadings are malleable, changeable and amendable." Eigner v. Worthington, 57 Cal. App. 4th 188, 195 (1997). 

The second issue is what may constitute a claim of disparagement sufficient to be considered trade libel or slander within the personal injury section of a standard commercial general liability policy. A general liability policy is usually structured into two basic insuring agreements: (1) "Coverage A" promises, "We will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies"; (2) "Coverage B" promises, "We will pay those sums the insured becomes legally obligated to pay as damages because of 'personal and advertising injury.'" This latter coverage grant includes coverage for standard torts such as "oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services." Note that the insuring agreement does not require the disparagement claim to plead each element of the cause of action. Yet Hartford is contending that it should have no duty to defend an imperfectly pled disparagement claim, which is implied in the facts asserted in the complaint against its insured.

Hartford argues that its duty to defend must be narrowly limited to only those disparagement claims which are specifically pled, and that broadly interpreting the facts alleged in the complaint amounts to speculation. Swift cites Hyundai Motor America v. National Union, 600 F. 3d 1092, 1100 (9th Cir 2010), where the court held there was a duty to defend a patent infringement claim where there were allegations of violation of a method patent involving advertising ideas, even though the claim was not specifically pled as infringement of advertising ideas. Closer to the facts at issue in this case (where there are trademark infringement and unfair competition claims), Swift also cites Burgett Inc. v. Am. Zurich Ins. Co., 830 F. Supp. 2d 953,957 (E.D. Ca 2011), which found the insurer had a duty to defend an implied disparagement claim - that the insured's products were superior to that of the competitor, which were therefore inferior, as distinguished from claims that the insured was merely "palming off" its products to deceive potential customers.

In taking up review of the erroneous appellate decision, the Supreme Court should restore the rule of law reflected in more than four decades of jurisprudence. Stay tuned.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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