A Pennsylvania district court in CAMICO Mutual Insurance Co. v. Heffler, Radetich & Saitta, LLP (E.D. Pa. Jan. 28, 2013), refused to allow an insurer access to its insured’s defense file, holding that that the insurer was not a client of the insured’s defense counsel.  There, CAMICO Mutual Insurance Co. insured Heffler, Radetich & Saitta, L.L.P. (“Heffler”) which was sued for misappropriating class action settlement proceeds.  In response to the suit, Heffler selected its defense counsel, and CAMICO agreed to pay defense counsel’s fees.  

CAMICO filed this declaratory judgment action seeking a finding apparently regarding the available policy limits.  In connection therewith, CAMICO sought production of certain documents related to the underlying lawsuit.  Heffler refused, and CAMICO moved to compel.  CAMICO argued the application of exceptions to the attorney-client privilege, which the parties agreed would have otherwise protected the documents from production.

CAMICO relied on the co-client exception, which concerns where two or more clients share the same attorney.  CAMICO argued that the exception applied because defense counsel represented the joint interests of Heffler and CAMICO with respect to the underlying lawsuit.  The district court disagreed, relying on several authorities for the proposition that the insurer is not automatically a client of defense counsel, even when it funds its insured’s defense.  Further, the district court found that based on the factual record, CAMICO was not a client of defense counsel.  Therefore, the district court denied CAMICO’s motion.

Notably, the district court glossed over three important issues, which merit a brief discussion here:  (1) Heffler’s choice of its own defense counsel, (2) the common interest exception as an exception to the attorney-client privilege, and (3) CAMICO’s providing a defense to Heffler in the underlying lawsuit while seeking to litigate the extent of coverage.  

First, that Heffler chose its own defense counsel made the arguments in favor of the co-client exception peculiar.  If CAMICO had appointed defense counsel for Heffler, there probably would have been a better argument for a co-client exception.  

Second, several courts recognize the common interest doctrine as an exception to the attorney-client privilege.  E.g., Waste Management, Inc. v. Int’l Surplus Lines Ins. Co., 144 Ill. 2d 178, 579 N.E.2d 322 (1991).   Although the district court asserted, without more, that CAMICO’s counsel did not share information with Heffler’s defense counsel, that is the point—CAMICO desired that defense counsel provide its counsel with otherwise privileged information.  This may have been a legitimate exception to the attorney-client privilege.   And, the Third Circuit and the Supreme Court of Pennsylvania have not taken a position on whether they will follow the Illinois Supreme Court’s interpretation of the common interest exception as set forth in Waste Management. 

Third and finally, that CAMICO was not seeking a declaration that it had no duty to defend or indemnify suggests that CAMICO and Heffler could have a common interest with respect to the underlying lawsuit.  Most courts that have criticized the Waste Management reject, in pertinent part, the concept that the insurer can seek to vindicate its disclaimer of coverage in a declaratory judgment action, yet have a common interest with its abandoned insured in the underlying tort action.  While subject to debate, that CAMICO was merely seeking to litigate the available limits suggests that the common interest exception may be available here.

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Insurance coverage scholarship discussing cyber-liability and cyber-coverage has recently exploded, with authors catastrophizing the lawsuits arising out of social media and Web 2.0 (social networking sites and online platforms including Facebook, MySpace, and Twitter) and prophesying that insurers are somehow ill-equipped to respond to these claims.  Granted, we are seeing an increase in cybertort claims, likely due to the proliferation and tremendous growth of social networking sites and Web 2.0 media.  Cybertort claims may include a defamation claim based on insulting words posted on a Facebook page, a "bodily injury" claim against an online dating service, a disparagement claim based upon rumors and grievances aired by a consumer against a restaurant or automotive repair shop on Yelp.com, sexual harassment/hostile work environment claims arising out of inappropriate emails, products liability claims as a result of drug purchases over the Internet, and critical comments about one’s law firm on Abovethelaw.com. 

However, like "The Law of the Horse", cybertort claims are not all that different than those involving brick-and-mortar institutions and live persons that coverage practitioners have analyzed and evaluated for centuries.  While there are certain aspects of these cybertort claims that may lead to an uptick in number of suits filed, given how much easier it is to establish that the defendant published the words at issue, the coverage framework for addressing these suits remains the same-- and correctly so.  Based on well-established Coverage B jurisprudence, combined with a smattering of time-tested tort principles, insurers should know that they have all the needed tools at their disposal to determine coverage for these cybertort claims.

"The Law of the Horse" is a helpful analogy to understand why insurers should not be overly concerned about cybertort claims.  In the mid-1990s, as the Internet started gaining mainstream prominence, academics opined whether "cyberspace" would radically transform the legal landscape, e.g., employment contracting, antitrust and trade regulation, privacy law, international trade, consumer protection, healthcare, taxation, securities regulations, etc., and thereby require a legal framework with new and different rules and norms to account for its unique aspects.  Some academics even pushed for courses, textbook, treatises, and scholarship devoted entirely to "cyberlaw".  

Judge Frank Easterbrook of the Seventh Circuit vociferously disagreed with the notion of a unique legal framework for "cyberlaw" and compared it to "The Law of the Horse".  Judge Easterbrook analogized that centuries ago, when the problems du jour were disputes involving horses, legal scholarship devoted to horse law, i.e., disputes regarding the sale of horses, the care given by veterinarians to horses, and injuries suffered by individuals kicked by horses, would have been intellectually irresponsible.  Rather, an academic discipline of property law, tort law, and commercial transaction law would have provided the necessary knowledge to understand horse disputes as well as transactions and torts involving other common goods and services.  Likewise, Judge Easterbrook explained that cyberspace disputes are best understood through the prism of property, torts, and contracts, rather than a new and distinct legal framework.  Fifteen years later, these suggestions provide much needed guidance as coverage practitioners grapple with the disputes arising from social media and Web 2.0.

Although the new developments in connection with the Internet are exciting and may seem to be groundbreaking, given the idiosyncrasies of Web 2.0, the coverage questions are highly similar to those pre-Facebook.  For instance, whether someone slandered or libeled another; disparaged a business' goods, products, or services; or violated a person’s right of privacy (i.e., definitions d. and e. of the ISO definition of "personal and advertising injury") is not all that different now with sending Tweets than it was a century earlier with signs posted in the town square (obviously, the speed and distance this material travels is exponentially greater now).  E.g., Hoffman, LLC v. Community Living Solutions, LLC, 795 N.W.2d 62 (Wis. App. 2010) (where website did not mention or reference the plaintiff, there can be no libel or disparagement).  Further, the decision calculus for whether an act was an "accident" or whether a publication was made with knowledge of its falsity is no different for cybertorts and brick-and-mortar torts.  E.g., Four Corners Comms., Inc. v. Graphic Arts Mut. Ins. Co., 25 Misc. 3d 1236A, 906 N.Y.S.2d 772 (2009) (use of a website to compare a competitor to a douche product was an opinion and did not implicate the knowledge of falsity exclusion); Baxter v. Doe, 868 So. 2d 958 (La. App. 2d Cir. 2004) (publication of knowingly false and defamatory statements on an Internet website was uncovered intentional conduct).  The medium in which these claims arise may change, but the governing principles remain the same.

Web 2.0 should nonetheless have a pronounced impact on "advertising injury" coverage.  At a minimum, the Internet should make satisfying the ISO definition of "advertisement" much easier because these sites substantially lower the barriers to disseminating material to a large, geographically diverse swath of people.  Virtually every comment, posting, or submission on these sites is capable of being viewed by a large audience, even though the material may be intended for one person.  

One thing is certain: Web 2.0-based claims will continue to present challenges for insurers.  Still, insurers should feel confident that standard policy language and the existing legal framework applicable to brick-and-mortar institutions provide an adequate framework for addressing coverage for these emerging claims.

 

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The Eighth Circuit in AMCO Insurance Co. v. Inspired Technologies, Inc. (2011 U.S. App. LEXIS 16409, Aug. 10, 2011) held that the district court erred in finding that the policy’s knowledge of falsity exclusion precluded a duty to defend the insured for allegations of false advertising.

3M Company had sued Inspired Technologies (“ITI”) for alleged unfair and false advertising in violation of the Lanham Act, the Minnesota Uniform Deceptive Trade Practices Act, and a host of other Minnesota statutes.  ITI marketed a painter’s masking tape and allegedly inaccurately depicted 3M tape and incorrectly claimed that certain tests and product demonstrations proved that 3M tape performed poorly in specific respects.  In certain discovery responses, 3M stated that ITI’s photos in its marketing materials were manipulated with the intent to deceive.  ITI tendered the defense of the lawsuit to AMCO.  AMCO filed the instant action seeking a declaration that it did not owe ITI defense or indemnity, based mainly on the knowledge of falsity exclusion.  The district court granted summary judgment in favor of AMCO.

The Eighth Circuit reversed, finding that the discovery responses did not apply to all of 3M’s allegations regarding false advertising.  In particular, the complaint alleged that ITI failed to ensure the accuracy of its marketing data by following certain methods and practices.  The court believed that this allegation could be construed as a negligent act.  Further, because an unfair competition claim under the Lanham Act does not require that a plaintiff prove that a defendant knew that its advertisements were false, i.e., intent or willfulness is not required to establish a violation of the Lanham Act, AMCO breached its duty to defend ITI.  The Eighth Circuit remanded the case to the district court for further proceedings.  

Notably, this case is in accord with the Eleventh Circuit’s ruling in Vector Products, Inc. v. Hartford Fire Insurance Co., 397 F.3d 1316, 1319 (11th Cir. 2005).  As such, it appears that the knowledge of falsity exclusion has limited effect on the duty to defend.  Since the instant discovery responses regarding manipulation of images were found to insufficiently establish that the complaint was focused on intentional acts by the insured, what types of proof would you expect to find in order to rely on the knowledge of falsity exclusion as a basis for a denial of coverage?

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Claimants Against Liability Insurers

Posted on August 22, 2011 04:12 by Jonathan L. Schwartz

The Wisconsin Supreme Court recently held in Casper v. American International South Insurance Co., 2011 WI 81 (July 19, 2011), that an insurer may be sued directly by the claimant when the claimant is involved in an incident that takes place in Wisconsin, even if the policy was not issued and delivered in Wisconsin.  Wisconsin, as one of a handful of states that permit a claimant to file an action directly against the defendant’s insurer, now may see a greater number of direct actions against insurers. 

As background, a truck driven by an employee of Transport Leasing/Contract Inc. (“TLC”) collided with a minivan, seriously injuring the passengers in the minivan.  The passengers filed suit against TLC’s excess insurer, National Union Fire Insurance Company of Pittsburgh, PA (“National Union”).  The Wisconsin Supreme Court considered, in pertinent part, whether the passengers could maintain a direct action against National Union, even though the liability policy was neither delivered nor issued for delivery in Wisconsin.  The Court of Appeals had granted summary judgment in favor of National Union on the basis that the passengers could not maintain such action under Wis. Stat. §§ 631.01(1) and 632.24.  The Court of Appeals relied on Kenison v. Wellington Insurance Co., 218 Wis. 2d 700, 582 N.W.2d 69 (Ct. App. 1998).

The Wisconsin Supreme Court reversed and found that Wis. Stat. § 632.24 allowed for direct actions based on insurance policies delivered or issued for delivery outside Wisconsin.  Notably, this statute provides, “Any . . . policy of insurance covering liability to others for negligence makes the insurer liable . . . to the persons entitled to recover against the insured for the death of any person or for injury to persons or property, irrespective of whether the liability is presently established or is contingent and to become fixed or certain by final judgment against the insured.”  The Supreme Court characterized this language as “exceptionally inclusive.”

National Union argued that Wis. Stat. § 631.01(1) requires a narrower view.  That statutory provision states “… This chapter and ch. 632 apply to all insurance policies . . . delivered or issued for delivery in this state, on property ordinarily located in this state, on persons residing in this state when the policy . . . is issued, or on business operations in this state.”  National Union maintained that this provision required that the policy be delivered or issued for delivery in Wisconsin as a threshold prerequisite, relying on Kension.  However, the Supreme Court adopted the claimant’s disjunctive reading of the provision, i.e., that any of the four conditions may be met in order for a direct action to be maintained.  Thus, the Supreme Court announced the new rule (thereby overruling Kension) that Wis. Stat. § 632.24 “applies to any policy of insurance coverage liability, irrespective of whether that policy was delivered or issued for delivery in Wisconsin, so long as the accident or injury occurs in this state.”

Going forward, even though an insurer may be able to price a policy based on where it is issued and delivered, the fortuitous occurrence of an incident in a state, such as Wisconsin, may force the insurer into the unenviable position of having to litigate directly against the non-judgment creditor claimant.  Does this decision cause insurers to increase premium rates if insureds do significant business in Wisconsin, even though the insured’s principal place of business is not in Wisconsin, and the policy is not issued or delivered in Wisconsin?

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