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Vol. 5, Iss. 7
June 22, 2016

“Personal And Advertising Injury:”
Appeals Court Demonstrates The Challenge Of Applying Exclusions


For insurers, it can be tempting to rely on certain exclusions to disclaim coverage for a defense of a “personal and advertising injury” claim. Some of the offenses that qualify as “personal and advertising injury” are, just that, personal. This is especially true for invasion of privacy, libel and slander. Needless to say, a person who believes that they have suffered such an affront, to the point of filing suit seeking redress, is likely to have very strong words to describe the person who wronged them. The complaint is likely to be filled with allegations that the defendant’s actions, in libeling or slandering the plaintiff, or invading his or her privacy, were intentional, malicious, outrageous and/or knowingly wrong. In other words, when people accuse others of defaming them, they do not usually say that it was an accident or innocent mistake.

An insurer, examining the allegations of such a strongly-worded complaint filed against an insured -- filled with allegations of intentional conduct -- may view it as falling squarely within the terms of the policy exclusion for “‘personal and advertising injury’ caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury.’” As such, an insurer may consider disclaiming coverage, including for a defense.

But despite the seemingly strong argument, that the “knowing violation” exclusion serves as a basis to preclude a defense for a claim filled with allegations of intentional conduct, insurers should proceed with caution before doing so. This is the lesson of National Union v. E. Mishan & Sons, No. 15-2248 (2nd Cir. June 1, 2016).

In E. Mishan & Sons, the court addressed coverage for E. Mishan, doing business as Emson, Inc., for claims that Emson deceptively trapped customers into recurring credit card charges. Two underlying class actions alleged that Emson acted as a purveyor of data, facilitating “data passes,” and transferring private customer information for profit. The plaintiffs asserted such counts as violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, fraud by omission, breach of contract and unjust enrichment.

Emson’s insurers filed an action seeking a declaratory judgment that they were not required to defend Emson in the underlying lawsuits. The District Court granted summary judgment to the insurers, concluding that “‘all of the allegations’ against Emson in the underlying lawsuits fall into the coverage exclusion for ‘personal and advertising injury’ caused by knowing violations of another’s rights. In so concluding, the District Court noted that ‘it is readily apparent that Emson’s alleged conduct was intentional and knowing,’ as the underlying complaints ‘allege that Emson intentionally passed along the consumers’ private information as part of a scheme to defraud those consumers.”

Emson appealed. And despite the District Court’s seemingly solid decision, based on application of the policy language, the Second Circuit saw it Emerson’s way. The appeals court noted that “[i]n determining whether an insurer is obliged to defend a lawsuit against the insured, we examine the allegations in the complaint filed in that lawsuit.” However, the court added that the duty to defend exists only “until it is determined with certainty that the policy does not provide coverage.” (emphasis in original).

The court held that it could not conclude, with certainty, that the policy did not provide coverage, “because the conduct triggering the knowing violation policy exclusion is not an element of each cause of action. Therefore, Emson could be liable to plaintiffs even absent evidence that it knowingly violated its customers’ right to privacy.” (emphasis added). More specifically, the court explained that the claims against Emson, for breach of contract and unjust enrichment, do not require a showing of knowledge or intent. Therefore, “Emson could be held liable in the underlying lawsuits without a finding that [it] ‘cause[d]’ or ‘direct[ed]’ the injury ‘with the knowledge that the act would violate the rights of another and would inflict ‘personal advertising injury’ as required by the knowing violation exclusion.”

The lesson of E. Mishan is that, even if the duty to defend is determined by an examination of the allegations in the complaint, some courts may also look at the elements required to prove the cause(s) of action. For these courts, if intentional or knowing conduct – or some other element of the exclusion -- is not required, then it has not been established with certainty that the policy does not provide coverage. Therefore, a duty to defend is owed.

For another example, along the lines here, see Axiom Ins. Managers, LLC v. Capitol Specialty Ins. Corp., 876 F.Supp.2d 1005 (N.D. Ill. 2012) (“Even though the Texas Suit alleges intentional and knowing conduct, the exclusions do not negate the duty to defend since plaintiffs could have been held liable for defamation without proof of intent and knowledge.”) (addressing exclusion for “‘personal and advertising injury’ arising out of oral or written publication, in any manner, of material, if done by or at the direction of the insured with knowledge of its falsity”).


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