I have in my office a copy of a Travelers claims manual from the 1980s. In discussing the duty to defend, the manual says, in part: “Ambiguity…means that the words are capable of being understood in two or more reasonably logical ways. Ambiguity should be resolved in favor of the insured. Prompt decisions must be made and effectively communicated to the insured. Defense obligations are broader than the obligation to pay. More and more jurisdictions require the insurer to look beyond the allegations in a lawsuit to determine if the loss is covered. Underlying these principles is the requirement to meet the duty of good faith to the insured. The most positive way to do that is to look for coverage in our policies, and not to look for ways to deny coverage.” (Emphasis mine.)
Sounds like a policyholder brief! Respectfully, though, there are some areas in which claims personnel do seem to look for ways to deny coverage. One of these areas is Coverage B of the standard commercial general liability policy, which covers “advertising injury” and “personal injury.” That includes protection against claims for torts such as defamation and invasion of privacy. The problem is that the covered offenses often include an element of intent on behalf of the policyholder; and claims personnel are taught that any injury expected or intended by the policyholder is never covered.
This thorny issue recently came up in a case in the Second Circuit, National Fire Ins. Co. of Hartford v. E. Mishan & Sons, Inc. The case involves class action lawsuits alleging that the policyholder (Emson), which imports promotional products and other merchandise, engaged in a scheme to deceive customers into incurring recurring credit card charges. The policy contained the standard coverage for “personal and advertising injury,” defined in part to include “the oral or written publication, in any manner, of material that violates a person’s right of privacy.” But the policy also excluded coverage for personal and advertising injuries resulting from “knowing violations” of another’s rights. The policyholder contended that the claims involved allegations of violation of the right to privacy. But the insurance company contended that the “knowing violations” exclusion provided it with a way out. (The insurance policy giveth, the insurance policy taketh away…)
The Court disagreed with the carrier, though, because the possibility existed that Emson’s violation of privacy could have been negligent, not intentional. Specifically, the Court wrote: “We cannot conclude with certainty that the policy does not provide coverage, because the conduct triggering the knowing violation policy exclusion is not an element of each cause of action. Therefore, Emson could be liable to plaintiffs even absent evidence that it knowingly violated its customers’ right to privacy. Furthermore, while the underlying plaintiffs alleged generally that Emson acted knowingly and intentionally, the actual conduct described does not rule out the possibility that Emson acted without intent to harm.” (Emphasis mine.)
The Court noted that the duty to defend exists “until it is determined with certainty that the policy does not provide coverage.” Given that test, the Court held that it was improper for the insurance company to deny the claim.
(Side note of the “toot my own horn” variety: In holding that coverage existed, the Court relied extensively on CGS Industries, Inc. v. Charter Oak Fire Ins. Co., 720 F3d 71 (2d Cir. 2013). The CGS Court rejected application of the “knowing violation” exclusion in a Lanham Act coverage case, because even under the Lanham Act, the policyholder may have inadvertently, as opposed to intentionally, infringed. I served as local counsel on that case for David Gauntlett of Gauntlett & Associates in Irvine, California.)
A couple of observations about this decision. First, because the case was decided under New York law, the Court held that the carrier had “a duty to defend the entire action brought under any of the Policies, including the uncovered claims.” Under New Jersey law, conversely, if there is a reasonable way to allocate defense costs between covered and uncovered claims, the insurance company is only obligated to provide a defense as to the covered claims. This is why choice of law can be so critical in insurance coverage actions (and also why you should review proposed policy forms carefully for choice-of-law provisions before binding coverage.). Second, if you’re on the policyholder side, and an exclusion is used to remove coverage that has been specifically granted, think about the concept of “illusory coverage” as a way to support your claim. See Russell v. Princeton Laboratories, Inc., 50 N.J. 30, 38, 231 A.2d 800 (1967) (holding that contracts should not be interpreted in a way that gives the promisor – in our context, the carrier – the ability to make its promise “illusory,” or worthless).