News - February 2007

• Insurer Has No Duty to Defend Suit Alleging Insured Sent Unsolicited Fax Advertisements
• “Occurrence” in CGL Policies Means Injurious Exposure to Asbestos, Not the Manufacture and Distribution of Asbestos Products
• D&O Policy Does Not Cover Insured’s Breach of Contract
• Bad Faith: "Genuine Dispute" Defense Continues to Gain Momentum in First-Party Bad Faith Cases

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Insurer Has No Duty to Defend Suit Alleging Insured Sent Unsolicited Fax Advertisements

The California Court of Appeal has held that a liability insurer had no duty to defend an insured in an action alleging that the insured sent unsolicited advertisements to fax machines in violation of federal statutory law and common law privacy rights. (ACS Systems, Inc. v. St. Paul Fire and Marine Insurance Co. (2007) WL 214258)

Facts   

Various plaintiffs filed a class action lawsuit against ACS Systems, Inc., alleging that ACS had sent thousands of unsolicited advertisements to fax machines. The plaintiffs sought damages from ACS for, among other things, violation of the federal Telephone Consumer Protection Act and invasion of privacy

ACS tendered defense of the lawsuit to its liability insurer, St. Paul Fire and Marine Company, under a policy covering liability for (1) “advertising injury” and (2) “property damage” caused by “accident.”  St. Paul rejected ACS’ tender.

ACS subsequently sued St. Paul, alleging that St. Paul had breached the insurance policy by failing to defend ACS in the underlying class action lawsuit. However, the trial court ruled that the underlying claims against ACS were not potentially covered under the St. Paul policy, and that St. Paul thus had no duty to defend ACS in the underlying lawsuit. ACS appealed.

Holding

The Court of Appeal affirmed, finding that the underlying plaintiffs’ “junk fax” lawsuit against ACS was not potentially covered under either the “advertising injury” or “property damage” provisions of the St. Paul policy.

With respect to “advertising injury,” the court acknowledged that the plaintiffs in the underlying suit had sought damages from ACS for “invasion of privacy,” and that the St. Paul policy defined “advertising injury” to include “making known to any person or organization written or spoken material that violates an individual’s right of privacy.”  However, the court concluded that the suit against ACS was based on invasion of the privacy right of seclusion (i.e., the right to be free at a particular location or time from disturbance by others), and that St. Paul’s policy—read in context—only covered ACS for invasion of the privacy right of secrecy (i.e., the right to be free from disclosure of personal information to others). Because the underlying plaintiffs’ lawsuit suit against ACS was based on alleged violation of seclusion privacy, and the St. Paul policy only covered ACS for violation of secrecy privacy, the “advertising injury” coverage did not apply.

Turning next to the “property damage” provisions, the court noted that even if ACS’ alleged act of sending unsolicited faxes caused the recipients to suffer “property damage,” the St. Paul policy only covered property damage caused by “accident.”  Further, the St. Paul policy specifically excluded coverage for property damage which is “expected or intended” by an insured. According to the court, ACS’ alleged act of sending unsolicited faxes was not an “accident,” and any property damage suffered by the recipients was “expected or intended” by ACS. Therefore, St. Paul had no duty to defend ACS under the “property damage” provisions.

Comment 

This case represents the first time a California court has considered whether an insurer has a duty to defend an insured who is sued for sending unsolicited “junk faxes.”  The court examined numerous cases from other jurisdictions—some finding a duty to defend and some finding no duty to defend—before concluding that the particular wording of St. Paul’s policy did not impose a duty to defend.    

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"Occurrence" in CGL Policies Means Injurious Exposure to Asbestos, Not the Manufacture and Distribution of Asbestos Products

In a case of first impression, the California Court of Appeal has ruled that, in the context of multiple claims for bodily injury arising from asbestos exposure, the term “occurrence” in a commercial general liability policy referred to “injurious exposure to asbestos,” not the manufacture and distribution of asbestos-containing products. London Market Insurers v. Superior Court (Truck Ins. Exchange) (2007) 146 Cal.App.4th 648

Facts

Truck Insurance Exchange (Truck) issued commercial general liability policies to Kaiser, a manufacturer of asbestos products. The policies provided primary liability coverage for Kaiser over 19 policy periods, from 1964 to 1983. The Truck primary liability policies that were effective from January 1971 to April 1980 had a policy limit of $500,000 for “each occurrence” with no aggregate limit. Those policies defined “occurrence” as “an event or series of events or continuous or repeated exposure to conditions which results in legal liability, regardless of the number of persons, vehicles or objects affected by such act or acts or omission.” 

By 2004, more than 24,000 claimants had filed products liability suits against Kaiser. These claimants alleged they had suffered bodily injury, including asbestosis and various cancers, as a result of their exposure to Kaiser’s asbestos products. By October 2004, Truck’s indemnity payments to the claimants had exceeded $50 million. As a result, Truck filed a declaratory relief action, asserting that all asbestos-related claims in any given year arose out of a single “occurrence” because all had the same underlying cause:  “the design, manufacture and distribution by Kaiser and its subsidiaries of asbestos-bearing products.” 

London Market Insurers, Kaiser’s excess insurers, asserted that each asbestos claim constituted a separate “occurrence” because the claimants’ asbestos injuries took place at different times, different places and under different circumstances. Therefore, the excess insurers argued, there were multiple occurrences, each of which was subject to a separate “occurrence” limit. The trial court held that, under California law, “occurrence” meant the underlying cause of injury—the act or acts, of the insured that gave rise to the asbestos bodily injury claims. It further held that Kaiser’s manufacture and decision to place asbestos into products constituted a single “occurrence” and, therefore, Truck’s primary policies had been exhausted.

Holding

The Court of Appeal vacated the trial court’s ruling, finding that Kaiser’s manufacture and distribution of asbestos products over 30 years did not fall within the definition of “occurrence.”  First, Kaiser’s manufacture and distribution of asbestos products were not an “event” (which the court interpreted to mean a “discrete happening that occurred at a specific point in time”). Instead Kaiser’s manufacture and distribution was a course of conduct.

Second, Kaiser’s manufacture and distribution of asbestos products were not “conditions” to which the claimants were exposed. Instead, the asbestos fibers from Kaiser’s products were in fact the “conditions” to which the claimants were exposed.

Third, the court found that the “products hazard” provisions and other provisions in Truck’s policy supported its conclusion that an “occurrence” in Truck’s policies was the injury-producing event, not routine manufacture or distribution.

Finally, the court rejected the Truck’s assertion that California law defined “occurrence” as the underlying or remote cause of an alleged injury and not the immediate cause.

Notwithstanding these rulings, however, the court expressly held that the number of occurrences did not necessarily equal the number of asbestos claimants, and remanded to the trial court the issue of whether certain asbestos injury claims could be aggregated.

Comment

This case calls into question the reasoning of various other cases, such as Chemstar v. Liberty Mut. Ins. Co. 41 F.3d 429 (9th Cir. 1994) and Mead Reinsurance v. Granite State Ins. Co. 873 F.2d 1185 (9th Cir. 1989) which found one underlying cause responsible for causing multiple injuries and, therefore, one “occurrence” for purposes of determining policy limits. Liability insurers, whose policies do not contain aggregate limits, will likely find it more difficult to assert that multiple claims arose from one underlying cause or “occurrence” for purposes of determining policy limits, unless that underlying cause is the immediate cause of the claimants’ injuries.

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D&O Policy Does Not Cover Insured’s Breach of Contract

The California Court of Appeal has held that an insurer that issued a Directors and Officers liability policy had no duty to pay for a loss arising out of an insured’s failure to make payment under a contract. (August Entertainment, Inc. v. Philadelphia Indemnity Insurance Co. (2007) 146 Cal.App.4th 565)

Facts

Philadelphia Indemnity Insurance Company issued a Directors and Officers (D&O) policy to InternetStudios.com, Inc. The policy provided that Philadelphia Indemnity would pay for “loss” caused by a “wrongful act” of an insured, based on a claim made within the policy period. The D&O policy defined “wrongful act” as any “actual or alleged error, misstatement, misleading statement, act, omission, neglect or breach of duty committed by an Insured, individually or otherwise, in his or her capacity as a director or officer.”

During the policy period, August Entertainment, Inc. filed a suit alleging that InternetStudios and MacLean (one of InternetStudios’ officers) had contracted to purchase film rights from August for $2 million, but then failed to make payment. After Philadelphia Indemnity denied coverage for the suit, InternetStudios and MacLean assigned to August all rights under the policy and entered into a stipulated judgment. August then sued Philadelphia Indemnity for breach of contract and bad faith.

In its complaint, August alleged that the stipulated judgment was covered because the loss resulted from a “wrongful act” by MacLean, who mistakenly signed the contract without stating he was an agent for InternetStudios. The trial court disagreed and dismissed the case on demurrer, ruling that the complaint improperly attempted to force an insurer to pay for a corporate breach of contract.

Holding          

The Court of Appeal affirmed the trial court ruling in favor of the insurer. Despite MacLean’s alleged mistake in failing to disclose his status as agent of InternetStudios, there was no question the corporation voluntarily accepted the $2 million contract debt. The insureds’ failure to pay the contract price was not a loss caused by a “wrongful act,” since the policy definition of that term did not include “breach of contract.” 

While the D&O policy also contained a breach of contract exclusion, the court held that the presence of that exclusion did not serve to broaden the scope of liability coverage provided under the policy. The Court also cited public policy reasons for its ruling, noting that allowing liability coverage in this instance would encourage corporations to breach their contractual obligations. 

Comment       

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Bad Faith: "Genuine Dispute" Defense Continues to Gain Momentum in First-Party Bad Faith Cases

The “genuine dispute” defense continues to gain momentum in first-party bad faith cases. A recent case, Laura Rappaport-Scott v. Interinsurance Exchange of the Automobile Club (2007) 146 Cal.App.4th 831, illustrates the practical application of the defense.

Laura Rappaport-Scott sustained injuries in a rear-end automobile accident caused by a third-party. The third party’s liability insurer paid its coverage limit of $25,000.

Rappaport-Scott then made a claim to her own insurer, Interinsurance Exchange of the Automobile Club, which had issued a policy with medical payments coverage limits of $5,000 and UM/UIM coverage limits of $100,000.

Rappaport-Scott contended she had sustained damages in excess of $346,000 (which included about $46,000 for past and future medical expenses, $150,000 for lost income and $150,000 for pain and suffering). She made a settlement demand on Interinsurance Exchange in the amount of $75,000 (which was the difference between the third party’s liability limit of $25,000 and Interinsurance Exchange’s UM/UIM limit of $100,000).

Interinsurance Exchange paid its $5,000 medical payments coverage limits. However, Interinsurance Exchange otherwise disputed the extent of Rappaport-Scott’s damages and offered her $7,000 against the policy’s UM/UIM coverage limits.

Ultimately, Rappaport-Scott demanded UM/UIM arbitration. The arbitrator found that Rappaport-Scott had sustained damages totaling $63,000. This amount was then reduced by $30,000 (i.e., $25,000 for the amount the third party’s insurer paid and $5,000 for the amount Interinsurance Exchange paid under its medical payment coverage). Thus, the net arbitration award to Rappaport-Scott was $33,000.

After Interinsurance Exchange paid the $33,000 due under the arbitration award, Rappaport-Scott sued for bad faith, alleging that Interinsurance Exchange had refused to negotiate with her in good faith and had caused an unreasonable delay in concluding her UM/UIM claim. She also alleged that the difference between the amount offered by Interinsurance Exchange ($7,000) and the net arbitration award ($33,000) was evidence that Interinsurance Exchange had acted in bad faith. On these facts, the trial court ruled Rappaport-Scott could not state a cause of action for bad faith.

The Court of Appeal affirmed. The Court determined that, despite the disparity between the $7,000 Interinsurance Exchange offered and the $33,000 ultimately paid on the policy, the “vast difference” between the $346,000 in damages Rappaport-Scott claimed and the $63,000 in damages determined by the arbitrator demonstrated, as a matter of law, that a “genuine dispute” existed as to the amount payable on the claim. Thus, the Court determined that Rappaport-Scott could not maintain a cause of action for breach of the implied covenant based on an unreasonable delay in the payment of policy benefits.

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