Selvin_Potential Insurance Coverage

Potential Insurance Coverage
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Presented by:
Peter S. Selvin
TroyGould PC

The Importance of Liability Insurance
in Civil Litigation
 Liability insurance provides protection (i.e., indemnity) in
respect to a claim, but also funding for the insured’s defense
to litigation. It also imposes a duty on the insurer to settle
the case for its insured.
 The law heavily favors policyholders.
 Where the policy provides a duty to defend, there are three
important features: first, the duty to defend is extremely
broad; second, where there is a duty to defend, the carrier is
obligated to defend both covered and uncovered claims; and
third, a carrier that breaches the duty to defend may face
huge penalties for doing so.
 Coverage may be provided in many counter-intuitive
situations.
Business Litigation - Potential Insurance Coverage
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What is “Liability Insurance”?
 Definition: Any type of insurance that protects an individual or
business from the risk that they may be sued and held legally liable
for something such as malpractice, injury or negligence. Liability
insurance policies cover both legal costs and any legal payouts for
which the insured would be responsible if found legally liable.
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Common Forms of Liability Insurance
 Comprehensive General Liability (CGL)
 Errors and Omissions (E & O)
 Directors and Officers (D & O)
 Employment Practices (EPLI)
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How Is Liability Insurance Different From
Other Forms Of Insurance?
 “Third party” versus “first party”
 Trigger of coverage is not loss sustained by insured, but claim
asserted by third party
 Insurer has obligation to defend and indemnify insured in the
event a “claim” asserted by a third party
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Gross Anatomy of a Liability Policy
 Insuring agreement – what does the policy cover?
 Trigger of coverage – is it a “claim”?
 “Occurrence” versus “claims made” coverage
 Notice or reporting of claim –different rules for “claims made”
versus “occurrence” based policies.
 Notice or reporting of “circumstances”
 Retention/deductible
 Exclusions
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Framing a Complaint to Trigger Coverage
The two key principles:
1. The duty to defend is not limited by the causes of action that are
pled by the plaintiff. “…that the precise causes of action pled by the
third party complaint may fall outside policy coverage does not
excuse the duty to defend where, under the facts alleged,
reasonably inferable or otherwise known, the complaint could be
fairly amended to state a covered liability.” Scottsdale Ins. Co. vs.
MV Transportation, 36 Cal.App.4th 643, 654 (2005); Hartford
Casualty vs. Swift Distribution, 59 Cal.4th 277 (2014).
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Framing a Complaint to Trigger Coverage, cont.
The two key principles, cont.:
2. Insurer must provide a complete defense to its insured even where
some causes of action may be outside coverage. Thus, if any claims
in a third party complaint against a party insured under a CGL policy
are even potentially covered by the policy, the insurer must provide
its insured with a defense to all claims. Horace Mann Ins. Co. vs.
Barbara B., 4 Cal.4th 1076, 1081 (1993). This requirement that an
insurer provide a complete defense in a “mixed” action is necessary,
even if outside the policy’s strict terms, to protect the insured’s
litigation rights with respect to the potentially covered claims. Buss
vs. Superior Court, 16 Cal.4th 35, 49 (1997).
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Reservation of Rights
 “An insurer’s notification to an insured that coverage for a claim may not
apply. Such notification allows an insurer to investigate (or even defend) a
claim to determine if coverage applies (in whole or in part) without waiving
its rights to later deny coverage based on information revealed by the
investigation." Glossary of Insurance Management Terms (9th ed.).
International Risk Management Institute, 2004, p. 192.
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Reservation of Rights, cont.
 "An insured is entitled to know early in the litigation process whether the
insurer intends to honor [its] duty [to defend] in order that the insured may
take steps to defend himself. If in fact the insurer undertakes that defense
the insured may reasonably rely upon the nonexistence of policy defenses. To
hold otherwise would allow the insurer to conduct the defense of the action
without the knowledge of the insured that a conflict of interest exists
between itself and the insurer. The conflict is that the insurer retains a policy
defense which would relieve the insurer of all liability while simultaneously
depriving the insured of the right to conduct his own defense. It is the
reliance of the insured upon the insurer's handling of the defense and the
subsequent prejudice which gives rise to an estoppel in the first instance
against the insurer from raising policy defenses.“ Penn-America Ins Co. v.
Sanchez, 220 Ariz. 7, 202 P. 3d 472 (2008).
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The Duty to Defend
 Under Civil Code § 2778(4), the duty to defend is implied in all liability
insurance contracts unless the policy clearly and unambiguously excludes
such a duty. One of the most basic cornerstones of modern insurance law is
that the duty to defend is broader than the duty to indemnify. Gray v. Zurich
Ins. Co., 65 Cal. 2d 263 (1966).
 In order to trigger an insurer’s duty to defend, “the insured need only show
that the underlying claim may fall within policy coverage.” Montrose Chemical
Corp. v. Superior Court, 6 Cal. 4th 287, 300 (1993). “[T]he insurer must
prove it ‘cannot.’” Montrose, 6 Cal. 4th at 300 (1993). This is so even if a
claim is “insubstantial” and would not support an award of damages. Horace
Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 1086 (1993).
 By contrast, the duty to indemnify is governed by facts established at trial.
City of Laguna Beach v. Mead Reinsurance Corp., 226 Cal. App. 3d 822, 829-
830 (1990). An insurer is obligated to indemnify against liability only if facts
proven at trial show a covered claim. (California Insurance Law Handbook
(2011) at § 46:1)
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Consequences of an Insurer’s Wrongful Failure
to Defend
 Where the carrier wrongfully fails to defend, it will be deemed to have waived
any exclusions to coverage under the policy that it otherwise would have had
with respect to its obligation to indemnify. If a carrier denies the insured a
defense and it is ultimately determined that a defense was owed, the carrier
can be subjected to a claim of bad faith and may ultimately be required to
provide indemnity even where no duty to indemnify exists. Isaacson v.
California Ins. Guarantee Assn, 44 Cal. 3d 775, 791 (1988). See also Amato
v. Mercury Casualty Co., 53 Cal. App. 4th 825 (1997).
 This seemingly harsh result advances the policy of incentivizing insurers to
vigorously search the underlying claim for the purpose of finding a duty to
defend. See Pension Trust Fund for Operating Engineers v. Federal Ins. Co.,
307 F. 3d 944, 951 (9th Cir. 200); see also K2 Investment Group, LLC v.
American Guarantee & Liability Insurance Company, 2013 WL 2475869 (NY
App. 2013) (when a liability insurer has breached its duty to defend its
insured, the insurer may not later rely on policy exclusions not contained in
its initial disclaimer to escape its duty to indemnify the insured for a judgment
against him).
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Once the duty to defend attaches, the insurer also has an
obligation to settle the claim within policy limits
 If the carrier rejects a reasonable settlement offer from the
claimant that is within policy limits, it may be liable for any
judgment that is in excess of the policy limits. See Communale v.
Traders & Gen Ins. Co., 50 Cal. 2d 654 (1958).
 Importantly, in rejecting such a settlement offer, the carrier may
not take into account or consider any defenses it may have to
coverage for the claim. See Johansen v. California State Auto
Ass’n Inter-Ins. Bureau, 15 Cal. 3d 9 (1975).
 At the same time, in order to establish a claim for bad faith, the
insured must demonstrate that the policy obligated the insurer to
indemnify the insured for the underlying loss. See Dewitt v.
Monterey Insurance Company 204 Cal. App. 4th 233 (2012).
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Selection of Counsel
 If a carrier assumes its insured's defense with no reservation of rights, the
carrier normally controls the defense, including selection of counsel.
 But "if a conflict of interest arises which creates a duty on the part of the
insurer to provide independent counsel to the insured, the insurer shall
independent counsel to the insured". Cal. Civ. Code § 2860(a).
 A conflict of interest may exist "when an insurer reserves its rights on a given
issue and the outcome of that coverage issue can be controlled by counsel
first retained by the insurer…" Cal. Civ. Code § 2860(b).
 A carrier that refuses to fund independent counsel in circumstances where
such a conflict of interest exists may be liable for breach of its duty to defend.
See Montrose Chemical Corporation v. Century Indemnity Company, 2010 WL
3566700 (2010).
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“Cumis” Counsel’s Direct Exposure for Fees
Unnecessary for the Insureds’ Defense
In 2015, the California Supreme Court decided in Hartford Casualty
vs. J. R. Marketing, LLC, 61 Cal.4th 998 (2015) that an insurer may
seek reimbursement directly from so-called “Cumis” counsel for fees
attributable to time that was fraudulent or was otherwise manifestly
useless and wasteful when incurred.
 “Cumis counsel have been unjustly enriched at the insurer’s
expense [and they] provide no convincing reason why they
should be absolutely immune from liability for enriching
themselves in this fashion.”
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Utilizing a CGL Policy’s coverage for “personal injury”
or “advertising injury” in business disputes
 In lawsuits involving claims of infringement, misappropriation or the
violation of the right of privacy, the key portion of a CGL policy is the
“personal injury” or “advertising injury” coverage found in Coverage
B. That coverage section will typically contain language providing as
follows:
a. We will pay those sums that the insured becomes legally obligated to
pay as damages because of “personal and advertising injury” to which this
insurance applies. We will have the right and duty to defend any “suit” seeking
those damages…
b. This insurance applies to “personal and advertising injury” caused by
an offense arising out of your business but only if the offense was committed
in the “coverage territory” during the policy period.
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“Accidental” conduct is not required for coverage for
personal or advertising injury
Importantly, coverage for personal or advertising injury does not
depend on the existence of an “occurrence,” which typically is
defined in terms of “accidental” conduct. See, e.g., General
Accident Ins. Co. v. West American Ins. Co., 42 Cal. App. 4th 95,
103 (1996). Thus, coverage for personal and advertising
injury is not limited to negligence and may even cover
intentional torts. See, e.g., David Kleis, Inc. v. Superior Court, 37
Cal. App. 4th 1035, 1047 (1995).
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Recent appellate decision imposing duty to defend on liability carrier in
connection with trade secrets claim by company against one of its
former employees
 The recent unpublished appellate decision in Tetra Vue, Inc. vs.
St. Paul Fire & Marine Ins. Co. (Cal. Ct. App. July 19, 2013, No.
D061002) illustrates both the usefulness of Coverage B in
business cases and the breadth of the duty to defend.
 In that case, the Court of Appeal found that because the claims
against the insured potentially alleged advertising injury, the
insurer (St. Paul) was obliged to provide its insured with a
defense where the insured’s former employer had accused him of
misappropriating proprietary material and using that proprietary
material in connection with the insured’s new business venture.
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Recent appellate decision imposing duty to defend on liability carrier in
connection with trade secrets claim by company against one of its
former employees, cont.
 The Court of Appeal held St. Paul could decline to defend only if it could
conclusively eliminate the possibility that General Atomics was alleging it
suffered harm from the misappropriation and use of its advertising
material, an allegation that would trigger coverage under the policy.
While the cross-complaint alleged only that Banks and TetraVue misused
propriety General Atomics materials, it was possible that General Atomics
itself at some point used the same materials to attract the attention of
others to seek customers and/or increase its business.
 If this were shown to have occurred, the use of the same materials by
Banks and TetraVue would potentially constitute advertising injury,
triggering coverage under the policy. As a result, the court found the
cross-complaint alleged at least a possibility that a claim asserted by
General Atomics against TetraVue and Banks might have been covered.
The court of appeal reversed the trial court’s judgment and remanded the
case for further consistent proceedings. 10 California Insurance Law &
Litigation Alert (August 31, 2013) at p. 149.
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Examples of coverage in counter-intuitive situations
 Patent infringement
 The application of D&O policies in business or IP disputes
 Cyber-related risks
 Construction defect claims
 Trade dress claims
 The concept of “disparagement”
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Patent infringement may be covered pursuant to a
CGL policy’s “Advertising Injury” coverage
See, e.g., Amazon.com International, Inc. vs. American Dynasty
Surplus Lines Ins. Co., 120 Wash. App. 610 (2004) (patent
infringement covered under “misappropriation of advertising
ideas” offense where infringed software itself constituted or
embodied advertising technique); Hyundai vs. National Union
Fire Ins. Co., 600 F. 3d 1092 (9th Cir. 2010) (coverage for
infringement of business method patent arising out of Hyundai’s
“build your own vehicle” feature on its website); Dish Network
Corporation v. Arch Specialty Ins. Co., 659 F. 3d 1010 (10th Cir.
2011) (coverage for patent infringement where the patent
involved a customer service telephone system that allowed
customers to perform pay-per-view ordering and customer
service over the phone).
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Because of the broad grant of coverage under D&O policies,
many business and IP disputes may (surprisingly) be covered
 Acacia Research Corp. v. National Union Fire Insurance Co. of
Pittsburgh, PA, 2008 WL 4179206 (C.D. Cal. Feb. 8, 2008) (D&O
carrier obligated to reimburse company and its officer for defense
fees and settlement paid in IP theft/trade secrets case).
 American Century Services Corp. v. American International
Specialty Lines Insurance Co., 2002 WL 1879947 (S.D.N.Y.
August 14, 2002) (patent infringement claims were potentially
within coverage provision applicable to “wrongful acts”).
 MedAssets, Inc. v. Federal Ins. Co., 705 F. Supp. 2d 1368 (N.D.
Ga. 2010) (claim alleging misappropriation of confidential
information was covered under D&O policy despite presence of
“intellectual property” exclusion).
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Some cyber-related risks may be covered under
traditional insurance policies
Although new insurance products have been developed which are
specifically tailored for cyber-risk claims, some such claims may be
covered under traditional insurance policies.
 See, e.g., Retail Ventures, Inc. v. National Union Fire Insurance Company of Pittsburg,
PA, 691 F. 3d 821 (6th Cir. 2012) (insurance provided reimbursement to company for
remediation expenses where company was victimized by computer hackers who stole
private customer and credit card information); Creative Hospitality Ventures, Inc. v.
United States Liability Ins. Co., 655 F. Supp. 2d 1316 (SD Fla. 2009) (violation of right of
privacy, and hence “personal and advertising injury” coverage, under CGL policy
triggered where vendor failed to redact customer credit card information from receipts).
 Although this is a minority position, some cases also hold that data loss caused by a
computer virus may be covered under business interruption or other first-party property
policies. See, e.g., Southeast Mental Health Center, Inc. vs. Pacific Insurance Company,
Ltd., 439 F. Supp. 831 (WD Tenn. 2006); Lambrecht and Associates vs. State Farm
Lloyds, 119 S.W. 3d 16 (Tex. App. 2003).
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CGL Policy May Cover Defense of Data Breach
Class Action
Travelers Indem. Co. v. Portal Healthcare Solutions, LLC, 2016 WL
1399517 (4th Cir. 2016)
The Fourth Circuit ruled that Travelers Insurance must defend a
medical records company in a class action suit stemming from a data
breach which resulted in the disclosure of its customers’ personal
health information. The Court held that availability on the internet to
the general public qualified as a “publication” within the meaning of
the general liability policy. Thus, making any document or
information available on the internet may constitute a “publication”
for insurance purposes, where “publication” is a trigger for coverage.
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Insurers Are Held to Be Responsible for Defending
Telemarketing Class Action Suits
National Fire Ins. vs. E. Mishan & Sons, Inc. 2016 U.S. App. Lexis
10151 (2nd Cir. 2016)
Insurers must defend home goods company (Emson) in two class
actions arising from its alleged sharing of customer information with
a telemarketer. According to the Court, at least some of the claims
in the class actions fell outside policy exclusions for knowing and
intentional conduct.
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Construction Defect Claims
 Construction defect claims satisfy the “occurrence” requirement in a
CGL policy. Geddes & Smith v. St. Paul Mercury Indemnity Co., 63
Cal. 2d 602 (1965); Economy Lumber Co. v. Ins. Co. of No. America,
157 Cal. App. 3d 641 (1984); Maryland Cas Co. v. Reeder, 221 Cal.
App. 3d 961 (1990).
 See also McMillin Management Services v. State Farm General
Insurance Co., 2013 WL 5303056 (Cal. App. 4th Dist.) (insurer
required to defend project manager in construction defect suit filed
by group of homeowners); Anthem Electronics, Inc. v. Pacific
Employers Ins. Co., 302 F. 3d 1049 (9th Cir. 2002).
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Trade Dress Claims
Recognizing that a product’s design or appearance may inherently
also constitute a form of “advertising,” several courts have held that
trade dress inherently constitutes “advertising” within the meaning of
a CGL policy.
See St. Paul Fire and Marine Ins. Co., v. Advanced Interventional Systems, 824 F. Supp.
583, 585 (E.D. Va. 1993), affirmed 21 F. 3d 424 (4th Cir. 1994) (holding that trade dress
infringement “expresses essentially the same concept” as the term “style of doing
business”); Poof Toy Products Inc. v. U.S. Fid. & Guar. Co., 891 F. Supp. 1228, 1232
(E.D. Mich. 1995) (trade dress infringement constitutes “advertising injury” under the
advertising injury “offense” or “misappropriation of advertising ideas or style of doing
business”); Peerless Lighting Corp. v. American Motorists Ins. Co., 82 Cal. App. 4th 995,
1000, fn 4 (2000) (“infringement of trade dress arguably qualifies as ‘[m]isappropriation
of advertising ideas or style of doing business.’”)
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The concept of “disparagement”
 One of the key “offenses” under a CGL policy’s Coverage B “is an
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.” (emphasis
added)
 As shown below, the concept of “disparagement” as used in this
“offense” has been applied by courts to find coverage in
connection with a variety of business claims.
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“Disparagement” as a basis for finding coverage in
false advertising or unfair competition cases
 Several recent cases have found that “disparagement”, which is a triggering
“offense” in many CGL policies, may be implied for insurance coverage purposes
where, for example, a vendor claims that it was the “only producer” of a certain
software product (E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co., 590 F. Supp.
2d 1244 (N.D. Cal 2008)) or where it claims that its products are “more effective”
or “superior” to those made by others (Knoll Pharmaceutical Co. v. Automobile Ins.
Co. of Hartford, 152 F. Supp. 2d 1026, 1036 (N.D. III. 2001)).
 More recently, a federal court applying California law determined that there was
“disparagement” and hence insurance coverage where a complaint alleged that the
insured had “implied to the marketplace” that it had a superior right to use a
certain trademark and thus by implication represented that the underlying plaintiff
did not have the rights to that trademark. Burgett, Inc. v. American Zurich
Insurance Company, 2011 U.S. Dist. LEXIS 135449 (E.D. Cal. 2011).
 These cases support a finding for coverage in false advertising or unfair
competition cases, even where the underlying policy does not specifically identify
these claims as covered “offenses”.
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The California Supreme Court Decision In Hartford
Casualty v. Swift Distribution, 59 Cal. 4th 277 (2014)
But in 2014 the California Supreme Court significantly limited the
doctrine of “implied disparagement” in the insurance coverage context:
 “In evaluating whether a claim of disparagement has been
alleged, courts have required that defendant’s false or misleading
statement have a degree of specificity that distinguishes direct
criticism of a competitor’s product or business from other
statements extolling the virtues or superiority of the defendant’s
product or business…[This] involves two distinct … requirements.
A false and misleading statement (1) must specifically refer to
the plaintiff’s product or business, and (2) must clearly derogate
that product or business”. Id. at 291.
 Thus, an insured’s attempt to copy or infringe on the intellectual
property of another’s product does not, without more, constitute
disparagement. Id. at 296.
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Key Take-Aways and Best Practices
 There are opportunities to find coverage for lawsuits arising out of
business, IP and other risks under traditional insurance policies, such
as CGL, D&O and E&O.
 Report claims immediately under all potentially pertinent policies. Be
aware that there may be a reportable “claim” even if it has not
ripened into an actual lawsuit. In addition, “circumstances” that do
not yet constitute a “claim” may also be required to be reported.
 Do not accept a declination of coverage, but instead hold your
carriers to their statutory duties to investigate, respond, defend,
settle and indemnify.
 Consider the newer, non-traditional insurance products for IP
infringement and cyber-liability to fill gaps in coverage left by
traditional products.
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About the Speaker
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Peter S. Selvin
TroyGould PC
1801 Century Park East, Suite 1600
Los Angeles, CA 90067-2367
310-789-1230
pselvin@troygould.com

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