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Why Insurers Lose Duty To Defend Cases

At its core, being a coverage lawyer means being in the prediction business. Take an insurer-client that asks me to review a file and provide my opinion whether it has a duty to defend its insured(s). The client is essentially asking me to forecast whether, if it disclaims a duty to defend, and litigation ensues, it will be found to have breached such obligation?

Of course, to provide this soothsaying service requires a knowledge of the fundamental coverage issues in the claim. But that's just part of it.

Let me take a moment here to mention that, thankfully for my clients, my predictive abilities in this area are better than my annual NCAA basketball bracket.

In an effort to have as clear a crystal ball as possible on duty to defend advice, I have long been a student of why insurers lose duty to defend cases. Simply put, trying to figure this out is an important skill when advising insurer-clients on their obligations.  

As I see it, coverage litigation can be expensive and the consequences for breaching the duty to defend can be harsh -- including maybe an obligation to pay the insured's litigation fees.  So when insurers litigate their duty to defend, they obviously feel good about their case. But if insurers bring cases that they have a high confidence of winning, what's going on when they lose? 

The first and simple answer is that the duty to defend standard is very broad – a defense is usually owed if there is any possibility for coverage or a similar-sounding test. There is an awful lot of room for a judge to maneuver with an undefined standard like that. Is a 1% possibility? 51%? Does the possibility have to be reasonable? The tests do not address this. What's possible is in the eye of the beholder.    

But that broad standard is just one part of it. In my study of the issue, I have discovered that insurers sometimes lose duty to defend cases because, while they focus on what the complaint says or, in some cases, also extrinsic evidence – as they are supposed to do – the judge makes its decision based on something that the complaint doesn't say. It's hard enough for insurers to predict the duty to defend when considering what they can see. Now add what they can't see. This takes duty to defend predicting to a whole other level.  

Let me show you what I mean. Two recent cases – and more -- demonstrate this. I'll discuss each briefly. There's more to these decisions for sure, but I'm only focusing on this duty to defend aspect.

[Coincidentally, I'll be presenting my "Top 10 Duty to Defend Issues" program this Thursday at the remote 15th Annual White and Williams Coverage College. More details here:
Over 500 people have signed up so far.]
Fine print: There is no cost to attend Coverage College except for attorneys in private practice and non-sponsor vendors for whom tuition is $249. Continuing Legal Education (CLE) in PA, NY, NJ, DE and IL and Continuing Education (CE) in TX, FL, OK, DE credits are available. 
In AIX Specialty Ins. Co. v. Big Limo, Inc., No. 21-08 (S.D. Ohio July 1, 2021), two professional models sued Big Limo, Inc. because it used their photos on its Facebook page to promote its bar – Pinups and Pints. The models had no affiliation with this establishment, which they viewed as disreputable. They brought various claims against Big Limo. 

The court addressed whether coverage was owed for Big Limo, for defamation, under the "personal and advertising injury" coverage. But, get this, the court noted that the complaint did not actually assert a cause of action for defamation. Translation – there was no defamation count for the insurer to have even considered when making its duty to defend determination. 

But that didn't matter based on this duty to defend standard set out by the court: "[W]hether the factual allegations contained in the Complaint give rise to any other cause of action that, although not expressly asserted in the Complaint, arguably falls within the scope of the policy, thereby triggering the duty to defend." (italics in original; bold added).

The court held that a duty to defend was triggered because the complaint alleged defamation, despite not containing a defamation claim: "Ohio recognizes that a visual depiction, be that a drawing or a photograph, can be defamatory if it implies to a reasonable viewer that the person depicted in the drawing or photograph is involved in activity that impugns his or her integrity. In this case, a reasonable viewer looking at the Facebook advertisement that misappropriated Pepaj's image would understand the advertisement to mean that Pepaj was somehow affiliated with Pinups and Pints. The Court concludes that the factual allegations in the Complaint filed in the Underlying Lawsuit are sufficient to state a plausible claim of defamation, even though such a claim is not expressly asserted." (emphasis added).

Needless to say, it was difficult for the insurer to have seen that one coming.

Another example of the duty to defend being owed based on the unseen is Am. Bankers Inc. Co. v. Cameron, No. 19-138 (D. Mont. Sept. 14, 2021) which involved a lot of bad blood between two city officials in the town of Red Lodge, Montana (pop. 2,100).

Rebecca Narmore, city attorney for Red Lodge, sued Mary Cameron, a member of city council, alleging that Cameron defamed her in Facebook posts. At issue was coverage for Cameron under the liability section of a renter's policy. Unlike a CGL policy and its coverage part for "personal and advertising injury," here the court addressed coverage for "bodily injury" caused by an "occurrence."

Narmore's complaint against Cameron alleged as follows:     
9. Defendant published via the world wide web through the platform commonly known to [sic] as "Facebook" under the title of "Between Two Ferns With City Counsel"
a. Defendant alleged that Plaintiff is corrupt;
b. Defendant stated, "like a tomato, if it smells rotten and looks rotten, it generally it[sic]."
c. Defendant stated, "[t]he stench of the toxic carpet bagger has infected decent people.
10. Defendant is a sitting member of the City Council for the Town of Red Lodge.
11. Defendant is the elected representative for Ward 1.
The complaint included Facebook posts as exhibits, in which Cameron stated as follows:

"a few months ago the council voted to hire their own attorney to protect us from the 'city' we were elected to govern, because the city attorney had 'veto' power over the agenda (still does) and we can't get the legislation we've discussed and approved of on the agenda for action. It is still happening. In my opinion this whole administration including the mayor and department heads is corrupt. It sounds silly that in a little town of 2,100 generally nice folks that we would have a corrupt administration, but, like a tomato, if it smells rotten and looks rotten, it generally is."

In a subsequent post, Cameron stated: "The stench of the toxic carpet bagger has infected decent people."

On the "occurrence" issue, the court concluded that Cameron acted intentionally. However, despite Narmore's allegations in the complaint, making it plain that Cameron defamed Narmore, the court noted that the Facebook post did not specifically name Narmore:

"Review of the Facebook posts shows that Cameron did not name Narmore specifically or individually. Cameron did not, as Narmore alleges, call her corrupt. Cameron actually posted, "[i]n my opinion this whole administration including the mayor and department heads is corrupt." Cameron also likened the administration to a "rotten tomato." But it is not clear from the post who is included within the "administration," and who may be considered a "department head." At most, Cameron potentially later made an oblique reference to Narmore in a subsequent post when she used the phrase "carpet bagger." It is alleged in the Underlying Complaint that Narmore spent the majority of her life in Alabama, but it is unclear whether other members of the Red Lodge city government are also not Red Lodge natives. Nevertheless, because Cameron did not name Narmore, nor make a reference which would have made it apparent to anyone reading the post that it was intended to refer to Narmore, it is reasonable to conclude that Cameron did not intend or expect to damage Narmore."

That's right. Despite Narmore herself admitting that the Facebook posts was a reference to her and that it caused her injury – which is why she sued Cameron for defamation in the first place – it may not have been as far as the court saw it. Thus, as the court saw it, for duty to defend purposes, it was reasonable to conclude that Cameron did not intend or expect to damage Narmore.

Again, I just can't see how the insurer could have possibly seen that coming.
The morale of the story for insurers and duty to defend predictions: When it comes to their duty to defend, what you see is not always what you get. 


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