In a recent ruling, the United States Court of Appeals for the Fifth Circuit determined that an insurer owed no defense and indemnity to three strip clubs that had previously been sued for misappropriating the images of various models who had never consented to their likenesses being used for such advertising.

In Princeton Excess & Surplus Lines Ins. Co. v. A.H.D. Houston, Inc., the Fifth Circuit reversed a summary judgment rendered by the United States District Court for the Southern District of Texas, holding that the commercial general liability insurer bears no duty to defend or indemnify their insureds for violations exceeding the scope of coverage pursuant to the “eight corners” rule.

What’s in a Name? (Or an Image, or a Likeness?)

The facts giving rise to the underlying litigation in Princeton could be ripped from the Hollywood headlines. In 2017, sixteen professional models discovered that their images were being used in advertisements for three Texas strip clubs. While models were typically accustomed to seeing their images in commercial contexts, these particular promotions were shocking because the clubs used and manipulated images of the models without their consent. The advertisements depicted the models in sexually suggestive online posts that insinuated that they endorsed or were employed by the clubs in question.

The models sued in Texas state court, alleging that the clubs invaded their privacy by misappropriating their images and likeness. They were granted summary judgment, with the clubs ordered to pay nearly $1.5 million to the models.

The Fifth Circuit Bares It All

At the time of the initial lawsuit, the clubs had two policies in effect through their commercial general liability policies, which were insured by Princeton Excess and Surplus. Their general conditions were identical; however, their exclusions were not. The first policy contained a “Field of Entertainment” exclusion under which coverage was excluded for the insured’s liability for IP infringement, invasion of policy, defamation, copyright violations, etc. The second policy contained an “Exhibitions and Related Marketing” exclusion, exluding coverage in the event of liability related thereto, such as damages arising from “the creation, publication, performance, exhibition, distribution, or exploitation of…image or likeness…in any medium.” Consequently, the clubs sought insurance coverage for the damages awarded to the models through polices issued by Princeton Excess and Surplus.

Princeton filed a declaratory action in federal court in Houston alleging that the exclusions established that it owed neither defense nor indemnity to the insured clubs and, by proxy, to the models themselves. The district court granted summary judgment for the models and the clubs, holding that Princeton had the duty to defend and indemnify under both of the policies, and that the exclusions, in some respects, rendered coverage illusory.

Upon Princeton’s appeal, the Fifth Circuit held that (1) neither the “Field of Entertainment” nor the “Exhibitions and Related Marketing” exclusions rendered coverage merely illusory, and (2) that the clubs’ insurance claims were thereby not subject to defense or indemnity.

The appellate court applied the oft-cited “eight corners” rule, under which an insurer is only obliged to provide a defense if potential for such coverage arises within the eight corners of the pertinent documents; that is, the four corners of the insurance policy itself, and the four corners of the petition alleging coverage. The insured bears the initial burden of proving that they may be entitled to coverage; consequently, the insurer then must show why the claim is not covered.

Applying the eight corners rule, the Fifth Circuit held that the duty to defend was precluded under both policies. For the first policy, since the models alleged that the clubs invaded their privacy, the contents of both the complaint and the policy directed the Fifth Circuit to find in favor of Princeton per the “Field of Entertainment” exclusion. The duty to indemnify under the first policy is to be determined on remand. As to the second policy, the Fifth Circuit found that “to slice and dice the policy language as the district court did in nullifying the exclusion is contrary to the policy’s text and structure, and therefore to the intent of the parties.” Consequently, such contravention violated the eight corners rule, absolving Princeton of the duties of defense and indemnity.

The Takeaway: Say What You Mean, Mean What You Say

The crux of Princeton is aptly summarized in the opinion itself: “An insurance policy is not illusory merely because it does not provide coverage for a claim the policyholder thought it would cover…Texas law does not recognize coverage because of [the] reasonable expectation of the insured.” This language, and the decision as a whole, demonstrates the fine line to be tread by both insurers and the insured. Insurers must clearly delineate intended exclusions in a manner that does not render the policy itself illusory.

As the Princeton decision demonstrates, coverage is a complex topic that often creates controversy.