Every once in a while, I come across a case in which the facts are just so perfect, I can’t not write about them. Take, for example, the recent Sixth Circuit decision in Stafford v. Jewelers Mutual. A 5.56 carat pink diamond. A deal by a diamond merchant to buy the jewel (for cash, at the ridiculously low price of $8000) from a shady German “businessman” at a Las Vegas hotel. After the sale, the “businessman” disappears without a trace. Then the diamond disappears from a sealed box. If you’re of a certain age, this should remind you of a series of Peter Sellers films. (The Court, in fact, described the fact pattern as “scripted for a movie.”)
The Stafford case involved “personal injury” coverage, which, along with “advertising injury” coverage, constitutes “Coverage B” in standard commercial general liability policies. This is an oft-misunderstood and vexing area. Basically, persons and organizations have certain legally protected rights that, if violated, may result in damage to them. These include a right to privacy, and a right not to be disparaged. Under certain circumstances, Coverage B provides protection against claims that such rights have been harmed.
In the Stafford case, Stafford, the company that bought the “Pink Panther” from the shady businessman, shipped it to Julius Klein Diamonds (“JKD”), via Brinks truck, in a sealed box. JKD and Stafford had an ongoing business relationship, and JKD planned either to buy the diamond, or to certify it for Stafford’s jewelers and return it. JKD received the package the same day Stafford shipped it, but claimed that the diamond was missing from the box.
Stafford then sued JKD, as well as Stafford’s carrier, Jewelers Mutual Insurance Company, for damages relating to the loss of the diamond. (Jewelers Mutual had sold Stafford a “Businessowners Special Policy,” which apparently contained both property and liability coverage.) JKD counterclaimed, arguing that Stafford had made false representations concerning the shipment (specifically, by falsely representing to JKD that the pink diamond had been placed inside the shipping box). The case went to trial, and a jury found in Stafford’s favor, awarding over $1.7 million in damages against JKD. Stafford, however, was not entirely happy with the outcome, because the costs of successfully defending against JKD’s counterclaim amounted to more than $1 million. Stafford wanted Jewelers Mutual to pay the defense costs under the liability portion of the policy, which Stafford argued included personal injury coverage for offenses such as disparagement. Stafford maintained that JKD’s counterclaim was based on “disparagement,” since Stafford had essentially accused JKD of theft, which JKD (unsuccessfully) contended was a meritless claim.
Jewelers Mutual disagreed with Stafford’s position, and so did the Court.
Apparently, throughout the lawsuit against JKD, Stafford had characterized the JKD counterclaim as one for “fraud.” The Sixth Circuit grabbed onto that fact like a terrier latching onto an ankle, writing: “Because Stafford took the position that JKD’s counterclaim involved nothing but fraud throughout the [underlying] case, and because Stafford then prevailed on that claim when it was presented to a jury, it cannot now assert the counterclaim instead alleged disparagement, defamation, or negligent misrepresentation.”
Really? Who cares what “label” was placed on the counterclaim, even by the policyholder? For purposes of interpreting coverage, shouldn’t the appropriate inquiry simply be into what the policy actually says, as compared to the allegations in the counterclaim? If not, then lawyers and policyholders need to be even more extremely careful about everything they write, for fear that their statements may “trump” the actual language in the relevant documents (the policy and the operative complaint).
Perhaps the New Jersey Supreme Court best characterized this dilemma in Voorhees v. Preferred Mut. Ins. Co. [128 N.J. 165, 174 (1992)] when it wrote: “The duty to defend …is determined by whether a covered claim is made, not by how well it is made. A third party does not write the complaint to apprise the defendant’s insurer of potential coverage; fundamentally, a complaint need only apprise the opposing party of disputed claims and issues.” (Emphasis mine.)
Alas, even if the “label” hurdle had been overcome here, the substantive insurance claim failed anyway. The Sixth Circuit concluded that there was no slander, libel or disparagement (as required by paragraph “a” of the “personal injury” coverage) because there was no “publication” of material to a third party – only to JKD. The Court also noted that the counterclaim did not “include allegations that Stafford said anything about JKD or its services,” only about the diamond not being in the box. (That last point is sort of silly, but I don’t get to make these decisions, only complain about them. If the diamond wasn’t in the box, then Stafford was accusing JKD of theft.)
As to the “publication” requirement in certain personal injury-type claims, we saw this situation recently in the cyberliability context, in the Connecticut case of Recall Total Information v. Federal Insurance. There, IBM hired a contractor (Recall) to transport and store electronic media tapes containing personal information (including social security numbers) of 500,000 IBM employees. The tapes fell out of the back of a truck that was rolling down the highway, an unknown person picked them up, and IBM claimed $6 million in damages to remediate the problem (primarily consisting of costs to identify and notify the persons whose data potentially had been compromised). Recall filed a claim with its liability carrier, under the “invasion of privacy” provisions in the “personal injury” coverage. But, as in Stafford, the Court held that no “personal injury” because there was no proof of “publication”. Specifically, there was no proof that anyone had actually downloaded the data from the tapes. The Court wrote: “Regardless of the precise definition of publication, we believe that access is a necessary prerequisite to the communication or disclosure of personal information.”
Back to the Stafford case. One possible avenue of recovery in the policy (not discussed by the Court) was the additional “malicious prosecution” coverage under the personal injury part (an offense that does not require “publication”). After all, JKD essentially contended (unsuccessfully) that Stafford improperly prosecuted the claim of the missing diamond, in an effort to commit insurance fraud. The problem is that, for a malicious prosecution lawsuit to have merit, the underlying claim has to terminate unfavorably for the alleged “malicious prosecutor” (here, Stafford). Stafford won its lawsuit against JKD, so the personal injury coverage for malicious prosecution wouldn’t work. Note to risk managers: Try to have personal injury coverage endorsed on the policy for “abuse of process,” not only “malicious prosecution.” “Abuse of process” does not require the plaintiff (policyholder) to lose its case, and therefore coverage for “abuse of process” is broader.
As for Stafford and the Pink Panther, well, sometimes, things just don’t work out quite as well as you’d like.