Insurance Law News - November 2011

• Police Seizure and Destruction of Marijuana Does Not Constitute "Theft" Within Meaning of Homeowners Policy
• "Personal and Advertising Injury" Coverage Does Not Extend to Insured's Alleged Act of Copying Another's Product

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Police Seizure and Destruction of Marijuana Does Not Constitute "Theft" Within Meaning of Homeowners Policy

No “theft” occurred where the police obtained a search warrant, seized and later destroyed the insured’s marijuana. (Barnett v. State Farm General Ins. Co. (2011) 200 Cal.App.4th 536)

Facts

Greg Barnett grew numerous marijuana plants in the backyard of his residence, and kept dried marijuana inside his house. Barnett maintained that he was permitted to possess the marijuana for medicinal purposes in accordance with California law.

The local police obtained a warrant authorizing them to search Barnett’s residence and to seize any marijuana found there. The officers searched Barnett’s property, dug up and seized the marijuana plants from Barnett’s backyard, and seized the dried marijuana (and related paraphernalia) from the house.

Shortly after the police raid, Barnett submitted a claim to his homeowner’s insurer, State Farm General Insurance Company. Barnett claimed that the value of the seized marijuana was $98,000.

The State Farm policy covered personal property against various named perils, including “theft.” The policy also covered “trees, shrubs and other plants” against various named perils, including “theft.”

The district attorney did not immediately file charges against Barnett, so Barnett filed a petition in court in an effort to regain possession of his property. The court denied Barnett’s petition on the grounds that the quantity he possessed exceeded the quantity that was permitted under California law. Shortly thereafter, the police destroyed some of Barnett’s marijuana in a bulk narcotics burn.

Eventually, the district attorney filed criminal charges against Barnett for cultivation and possession of marijuana. While the criminal charges were pending, the police destroyed the rest of Barnett’s marijuana in another bulk narcotics burn.

Barnett asserted that the police had intentionally provided incomplete information to the judge when they obtained the search warrant, and that the judge would not have issued the warrant if the police had provided complete information. Later, on a motion by the district attorney, the court dismissed the charges against Barnett.

State Farm concluded that no “theft” occurred, and State Farm therefore denied Barnett’s claim. Barnett then filed suit against State Farm, alleging causes of action for breach of contract and bad faith. The trial court agreed that no “theft” had occurred and entered summary judgment in favor of State Farm. Barnett then appealed.

Holding

The Court of Appeal affirmed, holding that no “theft” occurred because the police seized the marijuana pursuant to a facially-valid search warrant. The appellate court ruled that, although the policy did not define the term “theft,” the term is commonly understood to refer to a criminal taking, i.e., a taking “without a good faith claim of right.” The court also noted that, per California Penal Code section 484, a “theft” occurs when someone “feloniously” steals, takes, carries, leads, or drives away the personal property of another with the intent to permanently deprive the owner of the property.

Here, the police department’s seizure of Barnett’s marijuana at his home pursuant to a search warrant did not constitute a “theft” because the claim of right dispelled the criminal character necessary to constitute a theft within the common meaning of the word. 

Comment

Insurance carriers generally do not face many first-party claims arising out of taking of property by law enforcement authorities. However, insurers often face first-party claims arising out of taking of property by civil disputants (e.g., spouses or business partners) who claim ownership of the property.

This case supports the notion that taking property based on a claimed right generally is not a “theft,” even if the claimed right later is proved to be invalid. If the claimed right later is proved to be invalid, the true owner of the property might be able to establish that the taker committed some kind of civil conversion, but the owner will have difficulty proving that the taker committed a criminal “theft.”  

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"Personal and Advertising Injury" Coverage Does Not Extend to Insured's Alleged Act of Copying Another's Product

A commercial general liability policy’s “personal and advertising injury” coverage did not require an insurer to defend an insured against a lawsuit alleging that the insured had copied another’s product. (Oglio Entertainment Group, Inc. v. Hartford Cas. Ins. Co. (2011) 200 Cal.App.4th 573)

Facts

Oglio Entertainment Group, Inc. (“Oglio”) is an independent music label. Mark Jonathan Davis (“Davis”) is a musician / comedian who uses the professional name “Richard Cheese” to perform and record lounge-style versions of popular rock, hip-hop and pop songs. Oglio and Davis entered into a three-year recording contract pursuant to which Davis agreed to record an album of lounge-style arrangements of popular songs for distribution by Oglio. The contract provided that Oglio would own the copyrights to the recordings, and that Oglio would have the right to use Davis’ professional name to promote the album. The contract also provided that within two years after execution of the contract and upon payment of a minimum advance of $15,000, Oglio could require Davis to record a second album.

According to Davis, the first album was a financial success. However, when Oglio attempted to exercise its option to have Davis record a second album, Oglio allegedly sought to reduce Davis’ advance from $15,000 down to $7,000. After Davis refused to agree to the modification, and while the parties’ contract was still in effect, Oglio allegedly hired other recording artists to record competing lounge-style versions of popular songs, in order to trade on Davis’ public recognition.

Davis sued Oglio for breach of contract, violation of right of publicity, intentional interference with prospective economic advantage, and breach of the covenant of good faith and fair dealing. In his complaint, Davis alleged that Oglio had recorded and released the competing albums with the intent to injure Davis’ professional reputation and to divert sales from Davis’ future albums.

Oglio tendered defense of the lawsuit to its general liability insurer, Hartford Casualty Insurance Company (“Hartford”), under a policy covering specified “personal and advertising injury” offenses. Hartford declined to defend Oglio. Following Hartford’s declination of coverage, Oglio paid $80,000 to settle Davis’ lawsuit.

Oglio then sued Hartford for breach of contract and bad faith, alleging that Hartford had wrongfully refused to defend and indemnify Oglio against Davis’ lawsuit. The trial court entered judgment in favor of Hartford, finding that Davis’ claims against Oglio were not potentially covered under the “personal and advertising injury” section of the Hartford policy. Oglio appealed.

Holding

The Court of Appeal affirmed, concluding that Davis' underlying complaint against Oglio did not allege “personal and advertising injury” as defined in the Hartford policy. The policy defined “personal and advertising injury” so as to include injury arising out of “copying, in your ‘advertisement,’ a person's or organization’s ‘advertising idea’ or style of ‘advertisement.’” The policy then defined “advertisement” so as to include “the widespread public dissemination of information or images that has the purpose of inducing the sale of goods, products or services,” and defined “advertising idea” as “any idea for an ‘advertisement.’”

Here Davis had alleged that while the Oglio / Davis recording contract was in effect, Oglio had sought out, in bad faith and with the intention of injuring Davis’ recording career, other potential recording artists to record competing lounge-style versions of popular songs. According to the appellate court, these were not allegations that Oglio copied, in an advertisement, Davis' advertising idea or style of advertisement. Rather, these were allegations that Oglio sought out artists to copy Davis' product and that Oglio then sold a competing product which injured Davis' sales and the value of his professional name. There was no allegation that Oglio used an advertisement that copied an advertisement or advertising idea belonging to Davis. Because Davis had not sought damages from Oglio for “personal and advertising injury” as defined in the policy, Hartford had no duty to defend.

Comment

The policy also contained various exclusions, including a “breach of contract” exclusion and an “intellectual property” exclusion. However, because the appellate court concluded that Davis’ claims against Oglio did not fall within the scope of the insuring agreement, the court was not required to determine whether Davis’ claims against Oglio were subject to some exclusion.

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