Insurance Law News - February 2009

• Liability Policy’s “First Publication” Exclusion Applies to Infringement Claims
• Uninsured Motorist Coverage Does Not Apply to Listed “Driver” Who is Injured as Pedestrian
• Statutory Attorney Fees Paid to Plaintiffs In Settlement Constitute Costs “Taxed” Against Insured Under “Supplementary Payments” Provision

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Liability Policy’s "First Publication" Exclusion Applies to Infringement Claims

The Ninth Circuit Court of Appeals, applying California law, has held that a liability policy’s “first publication” exclusion barred coverage for infringement claims where the insured first published allegedly infringing material before the policy period. (United Nat. Ins. Co. v. Spectrum Worldwide, Inc. --- F.3d ---, 2009 WL 224520)

Facts

In December 1997, Sunset Health Products, Inc. hired Spectrum Worldwide, Inc. to advertise and distribute Sunset’s “Hollywood 48-Hour Miracle Diet” drink (“Miracle Diet”). Soon thereafter, Spectrum developed plans to market and sell a similar product called “The Original Hollywood Celebrity Diet” drink (“Celebrity Diet”). Spectrum then terminated its contract with Sunset and began marketing the Celebrity Diet. Starting in 1999 and continuing through 2001, Spectrum’s Celebrity Diet utilized labeling and packaging that bore similarities to the labeling and packaging of Sunset’s Miracle Diet.

In April 2001, Spectrum obtained a $1 million excess policy from United National Insurance Company. The United National policy covered damages that Spectrum became obligated to pay because of specified “advertising injury” offenses, including “misappropriation of advertising ideas or style of doing business” and “infringement of copyright, title or slogan.” However, the United National policy also contained a “first publication” exclusion which barred coverage for advertising injury “arising out of oral or written publication of material whose first publication took place before the beginning of the policy period.”

In October 2001, Sunset filed a trade dress infringement claim against Spectrum, alleging that the labeling and packaging of Spectrum’s Celebrity Diet was confusingly similar to the labeling and packaging of Sunset’s Hollywood Diet. Sunset eventually settled its claims against Spectrum for $3,220,000, which was funded by Spectrum's insurers. United National contributed $420,000 to the settlement.

Following the settlement, United National filed an action for declaratory relief / reimbursement against Spectrum in federal district court. United National sought a ruling that the “first publication” exclusion in its policy barred coverage for Spectrum’s alleged liability to Sunset in the underlying infringement action, and that Spectrum was thus obligated to reimburse United National for the $420,000 it had contributed to the underlying settlement. The district court ruled that United National’s “first publication” exclusion barred coverage for Spectrum’s liability, and ordered Spectrum to reimburse United National $420,000 plus interest. Spectrum appealed.

Holding

The Ninth Circuit Court of Appeals, applying California law, affirmed. The court began by holding that the “first publication” exclusion applies not only to advertising injury offenses involving defamation and invasion of privacy, but also can apply to advertising injury offenses involving infringement. The court then held that the evidence showed that Spectrum first began publishing infringing material in 1999, before the United National policy took effect in April 2001. Under such circumstances, the “first publication” exclusion relieved United National of any duty to indemnify Spectrum in connection with the underlying settlement, and Spectrum was thus obligated to reimburse United National for the $420,000 it had contributed to the underlying settlement.

Comment

The Ninth Circuit’s decision in this case effectively overrules Arnette Optic Illusions, Inc. v. ITT Hartford Group, Inc. (C.D.Cal.1998) 43 F.Supp.2d 1088, in which a California federal district court had suggested that the “first publication” exclusion might only apply to advertising injury offenses involving defamation and invasion of privacy. According to the Ninth Circuit, the “first publication” exclusion applies to all enumerated advertising injury offenses, including those involving infringement.

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Uninsured Motorist Coverage Does Not Apply to Listed "Driver" Who is Injured as Pedestrian

The California Court of Appeal has held that uninsured motorist coverage did not apply to a listed “driver” who, while crossing the street as a pedestrian, was struck by an uninsured motorist. (Mercury Ins. Co. v. Pearson (2008) 169 Cal.App.4th 1064)

Facts

Susan Hyung and her live-in fiancé, Douglass Pearson, were pedestrians in a crosswalk when they were struck by a speeding car driven by an uninsured motorist. Hyung died from her injuries and Pearson was seriously injured.

Prior to the accident, Mercury Casualty Company had issued an automobile insurance policy which listed Hyung as the “named insured,” and which listed both Hyung and Pearson as “drivers.” The policy’s uninsured motorist section provided coverage to (1) named insureds, their spouses and resident relatives while occupying a motor vehicle or otherwise, and (2) any other person “while in or upon or entering into or alighting from an insured motor vehicle.” The policy also contained a “Designated Persons Endorsement” which was signed by both Hyung and Pearson, and which stated among other things that the UM coverage did not apply to bodily injury “sustained by a resident of the same household as the Named Insured, who is not a relative, unless such person(s) is occupying a motor vehicle listed in the policy declarations.”

Hyung's heirs made a claim under the UM coverage of the policy. In response, Mercury paid Hyung’s heirs the UM coverage’s per-person limit of $100,000. Pearson also made a claim under the UM coverage of the policy. However, Mercury denied Pearson's UM claim on the grounds that Pearson did not qualify as (1) a named insured, spouse or resident relative, or (2) any other person “while in or upon or entering into or alighting from an insured motor vehicle.”

Mercury sued Pearson for declaratory relief, and Pearson cross-complained against Mercury for declaratory relief, breach of contract and bad faith. The trial court ruled in favor of Mercury and Pearson appealed.

Holding

The Court of Appeal affirmed. Although the Mercury policy’s UM section covered a named insured, spouse or resident relative either while occupying a motor vehicle or as a pedestrian, Pearson was not a named insured, spouse or resident relative. Further, although Mercury’s UM section covered any other person “while in or upon or entering into or alighting from an insured motor vehicle,” Pearson was injured not while occupying an insured motor vehicle, but rather, while crossing the street on foot. Accordingly, the Mercury policy did not provide UM coverage for Pearson.

Comment

In California, UM coverage is governed by Insurance Code section 11580.2. The statute requires insurers to provide UM coverage for bodily injury to named insureds, spouses and resident relatives, whether or not they are occupying a motor vehicle at the time of the accident. However, the statute only requires insurers to provide UM coverage for other persons “while in or upon or entering into or alighting from an insured motor vehicle.” In this case, the language of Mercury’s UM coverage mirrored the language set forth in the statute, and thus there was no basis for arguing that the policy language was ambiguous.

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Statutory Attorney Fees Paid to Plaintiffs In Settlement Constitute Costs "Taxed" Against Insured Under "Supplementary Payments" Provision

The California Court of Appeal has held that when an insured pays statutory attorney fees to plaintiffs as part of a settlement, those statutory attorney fees qualify as costs “taxed” against the insured under a “supplementary payments” provision in a liability policy. (Employers Mut. Cas. Co. v. Philadelphia Indem. Ins. Co. (2008) 169 Cal.App.4th 340)  

Facts

Louis Simpson owned and operated a mobile home park. In 2003, 188 residents of the mobile home park sued Simpson alleging that he had failed to maintain the mobile park in a habitable condition. The plaintiffs sought damages and statutory attorney fees from Simpson pursuant to California’s Mobilehome Residency Law (Civil Code section 798 et seq.).

Simpson tendered defense of the lawsuit to several general liability insurers, including Employers Mutual Insurance Company, Evanston Insurance Company and Philadelphia Indemnity Insurance Company. Employers and Evanston jointly provided a defense to Simpson through two separate “panel” law firms and a third law firm that acted as “independent counsel.” Philadelphia, on the other hand, denied coverage and refused to participate in Simpson’s defense. 

Eventually, the plaintiffs settled their “failure to maintain” lawsuit against Simpson for a total of $3 million, with $1.2 million allocated to damages and $1.8 million allocated to statutory attorney fees. Employers and Evanston funded the entire settlement on behalf of Simpson. In addition, Employers and Evanston paid a total of $740,000 in defense costs to the two panel law firms and independent counsel that represented Simpson.

Evanston assigned its contribution rights to Employers. Employers then filed a contribution action against the non-participating insurers, including Philadelphia. The trial court ruled that Philadelphia did have a duty to defend and indemnify Simpson in the underlying lawsuit. The issue thus became what portion of the defense and indemnity costs should be allocated to Philadelphia.

With respect to plaintiffs’ damagesof $1.2 million, the trial court used a “modified” time on the risk method whereby the court multiplied the plaintiffs’ damages by Philadelphia’s time on the risk (22.2%) and the percentage of plaintiffs who resided in the park during Philadelphia’s policy period (58%). Thus, Philadelphia was responsible for $154,000 of the plaintiffs’ damages (i.e., $1.2 million x 22.2% x 58% = $154,000).

With respect to plaintiffs’ statutory attorney fees of $1.8 million and Simpson’s defense costs of $740,000, the trial court used a “straight” time on risk method whereby the court simply multiplied the plaintiffs’ statutory attorney fees and Simpson’s defense costs by Philadelphia’s time on the risk (22.2%). Thus, Philadelphia was responsible for $400,000 of the plaintiffs’ statutory attorney fees (i.e., $1.8 million x 22.2% = $400,000), and $164,000 of Simpson’s defense costs (i.e., $740,000 x 22.2% = $164,000). Philadelphia appealed the rulings as to Philadelphia’s responsibility for the plaintiffs’ statutory attorney fees and Simpson’s defense costs.

Holding

The Court of Appeal affirmed.

First, the appellate court held that the trial court properly required Philadelphia to contribute $400,000 toward the $1.8 million in statutory attorney fees which Simpson paid as part of the underlying settlement with the plaintiffs. The appellate court noted that the Philadelphia policy contained a “supplementary payments” clause which provided that Philadelphia would pay all costs (including statutory attorney fees) “taxed” against the insured in a lawsuit. Although the underlying lawsuit was settled without a trial, the policy’s coverage for costs “taxed” against the insured was not limited only to situations where a court ordered the insured to pay statutory attorney fees to the plaintiff after trial. Rather, the word “taxed” could also be construed to include situations where the insured agreed to pay statutory attorney fees to the plaintiff as part of a settlement. Further, while only 58% of the plaintiffs lived in Simpson’s mobile home park during the Philadelphia policy period, the trial court did not err in requiring Philadelphia to pay a simple 22.2% “time on the risk” share of the statutory attorney fees. The trial court was not required to multiply Philadelphia’s share of the $1.8 million in statutory attorney fees by bothPhiladelphia’s time on the risk (22.2%) and the percentage of overall plaintiffs who resided in the park during Philadelphia’s policy period (58%).

Next, the appellate court held that the trial court properly required Philadelphia to contribute $164,000 toward the $740,000 in defense costs which Employers (and its assignor, Evanston) had paid on behalf of Simpson in the underlying lawsuit. Although a portion of the $740,000 in defense costs was for “independent counsel” fees which were owed because Evanston defended Simpson under a reservation of rights, and although Philadelphia never defended Simpson under any reservation of rights, the court concluded that “Philadelphia stood to gain if Evanston successfully challenged coverage” and thus “it was equitable for Philadelphia to share in the cost of Simpson’s Cumis counsel.” Further, Philadelphia failed to establish that the two “panel” defense firms Employers and Evanston hired in the underlying lawsuit had performed “duplicate” work in defending the insured, Simpson.

Comment

Generally, when one insurer files a contribution action against another insurer, the trial court has broad discretion to allocate defense and indemnity costs in any number of “equitable” ways – e.g., equal shares, time on risk, policy limits, premiums collected, etc. Unless the trial court adopts an allocation approach that is manifestly unreasonable, the trial court’s decision will be upheld by an appellate court.

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