News - April 2008

• Where Policy Covers "Personal Injury" Caused By "Accident," Insurer Has No Duty to Defend Insured Against Suit Alleging "Intentional" False Imprisonment
• Excess Insurer Has No Duty to Pay Where Insured Settles With Primary Insurer For Less Than Primary Policy’s Limits
• Ninth Circuit Finds a Duty to Defend Lawsuits Filed Against a Rock Band Musician and Related Corporation
• Property Insurance: "Absolute" Mold Exclusion Ruling Stands, Per California Supreme Court

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Where Policy Covers "Personal Injury" Caused By "Accident," Insurer Has No Duty to Defend Insured Against Suit Alleging "Intentional" False Imprisonment

The California Court of Appeal has held that where a homeowners policy covered various “personal injury” offenses caused by “accident,” the insurer has no duty to defend an insured against a suit alleging an “intentional and deliberate” false imprisonment. (Lyons v. Fire Insurance Exchange (2008) WL 615887) 

Facts  

Plaintiff Stephen Lyons, a sports newscaster and former professional baseball player, met Stacey Roy while they were each vacationing with their families in Hawaii. After an afternoon of poolside conversation, Lyons accompanied Roy up the elevator to the floor where Roy’s hotel room was. The two then exited the elevator. According to Roy, Lyons then took Roy’s wrist, led her to a hallway alcove, partially removed her clothes and tried to force her to perform a sexual act.

Lyons had a somewhat different version of the incident. He admitted that he took Roy’s wrist, led her to the alcove and asked her to expose her breasts. However, he claimed that when Roy declined, he took her to the door of her hotel room and then he returned to the pool.

Roy subsequently filed a civil suit against Lyons, alleging assault, battery and false imprisonment. Lyons tendered the defense of the action to his homeowners insurer, Fire Insurance Exchange (FIE), under a policy covering “bodily injury,” “property damage” or “personal injury” resulting from an “occurrence.” The policy defined “personal injury” so as to include “false arrest, imprisonment… and detention,” and defined an “occurrence” as an “accident.” FIE denied Lyons’ tender on the ground that none of Roy’s claims against Lyons arose from an “occurrence,” or “accident,” as required by the FIE policy.

Lyons then sued FIE for breach of contract and bad faith, alleging that FIE had wrongfully failed to defend Lyons against Roy’s lawsuit. However, the trial court found that Roy’s suit against Lyons was not potentially covered under the FIE policy and thus entered summary judgment in favor of FIE.

Holding

The Court of Appeal affirmed the trial court’s grant of summary judgment in favor of FIE.

First, the Court rejected Lyons’ argument that the requirement of an “accident” did not apply to “personal injury” offenses such as “false imprisonment.” Rather, the Court held that that the “accident” requirement applied to all coverages under the policy – bodily injury, property damage and personal injury.

Second, the Court held that under the undisputed facts (i.e., that Lyons took Roy’s wrist in the context of his sexual advances, and that his conduct restrained her), there was no way that the alleged false imprisonment arose from an “accident.” To the contrary, all of Lyons’ conduct was intentional and deliberate. Although Lyons may have believed that Roy would consent to his sexual advances, that did not turn Lyons’ intentional conduct into an “accident” because, under California law, the term “accident” refers to the nature of the insured’s conduct, not his state of mind. Therefore, mistaken consent does not, as a matter of law, create an accident for coverage purposes. The Court pointed out that there may be situations where a false imprisonment can occur by “accident” (e.g., where a shopkeeper at closing time intentionally locks his storage vault but forgets that he had sent an employee inside to take inventory). Here, however, Lyons’ deliberate conduct (taking Roy by the wrist in the context of a sexual advance) could not be characterized as an “accident.”  

Since there was no potential for coverage under the policy, FIE did not have a duty to defend Lyons against Roy’s lawsuit, and summary judgment in favor of the FIE was proper.

Comment

Note that standard liability policies covering “personal injury” offenses do not require an “accident.” Here, however, the FIE policy was not a standard policy: it specifically limited coverage to “personal injury” resulting from an “accident.” Ultimately, the Court attempted to give effect to the FIE policy as written, essentially holding that the policy would cover an insured for a “negligent” false imprisonment, but would not cover an insured for an “intentional” false imprisonment. It is likely that if the Court had been considering a policy with standard “personal injury” coverage (which does not require an “accident”), the Court would have found at least a duty to defend.

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Excess Insurer Has No Duty to Pay Where Insured Settles With Primary Insurer For Less Than Primary Policy’s Limits

The California Court of Appeal has held that an excess policy’s “exhaustion” clause unambiguously relieved an excess insurer of any duty to indemnify its insured for unreimbursed defense and settlement costs after the insured settled with its primary insurer for less than the primary policy’s limit of liability. (Qualcomm v. Certain Underwriters at Lloyd’s, London (2008) 73 Cal.Rptr.3d 770)

Facts

National Union Fire Insurance Company of Pittsburgh (National Union) issued Qualcomm, Inc. (Qualcomm) a primary directors and officers (D&O) liability policy, which insured Qualcomm and its directors and officers for “loss,” including settlements and defense costs arising from civil lawsuits. National Union’s primary policy had a $20 million limit of liability.

Certain Underwriters at Lloyd’s, London (Underwriters) issued Qualcomm a first level excess D&O liability policy, which provided another $20 million in coverage in excess of National Union’s $20 million primary policy limit. The Underwriters excess policy contained an “exhaustion” clause which stated that “Underwriters shall be liable only after the insurers under each of the Underlying Policies [i.e., the National Union primary policy] have paid or have been held liable to pay the full amount of the Underlying Limit of Liability.”

Various Qualcomm employees filed a class action lawsuit against Qualcomm asserting a right to unvested company stock options. Other employees filed similar lawsuits, asserting a right to accelerated vesting of stock options.

Qualcomm tendered the defense of these underlying actions to National Union and Underwriters. Qualcomm settled a coverage dispute with National Union in exchange for National Union’s payment of $16 million under the National Union $20 million primary policy. Qualcomm then paid the $4 million “gap” between National Union’s settlement amount and National Union’s primary policy limit. Thereafter, Qualcomm sought coverage from the excess insurer, Underwriters, for an additional $9 million in settlement payments and defense expenses that Qualcomm incurred in the underlying actions. Underwriters asserted that it had no obligation to pay, as the underlying National Union primary policy had not exhausted.

Qualcomm sued Underwriters for breach of contract and declaratory relief, contending that Underwriters’ excess policy obligated it to reimburse Qualcomm for the $9 million Qualcomm had incurred in defending and settling the underlying actions. Qualcomm asserted that National Union and Qualcomm had collectively paid at least $20 million for the defense and indemnity of the underlying actions. Underwriters countered that the “exhaustion” clause in its excess policy required National Union to pay or become obligated to pay its entire $20 million policy limit. The trial court ruled in Underwriters’ favor and Qualcomm appealed.

Holding

The Court of Appeal affirmed the trial court’s ruling, concluding that the “exhaustion” clause in Underwriters’ excess policy unambiguously required National Union to pay or be legally obligated to pay no less than its $20 million primary policy limit before Underwriters became obligated to pay under its excess policy. In holding that the Underwriters’ excess policy was not triggered, the appellate court rejected Qualcomm’s public policy arguments regarding the encouragement of settlements between insureds and primary insurers. Instead, the appellate court focused on the “literal language” of the excess policy, which required that the primary insurer pay the “full amount” of its limits before the excess policy would apply.

Comment

This case follows a long line of authorities in which California courts have held that the public policy considerations do not supersede clear and unambiguous policy language.

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Ninth Circuit Finds a Duty to Defend Lawsuits Filed Against a Rock Band Musician and Related Corporation

The Ninth Circuit Court of Appeals has held that a general liability insurer had a duty to defend a rock band musician and a related corporation against underlying actions filed by former band members alleging improper use of a logo in advertising merchandise and damage to reputation. (Manzarek v. St. Paul Fire & Marine Ins. Co. (2008) 2008 WL 763385)

Facts

St. Paul Fire & Marine Insurance Company issued commercial general liability policies to Raymond Manzarek (a founding member of the rock group The Doors) and Doors Touring, Inc. (DTI). The policies each contained a Field of Entertainment Limitation Endorsement (FELE), which excluded coverage for “advertising injury” that “results from the content of, or the advertising or publicizing for, any Properties or Programs which are within your Field of Entertainment.” The policies defined “Field of Entertainment Business” to include”[t]he creation, production, publication, distribution, exploitation, exhibition, advertising and publicizing of product or material in any and all media such as motion pictures…, television programs, commercials or industrial or educational or training films, phonograph records, audio or video tapes, CDs or CD ROMs, computer on-line services or internet or Web site pages, cassettes or discs, electrical transcriptions, music in sheet or other form, live performance, books or other publications.”

Manzarek and DTI sued St. Paul for breach of contract and bad faith after St. Paul refused to defend them against two underlying actions filed by former band members and their heirs. The underlying actions alleged that Manzarek and DTI (1) infringed The Doors name, logo and trademark in advertising their planned show tours and (2) improperly used The Doors logo on their website to market products and merchandise. In one of the underlying actions, a former band member also alleged that he suffered damage to his reputation.

The federal trial court granted St. Paul’s motion to dismiss based on the policies’ FELE. The trial court held that the FELE was conspicuous, plain and clear and that it eliminated St. Paul’s duty to defend the underlying actions.

Manzarek and DTI appealed, arguing that the FELE did not relieve St. Paul of the duty to defend Manzarek and DTI in the underlying actions. Manzarek and DTI also complained that St. Paul had not issued or delivered any policy before Manzarek and DTI tendered the underlying actions to St. Paul.

Holding          

The Ninth Circuit Court of Appeal, applying California law, reversed the trial court’s ruling in favor of St. Paul, and held that St. Paul did have a duty to defend Manzarek and DTI under the policies’ “advertising injury” coverage and “bodily injury” coverage.

With respect to “advertising injury” coverage, the Ninth Circuit noted that the underlying actions were silent as to what product the insureds advertised on their website. Further, according to the appellate court, the FELE might not apply to advertisements for products such as t-shirts, salad dressing or guitars outside the insureds’ field of entertainment business. Because the FELE did not necessarily apply in all scenarios, St Paul had a duty to defend Manzarek and DTI under the “advertising injury” coverage. The appellate court also expressed concern about enforcing a limitation of coverage if the policies were not delivered prior to the insureds’ tender of the underlying actions.

With respect to “bodily injury” coverage, the appellate court further held that the former band member’s alleged damage to reputation potentially triggered the “bodily injury” coverage, since St. Paul’s definition of “bodily injury” included mental anguish and emotional distress. Thus, for this independent reason, St. Paul had a duty to defend Manzarek and DTI in the underlying actions.

Comment

A troubling aspect of this case is the Ninth Circuit’s apparent holding that the claim of damage to reputation constituted “bodily injury” within the meaning of the St. Paul policy.

First, in prior cases, the California state courts have held that even when a policy defines “bodily injury” so as to include “emotional distress,” emotional distress resulting from an otherwise uncovered economic loss does not qualify as “bodily injury.” (See, e.g., Ticor Title Ins. Co. v. Employers Ins. of Wausau (1995) 40 Cal.App.4th 1699.) Although the Ninth Circuit was required to apply California law, it appears that the Ninth Circuit either overlooked or ignored this prior California case law.

Second, given the Ninth Circuit’s conclusion that the insurer was required to defend under the “advertising injury” coverage, it was unnecessary for the court to ever reach the issue of “bodily injury” coverage. Under the circumstances, it can perhaps be argued that the Ninth Circuit’s comments about the scope of “bodily injury” coverage are non-binding “dicta.”

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Property Insurance: "Absolute" Mold Exclusion Ruling Stands, Per California Supreme Court

The California Supreme Court has refused to hear a challenge to a recent California Court of Appeal case that upheld the validity of an “absolute” mold exclusion in a property insurance policy. In De Bruyn v. Superior Court (2008) 158 Cal.App.4th 1213, the Court of Appeal held that even though “sudden and accidental” water damage—a covered peril—was the predominant cause of mold, a policy’s “absolute” mold exclusion was enforceable because the exclusion clearly communicated that mold “however caused” was never covered.

Because the Supreme Court has refused to hear the challenge, the Court of Appeal’s published ruling in De Bruyn remains valid case law at this time. The De Bruyn case involved an exclusion in a Farmers Insurance Exchange homeowner’s insurance policy that provided that the policy did not “under any circumstances” cover mold, even if resulting from a covered cause of loss (such as the “sudden and accidental” discharge of water from a plumbing system). Other language in the policy provided that “[w]henever … mold … occurs, the … mold … and any resulting loss is always excluded under this policy, however caused.”

In recent years, many insurers have added special limits of liability that are intended to apply when a covered cause of loss (such as a covered plumbing leak) produces mold. The De Bruyn case is significant because it involves a provision that excludes any coverage for mold, even if a covered peril is the cause of the mold. See a more complete summary of the De Bruyn case.

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