The other day, I was talking with a lawyer who represented a plaintiff in litigation relating to a failed business transaction. He was lamenting the fact that, if he were to take judgment against the defendants, there wouldn’t be insurance to help satisfy the claim, since, according to him, “no insurance company is ever going to pay for breach of contract.” This called to mind a fundamental tenet of my first boss in this business, who used to say: “If you go into a case thinking there’s no coverage, I guarantee you won’t find any.” I think this may be especially so when dealing with Coverage B of a standard general liability policy (which relates to “personal injury” and “advertising injury”). You really have to compare, very carefully, all of the allegations in the underlying complaint to the specific terms of coverage, and not rely on the labels created by the underlying plaintiffs’ attorney or your insurance company or broker.
This issue recently came up in the New Jersey Appellate Division, in a case involving the alleged breach of a non-compete and confidentiality agreement by an insurance broker. (The case is Borden-Perlman Insurance Agency v. Utica Mutual Insurance Company, and you can download a complete copy of the decision by clicking here.)
Facts: Trombetta worked for Orchestrate, a company that, among other things, serves as a managing general underwriter, placing coverage in the “sports medicine industry.” He had signed a three-year non-compete and confidentiality agreement with Orchestrate. He left Orchestrate and went to work for Borden-Perlman, an insurance brokerage, and one month later, he apparently used Orchestrate’s confidential information to go after Orchestrate’s clients. That understandably made Orchestrate unhappy, so Orchestrate brought suit for, among other things, tortious interference and defamation. According to Orchestrate, Trombetta improperly had told Orchestrate’s clients that Orchestrate didn’t process insurance claims in a timely manner; didn’t provide promised discounts to its clients; and was generally guilty of sloppy paperwork.
Business torts like defamation always present a problem for those of us who do coverage work, because they contain an element of deliberate intent, and judges and insurance claims representatives are sometimes unable to process the concept of insurance coverage for alleged intentional acts that cause intended results.
Here, though, the Utica policy defined “personal injury” to include slander and libel (as is typical in Coverage B of a general liability policy). While the policy excluded coverage for “deliberate…[or] knowing conduct,” the policy also stated that Utica would defend such allegations, but would not “have any liability for any judgment for dishonest, fraudulent, malicious, or criminal conduct.” (Emphasis mine.)
In holding that Utica had breached its duty to defend, the Court wrote: “We have determined that the defamation, tortious interference, and negligent misrepresentation allegations may potentially arise out of negligent misleading and false statements made during the course of rendering services to various clients. The policy recognizes that insureds may be sued for defamation, and in such suits, insureds may generally be accused of engaging in dishonest, fraudulent, or malicious conduct [which] may be excluded under the policy as a covered loss, [but] the clear language of the policy requires Utica to defend Borden-Perlman for covered losses, such as defamation and tortious interference, which allegedly were caused by the defamation.” (Emphasis again mine.)
An aside: Sometimes in coverage claims, the policyholder’s failure or success will turn on which state’s law applies. Here, the New Jersey Court rendered its decision under Texas law, because the policy was a multistate liability policy, covering disclosed risks in New Jersey, Texas, and Pennsylvania; Borden-Perlman’s underlying liability arose in Texas; and there was no choice-of law provision in the policy. (To me, the carrier’s failure to include a choice-of-law provision always creates a latent ambiguity that should be construed in the policyholder’s favor. But that’s just me.) Why was this significant? Because under Texas law, the carrier had to defend the entire case, not only the covered claims. In New Jersey, conversely, some case law holds that the carrier has a duty to reimburse the policyholder only for covered claims, as long as defense costs can be reasonably apportioned between covered and non-covered claims. (Even in New Jersey, though, when the defense costs can’t be reasonably apportioned, the carrier must assume the cost of defense of both covered and non-covered claims.)
The takeaway: When dealing with insurance claims, always remember the Felix Unger Rule, which you can review by clicking here.