Insurance Recovery Law – June 2014

In This Issue:

  • Lab’s “Body Bag” Presentations Triggered Coverage For Defamation Claims
  • Policyholder Wins Defense For Whistleblower Suit
  • Choice Of Law Battle Fizzles Out, Leaving Insured With TCPA Coverage
  • GOAL! Antitrust Exemption Argument Doesn’t Score With Judge In Major League Soccer Coverage Dispute
  • Court Affirms Coverage Order For $85M Defamation Suit

Lab’s “Body Bag” Presentations Triggered Coverage For Defamation Claims

Why it matters
We’ve all sat through some pretty boring PowerPoint presentations. But the lesson from a recent decision: it might be a good idea to keep your talking points relatively tame or face a coverage battle with an insurer as a result of a multi-million dollar defamation lawsuit filed by a competitor. Labeling toe-tags of body bags with the names of competitors landed a drug testing company in federal court, facing charges of defamation. Adding to the problem, the company’s insurer argued that the suits were not covered by the policy’s “personal or advertising injury” provision. The court sided with the policyholder, however, finding the allegations in the underlying complaint (that a competitor sold “bad science” and harmed patients) were potentially disparaging and therefore fell within coverage.

Detailed Discussion
A diagnostics laboratory providing specialty testing services, Millennium Labs offers urine drug testing to identify the presence or absence of medications, illegal drugs, or other substances in a patient’s system. Millennium purchased a general liability policy from Darwin Select Insurance Company that included coverage for “personal and advertising injury.”

The provision defined such as injuries as “injury, other than bodily injury, arising out of … [o]ral or written publication, in any manner, that slanders or libels a person or organization or disparages a person’s or organization’s goods, product or services.”

In 2011, a competitor of Millennium, Ameritox Ltd., filed multiple lawsuits alleging causes of action like false advertising, unfair competition, and tortious interference, as well as violations of state consumer protection statutes. Specifically, Ameritox alleged that Millennium was engaged in a scheme to cause the destruction of Ameritox and that “Millennium’s general counsel…gave a PowerPoint presentation to a gathering of Millennium’s nationwide sales representatives which included a slide with a graphic of a target over Ameritox’s name. On a follow-up slide, Ameritox’s name was displayed in a body bag with a toe-tag hanging from it.”

In separate litigation brought by Millennium against Calloway Laboratories, another competitor, it filed a counterclaim making similar allegations about a Millennium PowerPoint presentation.

Millennium tendered its defense request to Darwin but the insurer denied coverage, arguing that the underlying actions did not allege personal or advertising injury under the policy.

But U.S. District Court Judge Marilyn L. Huff agreed with Millennium that the suits created a potential for coverage under the terms of the policy. When the insured tendered its claim for coverage of both actions, it included language from the complaint with allegations that Millennium “engaged in a concerted plan to ‘attack’” competitors and instructed sales reps to do likewise.

“Based on this information, Darwin could have determined that the underlying actions fell within the policy’s coverage of claims based on disparagement of an organization’s goods, products, or services,” the court said. Millennium further produced the notes used during the PowerPoint presentation with a sales pitch to be repeated by sales reps, including comments like “I don’t want Ameritox’s money. I want to help you drive them out of business in 2012. They have nothing to sell against us but bad science and illegal inducements.”

“These comments disparage Ameritox’s products and services,” Judge Huff wrote, demonstrating that the underlying claims may fall within policy coverage. A similar showing was made for the Calloway action.

Darwin’s attempt to evade coverage based on an exclusion for “Related Acts Deemed Single Act” also failed. A general assertion that the PowerPoint presentations were part of “the same alleged scheme” was insufficient to sway the court, which held that Darwin did not provide evidence to show that the comments constituted a “same or related act.”

Judge Huff granted Millennium’s motion for summary judgment, finding that Darwin breached its duty to defend the underlying lawsuits.

To read the order in Millennium Laboratories, Inc. v. Darwin Select Insurance Co., click here.

Policyholder Wins Defense For Whistleblower Suit

Why it matters
A whistleblower suit in which the government declined to intervene did not trigger an exclusion for cases brought by governmental entities, according to a New York Supreme Court Justice. A former employee filed a False Claims Act suit claiming a hospital engaged in a total of $30 million in overbilling. The insurer rejected a request for defense coverage, pointing to an exclusion for cases brought by governmental entities. But the court distinguished cases brought by government entities from those “on behalf” of the government. “Limiting the exclusion to actions in which the government has an active, participatory role in enforcing its statutory rights … would draw a meaningful distinction between lawsuits that are brought in a regulatory or official capacity, and those that are not,” the court wrote, granting summary judgment for the insured.

Detailed Discussion
Huron Consulting Group brought a declaratory judgment action against insurer Lloyd’s of London to determine defense obligations under a professional liability policy. Huron and a consulting firm performed work on behalf of St. Vincent’s Hospital in New York in an attempt to reverse the hospital’s failing finances.

A relator filed a False Claims Act (FCA) suit in New York federal court alleging that some of the billing practices engaged in by the hospital during Huron’s consulting period constituted illegal overbilling of Medicare and Medicaid payments. According to the complaint, the government made over $30 million in unjustified payments to St. Vincent’s as a result.

The government provided notice that it declined to intervene in the litigation, reserving the right to do so based on future developments. The FCA suit was later dismissed with prejudice.

Huron shouldered its own defense costs after Lloyd’s refused to pay because of a policy exclusion. Exclusion N stated: “The coverage under this Insurance does not apply to Damages, Penalties or Claims Expenses in connection with or resulting from any Claim, or to any Privacy Notification Costs: Brought by or on behalf of the Federal Trade Commission, the Federal Communication Commission, or any federal, state, local or foreign governmental entity, in such entity’s regulatory or official capacity.”

Lloyd’s again relied upon the exclusion in response to Huron’s summary judgment motion, as well as Exclusion A, which precluded coverage for actions alleging criminal, dishonest, fraudulent, or malicious conduct until such time as the insured was finally adjudicated to have engaged in such intentional wrongdoing.

The court found no merit in either contention. Exclusion A provided that the insurer would advance defense costs for the specific claims subject to recoupment in full should the insured be adjudged liable. But Lloyd’s failed to advance defense costs, New York Supreme Court Justice Saliann Scarpulla wrote, and the case against Huron had already been dismissed. “As the [FCA] action was dismissed with prejudice, with the court specifically finding that Huron’s billing practices were not false or fraudulent, Underwriters remain liable for those expenses,” the court said.

Turning to Exclusion N, the court similarly found it did not defeat coverage. “Although some courts have characterized qui tam actions under the FCA as being brought ‘on behalf’ of the government, it is also true that ‘[q]ui tam relators pursue their claims essentially as private plaintiffs, except that the government may displace a relator as the party with primary authority for prosecuting an action,” Justice Scarpulla said.

“In this case, the government declined to participate as a party,” the court said. “Accordingly construing the clause narrowly and in favor of the insured, the court finds that Exclusion N does not bar coverage in FCA actions which are pursued by private parties without government intervention.”

The court’s conclusion was bolstered by the additional language in the exclusion that the government entity must be functioning in its official or regulatory capacity.

“While Underwriters argue that FCA actions further the government’s regulatory and official objectives, that would be true of any action that could be brought on its behalf, and thus render the qualification illusory,” the court explained. “Limiting the exclusion to actions in which the government has an active, participatory role in enforcing its statutory rights, however, would draw a meaningful distinction between lawsuits that are brought in a regulatory or official capacity, and those that are not.”

To read the decision in Certain Underwriters at Lloyd’s, London v. Huron Consulting Group, click here.

Choice Of Law Battle Fizzles Out, Leaving Insured With TCPA Coverage

Why it matters
Indiana or Illinois? The Illinois Supreme Court’s decision to apply its own state law to a dispute over coverage for a Telephone Consumer Protection Act (TCPA) lawsuit led to a victory for the insured. The parties agreed that coverage for the suit was required if Illinois law applied. But the insurer contended that Indiana law should apply and that a conflict existed between the two states’ legal positions. Although no state courts in Indiana have opined on the issue of coverage for TCPA suits under commercial general liability policies, two federal district courts in the state had guessed that the Indiana Supreme Court would not require coverage. Those decisions conflict with Illinois law, the insurer said. But the Illinois Supreme Court was not convinced, finding that an actual conflict did not exist and that Illinois law should apply – leaving the insured with defense coverage for the TCPA suit.

Detailed Discussion
In yet another example of the proliferation of TCPA suits, Illinois-based Bridgeview Health Care Center filed suit against Affordable Digital Hearing after allegedly receiving unsolicited faxes. Affordable’s owner, Jerry Clark, was insured under a comprehensive general liability policy issued by State Farm. The policy was purchased through an Indiana agent and issued to Clark at a business address in Indiana.

State Farm accepted defense of the TCPA suit with a reservation of rights. Bridgeview filed a declaratory judgment action seeking a determination of the insurer’s rights and the parties filed cross motions for summary judgment.

The issue, as framed by the Illinois Supreme Court, was: “When a federal district court sitting in a sister state makes a prediction … that the supreme court of that state would resolve a legal issue in a way that is at odds with Illinois law, does that prediction, in itself, establish an actual conflict between the two states’ laws for purposes of a choice-of-law analysis?”

Although State Farm acknowledged that under Illinois law coverage was required under both the advertising injury and property damage provisions of the insurance policy, the insurer argued that Illinois law conflicted with Indiana law. Two federal district court decisions from the Southern District of Indiana predicted that the Indiana Supreme Court would hold that no coverage exists under a policy like Clark’s, State Farm said. Those decisions created a conflict with Illinois law, and Indiana law should apply because the state had more significant contacts with the dispute than Illinois.

But the Illinois Supreme Court disagreed. The federal court decisions were “predictive judgments” – really just a guess, and “such a prediction cannot, by itself, establish a conflict between state laws,” the court said. The court also noted that the decisions – issued in 2006 and 2008 – were based upon a Seventh U.S. Circuit Court of Appeals decision opining on how the Illinois Supreme Court would rule on the coverage issue, and the federal appellate panel guessed wrong.

The mere potential for a conflict between state laws is not sufficient to warrant a choice of law analysis, the court wrote, as applying Illinois law would result in no injury to State Farm if Indiana law is not in actual conflict with Illinois. “There is always a ‘potential’ for differences to arise on state-law questions, even on matters that have previously been addressed,” the court noted.

Lacking an actual conflict of state laws, the Illinois Supreme Court applied the law of its own state and granted Bridgeview’s summary judgment motion.

To read the decision in Bridgeview Health Care Center Ltd. v. State Farm Fire & Casualty Co., click here.

GOAL! Antitrust Exemption Argument Doesn’t Score With Judge In Major League Soccer Coverage Dispute

Why it matters
Major League Soccer (MLS) scored on its insurer recently, when a New York judge ruled that an antitrust exemption in the league’s policy did not prohibit coverage for an underlying lawsuit making additional allegations. MLS faced a suit claiming the league engaged in antitrust and racketeering violations and conspired to put a soccer promoter out of business. MLS was forced to pay for its own defense in the case when insurer Federal Insurance Company refused to pay. In the league’s breach of contract suit, the court said a policy exclusion for antitrust claims was inapplicable and MLS was entitled to reimbursement for its defense costs. The underlying plaintiff would be able to succeed in its suit without proving anti-competitive conduct, the court said, even though the other claims referenced the antitrust claims.

Detailed Discussion
In 2006, ChampionsWorld LLC sued the United States Soccer Federation and MLS in federal court. The complaint contained a total of seven causes of action. The first three alleged various antitrust violations by the defendants, alleging that they worked together to drive ChampionsWorld, a soccer promoter, out of business through anticompetitive practices.

The other causes of action included racketeering activities, federal extortion in violation of the Hobbs Act, and unjust enrichment. Each of the causes of action incorporated all of the previous allegations in the complaint.

MLS provided notice to Federal of the suit and sought defense coverage under its policy, which provided for $5 million and an additional $1 million for defense costs. The insurer denied coverage, relying on the antitrust exemption, which read:

“No coverage will be available … for any Insured Organization Claim … based upon, arising from, or in consequence of allegations of price fixing, restraint of trade, monopolization, unfair trade practices or any actual or alleged violation of the Federal Trade Commission Act, the Sherman Antitrust Act, the Clayton Act, or any other federal statutory provision involving antitrust, monopoly, price fixing, price discrimination, predatory pricing or restraint of trade activities, and any amendments thereto or any rules or regulations promulgated thereunder or in connection with such statutes; or any similar provision of any federal, state, or local statutory law or common law anywhere in the world.”

MLS paid for its own defense in the case. The defendants won their summary judgment motion and the complaint was dismissed but the league said its defense costs exceeded the $6 million policy limit.

Reviewing the allegations in the complaint, New York Supreme Court Justice O. Peter Sherwood said the dispute centered on whether the racketeering and unjust enrichment claims “arise from” anticompetitive conduct. If so, then the policy did not provide for defense costs.

But the court answered in the negative. “Although the RICO and unjust enrichment claims incorporate by reference other causes of action that allege excluded anticompetitive conduct, the RICO and unjust enrichment claims do not depend on a finding of such conduct to succeed,” Justice Sherwood wrote. “As such, the exclusion does not apply. [Federal] owed a duty to defend MLS.”

The insurer failed to demonstrate that it would have been impossible for ChampionsWorld to succeed on any of its claims without proving anticompetitive conduct, the court said. Separate causes of action for Hobbs Act violations, for example, “could plausibly stand in the absence of any anticompetitive behavior. Merely because these causes of action also incorporate by reference the first through third causes of action (as is customary in drafting complaints), it does not follow that the racketeering causes of action ‘arise from’ anticompetitive conduct.”

Antitrust violations “appear to predominate but nonetheless are merely among multiple bases of liability,” Justice Sherwood concluded, denying Federal’s motion to dismiss.

To read the decision in Major League Soccer v. Federal Insurance Company, click here.

Court Affirms Coverage Order For $85M Defamation Suit

Why it matters
A Virginia federal district court sided with an insured for a second time, affirming its ruling that an insurer was required to pay for the insured’s defense in a defamation suit seeking $85 million in damages. A watchdog group, the insured was faced with the underlying litigation based upon allegations related to investigatory articles on its website. Balking at defense coverage, the insurer argued that an exemption for insureds “whose business is publishing” was applicable. Although the court noted the insured did publish content on its website, such postings were incidental to its main purpose as a watchdog group. The ruling emphasized that the watchdog group was like “any other organization” that posts content on its website to promote its work. However, because the court (while denying the insurer’s motion to reconsider its decision) certified the ruling as final, the insurer may appeal the decision to the Fourth U.S. Circuit Court of Appeals.

Detailed Discussion
The Franklin Center for Government and Public Integrity (FCGPI) is a government watchdog group based in Washington, D.C. The group uses “citizen journalists” to highlight issues at the federal and state levels and posts content on its website,

In April 2013, the site featured two articles about GreenTech Automotive, Inc. GreenTech responded by filing a complaint in Mississippi federal court against FCGPI alleging defamation and intentional interference with business relations. The suit requested $85 million in damages.

FCGPI turned to insurer State Farm for defense coverage. State Farm objected, arguing that the complaint did not trigger coverage under the “personal and advertising injury” section and even if it did, one or more of five different exclusions applied.

Finding that the complaint “squarely [fell]” within the coverage for “personal and advertising injury,” the court turned to the exclusions put forth by State Farm.

U.S. District Court Judge Anthony J. Trenga focused the decision on Paragraph 17(b)(1), which excluded from coverage personal advertising injury “[c]ommitted by an insured whose business is: advertising, broadcasting, publishing or telecasting.” The parties disputed whether or not FCGPI was an insured “whose business is publishing.”

According to State Farm, FCGPI was primarily involved in the production of original news content and used most of its resources to generate and publish news stories on its website. The insured conceded that the publishing of news stories was one of its activities but argued that the postings were merely incidental to its actual “business” of exposing governmental fraud, waste, and abuse through investigative reporting.

With the insurance policy lacking a definition of the term “publishing,” Judge Trenga considered what a reasonable insured would have understood the term to mean, consulting multiple dictionaries. “[T]he traditional ‘business of publishing’ implies a commercial enterprise engaged in the production and sale of hard copy information texts,” he wrote, a different model than FCGPI’s business.

The court acknowledged that the nature of the content posted on FCGPI’s website “may have greater potential for generating defamation claims, and more claims under the Policy, than other organizations; but the content of its postings does not relate to whether its business ‘is’ publishing.”

“FCGPI’s ‘publishing’ activities would appear to be no different than that of any organization that posts informational content on a website it maintains to promote or accomplish its underlying organizational purposes or objectives,” the court concluded.

The court found further support for its decision in other sub-parts of the exclusion that specifically dealt with when an insured’s connection to a website would result in the exclusion of coverage. The broad coverage of defamation claims arising from personal or advertising injury from “oral or written publication, in any manner” also suggested that the policy contemplated insureds whose businesses engage in acts of publishing that do not trigger the Paragraph 17(k) exclusion, Judge Trenga said.

Finding more than one reasonable meaning of the phrase “an insured whose business is publishing,” the court said State Farm’s exclusion failed “to place an insured on fair notice as to when and under what circumstances the exclusion applies to defamation or other claims that are otherwise covered, but which arise out of an insured’s postings on its website.”

The judge made quick work of State Farm’s other proffered exclusions for intentional acts, criminal acts, and claims arising out of an electronic chat room, ordering the insurer to defend FCGPI.

State Farm responded to the ruling with a motion for reconsideration or, alternatively, certification under Federal Rule of Civil Procedure 54(b) so that the insurer could seek appellate review.

Judge Trenga said the insurer had not established a basis for reconsideration and affirmed his earlier ruling. But he did certify the decision as a final judgment, giving State Farm the green light to appeal his ruling.

To read the decision in State Farm Fire and Casualty Co. v. Franklin Center for Government and Public Integrity, click here.

To read the order denying the insurer’s motion for reconsideration, click here.