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Insurance Law News - April 2015

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Transient's "Warming" Fire That Became Uncontrolled Is Not "Vandalism" For Purposes of "Vacancy" Exclusion

Where a transient started a fire on the floor of a house in an apparent effort to keep warm but then lost control of the fire, the fire was not an act of "vandalism" for purposes of a "vacancy" exclusion. (Ong v. Fire Insurance Exchange (2015) 235 Cal.App.4th 901)


Hung Van Ong (Ong) owned a rental dwelling property. The tenants moved out, and the gas and electric utilities were turned off. About twenty months later, a fire destroyed the property.

Ong submitted a claim to his insurer, Fire Insurance Exchange (FIE). As part of its investigation, FIE retained an investigator to determine the origin and cause of the fire. In a written report, FIE's investigator concluded the fire originated on the floor of the kitchen, and likely was a "warming" fire that became uncontrolled and spread. Similarly, FIE's claim adjuster's log notes indicated that it was likely a transient had started a "warming fire [that] got out of hand."

The policy provided "all risk" (sometimes called "open peril") coverage for the dwelling. However, the policy excluded coverage for damage to the dwelling caused by "Vandalism or Malicious Mischief if the dwelling has been vacant for more than 30 consecutive days just before the loss." The policy did not define "Vandalism" or "Malicious Mischief."

FIE denied coverage for Ong's claim. In its denial letter, FIE stated as follows: "Our investigation indicates that this loss was the result of vandalism. A trespasser entered the vacant dwelling and intentionally set a fire.…"

Ong sued FIE for breach of contract and bad faith, and FIE moved for summary adjudication on the grounds that the vacancy exclusion barred coverage. The trial court granted FIE's motion, stating that "[t]he unauthorized person or persons who intentionally set the fire … certainly created an obvious hazard to the dwelling without justification, excuse or mitigating circumstances." The trial court also agreed with FIE's assertion that the "malice in law" concept (sometimes used in criminal arson cases) established the requisite intent to damage the property. Ong appealed.


The Court of Appeal reversed. Although someone intentionally set the fire, there was a triable issue of fact as to whether the fire was a "warming" fire that became uncontrolled, or whether the fire was intended to be an act of destruction. Based on dictionary definitions, the ordinary and popular meaning of "vandalism" is the willful destruction of property or the destruction of property with a desire to cause harm. This commonly-understood meaning of "vandalism" is very different from the "malice in law" concept that arises when intentional conduct gives rise to unintended damage. (For example, under the "malice in law" concept, a person who throws a firecracker onto a dry hillside and starts a brushfire can be guilty of the crime of arson, even though the person did not intend to start a fire.) Because there was a triable issue of fact as to whether the fire was intended to be an act of destruction, the appellate court remanded the case to the trial court for further proceedings.


The vacancy exclusion in FIE's policy was limited to "vandalism" and "malicious mischief." This required FIE to prove that the person(s) who started the fire intended to damage the building. The appellate court noted that FIE could have drafted the vacancy exclusion to extend to fire, which would have eliminated the need to prove intent to damage the property. In this regard, Insurance Code section 2071 (California's standard form fire insurance policy) allows insurers to exclude coverage for fire after a building has been "vacant or unoccupied" for more than 60 consecutive days.

This was not a unanimous opinion. One of the justices on the appellate panel dissented, arguing that because the fire started on the kitchen floor, there was sufficient evidence that the transient intended to deface the property, even if the fire ultimately grew to unintended proportion.

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General Liability Policy's "Intellectual Property" Exclusion Bars Coverage for Insured's Alleged Misappropriation of Claimant's Name

A commercial general liability policy's "intellectual property" exclusion relieved the insurer of any duty to defend or indemnify its insured against a suit alleging commercial misappropriation of the claimant's name. (Alterra Excess and Surplus Insurance Company v. Snyder (2015) 234 Cal.App.4th 1390)


R. Buckminster "Bucky" Fuller (Fuller) was an architectural engineer and inventor who was known for popularizing the geodesic dome. After Fuller died in 1983, Fuller's estate became the successor-in-interest to all of Fuller's rights. Fuller's estate subsequently entered into licensing agreements with various businesses pursuant to which the businesses paid to use Fuller's nickname "Bucky" in their marketing activities.

Maxfield & Oberton Holdings, LLC (Maxfield) manufactured and sold desktoys which were "inspired by" Fuller and which were known as known as "Buckyballs" and "Buckycubes." However, Maxfield used the "Bucky" name without ever entering into any licensing agreement with Fuller's estate. Thus, Fuller's estate filed a lawsuit against Maxfield alleging claims for (1) unfair competition in violation of 15 United States Code section 1125(a) (Lanham Act), (2) invasion of privacy (appropriation of name and likeness), (3) unauthorized use of name and likeness in violation of California Civil Code section 3344.1, and (4) violation of California Business and Professions Code section 17200 et seq.

Maxfield tendered the lawsuit to its general liability insurer, Alterra Excess and Surplus Insurance Company (Alterra). In response, Alterra agreed to defend Maxfield under a reservation of rights. Among other things, Alterra reserved the right to deny coverage based on the policy's "intellectual property" exclusion, which barred coverage for personal and advertising injury "arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights."

Alterra then filed a declaratory relief action against both Maxfield and Fuller's estate. Maxfield did not contest the declaratory relief action, but Fuller's estate did. Eventually, the trial court ruled that the Alterra policy's "intellectual property" exclusion barred coverage for Maxfield's alleged liability to Fuller's estate in the underlying action. Fuller's estate appealed.


The California Court of Appeal affirmed the judgment in favor of Alterra. According to the appellate court, Alterra's "intellectual property" exclusion was "conspicuously" placed in the policy and "plainly and clearly" barred coverage for Maxfield's alleged liability to Fuller's estate in the underlying action. The court emphasized that all of the claims Fuller's asserted against Maxfield were based on allegations that Maxfield infringed on "rights of publicity" belonging to Fuller's estate. According to the court, any such right of publicity was an "intellectual property right." Thus, all of the claims Fuller's estate asserted against Maxfield fell within Alterra's exclusion for claims arising out of "infringement of copyright, patent, trademark, trade secret or other intellectual property rights." There was no potential for coverage, and hence no duty to defend.


Alterra case is consistent with an earlier case entitled Aroa Marketing, Inc. v. Hartford Ins. Co. of the Midwest (2011) 198 Cal.App.4th 781.  In Aroa, another California appellate court held that a similarly-worded "intellectual property" exclusion relieved a general liability insurer of any duty to defend its insured, a marketing company, against claims that it had misappropriated a model's name and likeness. Both cases hold that an intellectual property exclusion bars coverage for claims based on the "right of publicity," as any such right is an "intellectual property" right.

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Insurer's Alleged Right to Equitable Offset Does Not Affect Amount of Damages Suffered By Insured, Only Amount of Damages That Can Be Recovered By Insured

A non-defending insurer's alleged right to equitably offset settlement amounts paid by other non-defending insurers does not affect the amount of damages suffered by the insured, only the amount of damages that can be recovered by the insured at trial. (McMillin Companies, LLC v. American Safety Indemnity Co. (2015) 233 Cal.App.4th 518)


McMillin Construction Services, L.P. (McMillin) served as the general contractor for a residential development in Temecula, California. Later, 117 homeowners from the development filed a construction defect lawsuit against McMillin. In response, McMillin sought defense and indemnity from its subcontractors' commercial general liability insurers, arguing that it qualified as an additional insured on the subcontractors' policies. However, the insurers denied coverage and McMillin thus defended itself in the construction defect action.

McMillin subsequently filed suit against the insurers alleging that their failure to defend constituted a breach of contract and a breach of the implied covenant of good faith and fair dealing. McMillin eventually settled with all of the insurers except one, American Safety Indemnity Company (ASIC). The settlements amounted to $690,154, of which $274,154 was allocated to defense expenses and $416,000 was unallocated. McMillin claimed that even with the settlements, it still had $309,957 in unreimbursed defense expenses.

In advance of trial, the parties filed motions in limine that addressed, among other issues, the admissibility of McMillin's prior settlements. Specifically, ASIC argued that because McMillin had recovered more in settlement proceeds than it had incurred in defense fees in the underlying action, McMillin could no longer prove an essential element of its cause of action for breach of contract – namely, damages. ASIC further argued that because McMillin could not recover for breach of contract, McMillin could not recover for breach of the implied covenant of good faith and fair dealing.

The trial court granted ASIC's motion in limine and, based on the effect of that ruling, entered judgment in ASIC's favor. McMillin appealed.


The Court of Appeal reversed. With respect to the offset issue, the court held that the parties had demonstrated a "basic misunderstanding" of equitable offsets. The court clarified that an equitable offset does not affect the amount of damages suffered, but rather affects the amount of damages that can be recovered at trial. Thus, the court held that ASIC's right to an equitable offset did not impact whether McMillin suffered damages as a result of ASIC's alleged breach of contract and bad faith. Based on the foregoing, the court held that ASIC's right to an offset did not defeat McMillin's right to proceed to trial on its breach of contract and bad faith causes of action.


McMillin makes clear that an insurer may utilize an equitable offset to reduce or eliminate the amount of damages awarded to an insured at trial in an action for breach of contract and bad faith. However, the insurer cannot use an equitable offset as a complete defense to the action itself because an equitable offset does not affect whether the insured suffered damages in the first place.

The McMillin court distinguished the earlier case of Emerald Bay Community Assn. v. Golden Eagle Ins. Corp. (2005) 130 Cal.App.4th 107. According to the court, there is a difference between a situation where other insurers provide the insured with a complete defense and thus the insured suffers no damage at all (i.e., Emerald Bay), and a situation where the insured is without a complete defense and thus suffers damage, but then, following litigation, recovers payments from other insurers which arguably compensate the insured (i.e., McMillin).

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