cases relating to advertising and personal injury … relating to advertising and personal injury...

January 7, 2014

Cases Relating to Advertising and Personal Injury Coverage for Libel/Slander/Disparagement Travelers Property Casualty Company of America v. Charlotte Russe Holding, Inc., 207 Call.App.4th 969 (2012)

Hartford Casualty Insurance Company v. Swift Distribution, Inc., 210 Cal.App.4th 915 (2012) (review granted by the California Supreme Court)

CNA Casualty of California v. Seaboard Surety Company, 176 Cal.App.3d 598 (1986)

Atlantic Mutual Ins. Co. v. J. Lamb, Inc., 100 Cal.App.4th 1017 (2002)

Barnett v. Fireman’s Fund Ins. Co., 90 Cal.App.4th 500 (2001)

E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co., 590 F.Supp.2d 1244 (N.D. Cal. 2008)

Michael Taylor Designs, Inc. v. Travelers Prop. Cas. Co. of Am., 761 F.Supp.2d 904 (N.D. Cal. 2011)

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The following case material was reprinted from WestlawNext with permission of Thomson Reuters.

Travelers Property Casualty Company of America v...., 207 Cal.App.4th 969...

144 Cal.Rptr.3d 12, 2012 Daily Journal D.A.R. 9673

© 2014 Thomson Reuters. No claim to original U.S. Government Works. 1

KeyCite Yellow Flag - Negative Treatment

Disagreed With by Hartford Cas. Ins. Co. v. Swift Distribution, Inc.,

Cal.App. 2 Dist., October 29, 2012

207 Cal.App.4th 969Court of Appeal, Second District, Division 1, California.

TRAVELERS PROPERTY CASUALTY COMPANYOF AMERICA, Plaintiff and Respondent,

v.CHARLOTTE RUSSE HOLDING, INC.,

et al., Defendants and Appellants.

No. B232771. | June 21, 2012.| Review Denied Sept. 26, 2012.

SynopsisBackground: Insurer brought action against insured, aclothing retailer, seeking declaratory judgment that therewas no potential for coverage under its commercialgeneral liability (CGL) policies for claims raised inmanufacturer's action alleging breach of contract, fraudulentand negligent misrepresentation, and intentional interferencewith contractual relationship. The Superior Court, LosAngeles County, No. BC442597, Robert L. Hess, J., enteredsummary judgment in favor or insurer. Insured appealed.

[Holding:] The Court of Appeal, Chaney, J., held thatcomplaint alleging that insured offered manufacturer'sproducts for sale at severely discounted prices, resulting indiminution of the brand, triggered personal injury coveragefor product disparagement.

Reversed.

West Headnotes (18)

[1] Appeal and ErrorExtent of Review Dependent on Nature of

Decision Appealed from

Appellate court independently determines thelegal effect of the documentation underlying a

summary judgment motion in the trial court.West's Ann.Cal.C.C.P. § 437c(c).

[2] JudgmentExistence or non-existence of fact issue

There is a triable issue of material fact forpurposes of summary judgment if, and onlyif, the evidence would allow a reasonable trierof fact to find the underlying fact in favor ofthe party opposing the motion in accordancewith the applicable standard of proof. West'sAnn.Cal.C.C.P. § 437c.

[3] JudgmentAbsence of issue of fact

An issue of fact becomes one of law for purposesof summary judgment only if the undisputedfacts leave no room for a reasonable differenceof opinion. West's Ann.Cal.C.C.P. § 437c.

[4] JudgmentWeight and sufficiency

JudgmentShowing to be made on supporting affidavit

In order to carry its burden of proof, a partymoving for summary judgment must first makea prima facie showing that there is an absenceof an essential element of, or a complete defenseto, the case against it. West's Ann.Cal.C.C.P. §437c.

[5] InsuranceQuestions of law or fact

The interpretation, construction, and applicationof an insurance contract are purely issues of law.

[6] InsuranceIn general; standard

A liability insurer's duty to defend arises whena suit against its insured seeks damages that arepotentially within the policy's coverage.

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A liability insurer has no duty to defend itsinsured only if the claim against it cannot, byany conceivable theory, raise an issue that wouldbring it within policy's coverage.

1 Cases that cite this headnote

[8] InsurancePleadings

InsuranceMatters beyond pleadings

The duty to defend does not depend on the labelsgiven to the causes of action in the underlyingclaims against the insured; instead it rests onwhether the alleged facts or known extrinsic factsreveal a possibility that the claim may be coveredby the policy.



A liability insurer's duty to defend is broader thanits duty to indemnify; it therefore may owe aduty to defend its insureds even when a trier offact might ultimately determine that the policydoes not entitle them to indemnity for the claimsagainst them.

[10] InsuranceMatters beyond pleadings

Whether the liability insurer owes a duty todefend turns not on whether the insured provesto be actually entitled to be indemnified forthe underlying claim, but only on those factsknown by the insurer at the inception of a thirdparty lawsuit, along with facts extrinsic to thecomplaint that may also reveal a possibility thatthe claim may be covered by the policy.


InsuranceCommencement of Duty; Conditions

Precedent

InsuranceTermination of duty; withdrawal

With regard to the duty to defend, the liabilityinsurer's coverage obligation begins wheneverthe insurer becomes aware of facts giving rise tothe potential for coverage, and continues until ithas been established that there is no potential forcoverage.


[12] JudgmentInsurance

In order to prevail on a liability insurer's motionfor summary judgment based on the absence ofa duty to defend, the insured need only showthat the underlying claim may fall within policycoverage, and the insurer must prove it cannot;once the possibility of coverage arises, any doubtas to whether the facts establish or defeat theexistence of the defense duty must be resolved inthe insured's favor.

[13] InsuranceDefamation or disparagement

Complaint alleging that insured clothingretailer offered manufacturer's products forsale at severely discounted prices, resultingin significant and irreparable damage toand diminution of the brand and trademark,damaging its “marketability and saleability,”triggered commercial general liability (CGL)policy's personal injury coverage for“publication of material that slanders or libels aperson or organization or disparages a person'sor organization's goods, products or services,”and, thus, insurer owed duty to defend; althoughcomplaint did not expressly allege productdisparagement or all the elements of trade libel,complaint could reasonably be interpreted toconstitute a claim of product disparagementresulting in damage to brand.



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See 2 Witkin, Summary of Cal. Law (10th ed.2005) Insurance, §§ 89, 148.



In order to trigger personal injury coverage for“publication of material that slanders or libels aperson or organization or disparages a person'sor organization's goods, products or services,”it is not essential that the underlying claims beexpressly phrased in terms of “disparagement”or trade libel; the underlying claims may triggera duty to defend if the conduct for whichthe policies provide coverage is charged byimplication, as well as by direct accusation.



A claim alleging all the elements of a trade libelcause of action is not a prerequisite to personalinjury coverage for “publication of material thatslanders or libels a person or organization ordisparages a person's or organization's goods,products or services.”



Liability insurer's duty to defend is notconditioned on the sufficiency of the underlyingpleading's allegations of a cause of action; that isan issue for which the policy entitles the insuredto an insurer-funded defense.


[17] InsuranceMatters beyond pleadings

The fact that the liability insurer may knowof a good defense, even an ironclad one, tothe underlying claim does not relieve it of itsobligation to defend its insured.



Commercial general liability (CGL) policyproviding personal injury coverage for“publication of material that slanders or libels aperson or organization or disparages a person'sor organization's goods, products or services”covers publication of material either that slandersor libels a person or organization, or thatdisparages a person's or organization's goods,products or services; both are not required.


Attorneys and Law Firms

**14 Caldwell Leslie & Proctor, Los Angeles, ChristopherG. Caldwell, Andrew Esbenshade and Kelly L. Perigoe forDefendants and Appellants.

**15 Lewis Brisbois Bisgaard & Smith, Los Angeles, LaneJ. Ashley, Raul L. Martinez and Raquel Vidal for Plaintiff andRespondent.

Opinion

CHANEY, J.

*971 Plaintiff and respondent, Travelers Property CasualtyCompany Of America (Travelers), filed this action fordeclaratory relief seeking a *972 determination that therewas no potential for coverage under its policy, and thereforeno duty to defend its insureds, Charlotte Russe Holding,Inc., Charlotte Russe Merchandising, Inc., David Mussafer,Jenny J. Ming, Advent International Corp., Advent CRHoldings, Inc., and Advent CR, Inc. (the Charlotte Russeparties), in litigation against them by Versatile Entertainment,Inc., and its parent, People's Liberation, Inc. (collectivelyVersatile). The trial court agreed with Travelers, and grantedits motion for summary judgment. We will reverse thesummary judgment.

BACKGROUND 1

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1 Unless otherwise noted, the facts are taken from those

conceded by the parties to be undisputed, and the

documents presented by the parties in connection with

the summary judgment motion.

Underlying lawsuits by Versatile against the CharlotteRusse partiesThe underlying litigation for which the Charlotte Russeparties sought coverage arises out of pleadings filed byVersatile in litigation against the Charlotte Russe parties. OnOctober 26, 2009, certain of the Charlotte Russe parties suedVersatile alleging claims for fraud, breach of contract, andrestitution. On October 27, 2009, Versatile filed an actionagainst those parties, alleging causes of action for breachof contract, declaratory relief, and fraudulent and negligentmisrepresentation. Also on October 27, 2009, Versatile filedanother action against others of the Charlotte Russe parties,alleging their intentional interference with the contractualrelationship between Versatile and Charlotte Russe. And onDecember 23, 2009, Versatile filed a cross-complaint in the

Charlotte Russe parties' action against it. 2

2 Although Travelers' summary judgment motion

identifies four sets of pleadings involving the various

Versatile and Charlotte Russe parties, because they all

contain substantially identical allegations against the

Charlotte Russe parties, we discuss them below without

specific identification or differentiation.

As relevant here, Versatile's pleadings alleged that theCharlotte Russe parties had contracted in December 2008 tobecome the exclusive sales outlet for Versatile's “ ‘People'sLiberation’ ” brand of apparel, which included jeans andknits. Versatile identified the People's Liberation brand asa “ ‘premium,’ ” “ ‘high end’ ” brand, claiming that ithad “ ‘invested millions of dollars developing the [People'sLiberation] [b]rand so that it became associated in themarketplace with high-end casual apparel” which “wasdistributed ... exclusively through fine department storesand boutiques....' ” (Italics omitted.) Versatile alleged thatalthough Charlotte Russe had never before offered this sortof apparel for sale “ ‘at a higher price point commandedby a premium brand such as People's Liberation Brand,’” (italics omitted) Charlotte Russe had promised to providethe investment and *973 support necessary to “ ‘promotethe sale of premium brand denim and knit products in orderto encourage [Charlotte Russe's] customers to purchase suchpremium products at a higher price point at its [CharlotteRusse] stores.’ ” (Italics omitted.) Versatile's pleadings wenton to allege that the Charlotte Russe parties had failed

to live up to those representations, however, giving rise**16 to its allegation of causes of action for breach of

contract, declaratory relief, and fraudulent and negligentmisrepresentation.

Specifically, Versatile alleged, the Charlotte Russe partieshad threatened, and had begun, “ ‘the “fire sale” of People'sLiberation Branded apparel at “close-out” prices.’ ” This saleof Versatile's premium brand clothing at severe discounts notonly violated the parties' agreement, it alleged, but “will alsocertainly result in significant and irreparable damage to anddiminution of the People's Liberation Brand and trademark.”Versatile sought declaratory relief and damages for its losses“as a result of Defendants' breaches, including damage to anddiminution of the People's Liberation Brand and trademarkwhich will certainly result from Defendants' ‘fire sale’ ofPeople's Liberation Branded goods at ‘close-out’ prices.”

During their later correspondence with Travelers, theCharlotte Russe parties informed Travelers that Versatile'sdiscounting claim was factually based on the Charlotte Russeparties' “ ‘public display of signs in store windows and onclothing racks announcing that People's Liberation brandjeans were on sale,’ ” as well as on their “written mark-downs on individual People's Liberation clothing items.” Andin connection with Travelers' summary judgment motion, theCharlotte Russe parties presented evidence of 70 to 85 percentprice markdowns of People's Liberation brand clothing, andthe opinion of an experienced apparel industry expert thatsuch markdowns and “dramatic price reduction[s], promotedin such a manner, had the potential to have a disparagingeffect on the People's Liberation brand,” for it suggests tothe consumer that the product—particularly “premium, high-end or luxury goods such as the People's Liberation brand

products”—is of an inferior quality.” 3

3 The expert went on to opine: “Decreasing the price

of certain premium or luxury goods (like People's

Liberation brand products) decreases consumers'

preference for buying them because they are no

longer perceived as exclusive/high status products....

“[A] retailer's price reduction disparages the product's

‘worth’—in terms of reputation, panache, and other

modalities of chic—in the eyes of both the market, at

large, and potential purchasers, in specific.”

The relevant Travelers policiesThe Charlotte Russe parties were covered by twoconsecutive Travelers policies, from September 30, 2008




to September 30, 2010, providing commercial generalliability coverage. Both policies include “personal injury” and*974 “advertising injury” liability coverage, with insuring

agreements providing that the insurer has a duty to defendthe insured against any suit seeking damages for “personalinjury” and “advertising injury” claims.

The policies' personal injury coverage applies to “ ‘[p]ersonalinjury’ caused by an offense arising out of your business,excluding advertising....” Its advertising injury coverageapplies to “ ‘[a]dvertising injury’ caused by an offensecommitted in the course of advertising your goods,products or services; ...” Both provide “broad ‘offense-based’ coverage” for claims alleging injury arising out of“[o]ral, written, or electronic publication of material thatslanders or libels a person or organization or disparagesa person's or organization's goods, products or services,provided that claim is made or ‘suit’ is brought by theperson or organization that claims to have been slandered orlibeled, or whose goods, products or services have allegedlybeen disparaged; ...” The policies exclude coverage for an “‘advertising injury’ arising out of a breach of contract.” Thereis no **17 similar exclusion for a personal injury arising outof a breach of contract.

Travelers denies coverageThe Charlotte Russe parties tendered the Versatile actions toTravelers for a defense on December 24, 2009.

On May 13, 2010, Travelers notified the Charlotte Russeparties by letter that it was declining to either indemnifyor defend them against the claims asserted by Versatile, onthe ground that there was no potential for coverage. In theensuing exchange of correspondence, Charlotte Russe tookthe position that Versatile's claims involved disparagementwithin the policies' terms, potentially within the policies'coverage for both personal injury and advertising injury.Travelers maintained that “coverage was not available underits Policies because ‘the reduction of a product's price is not ...a disparagement of that product.’ ”

The coverage litigation and Travelers' motion forsummary judgmentOn July 29, 2010, Travelers filed a declaratory reliefaction, seeking a determination that it owed no duty todefend or indemnify the Charlotte Russe parties in thevarious underlying actions. The Charlotte Russe parties cross-complained for declaratory relief, breach of contract, and

breach of the implied covenant of good faith and fair dealing,alleging that Travelers' denial of a defense under the liabilitypolicies resulted in serious damages.

Travelers moved for summary judgment, contending thatthe Charlotte Russe parties would be unable to establish apotential for coverage under the *975 Travelers' policies.The motion's key contention was that in order for theCharlotte Russe parties to be eligible for coverage underits policies' personal injury or advertising injury provisions,the claims against them must amount to actionable claimsof trade libel. According to Travelers' motion, “underestablished California law, the allegations in the underlyingVersatile litigation against the Charlotte Russe entities mustbe compared with the elements of the trade libel tort inorder to properly assess the potential for coverage under theTravelers' disparagement coverage.” The motion contendedthat a cause of action for trade libel or disparagement requiresan allegation of the publication of a false statement andresulting loss of business, and that Versatile's claims againstthe Charlotte Russe parties alleged neither.

Travelers is awarded summary judgment; the CharlotteRusse parties appealThe trial court heard Travelers' summary judgment motion onMarch 9, 2011, overruling Travelers' objections to certain ofthe Charlotte Russe parties' opposing evidence, but grantingTravelers' motion. Judgment was entered in Travelers' favoron April 22, 2011, and notice of its entry was filed April 29,2011. The Charlotte Russe parties filed a timely appeal onMay 3, 2011.

DISCUSSION

The critical question in this appeal is whether Versatile'sclaims against the Charlotte Russe parties constituteallegations that the Charlotte Russe parties disparaged itsgoods, within the meaning of the Charlotte Russe parties'coverage under the Travelers' policies. If they do not, therewas no potential for coverage, and Travelers had no duty todefend.

However, if Versatile's allegations can reasonably beinterpreted to encompass claims that the Charlotte Russeparties disparaged its goods, within the meaning of theTravelers' policies, there was a potential **18 for coverageunder the policies' personal injury coverage, and therefore a




duty to defend the Charlotte Russe parties against Versatile'sclaims in the underlying litigation. Because we concludethat the allegations of the Versatile pleadings could bereasonably interpreted to allege that the Charlotte Russeparties disparaged the People's Liberation brand and ledpotential purchasers to believe that it was not a “premium,”“high end” brand, we will reverse the summary judgment.

1. Standard of Review[1] Summary judgment may be granted only “if all the

papers submitted show that there is no triable issue as to anymaterial fact and that the moving party *976 is entitled toa judgment as a matter of law,” eliminating the need for atrial of the action. (Code Civ. Proc., § 437c, subd. (c); Villav. McFerren (1995) 35 Cal.App.4th 733, 741, 41 Cal.Rptr.2d719.) This court independently determines the legal effect ofthe documentation underlying the summary judgment motionin the trial court. (Villa v. McFerren, supra, 35 Cal.App.4that p. 741, 41 Cal.Rptr.2d 719.)

[2] [3] The party moving for summary judgment—Travelers—bears the burden of showing that there is notriable issue of material fact, and therefore that it is entitledto judgment as a matter of law. “There is a triable issueof material fact if, and only if, the evidence would allow areasonable trier of fact to find the underlying fact in favorof the party opposing the motion in accordance with theapplicable standard of proof.” (Aguilar v. Atlantic RichfieldCo. (2001) 25 Cal.4th 826, 850, 107 Cal.Rptr.2d 841, 24P.3d 493, fn. omitted.) An issue of fact becomes one of lawonly if “the undisputed facts leave no room for a reasonabledifference of opinion.” (Preach v. Monter Rainbow (1993) 12Cal.App.4th 1441, 1450, 16 Cal.Rptr.2d 320.)

[4] [5] In order to carry its burden of proof, a party movingfor summary judgment must first make a prima facie showingthat there is an absence of an essential element of, or acomplete defense to, the case against it. (Aguilar v. AtlanticRichfield Co., supra, 25 Cal.4th at p. 849, 107 Cal.Rptr.2d841, 24 P.3d 493.) Once the defendant has made that primafacie showing, the burden shifts to the opposing party to showthat one or more material facts essential to a cause of actionor defense require trial. (Code Civ. Proc., § 437c, subd. (p)(2).) The interpretation, construction, and application of aninsurance contract are purely issues of law. (Century TransitSystems, Inc. v. American Empire Surplus Lines Ins. Co.(1996) 42 Cal.App.4th 121, 125, 49 Cal.Rptr.2d 567.)

2. Versatile's claims give rise to a potential for coverageunder the Travelers policy

a. Duty to defend

[6] [7] [8] A liability insurer's duty to defend arises whena suit against its insured seeks damages that are potentiallywithin the policy's coverage. (La Jolla Beach & Tennis Club,Inc. v. Industrial Indemnity Co. (1994) 9 Cal.4th 27, 43, 36Cal.Rptr.2d 100, 884 P.2d 1048.) An insurer has no duty todefend its insured only if the claim against it cannot, by anyconceivable theory, raise an issue that would bring it withinpolicy's coverage. (Ibid.) The duty does not depend on thelabels given to the causes of action in the underlying claimsagainst the insured; “instead it rests on whether the allegedfacts or known extrinsic facts reveal a possibility that theclaim may be covered by the policy.” (Atlantic Mutual Ins.Co. v. J. Lamb, Inc. (2002) 100 Cal.App.4th 1017, 1034, 123Cal.Rptr.2d 256 (Atlantic Mutual ).)

**19 [9] [10] *977 A liability insurer's duty to defendis broader than its duty to indemnify; it therefore may owea duty to defend its insureds even when a trier of factmight ultimately determine that the policy does not entitlethem to indemnity for the claims against them. (MontroseChemical Corp. v. Superior Court (1993) 6 Cal.4th 287,300, 24 Cal.Rptr.2d 467, 861 P.2d 1153 (Montrose Chemical).) Whether the insurer owes a duty to defend turns noton whether the insured proves to be actually entitled to beindemnified for the underlying claim, but only on “ ‘thosefacts known by the insurer at the inception of a third partylawsuit,’ ” along with facts extrinsic to the complaint that mayalso “ ‘reveal a possibility that the claim may be covered bythe policy.’ ” (Id. at p. 295, 24 Cal.Rptr.2d 467, 861 P.2d1153.)

[11] [12] The insurer's coverage obligation beginswhenever the insurer becomes aware of facts giving rise tothe potential for coverage, and continues until it has beenestablished that there is no potential for coverage. (MontroseChemical, supra, 6 Cal.4th at p. 295, 24 Cal.Rptr.2d 467,861 P.2d 1153.) In order to prevail on an insurer's motion forsummary judgment based on the absence of a duty to defend,“the insured need only show that the underlying claim mayfall within policy coverage; the insurer must prove it cannot.”(Id. at p. 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153.) Once thepossibility of coverage arises, “[a]ny doubt as to whether thefacts establish [or defeat] the existence of the defense duty

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must be resolved in the insured's favor.” (Id. at pp. 299–300,

24 Cal.Rptr.2d 467, 861 P.2d 1153.) 4

4 Whether Versatile would have been entitled to recover

damages encompassing the sorts of losses it alleged to

be incurring as a result of the Charlotte Russe parties'

conduct (i.e., whether their price markdowns actually

disparaged Versatile's products) was not determined,

because the underlying litigation was settled in January

2011.

b. The underlying litigation need not allege all elementsof a cause of action for trade libel in order to triggerpersonal injury coverage for product disparagement

1. Coverage may be triggered by impliedallegations of disparaging statements

[13] The Versatile pleadings charged in the underlyinglitigation that the Charlotte Russe parties had offered thePeople's Liberation products for sale at severely discountedprices, resulting in “significant and irreparable damageto and diminution of the People's Liberation Brand andtrademark,” damaging its “marketability and saleability.”Travelers contends that these allegations of price discountsdo not accuse the Charlotte Russe parties of either productdisparagement or false statements, and therefore that they donot trigger the policies' personal injury or advertising injury

coverage. 5

5 Travelers has argued that advertising injury coverage

would in any event be unavailable due to the policies'

exclusions for advertising injuries that result from

breaches of contract. The Versatile parties respond

that advertising injury coverage remains potentially

available, because no breach of contract has been

established. We need not address this issue, because (as

in the Atlantic Mutual case) we find potential coverage

under the personal injury provision, to which the breach-

of-contract exclusion does not apply. (See Atlantic

Mutual, supra, 100 Cal.App.4th at p. 1030, fn. 12, 123

Cal.Rptr.2d 256.)

[14] *978 In order to trigger personal injury coverage itis not essential that the underlying claims must be expresslyphrased in terms of “ disparagement” or trade libel, **20however. (Atlantic Mutual, supra, 100 Cal.App.4th at p.1034, 123 Cal.Rptr.2d 256.) The underlying claims maytrigger a duty to defend if the conduct for which the policies

provide coverage is charged by implication, as well as bydirect accusation.

In the Atlantic Mutual case the policy provided coveragefor the insured's publication of material “ ‘that slanders orlibels a person or organization or disparages a person'sor organization's goods, products or services.... ’ ” (100Cal.App.4th at p. 1032, 123 Cal.Rptr.2d 256.) The insuredsought coverage for underlying litigation that alleged it hadfalsely stated to the plaintiff's customers that the plaintiff'sproducts were burdened with patents, and that their purchaseof those products would subject them to litigation. (Id. atpp. 1024, 1034–1035, 123 Cal.Rptr.2d 256.) The questiontherefore was whether the underlying litigation's allegationsamounted to claims that the insured had published “matterderogatory to the plaintiff's title to his property, or its quality,or to his business in general' ”; if so, it “disparaged” theproduct. (Id. at p. 1035, 123 Cal.Rptr.2d 256.)

The court held in Atlantic Mutual that the underlyinglitigation came within the policy's personal injury coveragebecause it alleged that the insured had published “ ‘matterderogatory to the plaintiff's title to his property, or its quality,or to his business in general.’ ” “The plain language of theAtlantic Mutual policy includes in the definition of ‘personalinjury’ the publication of any oral or written statement thatnot only slanders or libels but also one that disparages anorganization or its goods, products, or services. This amountsto coverage for product disparagement and trade libel as wellas defamation.” (Atlantic Mutual, supra, 100 Cal.App.4th atp. 1035, 123 Cal.Rptr.2d 256.)

The language of Travelers' policies is the same as thatin Atlantic Mutual, providing coverage for “publication ofmaterial that slanders or libels a person or organization ordisparages a person's or organization's goods, products orservices....” And here, too, the allegation of disparagementmay be implied. The question here, as in Atlantic Mutual,therefore is not whether the underlying claims expresslyallege that the Charlotte Russe parties disparaged Versatile'sproducts, but whether the allegations may be understood toaccuse the Charlotte Russe parties of statements and conduct*979 “that slanders or libels a person or organization or

disparages a person's or organization's goods, products or

services....” 6

6 “[T]the language employed [is] to be regarded ...

according to the sense and meaning under all the

circumstances attending the publication which such























language may fairly be presumed to have conveyed to

those to whom it was published. So that in such cases

the language is uniformly to be regarded with what has

been its effect, actual or presumed, and its sense is to be

arrived at with the help of the cause and occasion of its

publication.” (Bettner v. Holt (1886) 70 Cal. 270, 274,

11 P. 713.)

2. A claim of trade libel is not a prerequisiteto personal injury coverage for disparagement

[15] Travelers contends that “disparagement,” in theinsurance context, “refers to the tort of trade libel,” a tortthat requires pleading and proof of a false statement of fact.According to Travelers, coverage therefore is defeated as amatter of law by the underlying pleadings' failure to allege “aninjurious false statement disparaging Versatile's products....”

However, Versatile's pleadings alleged that the People'sLiberation brand had been identified in the market aspremium, high-end goods; and that the Charlotte **21 Russeparties had published prices for the goods implying that theywere not. It therefore pled that the implication carried by theCharlotte Russe parties' pricing was false. That is enough.(Atlantic Mutual, supra, 100 Cal.App.4th at pp. 1034–1035,123 Cal.Rptr.2d 256; Nichols v. Great American InsuranceCompanies (1985) 169 Cal.App.3d 766, 774, 215 Cal.Rptr.416 [statement may constitute product disparagement ifplaintiff pleads facts showing the statements' defamatorymeaning “by innuendo”]; E.piphany, Inc. v. St. Paul Fire &Marine Ins. Co. (N.D.Cal.2008) 590 F.Supp.2d 1244, 1253–1254 [insured's claim of superiority of its products necessarilyimplied inferiority of competitor's products].)

[16] [17] Moreover, even if it were true that Versatile'sclaim against the Charlotte Russe parties could not beviable without alleging all the elements of a trade libelcause of action, as Travelers argues and the trial court

apparently concluded, 7 the result here would be no different.The insurer's duty to defend is not conditioned on thesufficiency of the underlying pleading's allegations of acause of action; that is an issue for which the policyentitled the Charlotte Russe parties to an insurer-fundeddefense. (Montrose Chemical, supra, 6 Cal.4th at p. 298, 24Cal.Rptr.2d 467, 861 P.2d 1153 [“insurer may not decline todefend a suit merely because it is devoid of merit, but insteadmust assert appropriate defenses on its insured's behalf inthe underlying action”]; *980 Barnett v. Fireman's FundIns. Co. (2001) 90 Cal.App.4th 500, 510, 108 Cal.Rptr.2d

657.) “The fact that [the insurer] may have known of a gooddefense, even an ironclad one, to the [underlying] claim didnot relieve it of its obligation to defend its insured.” (CNACasualty of California v. Seaboard Surety Co. (1986) 176

Cal.App.3d 598, 609, fn. 4, 222 Cal.Rptr. 276.) 8

7 The trial court stated during argument that “[t]here is no

trade libel alleged because there is no claim that there

was a false statement.”

8 We do not share Travelers' certainty that a claim of

objective falsity is in all circumstances an essential

element of the tort of trade libel. The cases it cites for

this proposition involve or discuss both disparagement

and trade libel—but none of them hold, in the context

of insurance coverage for disparagement, that the

concepts are interchangeable or inextricably linked.

(E.g., Microtec Research v. Nationwide Mut. Ins. Co.

(9th Cir.1994) 40 F.3d 968, 972; ComputerXpress,

Inc. v. Jackson (2001) 93 Cal.App.4th 993, 1010, 113

Cal.Rptr.2d 625; Polygram Records, Inc. v. Superior

Court (1985) 170 Cal.App.3d 543, 548, 216 Cal.Rptr.

252; Nichols v. Great American Insurance Companies,

supra, 169 Cal.App.3d at p. 773, 215 Cal.Rptr. 416;

Total Call Internat., Inc. v. Peerless Ins. Co. (2010) 181

Cal.App.4th 161–169, 104 Cal.Rptr.3d 319.)

Finally, we cannot rule out the possibility that Versatile'spleadings could be understood to charge that the dramaticdiscounts at which the People's Liberation products werebeing sold communicated to potential customers theimplication—false, according to Versatile—that the productswere not (or that the Charlotte Russe parties did not believethem to be) premium, high-end goods. Arguably, a trade libelclaim might survive under these theories. According to thecomments to the Restatement Second of Torts, the conceptof trade libel encompasses “a statement in the form of anopinion, if the statement implies the existence of undisclosedfacts that justify the opinion....” (Rest.2d Torts, § 626, com.c, p. 346; see also Atlantic Mutual, supra, 100 Cal.App.4that pp. 1024–1025, fn. 3, 123 Cal.Rptr.2d 256 [allegation thatinsured asserted patent carries implication of false statementthat competitor was infringing patent].)

**22 3. The policy language does notrequire pleading or proof of a trade libel tort

We find no suggestion in the language of the policy's personalinjury coverage that a prerequisite to establishing a potentialfor personal injury coverage for disparagement is that the








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accusations against its insured must include all the essentialelements of the trade libel tort (whatever those requirementsmay be). Rather, the policy language is inconsistent with thatcontention.

[18] The claims asserted by Versatile were sufficient to raisereasonable inferences that the Charlotte Russe parties haddisparaged the People's Liberation products and brand, withinthe meaning of the policy language. As noted above, thatlanguage provides personal injury coverage for “publicationof material that slanders or libels a person or organizationor disparages a person's or organization's goods, products orservices....” (Italics added.) That phraseology makes coveragefor disparagement an alternative to coverage for libelousmaterials, not an element of that coverage. Under it, the *981policy covers publication of material either that slanders orlibels a person or organization, or that disparages a person'sor organization's goods, products or services; both are notrequired.

CONCLUSION

Coverage is triggered under this policy language by aclaim that the insureds published material that disparagesa person's or organization's goods, products or services,whether trade libel is or is not an element of that claim.Because the Versatile claims against the Charlotte Russeparties could reasonably be interpreted to constitute a claim ofproduct disparagement resulting in damage to their People'sLiberation brand, those claims are sufficient to triggerTravelers' obligation to provide the Charlotte Russe partieswith a defense. The trial court therefore erred in grantingsummary judgment to the contrary.

DISPOSITION

The judgment is reversed. Appellants are awarded their costson appeal.

We concur: ROTHSCHILD, Acting P.J. and JOHNSON, J.

Parallel Citations

207 Cal.App.4th 969, 2012 Daily Journal D.A.R. 9673

End of Document © 2014 Thomson Reuters. No claim to original U.S. Government Works.



Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 210 Cal.App.4th 915 (2012)

148 Cal.Rptr.3d 679, 105 U.S.P.Q.2d 1389, 12 Cal. Daily Op. Serv. 12,329...


KeyCite Red Flag - Severe Negative Treatment

Review Granted and Opinion Superseded by Hartford Cas. Ins. v.

Swift Distribution, Cal., February 13, 2013

148 Cal.Rptr.3d 679Review Granted

Previously published at: 210 Cal.App.4th 915(Cal.Const. art. 6, s 12; Cal. Rules of

Court, Rules 8.500, 8.1105 and 8.1110,8.1115, 8.1120 and 8.1125)Court of Appeal, Second

District, Division 3, California.

HARTFORD CASUALTY INSURANCECOMPANY, Plaintiff and Respondent,

v.SWIFT DISTRIBUTION, INC. etal., Defendants and Appellants.

No. B234234. | Oct. 29, 2012.| Review Granted Feb. 13, 2013.

SynopsisBackground: Liability insurer brought action against insuredfor declaratory judgment that insurer had no duty to defend anunderlying action. The Superior Court, Los Angeles County,No. BC442537, Debre K. Weintraub, J., granted summaryjudgment for insurer. Insured appealed.

[Holding:] The Court of Appeal, Kitching, J., held that actionbased on advertisements for product that resembled and hadsimilar name to competitor's product was not within “productdisparagement” coverage.

Affirmed.


*681 Little Reid & Karzai, Eric R. Little, M. Catherine Reidand Najwa Tarzi Karzai, Irvine, for Defendant and Appellant.

Tressler, David Simantob and Elizabeth L. Musser, LosAngeles, for Plaintiff and Respondent.

Opinion

KITCHING, J.

INTRODUCTION

The issue in this appeal is whether the “advertising injury”provision of an insurance policy required the insurer toprovide a defense for its insured against a claim thatthe insured company's advertisements disparaged anothercompany's products. In this case, Company A advertised itsproduct, which resembled and had a name similar to theproduct sold by Company B. Company A's advertisement,however, did not identify Company B's product expresslyand did not disparage Company B's product. When CompanyB sued, Company A made a demand on its insurer todefend against that suit under an insurance policy provisionthat provided coverage for “advertising injury,” defined asinjury arising out of publication of material that disparageda person's or organization's goods, products, or services.Because the advertisement did not identify Company B'sproduct, and contained no matter derogatory to CompanyB's title to its property, its quality, or its business, nodisparagement occurred. Therefore the insurance policy didnot provide a potential for coverage of this claim for damagesbecause of advertising injury and the insurer did not owe theinsured a duty to defend.

Specifically, in an underlying action, Gary–Michael Dahl(Dahl), who manufactured and sold the “Multi–Cart,” suedSwift Distribution, Inc., dba Ultimate Support Systems, Inc.,Michael Belitz, and Robin Slaton (Ultimate), for patentand trademark infringement, unfair competition, dilution ofa famous mark, and misleading advertising arising fromUltimate's sale of its product, the “Ulti–Cart.” Ultimatetendered defense of Dahl's action to its insurer, HartfordCasualty Insurance Company (Hartford), which refusedto defend it in the Dahl action. In a subsequent actionfor declaratory relief against Ultimate, Hartford sought adeclaration that it had no duty to defend or indemnifyUltimate in the Dahl action. The trial court granted Hartford'smotion for summary judgment and Ultimate appeals.

We find that Ultimate's advertisements did not expresslyrefer to Dahl's Multi–Cart and did not “disparage” Dahl'sMulti–Cart product or business, and there was no coverageor potential for coverage for “advertising injury” under theHartford insurance policy. Thus Hartford had no duty todefend Ultimate in the Dahl action, and the trial court

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correctly granted summary judgment for Hartford. We affirmthe judgment.

FACTUAL AND PROCEDURAL HISTORY

Hartford issued a liability insurance policy to SwiftDistribution, Inc. dba Ultimate Support Systems for theperiod January 29, 2009, to January 29, 2010. The Hartfordpolicy's insuring agreement stated: “We will pay those sumsthat the insured becomes legally obligated to pay as damagesbecause of ... ‘personal and advertising injury’ to whichthis insurance applies. We will have the right and duty todefend the insured against any ‘suit’ seeking those damages.However, we will have no duty to defend the insured againstany ‘suit’ seeking damages for ... ‘personal and advertisinginjury’ to which this insurance does not apply.”

*682 The policy defined “personal and advertising injury”in several ways. One definition of “personal and advertisinginjury” was “ injury ... arising out of ... [o]ral, writtenor electronic publication of material that slanders or libelsa person or organization or disparages a person's ororganization's goods, products or services[.]”

On January 26, 2010, Dahl filed an action against Ultimate,Dahl v. Swift Distribution, Inc. in U.S. District Court, CentralDistrict of California. The Dahl complaint alleged that Dahlowned a U.S. patent to a “convertible transport cart,” whichhe had sold as the “Multi–Cart” collapsible cart since 1997.The Multi–Cart can be manipulated into eight configurations,and is used to move music, sound, and video equipmentquickly and easily. The U.S. Patent and Trademark Officeissued a patent to Dahl for the “Multi–Cart” mark. The Dahlcomplaint alleged that Ultimate impermissibly manufactured,marketed, and sold the “Ulti–Cart,” which infringed patentsand trademarks for Dahl's Multi–Cart and diluted Dahl'strademark. The complaint attached advertisements for theUlti–Cart, which do not name the Multi–Cart, Dahl, or anyother products other than the Ulti–Cart.

Ultimate made three demands upon Hartford to defend it theDahl action under the Hartford insurance policy. Hartforddenied coverage to Ultimate for the Dahl action and statedthat Hartford had no duty to defend or indemnify Ultimate.Hartford filed a complaint for declaratory relief againstUltimate seeking a declaration that it had no duty to defendor indemnify Ultimate in the Dahl action.

While the Hartford complaint was pending, counsel forUltimate notified counsel for Hartford that the court inthe Dahl action granted Ultimate's motion for summaryadjudication as to Dahl's two patent infringement claims.Subsequently counsel for Ultimate notified counsel forHartford that the Dahl action had settled.

Hartford and Ultimate filed motions for summary judgmentor in the alternative summary adjudication. The trial courtentered an order granting summary judgment in favor ofHartford and denying Ultimate's motion. The judgmententered in favor of Hartford determined that Hartford hadno duty to defend or indemnify Ultimate in the Dahl action.Ultimate filed a timely notice of appeal.

ISSUE

Ultimate claims on appeal that the Dahl action allegedfacts that constituted the potentially covered offense ofdisparagement.

DISCUSSION

1. Standard of ReviewAny party to an action may move for summary judgmenton a cause of action or defense—a plaintiff contending thatthere is no defense to the action, a defendant contending thatthe action has no merit. (Code Civ. Proc., § 437c, subd. (a);Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843,107 Cal.Rptr.2d 841, 24 P.3d 493 (Aguilar ).)

The party moving for summary judgment bears the burden ofpersuasion that there is no triable issue of material fact andthat it is entitled to judgment as a matter of law. A triableissue of material fact exists only if the evidence would allowa reasonable trier of fact to find the underlying fact in favorof the party opposing the motion. (Aguilar, supra, 25 Cal.4that p. 850, 107 Cal.Rptr.2d 841, 24 P.3d 493.) “[I]f a plaintiffwho would bear the burden of proof by a preponderanceof evidence at trial moves for summary judgment, he mustpresent evidence that would require *683 a reasonable trierof fact to find any underlying material fact more likely thannot.” (Id. at p. 845, 107 Cal.Rptr.2d 841, 24 P.3d 493.)

A plaintiff moving for summary judgment has met its burdenof showing that there is no defense to a cause of action if ithas proved each element of the cause of action entitling it to

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judgment on that cause of action. Once the plaintiff has metthat burden, the burden shifts to the defendant to show theexistence of a triable issue of one or more material facts as tothat cause of action or a defense thereto. The defendant maynot rely upon the mere allegations or denials of its pleadingsto show that a triable issue of material fact exists, but insteadmust set forth specific facts showing that a triable issue ofmaterial fact exists as to that cause of action or a defensethereto. (Code Civ. Proc., § 437c, subd. (p)(1); Aguilar, supra,25 Cal.4th at p. 849, 107 Cal.Rptr.2d 841, 24 P.3d 493.)

The court must grant the motion if all the papers submittedshow there is no triable issue as to any material fact—thatno issue requires a trial as to any fact that is necessary underthe pleadings and the law—and that the moving party isentitled to a judgment as a matter of law. (Code Civ. Proc.,§ 437c, subd. (c); Aguilar, supra, 25 Cal.4th at p. 843, 107Cal.Rptr.2d 841, 24 P.3d 493.)

2. The Insurer's Duty to Defend Against Third PartyClaims Against the Insured[1] Liability insurance imposes on the insurer both theobligation to indemnify the insured against third party claimscovered by the policy and to defend such claims against itsinsured by furnishing competent counsel and paying attorneyfees and costs. The duty to defend is generally determinedfrom all the information available to the insurer when thedefense is tendered, although later developments may alsoaffect the insurer's duty to defend. (Howard v. AmericanNational Fire Ins. Co. (2010) 187 Cal.App.4th 498, 519–520,115 Cal.Rptr.3d 42.)

[2] [3] [4] The duty to defend is more broad than the dutyto indemnify. The insurer must indemnify claims coveredby the policy, but must also defend against a suit thatpotentially seeks damages within the coverage of the policy.The potential or possibility of coverage triggers the duty todefend. (Howard v. American National Fire Ins. Co. supra,187 Cal.App.4th at p. 520, 115 Cal.Rptr.3d 42.) The dutyto defend arises when the insurer learns of facts givingrise to the potential for coverage. (New Hampshire Ins. Co.v. Ridout Roofing Co. (1998) 68 Cal.App.4th 495, 505,80 Cal.Rptr.2d 286.) A determination whether the insurerowes a duty to defend is made in the first instance bycomparing allegations of the complaint with policy terms.Facts outside the complaint may give rise to a duty to defendwhen they reveal a possibility that the policy may cover theclaim. (Montrose Chemical Corp. v. Superior Court (1993)

6 Cal.4th 287, 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)“The duty to defend is determined by reference to the policy,the complaint, and all facts known to the insurer from anysource.” (Id. at p. 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153,italics omitted.)

[5] [6] The duty to defend is broad, but not unlimited. Thenature and kinds of risks covered by the policy define itsscope. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th1, 19, 44 Cal.Rptr.2d 370, 900 P.2d 619.) The insurer neednot defend where extrinsic facts eliminate the potential forcoverage despite allegations in the complaint which suggestpotential liability (ibid.), and where the third party complaintcan by no conceivable theory *684 raise a single issuewhich could bring it within the policy coverage. (MontroseChemical Corp. v. Superior Court, supra, 6 Cal.4th at p. 300,24 Cal.Rptr.2d 467, 861 P.2d 1153.)

In an action seeking declaratory relief on the issue of aninsurer's duty to defend, the insured must prove the existenceof a potential for coverage, i.e. that the policy may providecoverage of the underlying claim. The insurer, by contrast,must establish the absence of a potential for coverage; itmust prove that the policy cannot provide coverage of theunderlying claim. (Montrose Chemical Corp. v. SuperiorCourt, supra, 6 Cal.4th at p. 300, 24 Cal.Rptr.2d 467, 861P.2d 1153.)

3. Facts Known to HartfordUltimate cited specific paragraphs of the Dahl complaint ascontaining elements of a claim of disparagement.

Unfair Competition Under the Lanham Act: Dahl's claimfor unfair competition under the Lanham Act (15 U.S.C.§ 1125(a)) alleged that Ultimate advertised and offered forsale products that infringed two patents and the “Multi–Cart” mark owned by Dahl. The Dahl complaint alleged thatUltimate engaged in this advertising with intent to misleadthe public as to the origin and ownership of rights in Dahl'smark, and to mislead the public to believe that Ultimate'sproducts were the same as Dahl's or were authorized by orrelated to Dahl. The Dahl complaint alleged that Ultimate'sadvertising falsely made it appear that Ultimate designed, orwas authorized to manufacture and sell, Ultimate's infringingproducts (the “Ulti–Cart,” whose name and design was nearlyidentical to Dahl's “Multi–Cart”), and that Ultimate ownedor had manufacturing rights to the patent and trademark-protected Multi–Cart.

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Misleading Advertising: In a cause of action for untrue and/or misleading advertising, the Dahl complaint alleged thatUltimate violated Business and Professions Code sections17500 and 17505 by falsely claiming to be the manufacturer,wholesaler, or importer, or to own or control the intellectualproperty, factory, or other source of supply, of the Multi–Cart and Dahl's mark. This cause of action alleged that theseviolations caused Dahl's potential clients to contact Ultimateto buy its infringing product. It further alleged that through thefalse designation of origin, Dahl's intellectual property, mark,and patents were being inaccurately associated with Ultimate.

Allegations in Dahl's Application for a TemporaryRestraining Order: Dahl's application for a temporaryrestraining order alleged: (1) that Ultimate marketed a knock-off of Dahl's “Multi–Cart,” and by dropping the “M” from“Multi–Cart,” adopted a nearly identical name for its cartthat created a likelihood of confusion with Dahl's “Multi–Cart” trademark; (2) that Ultimate's use of a near-identicalmark was detrimental to Dahl's trade reputation and goodwill;(3) that if not enjoined by the court, Ultimate's use of theconfusingly similar “Ulti–Cart” mark would cause confusionin the public and loss of sales and customers to Dahl; (4)that the infringing “Ulti–Cart” mark would be used to Dahl'sdetriment since he would have no control over the nature andquality of Ultimate's carts; (5) that any fault with those goodswould adversely affect Dahl's future sales and would tarnishhis name and reputation; (6) that industry and the consumingpublic recognized the “Multi–Cart” mark as associated withDahl and as having a reputation for high quality and thepatented design Dahl invented; and (7) that Ultimate's useof the “Ulti–Cart” mark and name would cause confusion ormistake, or *685 would deceive the public as to the sourceof Ultimate's goods and services.

Dahl also responded to Ultimate's second set ofinterrogatories in the Dahl action. Dahl's responsesessentially repeat the allegations of the complaint.

4. Ultimate's Advertisements Did Not Disparage Dahl'sMulti–Cart and Thus There Was No Coverage or Potentialfor Coverage for Advertising Injury Under the HartfordInsurance Policy[7] To determine whether Hartford owes a duty to defend, wecompare allegations of the Dahl complaint, Dahl's applicationfor a temporary restraining order, and Dahl's responses tointerrogatories to the terms of the Hartford insurance policy.

The Hartford policy provided insurance coverage for “‘personal and advertising injury’ caused by an offense arisingout of your business[.]” The policy defined “personal andadvertising injury” to include “injury ... arising out of ...[o]ral, written or electronic publication of material thatslanders or libels a person or organization or disparages aperson's or organization's goods, products or services.”

[8] This provision provides coverage for productdisparagement, which is “an injurious falsehood directedat the organization or products, goods, or services ofanother....” (Atlantic Mutual Ins. Co. v. J. Lamb, Inc. (2002)100 Cal.App.4th 1017, 1035, 123 Cal.Rptr.2d 256 (AtlanticMutual ).) Disparagement, or injurious falsehood, mayconsist of publication of matter derogatory to plaintiff's titleto his property, its quality, or his business. (Ibid.) Tortiousproduct disparagement involves publication to third partiesof a false statement that injures the plaintiff by derogatingthe quality of goods or services. (Total Call Internat., Inc.v. Peerless Ins. Co. (2010) 181 Cal.App.4th 161, 169, 104Cal.Rptr.3d 319.)

[9] The injurious falsehood must specifically refer to thederogated property, business, goods, product, or serviceseither by express mention or reference by reasonableimplication. (Total Call Internat., Inc. v. Peerless Ins. Co.,supra, 181 Cal.App.4th at p. 170, 104 Cal.Rptr.3d 319,citing Blatty v. New York Times Co. (1986) 42 Cal.3d 1033,1046, 232 Cal.Rptr. 542, 728 P.2d 1177 [“plaintiff mustallege that ‘the statement at issue either expressly mentionshim or refers to him by reasonable implication.’ ”] ) Dahl'scomplaint, application for a temporary restraining order,and responses to Ultimate's discovery do not allege thatUltimate's advertisements specifically referred to Dahl byexpress mention.

Ultimate argues that Dahl's complaint alleged that Ultimate'suse of “Ulti–Cart,” a name similar to Dahl's “Multi–Cart,” referred to Dahl and Dahl's product by reasonableimplication. Dahl's complaint primarily alleged that becauseof its similarity to Dahl's “Multi–Cart,” Ultimate's use ofthe “Ulti–Cart” name misled the public into believing thatUltimate's products were the same as Dahl's, were approvedby Dahl, or were affiliated with Dahl's “Multi–Cart” products.

Even if the use of “Ulti–Cart” could reasonably implya reference to “ Multi–Cart,” however, Ultimate'sadvertisement contained no disparagement of “ Multi–Cart.”As stated, disparagement involves “an injurious falsehood

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directed at the organization or products, goods, or servicesof another....” (atlantic mutual, supra, 100 caL.app.4th atp. 1035, 123 cAl.rptr.2d 256.) The injurious falsehood ordisparagement may consist of matter derogatory to theplaintiff's title to his property, its quality, or to his businessin general. (Ibid.) The advertisements for the “ Ulti– *686Cart” did not include any of these derogations. Ultimate'sadvertisements referred only to its own product, the Ulti–Cart,and did not refer to or disparage Dahl's Multi–Cart. Dahl'scomplaint alleged that by using a product name (Ulti–Cart)that was very similar to Dahl's Multi–Cart product, Ultimatedeceived the public that Ultimate was the originator, designer,or authorized manufacturer and distributor of its infringingproducts. This, however, was not disparagement. (AtlanticMutual, supra, 100 Cal.App.4th at p. 1037, 123 Cal.Rptr.2d256; Truck Ins. Exchange v. Bennett (1997) 53 Cal.App.4th75, 90, 61 Cal.Rptr.2d 497; see also Microtec Research v.Nationwide Mut. Ins. Co. (9th Cir.1994) 40 F.3d 968, 971–972.) Because Dahl did not allege that Ultimate's publicationdisparaged Dahl's organization, products, goods, or services,Dahl was precluded from recovery on a disparagement theory.(Nichols v. Great American Ins. Companies (1985) 169Cal.App.3d 766, 774, 215 Cal.Rptr. 416.) Thus Dahl allegedno claim for injurious false statement or disparagement thatwas potentially within the scope of the Hartford policycoverage for advertising injury.

5. Cases Cited to Show Disparagement by Implication DoNot Apply

A. Travelers Property Casualty Co. of America v.Charlotte Russe Holding, Inc.The parties have cited the recent case of Travelers Property

Casualty Co. of America v. Charlotte Russe Holding, Inc.(2012) 207 Cal.App.4th 969, 144 Cal.Rptr.3d 12 (CharlotteRusse ). In Charlotte Russe, the manufacturer of “People'sLiberation” brand apparel sued the insured retailer. Themanufacturer claimed that the retailer, which had contractedto become the exclusive sales outlet for People's Liberationapparel, breached its contract and damaged the People'sLiberation brand and trademark by marking down pricesfor the apparel. This advertising allegedly suggested toconsumers that People's Liberation products were of inferiorquality. (Id. at pp. 972–973, 144 Cal.Rptr.3d 12.) CharlotteRusse held that the allegations in the complaint couldreasonably be interpreted to allege that the insured retailerdisparaged the People's Liberation brand, and that theadvertising injury provision of an insurance policy providedcoverage of, and the insurer had a duty to defend the insured

against, this claim of disparagement. (Id. at p. 981, 144Cal.Rptr.3d 12.) We disagree. As discussed below, we believesuch a conclusion has no objectively reasonable basis.

As a preliminary manner, we observe that the allegations inthe Dahl complaint about Ultimate do not correspond to thefacts in Charlotte Russe. The Dahl complaint did not allegethat Ultimate implied, by steeply discounted pricing, that theMulti–Cart was of poor quality. Unlike in Charlotte Russe,Ultimate's advertisements referred only to its own product,and did not refer to and therefore did not disparage Dahl'sproduct.

[10] More importantly, we disagree with the theory ofdisparagement apparently recognized in Charlotte Russe.There the manufacturer alleged that the People's Liberationbrand was identified in the market as premium, high-endgoods but the retailer's steeply discounted prices impliedthat those products were not premium, high-end goods. Themanufacturer “therefore pled that the implication carried bythe [retailer's] pricing was false.” (Charlotte Russe, supra,207 Cal.App.4th at p. 979, 144 Cal.Rptr.3d 12.) In spite ofthe requirements that there be a publication (Shanahan v.State Farm General Ins. Co. (2011) 193 Cal.App.4th 780,789, 122 Cal.Rptr.3d 572) that specifically refers *687 tothe plaintiff (Total Call Internat., Inc. v. Peerless Ins. Co.,supra, 181 Cal.App.4th at p. 170, 104 Cal.Rptr.3d 319),Charlotte Russe held that this reduced pricing was enoughto constitute disparagement, which triggered the duty todefend. We fail to see how a reduction in price—even a

steep reduction in price—constitutes disparagement. 1 Sellersreduce prices because of competition from other sellers,surplus inventory, the necessity to reduce stock because ofthe loss of a lease, changing store location, or going outof business, and because of many other legitimate businessreasons. Reducing the price of goods, without more, cannotconstitute a disparagement; a price reduction is not “aninjurious falsehood directed at the organization or products,goods, or services of another....” (Atlantic Mutual, supra,100 Cal.App.4th at p. 1035, 123 Cal.Rptr.2d 256.) A pricereduction may allegedly be injurious to the brand or its high-end, high-quality reputation, but it is not false and is thus notdisparagement. Such an “injury” is a common experience inthe everyday world of free market competition.

1 The manufacturer in Charlotte Russe may well have

had a breach of contract claim against the retailer, but

that is not relevant to the issue before us, which is the

viability of the manufacturer's claim that the retailer's










































price competition activity constituted disparagement of

the manufacturer's product for purposes of determining

insurance coverage. Even though there may be a valid

cause of action against an insured, that does not give rise

to an insurer's duty to defend and indemnify unless the

suit potentially seeks damages within the coverage of the

insurance policy.

We also question whether the insured could have objectivelyreasonable expectations (Bank of the West v. Superior Court(1992) 2 Cal.4th 1254, 1265, 10 Cal.Rptr.2d 538, 833 P.2d545) that the insurer would provide a defense and indemnitycoverage for a claim made against the insured for placinggoods on sale at a reduced price. The insurance policy inCharlotte Russe provided coverage for “ ‘publication ofmaterial that slanders or libels a person or organization ordisparages a person's or organization's goods, products orservices.’ ” (Charlotte Russe, supra, 207 Cal.App.4th at p.978, 144 Cal.Rptr.3d 12, italics added.) As we have alreadynoted, there was neither a publication nor a specific referenceto the manufacturer's products. For these reasons, we rejectthe analysis of Charlotte Russe.

B. Federal and Out–of–State DecisionsUltimate cites a series of cases from federal courts andfrom the courts of other states. These cases do not bindCalifornia courts. (Nagel v. Twin Laboratories, Inc. (2003)109 Cal.App.4th 39, 55, 134 Cal.Rptr.2d 420; US Ecology,Inc. v. State of California (2005) 129 Cal.App.4th 887, 905,28 Cal.Rptr.3d 894.) These cases are also distinguishable orinapplicable.

In Acme United Corp. v. St. Paul Fire & Marine Ins. Co. (7thCir.2007) 214 Fed.Appx. 596, a competitor sued Acme forallegedly making false and disparaging statements about thecompetitor's products by stating on its product packaging thatits scissors and paper trimmers were bonded with titanium,which made them superior to stainless steel scissors andpaper trimmers which were not bonded with titanium. Acme'sinsurer denied coverage and disclaimed any duty to defendunder the advertising injury liability provision of the policy,which indemnified the insured for damages for advertisingthat disparaged the products of others. (Id. at pp. 596–598.)Acme United Corp. concluded that the competitor's complaintsufficiently alleged that Acme's advertisements were directedat *688 the competitor's products and that Acme disparagedthe competitor's products through a false comparison. Theseallegations of advertising injury offense triggered the insurer'sduty to defend Acme against the competitor's complaint. (Id.at pp. 600–601.) Dahl's complaint, by contrast, does not allege

that Ultimate's advertisements falsely compared the Ulti–Cartto Dahl's Multi–Cart. Thus Dahl's complaint did not allegethe disparagement by false comparison that occurred in AcmeUnited Corp.

In Liberty Mut. Ins. Co. v. OSI Industries (2005) 831 N.E.2d192, Thermodyne sued OSI and Beltec for advertising andselling a “Temperfect Oven,” which contained flat aluminumplate shelving that Thermodyne claimed was unique and atrade secret. Thermodyne's lawsuit alleged that through anagent's statements, OSI and Beltec claimed ownership of thedevelopment of the Thermodyne oven and its flat aluminumplate shelving technology, which disparaged the ThermodyneOven by creating confusion about which company, OSI/Beltec or Thermodyne, had the rights to and produced an ovenwith the unique technology. This triggered the insurer's dutyto defend under the advertising injury provision of the policy.(Id. at p. 199.) Dahl's complaint does not allege that Ultimatemade statements claiming ownership of unique technology ofthe Multi–Cart or that Ultimate had the rights to and producedthe Multi–Cart. Thus Dahl's complaint did not allege thedisparagement by assertion of ownership of rights to another'sproduct that occurred in Liberty Mut. Ins. Co.

Ultimate cites E.piphany, Inc. v. St. Paul Fire & Marine Ins.Co. (N.D.Cal.2008) 590 F.Supp.2d 1244 for the propositionthat disparagement by implication is actionable underCalifornia law. (Id. at p. 1252.) In E.piphany Inc., Sigmasued E.piphany, alleging that E.piphany falsely advertisedits software products as “all Java” and “fully J2EE,” whichgave its products an unfair and undeserved advantage overSigma and other competitors which in fact did offer “allJava” and “fully J2EE” software. (Id. at pp. 1249–1250.)E.piphany sued its insurer seeking a declaration that theinsurer had a duty to defend. E.piphany, Inc. found thatSigma's complaint alleged that E.piphany falsely stated that itwas the only producer of “all Java” “fully J2EE” software andthat E.piphany suggested that its competitors' technology wasbehind E.piphany's technology. Thus the Sigma complaintalleged that E.piphany's false claims about the superiority ofits own products necessarily implied the inferiority of Sigma'scompeting products. (Id. at p. 1253.) E.piphany Inc. held thatthe Sigma complaint contained disparagement allegationspotentially covered by the insurer's policy and thus triggeredthe insurer's duty to defend. (Id. at p. 1254.)

As we have explained, the Dahl complaint did not allegethat Ultimate disparaged Dahl's products by implication.The Dahl complaint contained no allegations that Ultimate's





































advertising falsely stated it was the only producer of aproduct with features also available on Dahl's “Multi–Cart;”that Ultimate's advertising suggested that its competitor'stechnology was behind that of Ultimate; or that Ultimatemade false claims about the superiority of the Ulti–Cartwhich necessarily implied the inferiority of Dahl's competingproduct. Ultimate's advertisements did not disparageanother's product, either expressly or by implication; they saidnothing about a competitor's product.

In Michael Taylor Designs, Inc. v. Travelers Prop. Cas. Co.of America (N.D.Cal.2011) 761 F.Supp.2d 904, a furnituremanufacturer, Ivy Rosequist, sued *689 Michael TaylorDesigns, Inc. (MTD) for breach of contract and violation ofthe Lanham Act. Rosequist's complaint alleged that MTDdistributed promotional materials containing photographs ofRosequist's furniture, but displayed cheap, synthetic knock-offs of Rosequist's products in its showroom, which misledand confused customers about the origin of those productsand diluted and tarnished Rosequist's trade dress. (Id. at pp.907–908.) MTD sued the insurer seeking a declaration thatthe insurer had a duty to defend the trade dress infringementclaim alleged in the original complaint.

The issue was whether the Rosequist complaint contained aclaim for “disparagement” under the policy, which promisedcoverage where the insured “disparaged” the another's goods,products, or services. (Id. at p. 910.) Rosequist's complaintcreated a possibility of a covered claim for disparagementby alleging that defendant advertised Rosequist's products,did not sell Rosequist's products, and “steered” customersto imitation products. The term “steered” implied furtherstatements by defendant's personnel that the imitationproducts were the Rosequist furniture shown in defendant'spromotional materials. (Id. at pp. 911–912.)

The Dahl complaint alleges no comparable conduct byUltimate. It does not allege that Ultimate displayed photos ofthe Multi–Cart in advertisements and then steered customersto purchase the Ulti–Cart, or led customers to believe theUlti–Cart was Dahl's own product. Thus even under theanalysis of Michael Taylor Designs, Inc., the Dahl complaintdid not allege disparagement and did not create a possibilityof coverage under the advertising injury provision of theHartford insurance policy.

Finally, Ultimate cites Burgett, Inc. v. American ZurichIns. Co. (E.D.Cal.2011) 830 F.Supp.2d 953 as clarifyingan insurer's duty to defend a claim of disparagement by

implication. In Burgett, Persis International and Richards(Persis) sued Burgett for falsely representing to anothercompany, Samick, that it had valid and enforceable rightsto the “SOHMER” trademark, which Persis alleged thatit owned. The Persis complaint alleged that by enteringinto a licensing agreement with and accepting compensationfrom Samick, and by holding itself out to Samick and theworld as rightful owner of the SOHMER trademark, Burgettinduced and was contributorily liable for Samick's acts oftrademark infringement and unfair competition. Burgett'sinsurer, Zurich, declined to defend Burgett in the Persisaction, asserting that the personal and advertising injuryprovision did not provide coverage and that the trademarkexclusion excused Zurich from defending the action. (Id. atpp. 957–958.)

The Burgett court found that Burgett represented to Samickthat it was the only holder of the SOHMER trademark (whichimplied that Burgett's right to use the SOHMER trademarkwas superior to that of Persis), represented that Persis didnot have the rights to the SOHMER trademark, and created alikelihood of confusion or misunderstanding about the source,sponsorship, or approval of Persis's goods. Burgett heldthat the Persis complaint alleged sufficient facts to establishthe potential for coverage of its claim of disparagement byimplication, which triggered Zurich's duty to defend Burgettin the Persis action. (Id. at pp. 963–964.)

The Dahl complaint, by contrast, did not allege that Ultimaterepresented itself as the only holder of the Multi–Carttrademark, implied that Ultimate had a right to use theMulti–Cart trademark that was superior to that of Dahl, orrepresented that Dahl did not have rights to the Multi– *690Cart trademark. Thus the Dahl complaint did not allegedisparagement by implication, and no potential for coveragetriggered Hartford's duty to defend Ultimate in the Dahlaction.

DISPOSITION

The judgment is affirmed. Costs on appeal are awarded toplaintiff Hartford Casualty Insurance Company.

We concur: KLEIN, P.J., and CROSKEY, J.





















Parallel Citations

, 105 U.S.P.Q.2d 1389, 12 Cal. Daily Op. Serv. 12,329, 2012Daily Journal D.A.R. 15,041


CNA Casualty of California v. Seaboard Surety Co., 176 Cal.App.3d 598 (1986)

222 Cal.Rptr. 276



Declined to Follow by Curtis Universal, Inc. v. Sheboygan Emergency

Medical Services, Inc., E.D.Wis., February 22, 1994

176 Cal.App.3d 598, 222 Cal.Rptr. 276

CNA CASUALTY OF CALIFORNIA,Plaintiff and Appellant,

v.SEABOARD SURETY COMPANYet al., Defendants and Appellants.

No. A021608.Court of Appeal, First District, Division 3, California.

Jan 14, 1986.

SUMMARY

The trial court entered a judgment ordering three insurers,under principles of equitable contribution, to pay plaintiffinsurer a portion of the legal expenses it incurred indefending a lawsuit against their insured, which defendantshad declined. Defendants argued that their insurance policiesdid not provide coverage for any of the causes of actionalleged in the underlying antitrust complaint against theinsured. Defendants appealed, and plaintiff cross-appealed,contending that the trial court's method of apportioning theparties' individual contributions to the costs of defense wasnot equitable. (Superior Court of the City and County of SanFrancisco, No. 761572, Frank W. Shaw, Jr., Judge.)

The Court of Appeal affirmed, applying the rule that aninsurer's duty to defend must be analyzed and determined onthe basis of any potential liability arising from facts availableto the insurer from the complaint or other sources available toit at the time of the tender of defense, and that the obligationto defend is not dependent on the facts contained in thecomplaint alone. Looking to the facts alleged in the complaintagainst the insured, rather than the formal theory of liabilityor cause of action pleaded, the court held that those facts gaverise to the potential of liability under defendants' policies, andthey therefore bore the duty to defend the insured. The courtrejected the contention that certain limitations and exclusionsin their respective policies entitled defendants to refuse todefend the action. The court also held the trial court properlyapportioned the costs of defense among the four insurerson the basis of the relative limits of coverage set by theirrespective policies, and that plaintiff was not entitled to

receive its attorney fees incurred in bringing the contributionaction. (Opinion by Barry-Deal, J., with Scott, Acting P. J.,and Merrill, J., concurring.)

HEADNOTES

Classified to California Digest of Official Reports

(1)Insurance Contracts and Coverage § 107--Obligation toDefend Insured-- Scope.An insurer's duty to defend its insured is much broader thanthe duty to indemnify. The duty to defend must be analyzedand determined on the basis of any potential liability arisingfrom facts available to the insurer from the complaint or othersources available to it at the time of the tender of defense.If the insurer is obliged to take up the defense, it must doso as soon as possible, both to protect the interests of theinsured and to limit its own exposure to loss. Unlike the dutyto indemnify, which is only determined after liability is finallyestablished, the duty to defend must be assessed at the outsetof the case.

[See Cal.Jur.3d, Insurance Contracts and Coverage, § 415;Am.Jur.2d, Insurance, § 1405 et seq.]

(2)Insurance Contracts and Coverage § 107--Obligation toDefend Insured-- Determination.An insurer's obligation to defend its insured is not dependenton the facts contained in the complaint against the insuredalone; the insurer must furnish a defense when it learns offacts from any source that create the potential of liabilityunder its policy. The duty to defend is so broad that as longas the complaint contains language creating the potential ofliability under an insurance policy, the insurer must defendan action against its insured, even though it has independentknowledge of facts not in the pleadings that establish that theclaim is not covered.

(3)Insurance Contracts and Coverage § 107--Obligation toDefend Insured-- Particular Policies.Under insurance policies requiring an insurer to defend itsinsured in any suit alleging an injury under the policy even ifthe suit is “... groundless, false or fraudulent,” it is the dutyof the insurer to defend the insured when sued in any actionor the facts alleged in the complaint support a recovery for

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222 Cal.Rptr. 276


an occurrence covered by the policy, regardless of the factthat the insurer has knowledge that the injury is not in factcovered.

(4a, 4b)Insurance Contracts and Coverage § 107--Obligation toDefend Insured--Face of Complaint--Antitrust Action--OtherBases of Liability.General liability insurers for a regional clearing house for acredit card system had a duty to defend their insured in alawsuit by a competitor entitled “antitrust,” even though anantitrust defense was not within the coverage of the policies,where the facts alleged in the complaint gave rise to thepotential of liability under the policies' provisions coveringpiracy, unfair competition, idea misappropriation, libel,slander, and other defamation, and malicious prosecution.When there is doubt as to whether the duty to defend exists,the doubt must be resolved in favor of the insured. Thefact the antitrust action against the insured was ultimatelydismissed on statute of limitations grounds was immaterial tothe insurer's duty to defend, as was the dismissal of anothercause of action for lack of federal subject-matter jurisdiction.

(5)Insurance Contracts and Coverage § 107--Obligation toDefend Insured-- Rejection of Tender.Before an insurer may rightfully reject a tender of defensefrom its insured, it must investigate and evaluate the factsexpressed or implied in the third party complaint as well asthose which it learns from its insured and any other sources.Failure to do so bars the insured from denying the tendereddefense.

(6)Insurance Contracts and Coverage § 107--Obligation toDefend Insured-- Determination.All insurer's duty to defend its insured must be determinedfrom the fact and inferences known to the insurer from thepleadings, available information and its own investigation atthe time of the tender of defense, and cannot be adjudged onthe basis of hindsight.

(7)Insurance Contracts and Coverage § 107--Obligation toDefend Insured-- Exclusion.

All insurer may not decline a defense of its insured based on inexclusion in the policy where the application of the exclusionis only a possibility.

(8)Insurance Contracts and Coverage § 107--Obligation toDefend Insured-- Exclusions.An exclusion in a general liability policy was ambiguous onits face and thus inapplicable, where it excluded coveragefor “any claim or suit based upon or arising out of allegedfalse, misleading, deceptive, fraudulent or misrepresentingadvertising or any claim of suit for unfair competitionbased thereon,” but where the exclusion appeared to excludecoverage for virtually any claim made under the policy, whichpurported to provide indemnification for damages resultingfrom libel, slander, defamation, piracy, unfair competition,or idea misappropriation committed or alleged to have beencommitted in an advertising context. Any ambiguity in anexclusionary clause is strictly interpreted against the insurer,and reasonable doubts as to uncertain language must beresolved in favor of the insured.

(9)Insurance Contracts and Coverage § 132--Actions--Trial--Questions of Law and Fact--Material Concealment.The issue of whether an insured committed a “materialconcealment” under Ins. Code, § 330 et seq., is a questionof fact to be decided by the trial court on the basis of theevidence.

(10)Insurance Contracts and Coverage § 139--Actions--New Trialand Appeal--Judicial Review.On appeal in an insurance action, the judgment must beupheld if it is supported by any substantial evidence, evenif it is against the weight of other contradictory evidence.An appellate court must examine the record in the lightmost favorable to the prevailing party, giving it the benefitof every reasonable inference, and resolving all conflicts insupport of the judgment. Where evidence is undisputed, butdifferent inferences may be drawn therefrom, the appellatecourt is not at liberty to make its own inferences and decidethe case accordingly; the conclusions of the trial judgemust be accepted, since it is for the trier of fact to resolvesuch conflicting inferences in the absence of a rule of lawspecifying the inference to be drawn.

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222 Cal.Rptr. 276


(11)Insurance Contracts and Coverage § 107--Obligation toDefend Insured-- Effect of Denial of Liability.Where an insurer denies liability to defend its insured under apolicy which it has issued, it waives any claim that the noticeprovisions of the policy have not been complied with.

(12)Appellate Review § 32--Presenting and Preserving Questionsin Trial Court--Failure to Raise Issue.Although as a general rule issues not properly raised at trialwill not be considered on appeal, an appellate court may, inits discretion, consider an issue not properly raised in the trialcourt if the issue presents a pure question of law on undisputedevidence regarding either a noncurable defect of substance,such as lack of jurisdiction of complete failure to state a causeof action, or a matter affecting the public interest or the dueadministration of justice.

(13)Insurance Contracts and Coverage § 107--Obligation toDefend Insured-- Duration.An insurer's duty to defend its insured does not cease until thefinal determination of the underlying action on appeal.

(14)Insurance Contracts and Coverage § 107--Obligation toDefend Insured-- Multiple Insurers--Apportionment of Costsof Defense.Where several insurers were responsible for defending aninsured in a lawsuit, but only one assumed the defense, thetrial court, in an action for contribution by the one insureragainst the others, properly apportioned the costs of defenseon the basis of the relative limits of coverage set by theirrespective policies. The costs of defense must be apportionedon the basis of equitable considerations not found in theinsurers' own contracts, since the insurance companies whomust share the burden do not have any agreements amongthemselves. Although in given cases the true scope of aninsured's coverage might not be confined to the liability limitsof a given policy, but may also include the period of timecovered by the policy and the interrelation between the termsof the policy and the wrongs alleged against the insured by aclaimant, the method of allocation employed by the trial courtwas fair and reasonable.

(15)

Insurance Contracts and Coverage § 120--Contribution--Action--Attorney Fees.An insurer, who prevailed in an action against other insurersfor contribution for costs incurred in defending an insuredwhom the other insurers declined to defend, was not entitledto recover its attorney fees in the contribution action, where,although the prevailing insurer contended that, since it wasequitably subrogated to the rights of the insured, it shouldrecover its attorney fees just as the insured assertedly wouldhave had it sued the other insurers for breach of the covenantof good faith and fair dealing, the contention was basedentirely on hypotheticals with no foundation in fact. Theprevailing insurer had no contractual relationship with theother insurers and thus no standing to assert a breach ofthe covenant of good faith and fair dealing in its own right,and thus had no standing to recover its attorney fees in thecontribution action.

COUNSELRaymond C. Oleson for Plaintiff and Appellant. *603Graydon S. Staring, Thomas R. Dean, Gail M. Heckemeyer,Lillick McHose & Charles, Eric C. Bettelheim, John H.O'Reilly, Laurene A. Wheeler, Barfield, Barfield, Dryden &Ruane, Marvin A. Jacobs and Jay R. Mayhall for Defendantsand Appellants.

BARRY-DEAL, J.

This appeal raises important issues regarding the extent of theresponsibility of insurance carriers to provide their insuredwith a defense. Seaboard Surety Company (Seaboard),Insurance Company of North America (INA), and PacificIndemnity Company (Pacific) (collectively appellants) appealfrom a judgment ordering them under principles of equitablecontribution to pay respondent and cross-appellant CNACasualty of California (CNA) a portion of the legal expensesincurred by CNA in defending a lawsuit against their insured,Western States Bankcard Association (WSBA). We affirmthe judgment.

Appellants argue that their insurance policies could not beconstrued to provide coverage for any of the causes of actionalleged in the underlying antitrust complaint against WSBA,WSBA had no reasonable expectation of coverage under anyof the subject policies, and they therefore had no duty todefend WSBA; that particular limitations and exclusions onthe policies entitled appellants to refuse to defend WSBA;and that WSBA's failure to disclose the underlying claims atthe time it took out the subject insurance policies exoneratedappellants from any obligation to defend WSBA and barred


222 Cal.Rptr. 276


CNA, as subrogee, from obtaining any contribution for thatdefense. In addition, Pacific contends that the evidence failedto establish that it had issued an insurance policy of the kindfound by the trial court; that it was absolved from any dutyto defend WSBA both by CNA's failure to tender a formaldemand that Pacific share in that defense and by WSBA'sfailure to notify Pacific of threats of litigation occurring afterissuance of Pacific's policy; and that CNA was not entitled toany defense costs incurred after the trial below.

CNA has cross-appealed from the judgment, contendingthat the trial court's method of apportioning the parties'individual contributions to the costs of defense was notequitable, and that CNA itself was entitled to *604 receiveits own attorneys' fees incurred in this action for equitablecontribution.

IIn 1966, a number of major California banks formedWSBA to act as the regional clearinghouse for theMaster Charge credit card system. Beginning in 1966and continuing through 1977, Marsh & McLellan, Inc.,insurance brokers, obtained for WSBA an extensive insuranceprogram involving several insurance policies issued by anumber of insurance companies. Among these insurancecompanies were appellants. The comprehensive generalliability insurance policy of Pacific covered the period from1966 to 1969; that of INA was for the period from 1969to 1975; and CNA picked up the coverage in 1975. TheSeaboard policy, which had a somewhat different focus ofcoverage, ran concurrently with the others from January 1967to October 1977.

On March 21, 1977, Electronic Currency Corporation andMelvin Salveson filed suit in federal district court againstWSBA, alleging an antitrust cause of action for violation ofthe Sherman and Clayton Acts and a second cause of actionfor intentional interference with contractual relationships(Electronic Currency Corporation et al. v. Western StatesBankcard Association et al. (N.D.Cal.) No. C-772077-SW[the Salveson lawsuit]). An amended complaint was filed onMarch 3, 1978. On May 24, 1978, the federal district judgedismissed the pendent second cause of action for lack offederal subject matter jurisdiction.

WSBA tendered the defense of the amended complaint toINA, Pacific, and CNA on July 10, 1978, and to Seaboardon October 2, 1978. INA, Seaboard and Pacific declinedto undertake WSBA's defense. CNA, however, accepted the

tender of defense. CNA incurred a major portion of defensecosts, amounting to nearly $150,000 as of October 15, 1979.It then filed the present declaratory relief action on December18, 1979, seeking contribution from appellants for the costsincurred in defending WSBA in the federal action.

On May 7, 1981, the federal court granted summary judgmentfor WSBA on the remaining antitrust cause of action inthe Salveson lawsuit. Two months later, in July 1981, theinstant action came to trial. On December 30, 1982, the trialcourt filed a statement of decision finding that appellants allhad a duty to defend WSBA in the Salveson lawsuit; andit entered judgment ordering appellants to reimburse CNAfor its post-tender costs of *605 defense in the ratio thatappellants' separate policy limits bear to the total limits of allfour policies.

IIAll the appellants join in arguing that the Salveson lawsuitagainst WSBA was purely a federal antitrust action, that theirrespective insurance policies do not provide coverage forsuch an action, and that they therefore had no duty to defendWSBA. We disagree.

([1])The duty to defend is much broader than the duty toindemnify. An insurer's duty to defend must be analyzed anddetermined on the basis of any potential liability arising fromfacts available to the insurer from the complaint or othersources available to it at the time of the tender of defense. Ifthe insurer is obliged to take up the defense of its insured, itmust do so as soon as possible, both to protect the interestsof the insured, and to limit its own exposure to loss. Unlikethe duty to indemnify, which is only determined after liabilityis finally established, the duty to defend must be assessed atthe outset of the case. ( Gray v. Zurich Insurance Co. (1966)65 Cal.2d 263, 275-277 [54 Cal.Rptr. 104, 419 P.2d 168];Central Mutual Ins. Co. v. Del Mar Beach Club Owners Assn.(1981) 123 Cal.App.3d 916, 927-928 [176 Cal.Rptr. 895];Fresno Economy Import Used Cars, Inc. v. United StatesFid. & Guar. Co. (1977) 76 Cal.App.3d 272, 278-279 [142Cal.Rptr. 681]; Mullen v. Glens Falls Ins. Co. (1977) 73Cal.App.3d 163, 173-174 [140 Cal.Rptr. 605].) Thus, we arenot dealing with the question of whether the insurers wereactually liable to indemnify WSBA for the wrongs allegedin the Salveson lawsuit, but rather with their duty to defendWSBA against Salveson's claims as of the time that lawsuit

was filed. This distinction is critical. 1 *606

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222 Cal.Rptr. 276


1 “The duty to defend is, of course, broader than the duty

to indemnify. [Citation.] Where there is doubt as to

whether the duty to defend exists, the doubt should be

resolved in favor of the insured and against the insurer.

[Citations.] ” ( Eichler Homes, Inc. v. Underwriters at

Lloyd's, London (1965) 238 Cal.App.2d 532, 538 [47

Cal.Rptr. 843].) “The rule is well established that an

insurer's obligation to defend is broader than its duty

to indemnify. [Citations.] The duty of an insurer to

indemnify is determined, measured, and limited by the

terms of the insurance contract [citation], and depends

upon an ultimate adjudication of coverage. [Citation.]

In contrast, the duty of an insurer to defend depends

upon the facts known to the insurer at the inception of

the third party's suit against its insured. 'An insurer ...

bears a duty to defend its insured whenever it ascertains

facts which give rise to the potential of liability under

the policy.' [Citations.]” ( Walters v. Marler (1978)

83 Cal.App.3d 1, 28 [147 Cal.Rptr. 655], italics added

by the Walters court, disapproved on other grounds

in Gray v. Don Miller & Associates, Inc. (1984) 35

Cal.3d 498, 507 [198 Cal.Rptr. 551, 674 P.2d 253,

44 A.L.R.4th 763].) “[T]he duty to defend is broader

than the obligation to indemnify. This results from the

difficulty in determining whether the third party suit falls

within the indemnification coverage before the suit is

resolved. To solve this problem, the courts have imposed

a duty to defend whenever the insurer ascertains facts

which give rise to the possibility or 'potential' of liability

to indemnify [citation].” ( Fresno Economy Import Used

Cars, Inc. v. United States Fid. & Guar. Co., supra., 76

Cal.App.3d at p. 278.)

([2])The insurer's obligation to defend is not dependent onthe facts contained in the complaint alone; the insurer mustfurnish a defense when it learns of facts from any sourcethat create the potential of liability under its policy. ( Grayv. Zurich Insurance Co., supra., 65 Cal.2d at pp. 275-277;Giddings v. Industrial Indemnity Co. (1980) 112 Cal.App.3d213, 217 [169 Cal.Rptr. 278]; Mullen v. Glens Falls Ins. Co.,supra., 73 Cal.App.3d at pp. 169-170; Fireman's Fund Ins.Co. v. Chasson (1962) 207 Cal.App.2d 801, 804-805, 807 [24Cal.Rptr. 726].) Indeed, the duty to defend is so broad that aslong as the complaint contains language creating the potentialof liability under an insurance policy, the insurer must defendan action against its insured even though it has independentknowledge of facts not in the pleadings that establish that theclaim is not covered. ( [3])In this case, each of the insurancepolicies at issue required the insurer to defend WSBA in anysuit alleging an injury under the respective policy even if thesuit is “'... groundless, false or fraudulent.' Under such a clauseit is the duty of the insurer to defend the insured when sued in

any action where the facts alleged in the complaint support arecovery for an 'occurrence' covered by the policy, regardlessof the fact that the insurer has knowledge that the injury is notin fact covered. [Citations.]” ( Remmer v. Glens Falls Indem.Co. (1956) 140 Cal.App.2d 84, 90 [295 P.2d 19, 57 A.L.R.2d1379]; see Fireman's Fund Ins. Co. v. Chasson, supra., 207Cal.App.2d at pp. 805-807.)

In the seminal 1966 case of Gray v. Zurich InsuranceCo., supra., 65 Cal.2d 263, the Supreme Court establishedthe principles that we must follow in reviewing appellants'refusal to undertake their insured's defense. As here, theinsurer in Gray argued that it did not need to defend anaction “in which the complaint reveals on its face that theclaimed ... injury does not fall within the indemnificationcoverage ....” ( Id., at p. 268, fn. omitted.) In rejecting theinsurer's position, the Supreme Court held that the insurer'sduty is not measured by the technical legal cause of actionpleaded in the underlying third party complaint, but ratherby the potential for liability under the policy's coverage asrevealed by the facts alleged in the complaint or otherwise

known to the insurer. 2 “[Even] if we ... define the *607duty to defend by measuring the allegations in the [third partycomplaint] against the carrier's liability to indemnify, ... thecarrier must defend a suit which potentially seeks damageswithin the coverage of the policy .... [¶] Defendant cannotconstruct a formal fortress of the third party's pleadingsand retreat behind its walls. The pleadings are malleable,changeable and amendable .... [C]ourts do not examine onlythe pleaded word but the potential liability created by thesuit .... [¶] To restrict the defense obligation of the insurer tothe precise language of the pleading would not only ignorethe thrust of the cases but would create an anomaly for theinsured. Obviously, ... the complainant in the third partyaction drafts his [or her]complaint in the broadest terms; he[or she] may very well stretch the action which lies in onlynonintentional conduct to the dramatic complaint that allegesintentional misconduct. In light of the likely overstatement ofthe complaint and of the plasticity of modern pleading, weshould hardly designate the third party as the arbiter of thepolicy's coverage. [¶] Since modern procedural rules focuson the facts of a case rather than the theory of recovery inthe complaint, the duty to defend should be fixed by the factswhich the insurer learns from the complaint, the insured, orother sources. An insurer, therefore, bears a duty to defendits insured whenever it ascertains facts which give rise to thepotential of liability under the policy.” ( Id., at pp. 275-277,fn. omitted.)
































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222 Cal.Rptr. 276


2 The Supreme Court's decision in Gray is based on

the additional, alternative grounds that the insurer bore

an obligation to defend because the language of the

policy led the insured reasonably to expect such a

defense, and that an exclusionary clause in the policy

purporting to bar defense coverage of claims such as

those alleged in the complaint was ambiguous and not

sufficiently conspicuous, plain and clear. Appellants

attempt to distinguish Gray, arguing that there is no

exclusionary clause at issue in this case, that the principle

of adhesion contracts is not applicable because of the

greater bargaining equality of the parties here, and that

WSBA had no “reasonable expectation” of coverage for

the defense of the Salveson lawsuit under the policies at

issue. We need not address these contentions, however,

because we find that Gray is controlling here on the basis

of its alternative ground that the insurer's duty to defend

arises whenever the insurer ascertains facts which give

rise to the potential of liability under the policy. ( Mullen

v. Glens Falls Ins. Co., supra., 73 Cal.App.3d at p. 172.)

([4a])Looking to the facts alleged in the Salveson complaintrather than the formal theory of liability or cause of actionpleaded, and bearing in mind that where there is doubt as towhether the duty to defend exists, the doubt must be resolvedin favor of the insured ( Eichler Homes, Inc. v. Underwritersat Lloyd's, London, supra., 238 Cal.App.2d at p. 538), weconclude that those facts “give rise to the potential of liability”under appellants' policies, and appellants therefore bore theduty to defend WSBA.

The amended Salveson complaint was filed on March 3,1978. Although it stated two causes of action, the second,for “intentional interference” with contractual and businessrelationships, was dismissed for lack of federal subject matterjurisdiction before WSBA tendered the defense of the lawsuitto appellants in July 1978. The remaining cause of actionwas entitled “antitrust.” Appellants focus on this fact, andon the federal judge's *608 ultimate ruling that the entireSalveson lawsuit was barred by the federal antitrust statute oflimitations, in arguing that they had no duty to defend WSBAfrom an antitrust action which was not within the coverageof their policies. However, the first cause of action of theamended Salveson complaint also contained specific factualallegations in subparagraphs (i), (m), (o) and (q) of paragraph

21 which cannot so easily be discounted. 3

3 The relevant factual allegations of the Salveson amended

complaint are as follows: “[D]efendants have done the

following acts among others: ...

“(i) Knowingly misappropriated, stole and misused

property interests and trade secrets of plaintiffs

respecting their general purpose commercial transaction

card systems ....

“(m) Intentionally issued and caused the issuance of

statements misrepresenting the business, property and

rights possessed by plaintiffs to persons with whom

plaintiffs did business in an effort to disrupt and prevent

the relationships and reasonably anticipated relationships

between plaintiffs and said persons ....

“(o) ... [M]ade intentional misrepresentations of fact to

plaintiffs in an effort to further eliminate the competition

of plaintiffs and for the express purpose of fraudulently

delaying and obstructing plaintiffs' access to legal

remedy ....

“(q) Agreed to file and caused the filing of false,

frivolous and sham counterclaims in this action for

the purpose of punishing plaintiffs and further securing

and maintaining the monopoly position now enjoyed

by defendants in the general purpose commercial

transaction card business ....”

Subparagraphs 21 (i) and (o) charged that WSBAmisappropriated, stole and misused property interestsand trade secrets and made misrepresentations to theSalveson plaintiffs “in an effort to further eliminate thecompetition of plaintiffs.” These charges are arguably withinSeaboard's coverage for piracy, unfair competition andidea misappropriation, particularly since these terms areundefined in Seaboard's policy, and must therefore beconstrued against the insurance carrier. ( Insurance Co.of North America v. Sam Harris Constr. Co. (1978) 22Cal.3d 409, 412-413 [149 Cal.Rptr. 292, 583 P.2d 1335]; 61Cal.Jur.3d (rev. 1980) Unfair Competition, § 7, pp. 26-28.)Similarly, Seaboard's unfair competition provision and theprovisions in the INA and Pacific insurance policies forlibel, slander, or other defamatory or disparaging materialpotentially covered allegations in subparagraph 21 (m) thatWSBA misrepresented “the business, property and rightspossessed by [the Salveson] plaintiffs to persons with whomplaintiffs did business in an effort to disrupt and prevent”the business relationships between those persons and theplaintiffs. (Civ. Code, § 1770; Gudger v. Manton (1943)21 Cal.2d 537, 541 [134 P.2d 217], disapproved on othergrounds in Albertson v. Raboff (1956) 46 Cal.2d 375, 381[295 P.2d 405]; Phillips v. Glazer (1949) 94 Cal.App.2d 673,677 [211 P.2d 37]; Davis v. Wood (1943) 61 Cal.App.2d 788[143 P.2d 740]; 6 Cal.Jur.3d (rev. 1973) Assault and OtherWilful Torts, § 158, pp. 367-370.) Finally, the complaint'sallegation in subparagraph 21 (q) that WSBA filed “false,frivolous and sham counterclaims” in the Salveson action









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222 Cal.Rptr. 276


raised at least the possibility *609 of liability under themalicious prosecution coverage contained in the insurance

policies of INA and Pacific. 4 The trial court did not err infinding that these factual allegations gave rise to the potentialof WSBA's liability under appellants' respective policies, andthat appellants therefore bore the obligation to defend theirinsured, no matter how unmeritorious these claims may havebeen.

4 INA argues that this allegation in the Salveson complaint

regarding “false, frivolous and sham counterclaims”

could not possibly be covered by the malicious

prosecution provision in its policy, because any cause

of action for malicious prosecution requires a prior

termination of the earlier proceeding in favor of the

party alleging malicious prosecution. However, when

presented with a tender of a defense, it is not insurer's

place to analyze and evaluate the underlying claim of

liability in order to reject the defense of any claim that

is not meritorious. To the contrary, INA's own policy

provides that it shall have the “duty to defend any

suit against the Insured seeking damages on account of

such ... injury [including injury arising out of a malicious

prosecution] even if any of the allegations of the suit are

groundless, false or fraudulent ....” (Italics added.) The

fact that INA may have known of a good defense, even

an ironclad one, to the malicious prosecution claim did

not relieve it of its obligation to defend its insured.

IIIAppellants contend that the federal court's dismissal of theSalveson complaint's second cause of action for intentionalinterference with contractual and business relationships ongrounds of lack of federal subject matter jurisdiction, andsubsequent dismissal of the remainder of the action ongrounds of the antitrust statute of limitations, have collaterallyestopped or otherwise barred CNA from asserting that theSalveson lawsuit sounded in anything but antitrust, containedpotential common law tort claims covered by appellants'policies, or could be amended to allege any such causes ofaction. The contention is without merit.

The federal court's dismissal of the Salveson lawsuit's secondcause of action in May 1978, prior to the tender of the defenseto appellants, had no effect on appellants' duty to defendfor several reasons. First, the alleged facts which triggeredappellants' obligation to defend were contained within thefirst cause of action itself. It makes no difference that forstrategic adversarial reasons this cause of action was labelled“antitrust”; as established by Gray v. Zurich Insurance Co.,

supra., 65 Cal.2d at pages 275-277, it is not the form or title ofa cause of action that determines the carrier's duty to defend,but the potential liability suggested by the facts alleged orotherwise available to the insurer. Since this potential liabilitywas apparent from the allegations of the first cause of action inthe complaint presented to appellants, it was immaterial thatthe second cause of action had already been dismissed. *610

Second, none of the appellants conducted any investigationinto the allegations of the Salveson lawsuit after the tenderof defense. ([5]) “[B]efore an insurer may rightfully rejecta tender of defense, it must investigate and evaluate thefacts expressed or implied in the third party complaint aswell as those which it learns from its insured and anyother sources [citation].” ( Fresno Economy Import UsedCars, Inc. v. United States Fid. & Guar. Co., supra., 76Cal.App.3d at pp. 278-279; see also Mullen v. Glens FallsIns. Co., supra., 73 Cal.App.3d at pp. 173-174.) Havingutterly failed to investigate their potential liability despite thefacts alleged on the Salveson complaint giving rise to thatpotential, appellants were barred from denying their insured

the tendered defense. 5

5 Pacific argues, at some length, that WSBA violated

its duty of good faith and fair dealing by failing to

inform appellants of the dismissal of the pendent second

cause of action for “intentional interference,” and that

CNA is therefore estopped, as subrogee, from arguing

that the carriers should have investigated the Salveson

lawsuit to ascertain if it was covered by their policies.

The contention is meritless. As seen, any such failure

on the part of WSBA could have had no prejudicial

effect on appellants because the allegations giving rise

to the potential liability under appellants' policies were

all contained in the undismissed first cause of action

tendered to them. The dismissal of the “intentional

interference” cause of action simply had no effect on the

potential liability arising from the rest of the Salveson

complaint, and was therefore ultimately immaterial to the

question of appellants' defense obligation.

Third, contrary to appellants' speculative assertion, at thetime of tender appellants had no grounds for concludingthat the Salveson lawsuit was “incapable of amendment” toset forth explicit causes of action for malicious prosecution,libel, slander, defamation, disparagement, trade “piracy,”unfair competition, or idea misappropriation. Appellants'argument that the federal judge would not have permittedany amendments is primarily based on hindsight, in lightof the ultimate dismissal of the Salveson lawsuit under theantitrust statute of limitations. ([6])The duty to defend cannot









222 Cal.Rptr. 276


be adjudged on the basis of hindsight. It must be determinedfrom the facts and inferences known to an insurer from thepleadings, available information and its own investigations atthe time of the tender of defense. ( Gray v. Zurich InsuranceCo., supra., 65 Cal.2d at pp. 271-272, 275-277; FresnoEconomy Import Used Cars, Inc. v. United States Fid. &Guar. Co., supra., 76 Cal.App.3d at pp. 278-279; Mullen v.

Glens Falls Ins. Co., supra., 73 Cal.App.3d at pp. 173-174.) 6

*611

6 The case of California Union Ins. Co. v. Club Aquarius,

Inc. (1980) 113 Cal.App.3d 243, 247 [169 Cal.Rptr.

685], on which Pacific relies heavily, is not applicable.

That was an action by an insurer for declaratory relief on

the issue of its obligation to defend, filed after a full trial

on the underlying third party claim and the issuance of

findings of fact making if clear that the lawsuit did not

involve the limited risks set forth in the insurance policy.

Here, appellants never took the step of undertaking the

defense with a reservation of rights and then filing a

declaratory relief action to determine if they were obliged

to defend. The Salveson lawsuit never even reached the

trial stage. The federal court's dismissal of the second

cause of action did not constitute any sort of definitive

finding that WSBA would not be found liable for any

acts actually covered by appellants' insurance policies.

Moreover, even though the insurer received a declaratory

judgment in its favor in California Union Ins. Co v.

Club Aquarius, Inc., it was not retroactively relieved

of its defense obligations; and it continued to have a

defense duty until the declaratory judgment itself was

final on appeal. ( Fireman's Fund Ins. Co. v. Chasson,

supra., 207 Cal.App.2d at p. 807 [“[T]he insurer had

the duty to defend the personal injury actions and ...

the determination in the declaratory relief action of no

liability under the policy did not have the effect of

retroactively relieving the insurer of such duty to defend.

However, once the judgment in the declaratory relief

action becomes final (in this case upon the determination

of this appeal), the insurer's duty to defend such actions

shall cease since the duty to defend does not continue

beyond the final determination that the claim is not

within the coverage of the policy. [Citations.]”].)

At the time of tender, despite the federal court's dismissal ofthe pendent second cause of action, the possibility that thecomplaint could still be amended had not been precluded.Federal antitrust complaints are frequently amendedto include causes of action for defamation, maliciousprosecution, trade disparagement, unfair competition or ideamisappropriation. ( Mayview Corp. v. Rodstein (9th Cir.1980) 620 F.2d 1347, 1349-1350 [62 A.L.R.Fed. 713]; Ernest

W. Hahn, Inc. v. Codding (9th Cir. 1980) 615 F.2d 830,834; Breier v. Northern California Bowling Proprietors'Ass'n. (9th Cir. 1963) 316 F.2d 787, 789-791; Star Lines,Ltd. v. Puerto Rico Maritime Ship. A. (S.D.N.Y. 1978) 442F.Supp. 1201, 1203-1204; Landon v. Twentieth Century-Fox Film Corporation (S.D.N.Y. 1974) 384 F.Supp. 450,452; Peerless Dental Supply Co. v. Weber Dental Mfg. Co.(E.D.Pa. 1969) 299 F.Supp. 331, 332-336.) As stated byone federal court: “Where antitrust litigation is involved,allowance of amendments to complaints is perhaps especiallyproper for at least two reasons. First, antitrust litigation ofteninvolves complex legal issues and voluminous facts, mostof which are usually in the possession of the defendant.As a result, it is not unusual that a plaintiff in such caseshould find it necessary to adjust his [or her] position andcontentions as the case and its discovery proceed. Second, ...Congress has determined that private litigation serves a usefuland valuable role in the antitrust field, and the courts if atall possible should not impair this role of private litigationby placing unnecessarily strict pleading requirements on theparties involved. [Citation.]” ( Penn Galvanizing Company v.Lukens Steel Company (E.D.Pa. 1974) 65 F.R.D. 80, 81.) Inlight of this federal policy of liberal amendment of antitrustlawsuits, appellants could not assume at the time WSBAtendered defense of the Salveson lawsuit that the federal courtwould not permit any amendment to the complaint.

The instant case is remarkably similar to the recent NewYork case of Ruder & Finn v. Seaboard Sur. (1981) 52N.Y.2d 663 [439 N.Y.S.2d 858,422 N.Ed.2d 518]. As inthe instant case, the underlying federal lawsuit against theinsured in Ruder & Finn purported to state a cause ofaction in antitrust and based federal jurisdiction on theSherman and Clayton antitrust *612 acts. At the sametime, the complaint included allegations that the insured“unfavorably represented and falsely desparaged [sic]” theplaintiff's products. The insurance carrier, Seaboard, rejectedits insured's demand that it assume the defense of thelawsuit. Subsequently, the insured obtained a dismissal ofthe federal lawsuit on grounds of lack of subject matterjurisdiction. The insured then sued Seaboard to recoverexpenses incurred in defending the lawsuit. Seaboard arguedthat “two solitary, unsubstantiated words” that were part ofa “patently groundless and 'shotgun allegation' in the middleof ... a completely unrelated federal antitrust cause of actionwhich was, itself, undisputedly not covered” by Seaboard'spolicy could not possibly evoke a duty to defend the insured.Although the trial court agreed, the New York Court ofAppeals did not. It held that as a result of the allegation

































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222 Cal.Rptr. 276


of “false disparagement,” Seaboard had a duty to defend itsinsured under its policy's coverage for defamation and unfair

competition. 7

7 “It is a well-established legal principle that the duty of an

insurer to defend is broader than its duty to pay [citation].

The duty to defend arises whenever the allegations in

the complaint fall within the risk covered by the policy.

It therefore includes the defense of those actions in

which alternative grounds are asserted, even if some

are without the protection purchased. Further, a policy

protects against poorly or incompletely pleaded cases

as well as those artfully drafted. Thus the question is

not whether the complaint can withstand a motion to

dismiss for failure to state a cause of action. Nor is the

insured's ultimate liability a consideration. If, liberally

construed, the claim is within the embrace of the policy,

the insurer must come forward to defend its insured

no matter how groundless, false or baseless the suit

may be [citations] .... [¶] ... While in [the federal] case

the complaint's first cause of action was couched in

terms of restraint of trade, it went on to allege that

those whom it had joined as defendants were engaged

in 'false disparagement'.... These facts, though found

deficient to sustain the Federal antitrust claim, painted a

picture which, had it been established, conceivably could

have subjected defendant's insured and its codefendants

to liability for commercial disparagement. Albeit the

policy speaks in terms of 'defamation' rather than

'disparagement', we find the tort to which it refers

within the scope of the insuring clause's protection. The

conceptual similarities between these torts, the semantic

sameness which laymen might ascribe to them (compare

'defamation' with 'disparagement' as defined in Webster's

Third New International Dictionary) and, again, the rule

of construction resolving ambiguities against the insurer

all support this position. [¶] ... [T]he absence of an

element of a properly pleaded cause of action is of

no moment in determining Seaboard's duty to defend.

For that matter, neither did the fact that there was no

colorable basis for Federal jurisdiction relieve Seaboard

of its obligation. Rather, the latter merely provided the

insurer with what in fact turned out to be a sure-fire

defense in the Federal District Court.” ( Ruder & Finn

v. Seaboard Sur., supra., 52 N.Y.2d at pp. 669-670, 672

[439 N.Y.S.2d at pp. 861-863].)

We find this reasoning persuasive. Indeed, the Salvesoncomplaint made far more specific factual allegationspotentially covered by the insurance policies at issue herethan the “two words” in the underlying complaint in Ruder& Finn. ([4b])We therefore hold that the trial court did not

err in finding that the Salveson complaint alleged facts whichgave rise to potential liability covered by the policies of allthree appellants, and that appellants therefore owed a duty todefend their insured, WSBA. *613

IVAppellants argue that certain limitations and exclusions intheir respective policies entitle them to refuse to defendWSBA in the Salveson action. We disagree.

First, INA points to an exclusion in its policy stating that itdoes not apply to personal injury arising out of a defamatoryor disparaging publication or utterance, “if the first injuriouspublication or utterance of the same or similar material byor on behalf of the Named Insured [WSBA] was made priorto the effective date of this insurance ....” INA contends thatbecause the Salveson lawsuit alleges that WSBA's illegal andtortious activities began “at a time unknown to plaintiffs butat least as early as 1966,” and because the effective date ofINA's coverage was in November 1969, any claim set forthin the complaint potentially within its libel, slander, or “otherdefamatory or disparaging material” provisions is excluded.

However, the Salveson complaint merely alleges thatWSBA's entire course of conduct commenced “as early as1966.” It then proceeds to list a series of alleged wrongful actscommitted by WSBA in 18 paragraphs, without indicatingexactly when any of these specific acts occurred. Thetrial court below correctly concluded that “it was unclearwhether the Salveson action would prove that WSBA madedisparaging misrepresentations prior to the 1969 effectivedate of the INA coverage. ([7])The spirit of Gray [v. ZurichInsurance Co., supra., 65 Cal.2d 263] would not be served ifan insurer could decline a defense where the application of anexclusion was only a possibility.”

Seaboard argues that it was entitled to refuse WSBA's tenderof defense because its policy was limited to coverage ofenumerated wrongful acts “committed or alleged to havebeen committed in any advertisement, publicity article,broadcast or telecast and arising out of the Insured'sadvertising activities.” The term “advertising” is not definedin Seaboard's policy, and therefore must be construed strictlyagainst the carrier. ( Insurance Co. of North America v.Sam Harris Constr. Co., supra., 22 Cal.3d at pp. 412-413.)Even if we accept Seaboard's definition of “advertising”as “'the action of calling something ... to the attention ofthe public especially by means of printed or broadcast paidannouncements ...,”' it is clear that the factual allegations









222 Cal.Rptr. 276


in the Salveson complaint referred at least potentially tomisrepresentations, defamations and disparagements madeto the public. Part of WSBA's function was to serve as theadvertising arm of its member banks, and the entire questionof the use or misuse of the Mastercard “service mark” wascentral to the Salveson lawsuit. Once again, the duty to *614defend is broader than the duty to indemnify, and Seaboardwas obligated to defend WSBA because the allegations ofthe Salveson lawsuit created at least the potential of liabilitycovered by Seaboard's policy, even though that policy waslimited to advertising. ( Miller v. Elite Ins. Co. (1980) 100Cal.App.3d 739, 752-753 [161 Cal.Rptr. 322].)

([8])Seaboard also urges that the claims made in the Salvesoncomplaint were specifically barred by an exclusion in itspolicy excluding coverage for “any claim or suit basedupon or arising out of alleged false, misleading, deceptive,fraudulent or misrepresenting advertising or to any claimor suit for unfair competition based thereon ....” However,this exclusion is ambiguous on its face. It would appear toexclude coverage for virtually any claim made under theSeaboard policy, which purports to provide indemnificationfor damages resulting from libel, slander, defamation, piracy,unfair competition or idea misappropriation committed oralleged to have been committed in an advertising context.Any ambiguity in an exclusionary clause will be strictlyinterpreted against the insurer, and reasonable doubts as touncertain language must be resolved in favor of the insured. (Crane v. State Farm Fire & Cas. Co. (1971) 5 Cal.3d 112, 115[95 Cal.Rptr. 513, 485 P.2d 1129, 48 A.L.R.3d 1089]; Grayv. Zurich Insurance Co., supra., 65 Cal.2d at pp. 269-274;Miller v. Elite Ins. Co., supra., 100 Cal.App.3d at p. 751.) Aliteral interpretation of the exclusionary clause at issue wouldunreasonably restrict the coverage of Seaboard's policy. Wetherefore find this exclusionary provision inapplicable to the

facts of this case. 8

8 Citing Insurance Code section 533 and Civil Code

section 1668, which establish a public policy against

insurance coverage or indemnification for liability for

wilful tort, Seaboard argues that “[i]f the Salveson

complaint, as tendered for defense, could by any stretch

of the imagination come within the terms of the Seaboard

advertiser's liability policy, Seaboard would violate the

public policy of this State if it undertook to defend or to

indemnify the accused WSBA.” This precise argument

was made by the insurer in Gray v. Zurich Insurance Co.,

supra., 65 Cal.2d 263, and was there rejected. “In the first

place, the statutes forbid only contracts which indemnify

for 'loss' or 'responsibilityility y y' resulting from wilful

wrongdoing.... [T]he statutes 'establish a public policy

to prevent insurance coverage from encouragement of

wilful tort.' ... [I]f an insurer's obligation to pay a

judgment based on wilful conduct results from an

estoppel after the conduct, the obligation could not

have previously encouraged the conduct. Similarly,

the present contract does not offend the statute; a

contract to defend an assured upon mere accusations

of a wilful tort does not encourage such wilful

conduct.” ( Id., at pp. 277-278.) In any event, Seaboard's

obligation to defend WSBA does not arise from the

antitrust charges in the complaint, but rather from the

charges relating to defamation, unfair competition, and

idea misappropriation, as to which Seaboard's policy

expressly agreed to provide a defense.

VAll three appellants argue that WSBA concealed materialfacts concerning the history of Salveson's dispute with thebanks who were members of *615 WSBA, and that CNA, asWSBA's subrogee, is therefore estopped under the InsuranceCode from claiming any coverage under appellants' policies,

including any duty to defend. 9

9 The following provisions of the Insurance Code are

relevant: “Neglect to communicate that which a party

knows, and ought to communicate, is concealment.” (Ins.

Code, § 330.)

“Concealment, whether intentional or unintentional,

entitles the injured party to rescind insurance.” (Ins.

Code, § 331.)

“Each party to a contract of insurance shall communicate

to the other, in good faith, all facts within his [or her]

knowledge which are or which he [or she] believes to be

material to the contract and as to which he [or she] makes

no warranty, and which the other has not the means of

ascertaining.” (Ins. Code, § 332.)

“Materiality is to be determined not by the event, but

solely by the probable and reasonable influence of the

facts upon the party to whom the communication is due,

in forming his [or her] estimate of the disadvantages

of the proposed contract, or in making his [or her]

inquiries.” (Ins. Code, § 334.)

We have some doubt as to whether CNA, as the sole insurancecompany which recognized its obligation to defend WSBAand which consequently incurred all the cost of defense, canbe saddled with all the defenses appellants may have againstWSBA itself. ( Clemmer v. Hartford Insurance Co. (1978)22 Cal.3d 865, 876 [151 Cal.Rptr. 285, 587 P.2d 1098];Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 942-944[132 Cal.Rptr. 424, 553 P.2d 584]; Barrera v. State Farm














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222 Cal.Rptr. 276


Mut. Automobile Ins. Co. (1969) 71 Cal.2d 659, 670-673[79 Cal.Rptr. 106, 456 P.2d 674] [in an action by injuredthird party claimant, misrepresentations by the insured heldnot to constitute a defense for an insurer who failed toinvestigate insurability promptly].) Setting this concern toone side, however, we conclude that substantial evidencesupports the trial court's finding that there was no materialconcealment by WSBA sufficient to void appellants' dutiesto defend. Although WSBA did not inform its insurers ofits past disputes with Salveson until after the lawsuit wasfiled, the evidence showed that those disputes had actuallybeen between Salveson and individual banks, for the mostpart had occurred prior to the creation of WSBA, and hadbeen completely resolved by a settlement agreement in March1967, shortly after WSBA came into existence. Salvesonmade no claims or threats against WSBA during the entire10-year period between his settlement agreement with WSBAand the filing of the lawsuit in March 1977.

([9])The issue of whether WSBA committed a “materialconcealment” under the Insurance Code is a question offact to be decided by the trial court on the basis of theevidence. ( Horn v. Guaranty Chevrolet Motors (1969)270 Cal.App.2d 477, 482-483 [75 Cal.Rptr. 871]; Joycev. United Ins. Co. (1962) 202 Cal.App.2d 654, 662 [21Cal.Rptr. 361, 17 A.L.R.3d 517]; Olson v. Standard MarineIns. Co. (1952) 109 Cal.App.2d 130, 137-138 [240 P.2d379].) ( [10])On appeal, the judgment must be upheld if it*616 was supported by any substantial evidence, even if

it is against the weight of other contradictory evidence. (Campbell v. Southern Pacific Co. (1978) 22 Cal.3d 51, 60[148 Cal.Rptr. 596, 583 P.2d 121]; Chodos v. Insurance Co. ofNorth America (1981) 126 Cal.App.3d 86, 97 [178 Cal.Rptr.831].) This court must examine the record in the light mostfavorable to the prevailing party, giving it the benefit of everyreasonable inference, and resolving all conflicts in supportof the judgment. ( Board of Education v. Jack M. (1977) 19Cal.3d 691, 697 [139 Cal.Rptr. 700, 566 P.2d 602]; Estateof Teel (1944) 25 Cal.2d 520, 527 [154 P.2d 384].) Whereevidence is undisputed, but different inferences may be drawntherefrom, we are not at liberty to make our own inferencesand decide the case accordingly; the conclusion of the trialjudge must be accepted, since it is for the trier of fact toresolve such conflicting inferences in the absence of a rule oflaw specifying the inference to be drawn. ( McKinney v. Kull(1981) 118 Cal.App.3d 951, 955 [173 Cal.Rptr. 696]; Curtisv. Mendenhall (1962) 208 Cal.App.2d 834, 839 [25 Cal.Rptr.627].)

Here, the trial court's finding that respondents failed toestablish material concealment by WSBA is supportedby substantial evidence that was of “'ponderable legalsignificance,”' “'reasonable in nature, credible, and of solidvalue ....”' ( United Professional Planning, Inc. v. SuperiorCourt (1970) 9 Cal.App.3d 377, 392-393 [88 Cal.Rptr. 551];Estate of Teed (1952) 112 Cal.App.2d 638, 644 [247 P.2d54].) There was no error.

VIWe now turn to the arguments raised by Pacific alone. Itcontends that CNA “failed to establish” that Pacific hadissued a personal injury liability policy to WSBA, and that thetrial court erred in so finding. Once again, despite Pacific'sstrained attempts to characterize it otherwise, this argumentis actually a challenge to the sufficiency of the evidence.Indeed, Pacific concedes that the evidence on this issue was“conflicting”; however, it insists that the real issue is theburden of proof.

That “issue” is completely immaterial, since the trial court'sfinding that Pacific did issue such a policy is supportedby substantial evidence. For the most part, this evidenceconsisted of the testimony of Mr. David Cuddeback, theaccount executive with Marsh & McLennan who obtainedthe insurance for WSBA in 1966. Cuddeback testified onthe basis of his personal knowledge that the INA form ofpersonal injury endorsement was the standard form usedin the insurance industry, and that Pacific used that form.Pacific's own witness, Francis Culhane, agreed that there wasa standard form of personal injury endorsement used in theindustry and that *617 Pacific used that standard form. Thisevidence alone was substantial and sufficient to support thetrial court's findings on this issue. ( Campbell v. SouthernPacific Co., supra., 22 Cal.3d at p. 60; In re Marriage of Mix(1975) 14 Cal.3d 604, 614 [122 Cal.Rptr. 79, 536 P.2d 479].)

VIINext, Pacific contends that it was absolved from itsresponsibility to defend because WSBA failed to give itprompt notice of Salveson's claims after issuance of thepolicy, and because CNA failed to tender a formal demandfor a defense prior to incurring litigation expense in defendingthe Salveson lawsuit. These contentions are without merit.

The evidence in the record supports the trial court'sfinding that Pacific had adequate notice of potential liabilityto prevent any substantial prejudice to its interests, and













































222 Cal.Rptr. 276


that CNA should therefore not be estopped from seekingreimbursement. At WSBA's request, Marsh & McLennannotified Pacific in July 1978 of the Salveson lawsuit andWSBA's tender of the defense thereof. Pacific promptlydenied the tender on the grounds that its policy provided nocoverage. It was clearly not prejudiced by any subsequentfailure on CNA's part to make a formal demand to share inthe defense.

Pacific also asserts that it was relieved from its obligation todefend by WSBA's failure to inform it of certain threats madeby Salveson after issuance of Pacific's policy, just beforethe settlement agreement of March 1967. ([11])“'The law isestablished that where an insurance company denies liabilityunder a policy which it has issued, it waives any claim thatthe notice provisions of the policy have not been compliedwith.' [Citation.]” ( Lagomarsino v. San Jose etc. Title Ins.Co. (1960) 178 Cal.App.2d 455, 460 [3 Cal.Rptr. 80]; cf.Clemmer v. Hartford Insurance Co., supra., 22 Cal.3d at pp.881-883.) Having denied all liability under its policy, Pacificthus waived any claim it might have that WSBA forfeited itsright to a defense by failing to notify Pacific of Salveson'sclaims.

VIIIPacific's final contention is that the trial court erred inawarding CNA its defense costs incurred after trial belowin July 1981. By that time, appellants had acquired actualknowledge of the dismissal of the second cause of action ofthe Salveson complaint (the “intentional interference” causeof action), and of the granting of the motion for summaryjudgment as to the remainder of the Salveson lawsuit inFebruary 1981 on statute of limitations grounds. Pacificargues that as a result of these actions by the court, any *618duty to defend WSBA ended and CNA could have no rightsto reimbursement for defense costs thereafter.

Pacific raises this contention for the first time on appeal. 10

([12])As a general rule, issues not properly raised at trialwill not be considered on appeal. (9 Witkin, Cal. Procedure,supra., Appeal, § 311, pp. 321-322.) An appellate courtmay in its discretion consider an issue not properly raisedin the trial court if the issue presents a pure question oflaw on undisputed evidence regarding either a noncurabledefect of substance, such as lack of jurisdiction or completefailure to state a cause of action, or a matter affecting thepublic interest or the due administration of justice. ( Wilsonv. Lewis (1980) 106 Cal.App.3d 802, 805 [165 Cal.Rptr.

396]; Redevelopment Agency v. City of Berkeley (1978) 80Cal.App.3d 158, 167 [143 Cal.Rptr. 633]; 9 Witkin, Cal.Procedure, supra., Appeal, § 315, pp. 326-327.) The issuepresented, although apparently based on uncontroverted facts,is not of the above description. ( [13])(See fn. 11.) Wetherefore decline to consider it. ( Zito v. Firemen's Ins. Co.

(1973) 36 Cal.App.3d 277, 283 [111 Cal.Rptr. 392].) 11

10 In its reply brief, Pacific asserts in a footnote that it

did raise this issue in a letter to the trial judge dated

November 22, 1982. A copy of the letter is attached to the

reply brief. Pacific states that it was “inexplicably” not

included in the clerk's transcript. Pacific owes this court

more than this gratuitously empty excuse in explanation

for its total failure to include in the record the only scrap

of evidence indicating its objection to the trial court's

award of post-trial defense costs. Such references to

matters outside the record on appeal are not reviewable

or cognizable by this court and are not in compliance

with the Rules of Court. (Cal. Rules of Court, rule 15(a);

9 Witkin, Cal. Procedure (3d ed. 1985) Appeal, §§ 250,

475, pp. 256-257, 467-468.) In any event, the letter

only professes to offer “observations” for the court's

“thoughtful consideration.” On its face, it makes no

actual objection to the award of post-trial defense costs

attacked for the first time on appeal. Such a letter hardly

constitutes an appropriate or adequate method in which

to raise an objection for the trial court's consideration.

11 We note that despite the federal trial court's grant of

the motion for summary judgment with regard to the

Salveson lawsuit in February 1981, the decision was

appealed to the Ninth Circuit Court of Appeals and was

still on appeal at the time of the trial in the instant case.

The judgment at issue was filed and entered on December

30, 1982. The Ninth Circuit's decision affirming the

Salveson summary judgment was not filed until March

1983. Thus, for purposes of Pacific's obligation to

defend WSBA, the judgment in the Salveson lawsuit

was not final at the time of the trial court's award of

defense expenses in this case. Under California law,

the insurer's duty to defend does not cease until the

final determination of the underlying action on appeal.

( Fireman's Fund Ins. Co. v. Chasson, supra., 207

Cal.App.2d at p. 807.)

IXWe now turn to CNA's cross-appeal. CNA raises two issues:first, whether the trial court's apportionment of the costsof WSBA's defense among *619 the four insurers wasequitable; and second, whether CNA was entitled to receiveits own attorneys' fees in bringing the instant action.
















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222 Cal.Rptr. 276


AAll the insurers before this court were jointly responsiblefor defending WSBA in the Salveson lawsuit. ( ContinentalCas. Co. v. Zurich Ins. Co. (1961) 57 Cal.2d 27, 37 [17Cal.Rptr. 12, 366 P.2d 455].) ([14])The costs of defensemust be apportioned on the basis of equitable considerationsnot found in the insurers' own contracts, since the insurancecompanies who must share the burden do not have anyagreements among themselves. The courts have expresslydeclined to formulate any definitive rules for allocatingdefense costs among carriers, because of the “varyingequitable considerations which may arise, and which affectthe insured and the ... carriers, and which depend upon theparticular policies of insurance, the nature of the claim made,and the relation of the insured to the insurers. [Citation.]” (Signal Companies, Inc. v. Harbor Ins. Co. (1980) 27 Cal.3d359, 369 [165 Cal.Rptr. 799, 612 P.2d 889, 19 A.L.R.4th 75].)

Here, the trial court apportioned the costs of defense amongthe four insurers on the basis of the relative limits of coverageset by their respective policies. Thus, because CNA, INA andPacific each had policy limits of $300,000, while Seaboard'spolicy limits were only $100,000, the court determinedthat CNA, INA and Pacific would each be responsible for30 percent of the cost of defense and Seaboard would beresponsible for 10 percent.

CNA argues that this method of allocation employed by thetrial court was inadequate. It contends that simple allocationof the costs of defense by relative policy limits does notequitably take into account the fact that the policies of the fourinsurers were both concurrent and consecutive and coveredentirely different periods of time, while the risk of liabilityitself, measured by the terms of the underlying complaint,was not limited to specific times and dates but instead wascontinuous over a broad time span from 1966 through 1978.

CNA urges that in this case, the most equitable method ofallocating defense costs is to multiply the number of years ofcoverage of each insurance policy, or any fraction thereof, bythe per year aggregate liability limits stated in that policy, andthen to compare the resulting product for each insurer againstthe total coverage available to WSBA in order to determinethat insurer's pro rata percentage share of the defense costs. Asset forth in CNA's brief on its cross-appeal, the approximatepro rata percentage shares *620 of defense costs calculatedin this way are: Pacific, 20.7 percent; INA, 42 percent; CNA,12.6 percent, and Seaboard, 24.7 percent.

The trial court below concluded that the method of allocatingdefense costs among the contributing insurers suggested byCNA was not supported by California case law. We agreeby virtue of the numerous appellate decisions supporting thetrial court's procedure of prorating defense costs, and thecomplete absence of any California cases adopting CNA'sproposed approach. It is an accepted principle of Californialaw that “[w]here two insurers cover the same risk, defensecosts must also be shared between them pro rata in proportionto the respective coverage afforded by them to the insured.[Citation.]” ( Continental Ins. Co. v. Morgan, Olmstead,Kennedy & Gardner, Inc. (1978) 83 Cal.App.3d 593, 608[148 Cal.Rptr. 57]; accord Signal Companies, Inc. v. HarborIns. Co., supra., 27 Cal.3d 359; Travelers Indem. Co. v.Reliance Ins. Co. (1974) 12 Cal.3d 133 [115 Cal.Rptr. 232,524 P.2d 360]; Continental Cas. Co. v. Zurich Ins. Co.,supra., 57 Cal.2d 27; Hartford Acc. & Indem. Co. v. PacificIndem. Co. (1967) 249 Cal.App.2d 432 [57 Cal.Rptr. 492];Government Employees Ins. Co. v. St. Paul Fire etc. Ins. Co.(1966) 243 Cal.App.2d 186 [52 Cal.Rptr. 317]; Oil Base, Inc.v. Transport Indem. Co. (1956) 143 Cal.App.2d 453 [299 P.2d952].) The method of allocation employed by the trial courtwas, on the whole, fair and reasonable. We decline to reversethe court for using a procedure adopted in every Californiacase on point.

CNA argues, however, that these decisions do not stand fora particular method of allocation to be used in every case. Itpoints out that recent decisions have repeatedly emphasizedthe contrary principle in these cases that there is no definitiverule universally applicable in all situations; instead, courtsmust apply equitable considerations in allocating defensecosts on a case-by-case basis. ( Signal Companies, Inc. v.Harbor Ins. Co., supra., 27 Cal.3d at p. 369.) We agree that ingiven cases, the true scope of an insured's “coverage” mightnot be confined to the liability limits of a given policy; itmay also include the period of time covered by the policyand the interrelation between the terms of the policy andthe wrongs alleged against the insured by a claimant. In thiscase, however, the trial court did not abuse its discretion inassessing damages according to the formula followed by anoverwhelming weight of authority.

B([15])We are not persuaded by CNA's final argument that itwas entitled to receive its attorneys' fees incurred in bringingthe instant action. CNA argues that since it was equitablysubrogated to the rights of WSBA, it *621 should recover
































222 Cal.Rptr. 276


its attorneys' fees just as WSBA assertedly would have hadthe latter sued INA, Seaboard and Pacific for breach of thecovenant of good faith and fair dealing.

On its face, this contention is based entirely on hypotheticalswith no foundation in fact. WSBA did not assert anyclaim against INA, Seaboard and Pacific arising out of theunderlying Salveson lawsuit. WSBA is not even a party to thisaction. The defense costs at issue here were those incurred onWSBA's behalf in the Salveson lawsuit; WSBA has sufferedno loss in this case. There was no finding that any of theinsurers breached the covenant of good faith and fair dealingwith WSBA or that their conduct in this matter was tortious;nor was this an issue here. CNA itself has no contractualrelationship with the other insurers and thus no standing toassert a breach of the covenant of good faith and fair dealingin its own right. Thus, CNA has no standing to recover its

attorneys' fees in this action. 12

12 Prior to Brandt v. Superior Court (1985) 37 Cal.3d 813

[210 Cal.Rptr. 211, 693 P.2d 796], WSBA would not

have been entitled to attorneys' fees from the insurers

even if it had in fact sued them for breach of the covenant

of good faith and fair dealing, and won. The established

rule was that in the absence of an agreement between

the parties, attorneys' fees were not recoverable in a

bad faith action against an insurance company. (Code

Civ. Proc., § 1021; Moore v. American United Life Ins.

Co. (1984) 150 Cal.App.3d 610, 644-645 [197 Cal.Rptr.

878]; Austero v. Washington National Ins. Co. (1982)

132 Cal.App.3d 408, 411-417 [182 Cal.Rptr. 919].)

However, in Brandt v. Superior Court, supra., 37 Cal.3d

at page 815, the Supreme Court held that “[w]hen an

insurer tortiously withholds benefits, ... attorney's fees,

reasonably incurred to compel payment of the policy

benefits, [are] recoverable as an element of the damages

resulting from such tortious conduct ....” (Fn. omitted.)

The court determined that attorney's fees were not

recoverable qua attorney's fees, but rather as an element

of the damages proximately caused by the insurer's

tortious breach of the covenant of good faith and fair

dealing. ( Id., at pp. 815-818.) The case is not applicable

here, where tortious conduct by the insurers or bad faith

was never alleged, argued, proven, or determined. As

the Supreme Court itself points out in Brandt, “'[A]n

erroneous interpretation of an insurance contract by an

insurer does not necessarily make the insurer liable in

tort for violating the covenant of good faith and fair

dealing; to be liable in tort, the insurer's conduct must

also have been unreasonable. [Citations.] When no bad

faith has been alleged and proved, [previously decided

cases] preclude the award of attorney's fees incurred in

obtaining benefits that the insurer erroneously, but in

good faith, withheld from the insured ....' [Citation.]” (

Id., at p. 819, original italics).

The judgment is affirmed. Respondent and cross-appellantCNA is awarded its costs on appeal.

Scott, Acting, P. J., and Merrill, J., concurred.Petitions for a rehearing were denied February 13, 1986, andthe petitions of defendants and appellants for review by theSupreme Court were denied April 17, 1986. *622




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123 Cal.Rptr.2d 256, 02 Cal. Daily Op. Serv. 6984, 2002 Daily Journal D.A.R. 8703



Distinguished by Lockheed Corp. v. Continental Ins. Co., Cal.App. 6

Dist., November 22, 2005

100 Cal.App.4th 1017, 123 Cal.Rptr.2d 256, 02 Cal.Daily Op. Serv. 6984, 2002 Daily Journal D.A.R. 8703

ATLANTIC MUTUAL INSURANCECOMPANY, Plaintiff and Respondent,

v.J. LAMB, INC., Defendant and Appellant.

ATLANTIC MUTUAL INSURANCECOMPANY, Plaintiff and Respondent,

v.GRANITE STATE INSURANCE

COMPANY, Defendant and Appellant.

No. B150674., No. B151708.Court of Appeal, Second

District, Division 3, California.Aug. 1, 2002.

SUMMARY

A commercial liability insurer brought an action againstits insured and a prior insurer for a declaratory judgmentthat it owed no duty to defend a claim against the insuredarising out of the insured's allegedly false statements toa competitor's customers. The competitor alleged that theinsured intentionally communicated with the competitor'scustomers and falsely stated to them that the competitor wasunlawfully selling them products that were subject to theinsured's prior patent claim and that the insured intendedto sue those customers who continued to purchase productsfrom the competitor. The policies covered personal injury,including oral or written publication of material that slanderedor libeled a person or organization or disparaged a person's ororganization's goods, products, or services. The prior insurerhad settled with the insured. The trial court entered summaryjudgment in favor of plaintiff insurer. (Superior Court of LosAngeles County, No. BC230791, Cesar C. Sarmiento, Judge.)

The Court of Appeal reversed and remanded for furtherproceedings. The court held that the policies coveredthe competitor's suit against the insured. The term“disparagement” includes statements about a competitor'sgoods that are untrue or misleading and are made to influence

potential purchasers not to buy. Thus, the court held, bothinsurers had a duty to defend the suit against the insured,since it was not established when the first publication of thedisparaging statements was made, and therefore which policywas then in effect. The duty to defend arises when there is apotential for coverage. Accordingly, the settling insurer wasentitled to contribution from plaintiff insurer, but any liabilityfor indemnity depended on the determination on remand ofwhich policy was in effect at the relevant time. (Opinion byCroskey, J., with Klein, P. J., and Aldrich, J., concurring.)

HEADNOTES


(1)Summary Judgment § 3--Propriety.The purpose of a summary judgment motion is to expeditelitigation and eliminate needless trials. It may be granted onlyif all the papers submitted show that there is no triable issueas to any material fact and that the moving party is entitledto a judgment as a matter of law. After examining documentssupporting a summary judgment motion in the trial court, thereviewing court independently determines their effect as amatter of law.

(2)Summary Judgment § 19--Hearing and Determination--Burden of Proof.From commencement to conclusion, the party moving forsummary judgment bears the burden of persuasion that thereis no triable issue of material fact and that he or she is entitledto judgment as a matter of law. There is a triable issue ofmaterial fact if, and only if, the evidence would allow areasonable trier of fact to find the underlying fact in favorof the party opposing the motion in accordance with theapplicable standard of proof. An issue of fact becomes one oflaw and loses its triable character only if the undisputed factsleave no room for a reasonable difference of opinion.

(3)Summary Judgment § 11--Affidavits--Sufficiency--MovingDefendant.A defendant moving for summary judgment bears a burdenof production to make a prima facie showing, by declarationsand/or other evidence, that there is a complete defense tothe plaintiff's action or an absence of an essential element ofplaintiff's case. Once the defendant has met that burden, the

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burden shifts to the plaintiff to show that a triable issue ofone or more material facts exists as to that cause of action ora defense thereto. The plaintiff may not rely upon the mereallegations or denials of its pleadings to show that a triableissue of material fact exists but, instead, must set forth thespecific facts showing that a triable issue of material factexists as to that cause of action or a defense thereto.

(4)Insurance Contracts and Coverage § 11--Interpretation ofContracts-- Question of Law.Absent a factual dispute as to the meaning of insurance policylanguage, the interpretation, construction, and application ofan insurance contract is strictly an issue of law that canbe resolved in accordance with general summary judgmentprinciples.

(5)Insurance Contracts and Coverage § 107--Liability ofInsurer--Liability and Indemnity Insurance--Duty to Defend.A liability insurer's duty to defend will arise when a suitagainst an insured potentially seeks damages within thecoverage of the policy. An insurer, however, need not defendif the third party complaint cannot, by any conceivable theory,raise a single issue which would bring it within policycoverage. Thus, where a pleading against the insured raisesthe potential for coverage, the insurer must provide a defense.In order to prevail on a motion for the summary adjudicationof the duty to defend, the insured need only show that theunderlying claim may fall within coverage; the insurer mustprove it cannot.

(6)Insurance Contracts and Coverage § 79--Coverageof Contracts--Risks Covered by Liability Insurance--Commercial--Personal Injury.Coverage for personal injury in a business liability policy isnot determined by the nature of the damages sought in theaction against the insured, but by the nature of the claimsmade against the insured in that action. Under the personalinjury policy provision, coverage is triggered by the offense,not the injury or damage that a plaintiff suffers. Unlikecoverage for bodily injury and property damage, which isoccurrence based, there is no requirement for personal injurycoverage that there be an accidental occurrence. All that isrequired is that the injury arise out of the conduct of theinsured's business. Thus, even an intentional tort may becovered. The triggering event is the insured's wrongful act,

not the resulting injury to the third party claimant. Indeed,coverage will exist for a personal injury offense committedduring the term of the policy, even if the injury occurs afterthe policy expires.

(7)Insurance Contracts and Coverage § 107--Liability ofInsurer--Liability and Indemnity Insurance--Duty to Defend--Scope.A liability insurer owes a broad duty to defend its insuredagainst claims that create a potential for indemnity. Thecarrier must defend a suit that potentially seeks damageswithin the coverage of the policy. Implicit in this rule isthe principle that the duty to defend is broader than theduty to indemnify; an insurer may owe a duty to defendits insured in an action in which no damages ultimately areawarded. The determination whether the insurer owes a dutyto defend usually is made in the first instance by comparingthe allegations of the complaint with the terms of the policy.Facts extrinsic to the complaint also give rise to a duty todefend when they reveal a possibility that the claim maybe covered by the policy. For an insurer, the existence ofa duty to defend turns not upon the ultimate adjudicationof coverage under its policy of insurance, but upon thosefacts known by the insurer at the inception of a third partylawsuit. Hence, the duty may exist even where coverage isin doubt and ultimately does not develop. The defense dutyis a continuing one, arising on tender of defense and lastinguntil the underlying lawsuit is concluded, or until it has beenshown that there is no potential for coverage.

(8)Insurance Contracts and Coverage § 107--Liability ofInsurer--Liability and Indemnity Insurance--Duty to Defend--Scope.An insurer has a duty to defend an insured if it becomes awareof, or if the third party lawsuit pleads, facts giving rise tothe potential for coverage under the insuring agreement. Thisduty, which applies even to claims that are groundless, false,or fraudulent, is separate from and broader than the insurer'sduty to indemnify. The scope of the duty does not dependon the labels given to the causes of action in the third partycomplaint; instead it rests on whether the alleged facts orknown extrinsic facts reveal a possibility that the claim maybe covered by the policy.

(9)




Insurance Contracts and Coverage § 107--Liability ofInsurer--Liability and Indemnity Insurance--Duty to Defend--Scope--Rebuttal.Once the possibility of coverage under a liability policy hasbeen raised, then the insurer may defeat the claim of coverageby extrinsic evidence, but only where such evidence presentsundisputed facts that conclusively eliminate a potential forliability. Any doubt as to whether the facts establish ordefeat the existence of the defense duty must be resolvedin the insured's favor. Once the insured has establishedpotential liability by reference to the factual allegations of thecomplaint, the terms of the policy, and any extrinsic evidenceupon which the insured intends to rely, the insurer mustassume its duty to defend unless and until it can conclusivelyrefute that potential. Necessarily, an insurer will be requiredto defend a suit where the evidence suggests, but does notconclusively establish, that the loss is not covered. A carrierremains free to seek declaratory relief if undisputed factsconclusively show, as a matter of law, that there is no potentialfor liability.

(10a, 10b, 10c)Insurance Contracts and Coverage § 79--Coverageof Contracts--Risks Covered by Liability Insurance--Commercial--Personal Injury-- Trade Libel.A business liability policy covering personal injury, includingoral or written publication of material that slandered orlibeled a person or organization or disparaged a person's ororganization's goods, products, or services, covered a suitagainst the insured by a competitor alleging that the insuredintentionally communicated with the competitor's customersand falsely stated to them that the competitor was unlawfullyselling them products that were subject to the insured's priorpatent claim and that the insured intended to sue thosecustomers who continued to purchase products from thecompetitor. The term “disparagement” includes statementsabout a competitor's goods that are untrue or misleading andare made to influence potential purchasers not to buy.

[See 6 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, §1136A; West's Key Number Digest, Insurance

2311.]

(11)Insurance Contracts and Coverage § 79--Coverage of Contracts--Risks Covered by LiabilityInsurance--CommercialPersonal Injury--Trade Libel--Definition:Words, Phrases, and Maxims--Trade Libel.

Trade libel is defined as an intentional disparagement ofthe quality of property that results in pecuniary damage toplaintiff. Injurious falsehood or disparagement may consist ofthe publication of matter derogatory to the plaintiff's title toproperty, or its quality, or to his or her business in general.The plaintiff must prove in all cases that the publication hasplayed a material and substantial part inducing others not todeal with him or her, and that as a result he or she has sufferedspecial damages. Usually, the damages claimed consist of lossof prospective contracts with the plaintiff's customers.

(12)Statutes § 34--Construction--Language--Words and Phrases--Ejusdem Generis.The principle of ejusdem generis provides that where generalwords follow the enumeration of particular classes of personsor things, the general words will be construed as applicableonly to persons or things of the same general nature or classas those enumerated.

(13)Insurance Contracts and Coverage § 107--Liability ofInsurer-- Liability and Indemnity Insurance--Duty toDefend--Rebuttal--Sufficiency.An exclusion in a business liability policy excluding fromcoverage personal injury or advertising injury arising outof oral or written publication of slanderous, libelous, ordisparaging material, the first publication of which took placebefore the beginning of the policy period, did not foreclose theinsurer's duty to defend an otherwise covered claim against itsinsured for certain false statements it allegedly made against acompetitor, where, at the time the defense was tendered, therewas no evidence as to when the first publication occurredand whether it was within the policy period. A declarationby the insurer's claims adjuster providing a date for the firstpublication was vague and ambiguous. An insurer may onlydefeat an existing potential for coverage by undisputed factsthat conclusively negate such coverage. This is particularlytrue where the insurer seeks to defeat coverage by reliance onan exclusion.

(14)Insurance Contracts and Coverage § 120--Subrogation,Contribution, and Apportionment--Contribution.In the context of insurance law, the doctrine of equitablecontribution provides that where two or more insurersindependently provide primary insurance on the same risk forwhich they are both liable for any loss to the same insured,




the insurance carrier who pays the loss or defends a lawsuitagainst the insured is entitled to equitable contribution fromthe other insurer or insurers. The right to contribution dependsupon the existence of an obligation owed to a commoninsured. The right arises when one of two or more insurersare obligated to indemnify or defend the same loss or claimand one of those insurers has paid more than its share of theloss or defended the action without participation from theothers. Equitable contribution permits reimbursement to theinsurer that paid on the loss for the excess it paid over itsproportionate share of the obligation, on the theory that thedebt it paid was equally and concurrently owed by the otherinsurers and should be shared by them pro rata in proportion totheir respective coverage of the risk. The purpose of this ruleof equity is to accomplish substantial justice by equalizingthe common burden shared by coinsurers, and to prevent oneinsurer from profiting at the expense of others.

(15)Insurance Contracts and Coverage § 120--Subrogation,Contribution, and Apportionment--Contribution--TwoInsurers on Same Risk.Where two insurers provided liability coverage to the sameinsured for the same risk, although for different policyperiods, and both had a duty to provide a defense, as it couldnot be determined at the time the insured tendered defenseto both of them, which policy applied, the insurer whichprovided the defense was entitled to equitable contributionfrom the other insurer. However, only one of the insurerscould be liable for indemnifying the insured for the paymentit made to settle the insured claim against it.

[See Croskey et al., Cal. Practice Guide: Insurance Litigation(The Rutter Group 2001) ¶¶ 8:73.20-8:73.32.]

(16)Insurance Contracts and Coverage § 120--Subrogation, Contribution, and Apportionment--Contribution--Subrogation--Distinction.The different equitable principles on which contribution andsubrogation are based are reflective of different underlyingpublic policies. The aim of equitable subrogation is toplace the burden for a loss on the party ultimately liableor responsible for it and by whom it should have beendischarged, and to relieve entirely the insurer or surety thatindemnified the loss and that in equity was not primarily liabletherefor. On the other hand, the aim of equitable contributionis to apportion a loss between two or more insurers which

cover the same risk, so that each pays its fair share and onedoes not profit at the expense of the others.

COUNSELThe Soni Law Firm, Surjit P. Soni, Leo E. Lundberg, Jr., andGlenn H. Johnson for Defendant and Appellant J. Lamb, Inc.McCormick, Barstow, Sheppard, Wayte & Carruth, James P.Wagoner and Todd W. Baxter for Defendant and AppellantGranite State Insurance Company.Knapp, Petersen & Clarke and Gwen Freeman for Plaintiffand Respondent Atlantic Mutual Insurance Company.

CROSKEY, J.

The primary issue presented by these consolidated appeals 1

concerns the existence of coverage under a liability policy fora claim based upon disparaging statements allegedly made bythe insured about a third party's business and products.

1 On our own motion, we have consolidated case Nos.

B150674 and B151708 for resolution in a single opinion.

The plaintiff and respondent, Atlantic Mutual InsuranceCompany (Atlantic Mutual), filed this action for declaratoryrelief seeking a determination that there was no coverageunder its policy. The trial court agreed with Atlantic Mutual'sposition and the defendants and appellants, J. Lamb, Inc.(Lamb), and Granite State Insurance Company (GraniteState), appeal from *1024 the summary judgment enteredagainst them. Lamb was the insured in successive years underpolicies issued by Atlantic Mutual and Granite State andclaims that it is entitled to recover under the Atlantic Mutualpolicy even though it has already settled the same claim withGranite State. Granite State, on the other hand, claims thatAtlantic Mutual is liable to it for equitable contribution and/or subrogation and such claim is not precluded by its priorsettlement with Lamb.

Because we conclude that the disparaging statementspublished by Lamb fall within the very broad “personalinjury” coverage provided in Atlantic Mutual's policy, wereverse the summary judgment entered in Atlantic Mutual'sfavor. In so doing, we distinguish this case from our earlierdecision in Truck Ins. Exchange v. Bennett (1997) 53Cal.App.4th 75 [61 Cal.Rptr.2d 497] (Bennett), based on themore expansive policy language before us that compels usto conclude that personal injury coverage was intended fordisparaging publications in addition to those that were solelydefamatory. We also conclude that there was a potentialfor coverage under the policies of both Atlantic Mutual and

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Granite State, and thus both insurers owed Lamb a defense ofthe third party suit filed against it, even though only one willhave a duty to indemnify. Determining under which policyactual coverage will fall is a task for the trial court uponremand. Such determination, when made, will provide a basisfor the trial court to resolve the remaining issues between theparties.

Factual and Procedural Background 2

This coverage litigation arises out of a complaint filedagainst Lamb in the underlying federal action by ContinentalQuilting Co., Inc. (Continental), on May 3, 1999. In thatcomplaint, Continental sought a declaration that a patentclaimed by Lamb, a competitor of Continental, was invalidand unenforceable. The complaint also contained causes ofaction for statutory and common law unfair competitionand tortious interference with prospective advantage. Inessence, and as is relevant to the issues raised in this matter,Continental alleged that Lamb had communicated with anumber of Continental's customers and falsely stated thatContinental was infringing a patent owned by Lamb andthat Lamb would pursue legal action against those customerswho continued to purchase the infringing products sold by

Continental. 3

2 The facts recited are not in dispute and are established

by the appellate record before us. The issues we resolve

are legal in nature.

3 Specifically, Continental pled the following allegations

in its complaint that are relevant to the coverage issue

before us:

“61. Lamb has contacted and continues to

contact Continental Quilting's customers and potential

customers and has asserted the '642 patent against them

in spite of knowing that the '642 patent is invalid and

unenforceable.

“62. On information and belief, Lamb's communications

with Continental Quilting's customers and potential

customers have included improper threats, and are

made with the intent to mislead those customers

and potential customers with respect to Continental

Quilting's products.

“63. Lamb communicated with Continental Quilting's

customers to induce those customers and potential

customers to discontinue or refrain from purchasing

Continental Quilting's products and to instead purchase

Lamb's products.

“64. On information and belief, Lamb asserted the

'642 patent against Continental Quilting's customers and

potential customers in bad faith and without any intention

of enforcing the '642 patent against those customers or

potential customers. On information and belief, Lamb

intentionally misled Continental Quilting's customers

about the nature of Continental Quilting's products. [¶] ...

[¶]

“71. On information and belief, Lamb contacted and

continues to contact Continental Quilting's customers

and potential customers and threatened them with the

'642 patent, which Lamb knew or should have known

was invalid. On information and belief, Lamb threatened

to bring a patent infringement action against Continental

Quilting's customers and potential customers and made

other threats and harassing statements in bad faith and

without any intention of bringing such action. Lamb

contacted those customers and potential customers with

the intention of interfering with Continental Quilting's

business expectancies with those customers and potential

customers so as to deprive Continental Quilting of

realizing any financial benefit from those expectancies.”

On June 15, 1999, Lamb tendered defense of Continental'saction to both Atlantic Mutual and Granite State. Bothdenied coverage and refused to *1025 provide a defense.Atlantic Mutual's policy covered the period December 2,1998, to December 2, 1999. Granite State's policy covered thepreceding two years, December 2, 1996, to December 2, 1998.The policies of both insurers were substantially identical with

respect to the relevant policy provisions. 4 Lamb contendsthere is coverage under both the “personal injury” clause as

well as the “advertising injury” provision. 5 *1026

4 The relevant insuring and definitional clauses of the

policies of both insurers are based on standard ISO forms

and provide as follows:

“1. Insuring Agreement [¶] We will pay those sums that

the insured becomes legally obligated to pay as damages

because of 'personal injury' or 'advertising injury' to

which this insurance applies. We will have the right and

duty to defend any 'suit' seeking those damages.... [¶] ...

This insurance applies to: (1) 'Personal injury' caused

by an offense arising out of your business, excluding

advertising, publishing, broadcasting or telecasting done

by or for you; (2) 'Advertising injury' caused by an

offense committed in the course of advertising your

goods, products or services; but only if the offense was

committed in the 'coverage territory' during the policy

period. [¶] 2. Definition [¶] 'Advertising injury' means

injury arising out of one or more of the following

offenses: Oral or written publication of material that

slanders or libels a person or organization or disparages a

person's or organization's goods, products or services; ...




[¶] ... 'Personal injury' means injury other than 'bodily

injury,' arising out of one or more of the following

offenses: ... [¶] ... oral or written publication of material

that slanders or libels a person or organization or

disparages a person's or organization's goods, products

or services; ...” (Italics added.)

5 For the reasons set out in footnote 12, post, we need only

consider and discuss the coverage of the insurers under

the “personal injury” provision.

Both insurers based their denial of coverage on the groundthat the allegations of the Continental complaint establishedthat there was no potential for coverage as no claim for either“personal injury” or “advertising injury” was asserted. Inaddition, Atlantic Mutual contended that whatever acts mayhave been committed by Lamb, they did not occur duringthe policy period as required by the insuring clause. AtlanticMutual also argued that its “first publication” exclusion

applied to preclude coverage. 6

6 Atlantic Mutual's policy provided that: “This insurance

does not apply to: 'Personal Injury' or 'Advertising

Injury': Arising out of oral or written publication of

material whose first publication took place before the

beginning of the policy period; ...” (Italics added.)

Denied coverage under its liability policies, Lamb enteredinto negotiations with Continental to settle the underlyingaction. On August 23, 1999, a settlement was reachedwhereby Lamb paid $65,000 to Continental in exchange for

a dismissal of the underlying action. 7 In addition, Lambincurred $89,455 in defense costs and attorney's fees inreaching this resolution of the matter.

7 Lamb did not actually pay $65,000 in cash to

Continental, but rather agreed to provide to Continental

20,000 units of crib mattress pads at $2.50 per unit.

Lamb claims that its customary charge per unit for

such pad was $5.75. The $3.25 difference multiplied by

20,000 resulted in what Lamb claimed was settlement

consideration of $65,000. It appears, however, that a

factual dispute exists as to whether this settlement

consideration provided to Continental had an actual

value of $65,000.

Thereafter, Lamb wrote to both Atlantic Mutual and GraniteState, advised them of the settlement of the Continental actionand requested that they reconsider their denial of coverage.Atlantic Mutual refused to change its position, but GraniteState was persuaded to do so and entered into negotiationswith Lamb. On or about March 14, 2000, a settlement was

reached whereby Granite State agreed to pay Lamb $120,000in exchange for a full release of all liability arising from the

Continental claim. 8 *1027

8 The relevant portions of the settlement and release

agreement between Lamb and Granite State provide:

“This Settlement Agreement and Mutual Release

('Release') is entered into by and between J. Lamb,

Inc. (hereinafter 'Releasor') and Granite State Insurance

Company (hereinafter 'Releasee'), collectively referred

to herein as 'The Parties,' pursuant to the following:

[¶] Recitals [¶] A. Releasee issued to Releasor

general liability policies number CPP 512-43-96 and

CPP 512-43-9697 ('the policies'). [¶] B. On or

about May 3, 1999, an action was filed entitled

Continental Quilting Company, Inc. v. J. LAMB, Inc.,

United States District Court Case No. 99-04767 ('the

Continental Quilting Action.') [¶] C. Releasor tendered

the Continental Quilting Action to Releasee for defense

and indemnification. Releasee initially declined to

provide a defense to Releasor in the Continental Action.

[¶] D. Subsequently, Releasor settled the Continental

Quilting Action incurring attorneys' fees and costs in

the amount of $89,455.18. Resolution of the Continental

Quilting Action also involved Releasor sending product

to Continental Quilting at a reduced price suffering loss

of $65,000.00. [¶] E. Releasor requested that Releasee

reconsider its denial, which Releasee agreed. [¶] The

Parties now desire to settle all claims, disputes, duties,

and all other obligations between them arising out of

or in any way connected with any claims arising from

the Continental Quilting Action. [¶] Now Therefore, in

consideration of the respective covenant by and between

The Parties, as set forth below, The Parties do hereby

agree as follows: [¶] 1. Affirmative Covenant: [¶] A.

Releasee will deliver to Releasor's attorney a draft in

the amount of $120,000.00 made payable to 'The Soni

Law Firm Trust Account for the Benefit of J. Lamb,

Inc.' [¶] 2. Release [¶] A. For and in consideration

of the above affirmative covenant, Releasor hereby

releases and forever discharges Releasee of and from

any liability, duty or obligation under the Policies

(including, without limitation, any duty to investigate,

defend or indemnify) related to any and all past, pending

or future claims made as a result of the Continental

Quilting Action. Neither party releases, waives, or

otherwise modifies its rights or obligations under the

policy with respect to any other claim, whether such

claim has manifested or not, except all claims arising

from, or obligations under, the policy with respect to

any other claim, whether such claim has manifested

or not, except all claims arising from the Continental




Quilting Action [¶] ... [¶] D. Whole Agreement [¶]

This Release contains the entire agreement between

The Parties relating to the transactions contemplated

hereby and all prior or contemporaneous agreements,

understandings, representations and statements, oral or

written, are merged into this Release.”

Shortly after March 14, 2000, Granite State advised AtlanticMutual that it had also insured Lamb and that it had paidall of the defense costs (i.e., $89,455) incurred by Lambin defending the Continental action, as well as a part ofthe settlement costs allegedly expended by Lamb. This wasapparently the first time that Atlantic Mutual learned thatanother insurer was involved in the matter. Granite Statedemanded that Atlantic Mutual share, on an equitable basis,the $120,000 it had paid to Lamb to cover the above describedexpenses.

About the same time, Lamb also made a separate demandon Atlantic Mutual. Lamb took the position that GraniteState's payment to it was not for defense or settlement ofthe Continental action, but rather was a “claim buyout” inwhich Lamb agreed to release its bad faith claim againstGranite State and to accept a novation of the Granite Statepolicy “to exclude past, present or future coverage relating to”the Continental action. Lamb demanded that Atlantic Mutualpay Lamb the full amount of its total defense and settlementexpense ($154,455) which it claims to have incurred in theContinental action.

Atlantic Mutual rejected this demand and advised Lamb'scounsel that Lamb had no right to be paid twice for theclaim. Facing claims from both Lamb and Granite State forsubstantially the same money, and believing it owed nothingto either party, Atlantic Mutual, on May 30, 2000, filed thisaction against them for declaratory relief to determine theissue of coverage under its policy and its liability, if any, to

either party. 9 *1028

9 In its complaint, Atlantic Mutual described its position

in this dispute as follows: “Atlantic Mutual contends that

if it had a duty to defend and/or indemnify then Granite

State is equitably subrogated to the right of the insured

as to any claim against Atlantic Mutual, and/or Granite

State is the sole possessor of a right of contribution

against Atlantic Mutual. Atlantic Mutual desires to settle

the disputed claim with Granite State but is prevented

from doing so by such competing, inconsistent claim

from Lamb. Both Lamb and Granite State have made

competing and inconsistent claims for the same sums

by way of subrogation, contribution, and/or indemnity

from Atlantic Mutual. The combined sum sought is

in excess of the total amount expended by Lamb in

defending and settling the underlying action. Atlantic

Mutual is informed and believes that all defendants

contend otherwise in whole or in part. Atlantic Mutual

also denies any potential liability for breach of the

covenant of good faith and fair dealing.”

On July 20, 2000, Lamb filed a cross-complaint that includedclaims against Atlantic Mutual for breach of contract andbad faith and for declaratory relief against Granite State asto the meaning, purpose and legal effect of the settlementand release agreement of March 14, 2000 (hereafter theSettlement Agreement). Granite State also filed a cross-complaint against Atlantic Mutual for equitable subrogationand/or alternatively, equitable contribution.

Atlantic Mutual moved for summary judgment against bothLamb and Granite State on the ground that there was nocoverage under its policy for the claim asserted in theContinental action and therefore it had no liability to eitherparty as a matter of law. Granite State also moved forsummary judgment on its cross-complaint against Lamb.Lamb filed cross-motions for summary judgment against bothAtlantic Mutual and Granite State. With respect to thesecompeting motions, the trial court, in April and May, 2001,ruled as follows:

1. Atlantic Mutual's motion against Lamb on its complaintand Lamb's cross-complaint was granted on the ground thatthe Continental complaint had not alleged an offense thatconstituted either advertising or personal injury within themeaning of the Atlantic Mutual policy (this ruling is the

subject of the appeal in case No. B150674). 10

10 The trial court, in making this ruling, expressly did not

reach or rule upon Atlantic Mutual's contention that

coverage was precluded under the “first publication”

exclusion.

2. Atlantic Mutual's motion against Granite State was grantedon the ground that since there was no coverage for theunderlying Continental claim under the Atlantic Mutualpolicy, Atlantic Mutual had no duty to Granite State undereither equitable subrogation or equitable contribution for anysums paid with respect to the Continental claim against Lamb(this ruling is the subject of the appeal in case No. B151708).

3. Granite State's motion against Lamb on Lamb's cross-complaint for declaratory relief was granted on the groundsthat: (1) the Settlement Agreement between Granite State




and Lamb was not a novation; (2) the *1029 $120,000paid to Lamb was to satisfy Lamb's “claim that it wasentitled to reimbursement for its defense fees and settlementconsideration in the Continental action”; and, (3) theSettlement Agreement does not impair any rights GraniteState may have to equitable subrogation against, or equitablecontribution from, Atlantic Mutual (this ruling, which wedeem to be a summary adjudication of the claims raised byLamb's cross-complaint, is also the subject of the appeal in

case No. B150674). 11

11 The court also awarded Granite State attorney fees

pursuant to a fee provision in the Settlement Agreement.

Lamb has separately appealed that award in case No.

B154194. That matter is not before us.

Both Lamb (case No. B150674) and Granite State (case No.B151708) have filed timely appeals and we have, on ourown motion, consolidated them for resolution in this singleopinion.

Contentions of the PartiesLamb contends that the allegations of the Continentalcomplaint in the underlying action sufficiently allege anoffense within the meaning of the “personal injury” clausein Atlantic Mutual's policy. Therefore, Lamb argues, therewas at least a potential for coverage and Atlantic had aduty to provide both a defense and indemnity to Lamb forContinental's claim.

Lamb also contends that the Settlement Agreement betweenit and Granite State did not involve the reimbursement toLamb of its costs and expenses incurred in defending andsettling the Continental action, but rather the settlementby Granite State of Lamb's separate bad faith claim. As aresult, Lamb argues, Granite State has no right to claimeither equitable subrogation or equitable contribution againstAtlantic Mutual. Therefore, Lamb argues, since there wascoverage under the Atlantic Mutual policy, Lamb is the partyentitled to recoup all of the costs and expense of defendingand settling the Continental action. Granite State, having paidno part of that sum, is not entitled to any recovery fromAtlantic Mutual.

Granite State concurs with and joins Lamb's first argumentrelating to the question of whether there is coverage underAtlantic Mutual's policy. (This issue is thus necessarilycommon to the appeals in both case No. B150674 andcase No. B151708.) However, Granite State disputes Lamb's

characterization of the Settlement Agreement. It is GraniteState's position that there was no agreement to settle anythingother than Lamb's coverage claim under the Granite Statepolicy. Granite State contends that, by the express terms of*1030 the Settlement Agreement, it reimbursed Lamb for

all of its defense costs and expenses and a negotiated portionof its claimed settlement expense. Granite State claims thatthe amount actually “paid” by Lamb to settle the Continentalclaim was subject to considerable dispute and thus the totalfigure of $120,000 paid to Lamb by Granite State representedthe fruit of a negotiated compromise.

For its part, Atlantic Mutual disputes the coverage argumentsjointly advanced by Lamb and Granite State. It argues thatthe claims asserted by Continental and the allegations of itscomplaint in the underlying action did not, as a matter oflaw, constitute an offense within the meaning of the personal

injury clause of the Atlantic Mutual policy. 12 It also arguesthat it is undisputed that Lamb first published the disparagingstatements prior to the inception of the Atlantic Mutualpolicy. Therefore, the “first publication” exclusion applies topreclude coverage in any event. As a result, Atlantic Mutualclaims it has no liability, as a matter of law, to either Lambor Granite State.

12 The only “offense” relevant to this case appears,

in identical terms, in both the personal injury and

advertising injury clauses of the Atlantic Mutual policy:

“Oral or written publication of material that slanders or

libels a person or organization or disparages a person's

or organization's goods, products or services.” (Italics

added.)

The only difference between the two promised coverages

is that, for coverage to exist under the advertising

injury clause, the oral or written publication must have

occurred “in the course of advertising [Lamb's] goods,

products or services.” (Italics added.) Under the personal

injury clause, the offense must arise “out of [Lamb's]

business excluding advertising, publishing, broadcasting

or telecasting done by or for [Lamb].” (Italics added.) It is

not at all clear that the alleged oral or written publications

about which Continental complained occurred in any

“advertising” activity by or for Lamb, but we need not

reach that issue. The critical question before us relates

to whether such oral or written publications slandered

or libeled Continental or disparaged it or its goods,

products or services. If they did, there will be coverage

under Atlantic Mutual's policy without regard to whether

any advertising activity was involved (assuming that the

“first publication” exclusion does not apply); if they did

not, there will be no coverage, whether or not the oral




or written publications were uttered or communicated in

the course of an advertising activity. As a result, there

is no need for us to consider or discuss the question of

coverage under the advertising injury clause.

Discussion

1. Standard of ReviewThese consolidated appeals come to us after the trial courtgranted Atlantic Mutual's motion for summary judgment.([1]) The purpose of such a motion is to expedite litigation andeliminate needless trials. (Hood v. Superior Court (1995) 33Cal.App.4th 319, 323 [39 Cal.Rptr.2d 296].) It *1031 maybe granted only “if all the papers submitted show that thereis no triable issue as to any material fact and that the movingparty is entitled to a judgment as a matter of law.” (CodeCiv. Proc., § 437c, subd. (c); Villa v. McFerren (1995) 35Cal.App.4th 733, 741 [41 Cal.Rptr.2d 719].) After examiningdocuments supporting a summary judgment motion in thetrial court, this court independently determines their effect asa matter of law. (Villa v. McFerren, supra, 35 Cal.App.4th atp. 741.)

([2]) “[F]rom commencement to conclusion, the partymoving for summary judgment bears the burden of persuasionthat there is no triable issue of material fact and that he isentitled to judgment as a matter of law.... There is a triableissue of material fact if, and only if, the evidence wouldallow a reasonable trier of fact to find the underlying fact infavor of the party opposing the motion in accordance with theapplicable standard of proof.” (Aguilar v. Atlantic RichfieldCo. (2001) 25 Cal.4th 826, 850 [107 Cal.Rptr.2d 841, 24 P.3d493] (Aguilar), fns. omitted, italics added.) An issue of factbecomes one of law and loses its “triable” character only if theundisputed facts leave no room for a reasonable difference ofopinion. (Preach v. Monter Rainbow (1993) 12 Cal.App.4th1441, 1450 [16 Cal.Rptr.2d 320].)

([3]) A defendant moving for summary judgment bears aburden of production to make a prima facie showing, bydeclarations and/or other evidence, that there is a completedefense to the plaintiff's action or an absence of an essentialelement of plaintiff's case. (Aguilar, supra, 25 Cal.4th at p.849.) “Once the defendant ... has met that burden, the burdenshifts to the plaintiff ... to show that a triable issue of oneor more material facts exists as to that cause of action or adefense thereto. The plaintiff ... may not rely upon the mereallegations or denials of its pleadings to show that a triableissue of material fact exists but, instead, shall set forth thespecific facts showing that a triable issue of material fact

exists as to that cause of action or a defense thereto.” (CodeCiv. Proc., § 437c, subd. (o)(2).)

([4]) Where the facts are undisputed, the court can resolvethe question of law in accordance with general summaryjudgment principles. (Adams v. Paul (1995) 11 Cal.4th583, 592 [46 Cal.Rptr.2d 594, 904 P.2d 1205].) “Absent afactual dispute as to the meaning of policy language, whichwe do not have here, the interpretation, construction andapplication of an insurance contract is strictly an issue oflaw. [Citation.]” (Century Transit Systems, Inc. v. AmericanEmpire Surplus Lines Ins. Co. (1996) 42 Cal.App.4th 121,125 [49 Cal.Rptr.2d 567], italics in original.) *1032

([5]) A liability insurer's duty to defend will arise when asuit against an insured potentially seeks damages within thecoverage of the policy. (La Jolla Beach & Tennis Club,Inc. v. Industrial Indemnity Co. (1994) 9 Cal.4th 27, 43[36 Cal.Rptr.2d 100, 884 P.2d 1048].) An insurer, however,need not defend if the third party complaint cannot, by anyconceivable theory, raise a single issue which would bringit within policy coverage. (Ibid.) Thus, the settled rule isthat where a pleading against the insured raises the potentialfor coverage, the insurer must provide a defense. (MontroseChem. Corp. v. Superior Court (1993) 6 Cal.4th 287, 295[24 Cal.Rptr.2d 467, 861 P.2d 1153] (Montrose).) In order toprevail on a motion for the summary adjudication of the dutyto defend, “the insured need only show that the underlyingclaim may fall within coverage; the insurer must prove itcannot.” (Id. at p. 300.)

2. Principles of Personal Injury CoverageLike advertising injury, “personal injury” is a term of artthat describes coverage for certain enumerated offenses thatare spelled out in the policy. In this case, the only relevant“offense” under the relevant policy language is an “oral orwritten publication of material that slanders or libels a personor organization or disparages a person's or organization'sgoods, products or services.” (Italics added.) ([6]) Coveragefor personal injury is not determined by the nature of thedamages sought in the action against the insured, but by thenature of the claims made against the insured in that action.Under the personal injury policy provision, “[c]overage ...is triggered by the offense, not the injury or damage whicha plaintiff suffers.” (Fibreboard Corp. v. Hartford Accident& Indemnity Co. (1993) 16 Cal.App.4th 492, 511 [20Cal.Rptr.2d 376], italics added.) This conclusion is consistentwith the policy language which obligates the insurer to pay“all sums that the insured becomes legally obligated to pay as

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damages because of personal injury ....” (Italics added.) (Seealso Martin Marietta Corp. v. Insurance Co. of No. America(1995) 40 Cal.App.4th 1113, 1125 [47 Cal.Rptr.2d 670].)

Unlike coverage for bodily injury and property damage,which is “occurrence” based, there is no requirement forpersonal injury coverage that there be an “accidental”occurrence. All that is required is that the injury arise outof the conduct of the insured's business. Thus, even anintentional tort, such as those alleged in the Continentalcomplaint, may be covered. The triggering event is theinsured's wrongful act, not the resulting injury to the thirdparty claimant. Indeed, coverage will exist for a personalinjury “offense,” committed during the term of the policy,even if the injury occurs after the *1033 policy expires.(American Cyanamid Co. v. American Home Assurance Co.(1994) 30 Cal.App.4th 969, 982 [35 Cal.Rptr.2d 920].)

3. There Was a Potential for CoverageUnder the Atlantic Mutual Policy

a. A Liability Insurer's Duty to DefendIn Montrose, supra, 6 Cal.4th 287, the Supreme Courtsummarized the well-settled rules applicable to a liabilityinsurer's duty to defend. ([7]) “In Horace Mann Ins. Co. v.Barbara B. (1993) 4 Cal.4th 1076 [17 Cal.Rptr.2d 210, 846P.2d 792] (Horace Mann), we observed: '[A] liability insurerowes a broad duty to defend its insured against claims thatcreate a potential for indemnity. (Gray v. Zurich InsuranceCo. [1966] 65 Cal.2d 263 [54 Cal.Rptr. 104, 419 P.2d 168][Gray].) As we said in Gray, ”the carrier must defend a suitwhich potentially seeks damages within the coverage of thepolicy. “ (Id. at p. 275, italics in original.) Implicit in this ruleis the principle that the duty to defend is broader than the dutyto indemnify; an insurer may owe a duty to defend its insuredin an action in which no damages ultimately are awarded.[Citations.]' (Horace Mann, supra, 4 Cal.4th at p. 1081.)[¶] 'The determination whether the insurer owes a duty todefend usually is made in the first instance by comparing theallegations of the complaint with the terms of the policy. Factsextrinsic to the complaint also give rise to a duty to defendwhen they reveal a possibility that the claim may be coveredby the policy. (Gray, supra, 65 Cal.2d at p. 276.)' (HoraceMann, supra, 4 Cal.4th at p. 1081.) As one Court of Appealhas put it, '[f]or an insurer, the existence of a duty to defendturns not upon the ultimate adjudication of coverage under itspolicy of insurance, but upon those facts known by the insurerat the inception of a third party lawsuit. [Citation.] Hence,the duty ”may exist even where coverage is in doubt and

ultimately does not develop.“ [Citation.]' (Saylin v. CaliforniaIns. Guarantee Assn. (1986) 179 Cal.App.3d 256, 263 [224Cal.Rptr. 493].) [¶] The defense duty is a continuing one,arising on tender of defense and lasting until the underlyinglawsuit is concluded (Lambert v. Commonwealth Land TitleIns. Co. (1991) 53 Cal.3d 1072, 1077, 1079 [282 Cal.Rptr.445, 811 P.2d 737]), or until it has been shown that there isno potential for coverage....' ” (Montrose, supra, 6 Cal.4th atp. 295.)

([8]) “[A]n insurer has a duty to defend an insured if itbecomes aware of, or if the third party lawsuit pleads, factsgiving rise to the potential for coverage under the insuringagreement. [Citations.] This duty, which applies *1034 evento claims that are 'groundless, false, or fraudulent,' is separatefrom and broader than the insurer's duty to indemnify.[Citation.]” (Waller v. Truck Ins. Exchange, Inc. (1995) 11Cal.4th 1, 19 [44 Cal.Rptr.2d 370, 900 P.2d 619].) The scopeof the duty does not depend on the labels given to the causes ofaction in the third party complaint; instead it rests on whetherthe alleged facts or known extrinsic facts reveal a possibilitythat the claim may be covered by the policy. (See HurleyConstruction Co. v. State Farm Fire & Casualty Co. (1992)10 Cal.App.4th 533, 538 [12 Cal.Rptr.2d 629].)

([9]) Once that possibility of coverage has been raised (in thiscase, as we discuss below, by the allegations of Continental'scomplaint) then the insurer may defeat such claim of coverageby extrinsic evidence, but only where “ 'such evidencepresents undisputed facts which conclusively eliminate apotential for liability.' ” (Montrose, supra, 6 Cal.4th at pp.298-299, italics added.) “Any doubt as to whether the factsestablish [or defeat] the existence of the defense duty mustbe resolved in the insured's favor.” (Id. at pp. 299-300.) TheMontrose court endorsed the following statement of the rulethat applies in this case: “ '[O]nce the insured has establishedpotential liability by reference to the factual allegations of thecomplaint, the terms of the policy, and any extrinsic evidenceupon which the insured intends to rely, the insurer mustassume its duty to defend unless and until it can conclusivelyrefute that potential. Necessarily, an insurer will be requiredto defend a suit where the evidence suggests, but does notconclusively establish, that the loss is not covered.... A carrierremains free to seek declaratory relief if undisputed factsconclusively show, as a matter of law, that there is no potentialfor liability.' ” (Id. at p. 299, quoting the opinion of the Courtof Appeal, italics added.)







http://www.westlaw.com/Link/Document/FullText?findType=Y&pubNum=4040&cite=6CAL4TH287&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Search)






























b. The Allegations of Continental's ComplaintCharged an “Offense” Within the Meaning of the

Personal Injury Clause in the Atlantic Mutual PolicyAs the above principles establish, Atlantic Mutual's coverageresponsibility is first evaluated by an examination of thecomplaint in Continental's underlying action against Lamb.We have previously quoted the relevant portions of thatcomplaint (see fn. 3, ante). ([10a]) Those allegationsare best summarized as follows: Lamb was chargedby Continental with intentionally communicating withContinental's customers and falsely stating to them thatContinental was unlawfully selling them products that weresubject to Lamb's prior patent claim and that Lamb intendedto sue those customers who continued to purchase productfrom Continental. In short, Continental alleged that Lambhad falsely stated to Continental's customers *1035 thatContinental's products were burdened with a prior legal rightand their purchase of such products would subject them tolitigation.

Such allegations, in our view, clearly allege a disparagementof both Continental as well as its products. The term“disparagement” has been held to include statements abouta competitor's goods that are untrue or misleading and aremade to influence potential purchasers not to buy. (SeeSentex Systems, Inc. v. Hartford Acc. & Indem. Co. (C.D.Cal.1995) 882 F.Supp. 930, 944.) Whether characterized as atrade libel or product disparagement, an injurious falsehooddirected at the organization or products, goods, or servicesof another falls within the coverage of the Atlantic Mutualpolicy. The plain language of the Atlantic Mutual policyincludes in the definition of “personal injury” the publicationof any oral or written statement that not only slanders orlibels but also one that disparages an organization or itsgoods, products, or services. This amounts to coverage forproduct disparagement and trade libel as well as defamation.(See e.g., Amerisure Ins. Co. v. Laserage Technology Corp.(W.D.N.Y. 1998) 2 F.Supp.2d 296, 304 [where the courtconstrued nearly identical policy language and reached the

same conclusion].) 13

13 Because we read the Atlantic Mutual policy as

providing coverage for both defamatory and disparaging

publications and we find that the alleged statements by

Lamb constituted disparagement, we need not consider

or discuss their possible defamatory character.

([11]) The term “trade libel” was defined in Nichols v.Great American Ins. Companies (1985) 169 Cal.App.3d 766

[215 Cal.Rptr. 416], where the court discussed trade libel in

depth. 14 As the Nichols court explained it: “ 'Trade libelis defined as an intentional disparagement of the quality ofproperty, which results in pecuniary damage to plaintiff....”Injurious falsehood, or disparagement, then, may consist ofthe publication of matter derogatory to the plaintiff's title tohis property, or its quality, or to his business in general, ....[T]he plaintiff must prove in all cases that the publicationhas played a material and substantial part inducing othersnot to deal with him, and that as a result he has sufferedspecial damages .... Usually, ... the damages claimed haveconsisted of loss of prospective contracts with the plaintiff'scustomers.“ ' [Citation.]” (Id. at p. 773, quoting Erlich v.Etner (1964) 224 Cal.App.2d 69, 73 [36 Cal.Rptr. 256], italicsadded.) ( [10b]) Here, Continental's complaint alleges thatLamb contacted Continental's customers and falsely accusedContinental's products of infringing on Lamb's patent. Thisclearly constituted a “publication of matter derogatory to theplaintiff's title to his property, or its quality, or to his businessin general.” *1036

14 As we note below, the Nichols court concluded that no

trade libel was involved in the case before it. However,

its definition of the term “trade libel” is instructive.

The difference between this case and our earlier decisionin Bennett, supra, 53 Cal.App.4th 75, upon which AtlanticMutual heavily relies, is that here the policy languageexpressly goes beyond coverage for purely defamatorystatements to also include the disparagement of a party'sbusiness or products. In Bennett, the policy language definingthe relevant personal injury offense was more restrictive: “'a publication or utterance ... of a libel or slander or other

defamatory or disparaging material ....' ” (Bennett, supra,53 Cal.App.4th at p. 83, some italics omitted.) ([12])(See fn.

15.) Applying the principles of ejusdem generis, 15 we heldthat the word “disparaging,” as used in that particular policy,was limited to the defamation of a person's reputation andcould not be extended to provide coverage for a claim ofdisparagement or slander of title to property. (Bennett, at p.86.) Given the much broader language in the policy before us,Bennett is of no assistance to Atlantic Mutual's argument.

15 The principle of ejusdem generis provides that where

general words follow the enumeration of particular

classes of persons or things, the general words will be

construed as applicable only to persons or things of

the same general nature or class as those enumerated.

















(People v. Dyer (2002) 95 Cal.App.4th 448, 455 [115

Cal.Rptr.2d 527].)

We simply cannot rely on Bennett and adopt Atlantic Mutual'sargument that the personal injury coverage under the broaderlanguage of its policy did not extend to the claim assertedby Continental. To do so would ignore the very fundamentalprinciple that policy language be so construed as to giveeffect to every term. (See, e.g., Fireman's Fund Ins. Co. v.Superior Court (1997) 65 Cal.App.4th 1205, 1217-1218 [78Cal.Rptr.2d 418] [a court “ 'must strive to give every termmeaning unless to do so would render the term inconsistent orcontradictory' ”]; Martin Marietta Corp. v. Ins. Co. of NorthAmerica, supra, 40 Cal.App.4th at p. 1127 [quoting Union OilCo. v. International Ins. Co. (1995) 37 Cal.App.4th 930, 935[44 Cal.Rptr.2d 4], and noting that “ 'an interpretation thatgives effect to every clause is preferred over one that wouldrender other policy terms meaningless' ”]; AIU Ins. Co. v.Superior Court (1990) 51 Cal.3d 807, 826-827 [274 Cal.Rptr.820, 799 P.2d 1253] [construing the phrase “damages theinsured is legally obligated to pay” and declining to adoptinterpretation of the term “damage” that would render thephrase “legally obligated to pay” moot].)

As Granite State emphasizes in its brief, construing theAtlantic Mutual policy in the same manner as the policylanguage in Bennett (“a libel or slander or other defamatoryor disparaging material”) would render the additional andmore expansive phrase in the Atlantic Mutual policy (“ordisparages a person or organization's goods, products orservices”) meaningless. A separate meaning of this phrasemust be recognized. To the extent that there is any ambiguityin the language utilized in the insuring clause of *1037Atlantic Mutual's policy (see fn. 4, ante), that ambiguitymay be resolved by construing such language in a way thatis consistent with the objectively reasonable expectationsof Lamb. (See Nissel v. Certain Underwriters at Lloyd'sof London (1998) 62 Cal.App.4th 1103, 1110-1112 [73Cal.Rptr.2d 174].) In our view, coverage for the tradelibel clearly alleged here would most certainly fulfill thoseobjectively reasonable expectations. Given the disjunctivelanguage used in the Atlantic Mutual policy, a reasonableinsured would objectively expect coverage for the claimasserted by Continental.

Atlantic Mutual disagrees. It relies upon three other casesin addition to Bennett, supra, 53 Cal.App.4th 75: AetnaCas. & Sur. Co. v. Centennial Ins. Co. (9th Cir. 1988)838 F.2d 346, Nichols v. Great American Ins. Companies,supra, 169 Cal.App.3d 766, and Microtec Research v.

Nationwide Mut. Ins. Co. (9th Cir. 1994) 40 F.3d 968.None of these decisions, however, involved actual claimsof trade libel such as we have been presented with here,where the insured allegedly communicated directly with theclaimant's customers and disparaged both the claimant andits products. Thus, Aetna, Nichols, and Microtec provideno support for Atlantic Mutual's argument. In each case,the court held that the complaint's allegations did notamount to trade libel, or did not trigger personal injurycoverage, because the complaint failed to allege an essentialelement of trade libel-a disparaging statement about the

plaintiff's product. 16 Here, Continental's complaint allegesthat Lamb contacted Continental's customers and falselyaccused Continental of violating Lamb's patent. Such a claimamounted to a denigration of Continental's products no lessthan if Lamb had claimed they were defectively designedor manufactured. Lamb clearly stated that Continental'sproducts were burdened with a legal infirmity that wouldplace a Continental customer in legal jeopardy if it purchasedand used or resold the product. Thus, whereas Aetna, Nichols,and Microtec did not involve a disparaging statement madeabout a plaintiff's products, the present case clearly does.

16 In Aetna and Microtec, the insured did not disparage

the plaintiff's product, but rather palmed its own product

off as that of the plaintiff. In Nichols, the insured made

no statement disparaging the plaintiff's equipment or

license, and the only statements made about the plaintiff

at all were made in the course of advertising, and thus fell

within a policy exception to coverage for publications or

utterances made in the course of advertising.

([10c]) We therefore conclude that, as a matter of law, theinsuring clause of Atlantic Mutual's policy provided coveragefor the claim asserted by the allegations of Continental'scomplaint. Thus, a potential for coverage existed. Whetherthat potential coverage was defeated by facts extrinsicto Continental's complaint, however, depends upon theapplicability of the *1038 “first publication” exclusion alsorelied upon by Atlantic Mutual, but not reached or consideredby the trial court. We now turn to that issue.

c. Atlantic Mutual Owed Lamb a Duty toDefend the Underlying Continental Action

([13]) Atlantic Mutual's duty to provide Lamb with a defensedepends upon the existence of a potential for coverage atthe time of tender. Atlantic Mutual claims that such potentialwas foreclosed by the “first publication” exclusion andevidence that it claimed to have demonstrating that the first
































publication by Lamb of the disparaging material was prior tothe inception of the Atlantic Mutual policy; that is, during theGranite State policy period.

Atlantic Mutual's argument overlooks the significance of thefact that it is relying on a policy exclusion. The allegationsof the Continental complaint did not specify the date ofLamb's first utterance of any disparagement. Thus, basedupon those allegations alone, the possibility of coverageexisted. That complaint was tendered to Atlantic Mutual.This was sufficient, at that moment, to create a potential forcoverage and Atlantic Mutual's duty to defend arose.

It is settled that this duty is excused only where “ 'thethird party complaint can by no conceivable theory raisea single issue which could bring it within the policycoverage.' [Citation.]” (Montrose, supra, 6 Cal.4th at p. 300,quoting Gray, supra, 65 Cal.2d at p. 276, fn. 15, italicsadded by Montrose, some italics omitted.) As we have alreadynoted, “the insured need only show that the underlying claimmay fall within policy coverage; the insurer must prove itcannot.” (Montrose, at p. 300, some italics added.)

Atlantic Mutual's response is that it produced a declarationexecuted by its claims adjuster, who stated that he had spokenwith a representative of Lamb and that person had told him“that the dispute between Continental and [Lamb] originatedwith a conversation which occurred in September of 1998.”Apart from the fact that such declaration is both vague andambiguous and does not clearly establish the date of thecritical “first publication,” it also overlooks the fundamentalprinciples discussed above that an insurer may only defeatan existing potential for coverage by undisputed facts thatconclusively negate such coverage. This is particularly truewhere the insurer seeks to defeat coverage by relianceon an exclusion. An insurer may rely on an exclusionto deny coverage only if it provides conclusive evidence

*1039 demonstrating that the exclusion applies. (See, e.g.,Waller v. Truck Ins. Exchange, Inc., supra, 11 Cal.4th atp. 16 [exclusions are narrowly construed and insurer bearsburden of proving their application]; Merced Mutual Ins.Co. v. Mendez (1989) 213 Cal.App.3d 41, 47 [261 Cal.Rptr.273] [same]; Royal Globe Ins. Co. v. Whitaker (1986) 181Cal.App.3d 532, 537 [226 Cal.Rptr. 435] [same]; Clemmerv. Hartford Insurance Co. (1978) 22 Cal.3d 865, 880 [151Cal.Rptr. 285, 587 P.2d 1098] [same].) Thus, an insurer thatwishes to rely on an exclusion has the burden of proving,through conclusive evidence, that the exclusion applies in allpossible worlds.

The equivocal and self-serving declaration of AtlanticMutual's own claims adjuster certainly did not rise to thelevel of conclusive evidence. In any event, Lamb disputedAtlantic Mutual's claim as to the date of first publication.While such contrary evidence was not produced by Lamb atthe time that Atlantic Mutual denied coverage and refuseda defense, that fact does not alter our conclusion that theContinental complaint was, in and of itself, sufficient toestablish a potential for coverage that could only be defeatedby Atlantic Mutual conclusively establishing that the “firstpublication” exclusion applied. Atlantic Mutual did not dothat, and it does not matter that Lamb did not produce itscontrary evidence until later. Once the potential for coveragehad been established by the Continental complaint, Lambneeded to do no more. The burden was on Atlantic Mutual.

In its attempt to demonstrate that it had met that burden,Atlantic Mutual cites Gunderson v. Fire Ins. Exchange(1995) 37 Cal.App.4th 1106, 1114 [44 Cal.Rptr.2d 272], andRingler Associates Inc. v. Maryland Casualty Co. (2000)80 Cal.App.4th 1165, 1184 [96 Cal.Rptr.2d 136], for theproposition that its duty to defend should be based solelyon the evidence available to it at the time it denied Lamb'sclaim. This argument misapplies the holdings in these cases.Gunderson was a bad faith case where the insured suedhis insurer for unreasonably denying coverage. (Gunderson,supra, 37 Cal.App.4th at p. 1108.) At the time it deniedcoverage, the insurer did not have access to any evidencesuggesting that the claims in the underlying complainttriggered coverage. (Id. at pp. 1110-1111.) Shortly after theinsured settled the underlying litigation, he provided hisinsurer with evidence suggesting that it had a duty to defend.The court held that because he had not provided his insurerwith this evidence until after the underlying case had settled,he could not argue that the insurer's denial of coveragewas unreasonable and amounted to bad faith. (Id. at pp.1117-1118.)

Similarly, in Ringler, an insured/brokerage house brought abad faith action against its insurer for failing to provide itwith a defense in a suit that several life insurance companieshad brought against it based on allegedly *1040 defamatorystatements the brokerage house had made about their policies.(Ringler Associates Inc. v. Maryland Casualty Co., supra, 80Cal.App.4th at pp. 1172-1173.) The insurer denied coveragebased on its policy's first publication exclusion and, ratherthan provide the insurer with evidence regarding the allegedlydefamatory statements, the insured intentionally withheld




























information regarding the “number, nature, and timing of[the] defamatory statements” it allegedly had made. (Id. at p.1184.) The court held that the insurer could not be held liablefor bad faith when the evidence available to it at the time oftender suggested that the exclusion applied. (Ibid.)

These cases are of no help to Atlantic Mutual because, inthis case, the potential for coverage was established by theallegations of the underlying Continental complaint. AtlanticMutual needed no additional information from Lamb onthat point. Thus, we do not have here a case where aninsured has failed to timely provide information to an insurerthat would have established the potential for coverage inthe first instance. More significantly, we do not now havebefore us the claim that Atlantic Mutual was acting in badfaith or had relied unreasonably on the “first publication”information developed by its claims adjuster. Lamb raisedthe bad faith issue in its cross-complaint, but it was neverreached by the trial court. Upon remand, the trial courtmay appropriately consider the reasoning and holdings inGunderson and Ringler if Lamb pursues its claim for bad faithagainst Atlantic Mutual.

Even though it may ultimately be determined that AtlanticMutual has a viable defense to coverage by virtue of theapplication of the “first publication” exclusion, this can onlyaffect its liability for indemnification. Its duty to defenddepended on the existence of only a potential for coverage.That potential was never conclusively negated and obviouslycannot be negated short of an actual trial to resolve what isclearly a genuine factual dispute. Thus, we can only concludethat Atlantic Mutual owed Lamb a defense and it failed toprovide it.

For the exact same reasons, Granite State had a similarobligation and it decided, albeit tardily, to satisfy thatobligation by its payment to Lamb of the full amount ofthe costs incurred to defend the Continental action. Thiscircumstance leads us to the next issue which is Granite State'sclaim that it has a right to equitable contribution from AtlanticMutual.

4. Granite State Has a Viable Claim forEquitable Contribution as to Defense Costs

([14]) In the context of insurance law, the doctrine ofequitable contribution may be simply stated. “[W]here twoor more insurers independently *1041 provide primaryinsurance on the same risk for which they are both liable

for any loss to the same insured, the insurance carrier whopays the loss or defends a lawsuit against the insured isentitled to equitable contribution from the other insurer orinsurers, ...” (Fireman's Fund Ins. Co. v. Maryland CasualtyCo. (1998) 65 Cal.App.4th 1279, 1289 [77 Cal.Rptr.2d 296](Fireman's Fund), italics added.)

The right to contribution depends upon the existence of anobligation owed to a common insured. The right arises whenone of two or more insurers are “obligated to indemnify ordefend” the same loss or claim and one of those insurers haspaid more than its share of the loss or defended the actionwithout participation from the others. (Fireman's Fund,supra, 65 Cal.App.4th at p. 1293.) “Equitable contributionpermits reimbursement to the insurer that paid on the lossfor the excess it paid over its proportionate share of theobligation, on the theory that the debt it paid was equally andconcurrently owed by the other insurers and should be sharedby them pro rata in proportion to their respective coverage ofthe risk. The purpose of this rule of equity is to accomplishsubstantial justice by equalizing the common burden sharedby coinsurers, and to prevent one insurer from profiting at theexpense of others. [Citations.]” (Id. at pp. 1293-1294, someitalics added, fn. omitted.)

([15]) Applying these principles here, it is clear that bothAtlantic Mutual and Granite State provided liability coverageto the same insured for the same risk, although for differingpolicy periods. Although, as we explain in more detail below,they both could not be liable to provide indemnification toLamb (because of the differing policy periods), that fact doesnot alter the conclusion that they both had a duty to provide adefense. As already discussed, the Continental complaint didnot establish the date of the first publication of the disparagingpublications and there is still extant an unresolved disputeover that question. It is undisputed, however, that such firstpublication necessarily occurred during either Granite State'sor Atlantic Mutual's policy period. The resolution of thatdispute is very significant to the issue of indemnificationliability, but it is irrelevant to the defense burden. That burdenis established by the existence of the dispute. (Horace Mann,supra, 4 Cal.4th 1076, 1085.)

As we have already explained, Atlantic Mutual had a dutyto defend Lamb. Because it was also possible that Lamb'soffense took place during Granite State's policy period,Granite State also had a duty to defend Lamb. Granite Statedoes not contend otherwise; indeed, it concedes the point byits claim for equitable contribution. It could not do otherwise.














Given the uncertainty as to the date(s) of Lamb's actionsgiving rise to Continental's *1042 claim, a possibility ofcoverage under the policies of both insurers exists and willcontinue to exist until the issue is conclusively determined by

a final judicial decision. 17

17 The factual dispute critical to the “first publication”

issue (i.e., the date or dates of Lamb's alleged wrongful

conduct), on which Atlantic Mutual's actual coverage

liability depends, was not resolved in the now-settled,

underlying Continental action; it will therefore have to

be decided in this action.

Therefore, each insurer had a duty to provide a defense.Granite State has effectively done so and it is thereforeentitled to recover from Atlantic Mutual an equitablecontribution towards the total defense expenditure. Theproper amount that Granite State is entitled to recover willhave to be determined in the first instance by the trialcourt upon remand in accordance with the settled principlesapplicable to the doctrine of equitable contribution. (See, e.g.,Croskey et al., Cal. Practice Guide: Insurance Litigation (TheRutter Group 2001) ¶¶ 8:73.20 to 8:73.32, pp. 8-25 to 8-28.)

We reject Lamb's argument that the terms of the SettlementAgreement preclude Granite State from pursuing its equitablecontribution claim against Atlantic Mutual. Although itscontentions have not been consistent throughout theseproceedings, it appears that Lamb now argues that theSettlement Agreement resolved only its bad faith claimagainst Granite State and had nothing to do with eitherdefense of the Continental action or indemnification ofContinental's claim. There is nothing in this record, however,that provides any support for such a proposition. It is certainlynot supported by the terms of the Settlement Agreement,which does not even reflect that a claim for bad faith waspending or existed. Moreover, Lamb has not demonstratedthe existence of any facts extraneous to the terms of theSettlement Agreement that would support its present claimthat the $120,000 paid to Lamb should be allocated wholly,or in part, to a claim of bad faith. Finally, Lamb's argumentappears to be contradicted by the deposition testimony ofits “person most knowledgeable,” who testified that theSettlement Agreement constituted a novation of the GraniteState policy contract and did not involve a payment “fordefense and indemnity of bad faith.”

In short, we agree with the proposition, endorsed by bothinsurers, that Lamb is simply trying to collect twice for thesame claim. If it was Lamb's intent to allocate the $120,000

paid by Granite State, or any portion thereof, to a claim oftortious bad faith on the part of Granite State, then Lambshould have caused such allocation to be explicitly set forthin the Settlement Agreement. As it is presently worded, thatAgreement supports, rather than precludes, Granite State'spursuit of equitable contribution against Atlantic Mutual.Thus, the trial court properly resolved this issue by thesummary *1043 adjudication, in favor of Granite State, ofthe claims raised by Lamb's cross-complaint.

The most that Lamb is entitled to recover is the balance ofthe unreimbursed indemnification expense that it incurred.Such recovery, as we explain below, will depend on adetermination by the trial court that (1) there is actualcoverage under the Atlantic Mutual policy and (2) Lamb hasproven the actual value of its settlement with Continental andthat such value exceeds the amount paid to Lamb by GraniteState over and above the defense costs of $89,455 (i.e., theexcess of the difference between $120,000 and $89,455).

5. Granite State Also May Have aViable Claim for Equitable Subrogation

In a primer on equitable subrogation (and its distinction fromequitable contribution), the court in Fireman's Fund, supra,65 Cal.App.4th 1279, summarized the relevant principles.

([16]) “The different equitable principles on whichcontribution and subrogation are based are reflective ofdifferent underlying public policies. The aim of equitablesubrogation is to place the burden for a loss on the partyultimately liable or responsible for it and by whom it shouldhave been discharged, and to relieve entirely the insurer orsurety who indemnified the loss and who in equity was notprimarily liable therefor. [Citation.] On the other hand, theaim of equitable contribution is to apportion a loss betweentwo or more insurers who cover the same risk, so that eachpays its fair share and one does not profit at the expense of theothers. [Citations.]” (Fireman's Fund, supra, 65 Cal.App.4that p. 1296, some italics added.)

In State Farm & Casualty Co. v. Cooperative of AmericanPhysicians, Inc. (1984) 163 Cal.App.3d 199 [209 Cal.Rptr.251], the court held that in cases “involving disputes betweencarriers insuring the same policyholder, but for differentinterests,” an insurer that “fulfilled its legal obligation todefend and settle” a third party claim on behalf of its insuredassumes the position of its insured by paying the claim, andmay sue the other insurers in a separate action “to adjudicate












the factual merits of the coverage issue” between them. (Id.at pp. 204-205.)

“Properly read, American Physicians stands for the principlethat where different insurance carriers cover different risksand liabilities with respect to the same insured, they mayproceed against each other for reimbursement by subrogationrather than by contribution.... [C]ontribution is only availablein cases where there are coinsurers who share the same levelof *1044 obligation on the same risk. One insurer has noright of contribution from another insurer with respect toits payment on an obligation for which it was primarilyresponsible, and as to which the liability of the second insurerwas only secondary. [Citations.]” (Fireman's Fund, supra, 65Cal.App.4th at p. 1298, italics in original.)

Based upon these principles, Granite State seeks to recoverfrom Atlantic Mutual the amount it paid to Lamb under theSettlement Agreement. As we have already discussed, bothinsurers owed Lamb a defense and they will have to share thatliability on some equitable basis, such basis to be determinedupon remand by the trial court.

The same cannot be said for the amount paid by Lamb tosettle the Continental action. That is a burden that falls underthe indemnification promise of the policies issued by theinsurers. Necessarily, in this case only one insurer can beliable for that. To that extent, Atlantic Mutual and GraniteState insured different interests, that is, different time periods,and the operative event could only take place during one ofthose periods. The insurer that has indemnification coverageis the insurer that issued the policy covering the periodwhen Lamb's alleged disparaging publication first occurred.If that was during Atlantic Mutual's policy period, then noact creating any liability of Lamb would have taken placeduring the Granite State policy period, and thus Granite State

would have no indemnification liability. 18 On the other hand,if Lamb's first disparaging publication occurred during theGranite State policy, then Atlantic Mutual's first publicationexclusion would apply, and Atlantic Mutual would have nocoverage liability. As indicated above, Atlantic Mutual hasthe burden of proving the application of its exclusion.

18 As we have already noted (see fn. 4, ante), under the

insuring clause of the Granite State policy, coverage for

personal injury offenses required that they be committed

during the policy period.

As this comes to us upon a summary judgment grantedwithout considering this critical and disputed issue, we are

unable to determine which insurer will have indemnificationliability under its policy. That issue will have to be resolvedby the trial court upon remand.

If the court determines that Granite State has such liability,then Granite State will not be entitled to recover on itsequitable subrogation claim. If, on the other hand, it isdetermined that Atlantic Mutual is liable to indemnify Lamb,then (in addition to its right to equitable contribution) GraniteState shall be entitled to recover on its equitable subrogationclaim the difference between the $120,000 it paid to Lamband the $89,455 (for Lamb's defense *1045 costs) that is thesubject of the equitable contribution award already discussed.In addition, and depending on its proof as to the actual valuepaid to Continental, Lamb would be entitled to recover fromAtlantic Mutual the balance of the amount (i.e., in excessof the $120,000 paid by Granite State) it actually paid tosettle with Continental. Proof of such amount shall be Lamb'sburden.

ConclusionOur review of the appellate record demonstrates that theallegations of the Continental complaint charged offenseswithin the personal injury coverage of the Atlantic Mutualpolicy; also there are clearly disputed issues of fact as to theapplication of the “first publication” exclusion. Therefore,there was a potential for coverage under the Atlantic Mutualpolicy. This means that both Atlantic Mutual and GraniteState owed a duty to defend Lamb in the underlyingContinental action. As Lamb has already recovered itsdefense costs from Granite State, however, Atlantic Mutual'sliability for such defense costs will be limited to what is owedto Granite State under the latter's equitable contribution claim.Lamb's claim that Granite State cannot assert such a claim iswithout merit.

The issue of Atlantic Mutual's liability for indemnity,however, will depend on the trial court's determination of (1)whether there was any actual coverage under the AtlanticMutual policy and, if so, (2) the amount that Lamb actuallypaid to settle the Continental action. The resolution of the firstissue will turn on the application of the “first publication”exclusion in the Atlantic Mutual policy. On this question,Atlantic Mutual will have the burden of proof. If suchactual coverage under the Atlantic Mutual policy is found toexist, however, then Granite State will be entitled to recoverfrom Atlantic Mutual, under the principles of equitablesubrogation, up to the $30,545 sum that Granite State paid toLamb for indemnity under its policy.








The second issue will be determined upon evidence as to theactual value of the consideration given by Lamb to settlethe Continental action. On this issue, Lamb will have theburden of proof. If Lamb establishes that the value of theconsideration paid to Continental to settle the underlyingaction exceeded the $30,545 received from Granite State (i.e.,the difference between the $120,000 paid by Granite Stateand the amount allocated to the defense costs expended byLamb), then Lamb will be entitled to recover such amountfrom Atlantic Mutual if there is actual coverage under itspolicy.

We therefore will reverse the judgment of the trial courtand remand with directions for the conduct of such further

proceedings as will address and *1046 resolve these issues,as well as any others that may arise therefrom or that remainunaddressed as the result of the trial court's grant of asummary judgment to Atlantic Mutual.

DispositionThe judgment is reversed and both matters (case Nos.B150674 and B151708) are remanded to the trial court forfurther proceedings not inconsistent with the views expressedherein. Each party shall bear its own costs on appeal.

Klein, P. J., and Aldrich, J., concurred. *1047


Barnett v. Fireman's Fund Ins. Co., 90 Cal.App.4th 500 (2001)




Declined to Extend by Rizzo v. Insurance Co. of State of Pennsylvania,

C.D.Cal., August 30, 2013

90 Cal.App.4th 500, 108 Cal.Rptr.2d 657, 01 Cal.Daily Op. Serv. 5705, 2001 Daily Journal D.A.R. 6975

ALBERT E. BARNETT et al.,Plaintiffs and Appellants,

v.FIREMAN'S FUND INSURANCE

COMPANY, Defendant and Respondent.

No. D037272.Court of Appeal, Fourth District, Division 1, California.

June 4, 2001.

SUMMARY

Former executive officers and a former employee of aphysician practice management company brought an actionagainst the company's insurer for refusal to defend andindemnify them in an underlying action in which thecompany and a professional medical corporation alleged theofficers and employee made disparaging remarks about them.Plaintiffs in the present action had tendered defense of theunderlying action to the insurer, asserting that they wereadditional insureds under a comprehensive general liability(CGL) policy issued to the company. The trial court sustainedthe insurer's demurrer without leave to amend. (SuperiorCourt of Orange County, No. 795732, Randell L. Wilkinson,Judge.)

The Court of Appeal reversed. The court held that the trialcourt erred in sustaining the insurer's demurrer without leaveto amend, since the allegations against plaintiffs triggeredat least a potential for coverage under the personal injurycoverage for defamation provided under the CGL policy.The company was the named insured under the policy,and the officers were covered as additional insureds. Sincethe complaint alleged the officers were seeking to furthercorporate interests when they criticized the company, it waspossible they were engaged with respect to their dutiesas executive officers when they committed the allegedmisconduct and therefore a potential for coverage existed.However, the claim by the third additional insured, whowas an employee rather than an officer, did not allege factssufficient to state a cause of action against the insurer arising

from the underlying action brought against that particularinsured by the company, since the employee section of thepolicy excluded personal injury to employees. The courtfurther held that the complaint stated sufficient facts to allegethe insurer breached a duty to defend both the officers and theemployee against the medical corporation's complaint. TheCGL policy insured against claims for defamation made bythird parties if officers and employees were acting within thescope of their employment at the time the alleged defamatorycomments were made. (Opinion by McDonald, J., withKremer, P. J., and Huffman, J., concurring.)

HEADNOTES


(1)Appellate Review § 128--Scope of Review--Function ofAppellate Court-- Rulings on Demurrers.When the matter comes before the appellate court froma judgment of dismissal following the sustaining of ademurrer without leave to amend, the court accepts as truethe facts alleged in the complaint, together with facts thatmay be implied or inferred from those expressly alleged.The appellate court does not, however, accept the truth ofcontentions or conclusions of fact or law. Additionally, tothe extent the factual allegations conflict with the content ofthe exhibits to the complaint, the appellate court relies onand accepts as true the contents of the exhibits and treats assurplusage the pleader's allegations as to the legal effect ofthe exhibits.

(2)Appellate Review § 128--Scope of Review--Function ofAppellate Court-- Rulings on Demurrers--Grounds to Affirmor Reverse.On appeal from a judgment dismissing an action aftersustaining a demurrer, the appellate court reverses if theplaintiff has stated a cause of action under any legal theory.However, the court affirms the judgment if any one of theseveral grounds of demurrer is well taken.

(3)Insurance Contracts and Coverage § 11--Interpretation ofContracts--As Question of Law.The interpretation of the meaning of an insurance policyand the scope of coverage are questions of law. Whether athird party action asserts a potentially covered claim under

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the policy triggering the duty to defend requires the courtto interpret the language of the insuring agreement and is aquestion of law.

(4)Insurance Contracts and Coverage § 107.1--Liabilityand Indemnity Insurance--Determination of Obligation toDefend.An insurer must defend any action that seeks damagespotentially within the coverage of the policy. Conversely, theinsurer owes no duty to defend when the third party complaintcan by no conceivable theory raise a single issue that couldbring it within the policy coverage. However, to be entitled toa defense, the insured must prove the existence of a potentialfor coverage, while the insurer must establish the absence ofany such potential. In other words, the insured need only showthat the underlying claim may fall within policy coverage; theinsurer must prove it cannot. The determination of whetherthe duty to defend exists is made initially by comparing theallegations in the third party complaint with the terms of thepolicy, and considering extrinsic facts that reveal a possibilitythe claim may be covered by the policy. The existence of theduty to defend turns on all facts known by the insurer at theinception of the third party lawsuit. If the facts alleged bythe third party or known to the insurer create any potentialfor indemnity under the policy, the insurer must provide adefense even though noncovered acts are also alleged by thethird party action.

(5)Insurance Contracts and Coverage § 107.1--Liabilityand Indemnity Insurance--Determination of Obligation toDefend--Underlying Action for Defamation.In an action by former executive officers and a formeremployee of a physician practice management companyagainst the company's insurer for refusal to defend andindemnify them in an underlying action in which their formeremployer and a medical corporation alleged that plaintiffsmade disparaging remarks about them, the trial court erredin sustaining the insurer's demurrer without leave to amend,since the allegations against plaintiffs triggered at leasta potential for coverage under the comprehensive generalliability (CGL) policy. The CGL policy provided coverage forinjury arising out of oral or written publication of material thatslandered or libeled a person or organization or disparaged aperson's or organization's goods, products, or services. Thisclause covered claims for defamation. Although the officersand employee may not have alleged all of the elements

necessary to state a cause of action for defamation, the dutyto defend arises when the facts alleged in the underlyingcomplaint give rise to a potentially covered claim regardlessof the technical legal cause of action pleaded by the thirdparty. The complaints in the underlying action alleged that theofficers and employee told third persons that the company'smethods of doing business were flawed and would resultin its failure and made other representations that disparagedand damaged the company and corporation. Such allegationstriggered at least a potential for coverage under the personalinjury coverage for defamation.

[See 6 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, §1135 et seq.; West's Key Number Digest, Insurance k. 2311.]

(6)Insurance Contracts and Coverage § 107.1--Liabilityand Indemnity Insurance--Determination of Obligation toDefend--Additional Insured on Former Employer's Policy--Where Underlying Action Initiated by Former Employer.In an action by former executive officers of a physicianpractice management company against the company's insurerfor refusal to defend and indemnify them in an underlyingaction in which the company alleged the officers madedisparaging remarks about them, the trial court erred insustaining the insurer's demurrer without leave to amend,since the complaint stated sufficient facts to allege thatthe insurer breached a duty to defend the officers againstthe underlying complaint. The company was the namedinsured under a comprehensive general liability policy, andthe officers were covered as additional insureds. When aperson seeks coverage as an additional insured under a policyissued to a corporation as the named insured, an officer oremployee of the corporation is entitled to a defense if he or shewas acting in an insured capacity when allegedly engaged inthe injury-producing conduct. The complaint alleged that theofficers were acting to advance the interests of the companywhen they expressed concerns that changes implemented bythe company would violate California's prohibition againstthe corporate practice of medicine. Since the complaintalleged the officers were seeking to further corporate interestswhen they criticized the company, it was possible they wereengaged with respect to their duties as executive officerswhen they committed the alleged misconduct and thereforea potential for coverage existed. However, a claim by athird additional insured, who was an employee rather than anofficer, did not allege facts sufficient to state a cause of action,since the employee section of the policy excluded personal




injury to employees, thereby eliminating any potential that theemployee would be covered.

(7)Insurance Contracts and Coverage § 107.1--Liabilityand Indemnity Insurance--Determination of Obligation toDefend--Additional Insureds--Third Party Claims.In an action by former executive officers and a formeremployee of a physician practice management companyagainst the company's insurer for refusal to defend andindemnify them in an underlying action in which both thecompany and a medical corporation alleged plaintiffs madedisparaging remarks about them, the trial court erred insustaining the insurer's demurrer without leave to amend,since the complaint stated sufficient facts to allege the insurerbreached a duty to defend against the medical corporation'scomplaint. The comprehensive general liability (CGL) policyinsured against claims for defamation made by third parties ifofficers and employees were acting in their insured capacityat the time the alleged defamatory comments were made. Theofficers and employee alleged they were sued for defaminga third party (the medical corporation) while executing theirduties as an officer, or acting within the scope of employment,respectively, of the company. The medical corporation couldnot be deemed a subsidiary of a named insured (the company)under the CGL policy, so as to prevent the corporationfrom being treated as a third party claimant, since therewere no allegations or extrinsic facts that established thatthe corporation possessed the requisite relationship to thecompany that would qualify it as an additional named insured.

COUNSELZimmerman, Koomer, Connolly & Finkel, Michael D.Koomer and Scott Z. Zimmerman for Plaintiffs andAppellants.Mower, Koeller, Nebeker, Carlson & Haluck, Jon R. Mowerand John R. Armstrong for Defendant and Respondent.

McDONALD, J.

In late 1996 and early 1997 MedPartners, Inc. (MedPartners),and a different entity, Southern California MedicalCorporation (SCMC), filed lawsuits against appellants AlbertE. Barnett, Gloria Mayer (G. Mayer) and Thomas Mayer(T. Mayer) (the underlying action). In the underlying action,MedPartners and SCMC alleged appellants engaged in avariety of misconduct, including making disparaging remarksabout them. Appellants tendered the defense of the underlyingaction to respondent Fireman's Fund Insurance Company(Fireman's), asserting they were additional insureds under

a comprehensive general liability policy (the CGL policy)issued by Fireman's to MedPartners. Fireman's rejected thetender.

In the present lawsuit, appellants alleged Fireman's refusal todefend and indemnify them in the underlying action breachedits obligations under the CGL policy. Fireman's demurrer tothe complaint argued appellants were not entitled to a defenseor indemnity because (1) there was no possibility appellantswere acting in an insured capacity when they committed theconduct alleged in the underlying action and (2) the conductalleged in the underlying action was not covered by the CGLpolicy. The trial court sustained the demurrer without leaveto amend, and this appeal followed.

I. Factual and Procedural Background

A. The Facts of the Underlying Action([1]) Because this matter comes before us from a judgmentof dismissal following the sustaining of a demurrer withoutleave to amend, our factual *505 background acceptsas true the facts alleged in the complaint, together withfacts that may be implied or inferred from those expresslyalleged. (Marshall v. Gibson, Dunn & Crutcher (1995) 37Cal.App.4th 1397, 1403 [44 Cal.Rptr.2d 339].) We do not,however, accept the truth of contentions or conclusions offact or law. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318 [216Cal.Rptr. 718, 703 P.2d 58].) Additionally, to the extent thefactual allegations conflict with the content of the exhibits tothe complaint, we rely on and accept as true the contents ofthe exhibits and treat as surplusage the pleader's allegationsas to the legal effect of the exhibits. (Weitzenkorn v. Lesser(1953) 40 Cal.2d 778, 785 [256 P.2d 947]; Dodd v. CitizensBank of Costa Mesa (1990) 222 Cal.App.3d 1624, 1627 [272Cal.Rptr. 623].)

Barnett is a physician who founded and owned SCMC, aprofessional medical corporation that operated an integratedhealth care delivery system (the system) providing primaryand specialty medical services and inpatient and outpatienthospital services under capitated contracts with healthmaintenance organizations. In November 1995 SCMCentered into a contract with Caremark Physician Services, Inc.(Caremark) under which Caremark managed the operationsof the system on behalf of SCMC, but reserved to SCMC theexclusive control over all decisions relating to the practiceof medicine. This reservation was required to comply withCalifornia's prohibition against the corporate practice ofmedicine. (See generally Conrad v. Medical Bd. of California


















(1996) 48 Cal.App.4th 1038, 1042-1043 [55 Cal.Rptr.2d901].)

In 1996 MedPartners, a large physician practice managementcompany, acquired Caremark. Following the acquisitionBarnett and G. Mayer became executive officers ofMedPartners and T. Mayer became an employee ofMedPartners. MedPartners is the named insured under theCGL policy issued by Fireman's.

After MedPartners acquired Caremark, MedPartners madefundamental changes in the management and organizationalstructure of the system. Appellants expressed concern toMedPartners and others that, under the changes implementedby MedPartners, the system would no longer be supervisedand directed by physicians concerned and entrusted withproviding quality care to patients; instead the system wouldbe directed by a corporation more concerned with corporaterevenues than with the benefits provided to patients, therebyadversely affecting patient care and violating California'sprohibition against the corporate practice of medicine.Appellants sought to advance the interests of MedPartners byurging MedPartners to comply with California's prohibitionagainst the corporate practice of medicine. *506

In November 1996 MedPartners terminated appellantsas officers and employees of MedPartners. One reasonfor the terminations was to retaliate against appellantsfor their complaints about MedPartners' noncompliancewith the prohibition against the corporate practice ofmedicine. MedPartners then filed the underlying actionagainst appellants; SCMC subsequently filed a complaint inintervention in the underlying action. MedPartners' lawsuitalleged, among other things, that appellants told numerouspersons (within and outside of the MedPartners organization)that MedPartners' methods of doing business were flawedand would result in MedPartners' failure, and made otherrepresentations that disparaged and damaged MedPartners.MedPartners' complaint pleaded causes of action for breachof fiduciary duty, intentional interference with contractualrelations, breach of the implied covenant of good faith andfair dealing, and fraud.

SCMC's complaint in intervention alleged similar misconductby appellants and that appellants made disparaging anddamaging remarks about SCMC. SCMC's complaint inintervention pleaded claims for declaratory relief and forintentional interference with contractual relations.

Appellants asked Fireman's to defend and indemnifythem in connection with both MedPartners' complaint andSCMC's complaint in intervention. Appellants asserted theywere additional insureds under the CGL policy issued toMedPartners, and that the allegations of the complaintcreated a potentially covered claim for personal injury and/or advertising injury within the meaning of the CGL policy.Fireman's declined to defend or indemnify appellants.

B. The Present ActionAppellants filed this action against Fireman's, alleging itsrefusal to defend and indemnify them in the underlying actionbreached the contractual and good faith obligations owed tothem under the CGL policy. Fireman's demurrer to appellants'complaint asserted two arguments. First, Fireman's arguedappellants were not insureds under the CGL policy becauseBarnett and G. Mayer qualified as insureds only “withrespect to their duties as [MedPartners] officers,” and T.Mayer qualified as an insured only “for acts within thescope of [his] employment.” Fireman's argued that underMilazo v. Gulf Ins. Co. (1990) 224 Cal.App.3d 1528 [274Cal.Rptr. 632] (Milazo), acts by an additional insured thatare antagonistic or hostile to the business interests of thenamed insured cannot be acts “within the scope of theiremployment” or “with respect to their duties as officers”of the named insured. Second, Fireman's argued that in theunderlying action MedPartners and SCMC did not allege factssuggesting any possibility that appellants' *507 allegedmisconduct would be a covered act within the personal injuryor advertising injury coverages of the CGL policy.

Appellants argued that CGL policy contained no languagebarring coverage under the circumstances alleged in theunderlying action, and that Milazo was distinguishablebecause it involved insuring clauses and factualcircumstances different from those present here. Appellantsalso argued that even if Milazo excluded coverage forMedPartners' lawsuit, Milazo's rationale had no application toa third party action like the SCMC lawsuit. Finally, appellantsargued that in the underlying action MedPartners and SCMCalleged facts that could support liability for defamation withinboth the personal injury and the advertising injury coveragesof the CGL policy.

The trial court sustained Fireman's demurrer without leave

to amend and dismissed appellants' complaint. 1 This appealargues the trial court's ruling was in error.










1 The trial court ruled appellants were not insureds and

therefore could not state a cause of action against

Fireman's for breach of contract. This ruling also

precluded appellants from stating a cause of action

against Fireman's for breach of the covenant of good faith

and fair dealing. (Republic Indemnity Co. v. Schofield

(1996) 47 Cal.App.4th 220, 227 [54 Cal.Rptr.2d 637]

[persons who are not insureds cannot maintain action for

breach of the covenant of good faith and fair dealing].)

We conclude below that appellants have stated facts

sufficient to constitute a cause of action for breach of

contract, and Fireman's raises no independent argument

that the order sustaining the demurrer to appellants' cause

of action for breach of the covenant of good faith and fair

dealing was proper. Accordingly, we must reverse the

trial court's ruling as to appellants' breach of the covenant

of good faith and fair dealing claim for the same reasons

that support our reversal of the trial court's ruling as to

appellants' breach of contract action.

II. Standard of Review([2]) On appeal from a judgment dismissing an action aftersustaining a demurrer we give the complaint a reasonableinterpretation, and treat the demurrer as admitting all materialfacts properly pleaded, but not the truth of contentions,deductions or conclusions of law. We reverse if the plaintiffhas stated a cause of action under any legal theory. (Walkerv. Allstate Indemnity Co. (2000) 77 Cal.App.4th 750, 754 [92Cal.Rptr.2d 132].) However, we affirm the judgment if anyone of the several grounds of demurrer is well taken. (Weikelv. TCW Realty Fund II Holding Co. (1997) 55 Cal.App.4th1234, 1244 [65 Cal.Rptr.2d 25].) We apply de novo reviewto decide whether it was proper to sustain the demurrerbecause that ruling involved construction of the CGL and itsapplication to the facts alleged in the underlying lawsuits.(Ray v. Farmers Ins. Exchange (1988) 200 Cal.App.3d 1411,1415-1416 [246 Cal.Rptr. 593].) *508

III. Principles Governing Duty to Defend([3]) The interpretation of the meaning of an insurance policyand the scope of coverage are questions of law. (WesternMutual Ins. Co. v. Yamamoto (1994) 29 Cal.App.4th 1474,1481 [35 Cal.Rptr.2d 698].) Whether a third party actionasserts a potentially covered claim under the policy triggeringthe duty to defend requires us to interpret the languageof the insuring agreement and is a question of law. (AlexRobertson Co. v. Imperial Casualty & Indemnity Co. (1992)8 Cal.App.4th 338, 342-343 [10 Cal.Rptr.2d 165] [potentialfor coverage under insuring language presents issue of law];Century Transit Systems, Inc. v. American Empire Surplus

Lines Ins. Co. (1996) 42 Cal.App.4th 121, 125-126 [49Cal.Rptr.2d 567] [potential for coverage in light of policyexclusions presents question of law]; Union Oil Co. v.International Ins. Co. (1995) 37 Cal.App.4th 930, 936 [44Cal.Rptr.2d 4] [whether clause is ambiguous and whetherinsured has objectively reasonable expectation of coverageare questions of law subject to de novo review on appeal].)

Fireman's does not deny that the CGL policy covers liabilityof its insureds for defamation and requires Fireman's todefend appellants against a lawsuit in which they werepotentially liable for defamatory statements made in their

insured capacities. 2 ([4]) An insurer must defend any actionthat seeks damages potentially within the coverage of thepolicy. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263,275 [54 Cal.Rptr. 104, 419 P.2d 168].) Conversely, the insurerowes no duty to defend when the third party complaint “ 'canby no conceivable theory raise a single issue [that] could bringit within the policy coverage.' ” (Montrose Chemical Corp.v. Superior Court (1993) 6 Cal.4th 287, 300 [24 Cal.Rptr.2d467, 861 P.2d 1153] [quoting Gray, supra, at p. 276, fn. 15],italics omitted.) However, to be entitled to a defense, “theinsured must prove the existence of a potential for coverage,while the insurer must establish the absence of any suchpotential. In other words, the insured need only show that theunderlying claim may fall within policy coverage; the insurermust prove it cannot.” (Montrose, supra, at p. 300, italicsomitted.) The determination of whether the duty to defendexists is made initially by comparing the allegations in thethird party *509 complaint with the terms of the policy, andconsidering extrinsic facts that reveal a possibility the claimmay be covered by the policy. The existence of the duty todefend turns on all facts known by the insurer at the inceptionof the third party lawsuit. (Id. at p. 295.) If the facts allegedby the third party or known to the insurer create any potentialfor indemnity under the policy, the insurer must provide adefense even though noncovered acts are also alleged bythe third party action. (Horace Mann Ins. Co. v. Barbara B.(1993) 4 Cal.4th 1076, 1084 [17 Cal.Rptr.2d 210, 846 P.2d792].)

2 Barnett and G. Mayer qualified as insureds only “with

respect to their duties as [MedPartners] officers,” and T.

Mayer qualified as an insured only “for acts within the

scope of [his] employment” with MedPartners. However,

there is no dispute that if T. Mayer (while acting within

the scope of his employment with MedPartners) or

Barnett or G. Mayer (while discharging their duties

as officers of MedPartners) defamed a third party













































claimant and were sued for defamation, Fireman's would

be obligated to defend and indemnify them in the

defamation suit.

In this case, we address two issues. First, assuming appellantswere insureds under the CGL policy, did the underlyingaction assert a potentially covered claim against them; andsecond, did appellants qualify as insureds under the CGLpolicy?

IV. Analysis

A. The Defamation Claims Fall

Within the Personal Injury Coverage 3

([5]) The personal injury coverage of the CGL policy providescoverage for “injury ... arising out of one or more of thefollowing offenses: ... d. Oral or written publication ofmaterial that slanders or libels a person or organization ordisparages a person's or organization's goods, products orservices.” This clause covers claims against the insured fordefamation. (Cf. Truck Ins. Exchange v. Bennett (1997) 53Cal.App.4th 75, 83-86 [61 Cal.Rptr.2d 497].) Appellantsargue the underlying action raised a potentially coveredclaim for defamation because the complainants allegedthat appellants told numerous persons that MedPartners'methods of doing business were flawed and would resultin MedPartners' failure, and made other representations thatdisparaged and damaged MedPartners and SCMC. *510These allegations, argue appellants, trigger the personalinjury coverage of the CGL policy.

3 Appellants also suggest the nascent defamation claims

are covered under the advertising injury coverage

provided by the CGL policy. However, the advertising

injury section provides coverage if the injury was

“caused by an offense committed in the course of

advertising your goods, products or services.” Most

courts have limited the scope of this coverage by the

common sense understanding that advertising activities

mean widespread promotional activities directed to the

public at large (see Bank of the West v. Superior Court

(1992) 2 Cal.4th 1254, 1276, fn. 9 [10 Cal.Rptr.2d 538,

833 P.2d 545]). Appellants present neither argument

nor authority supporting a contrary interpretation of this

coverage. Moreover, although appellants peremptorily

argue that it is possible T. Mayer defamed MedPartners

during widespread promotional activities directed to

the public at large, they cite nothing in the record

supporting this possibility and do not attempt to

explain how an employee could defame his or her

employer during promotional activities and nevertheless

be deemed to have been acting within the scope of

employment. Accordingly, we decline to further address

this suggestion. (Dills v. Redwoods Associates, Ltd.

(1994) 28 Cal.App.4th 888, 890, fn. 1 [33 Cal.Rptr.2d

838].)

Fireman's argues, however, that personal injury coveragesof liability poli-cies apply only to acts enumerated by thepolicy as covered offenses. (Fibreboard Corp. v. HartfordAccident & Indemnity Co. (1993) 16 Cal.App.4th 492, 511[20 Cal.Rptr.2d 376].) It cites Lindsey v. Admiral Ins. Co.(N.D. Cal. 1992) 804 F.Supp. 47, 52 for the proposition thatthe insurer has no obligation to defend unless the underlyingcomplaint alleges all of the elements necessary to establish anenumerated offense. From this foundation, Fireman's arguesthe complaints in the underlying action did not allege all of theelements necessary to state a cause of action for defamation,

and therefore it had no duty to defend the underlying action. 4

4 Fireman's also cites Gunderson v. Fire Ins. Exchange

(1995) 37 Cal.App.4th 1106, 1114 [44 Cal.Rptr.2d 272]

as holding that, where the underlying complaint does not

allege a covered claim, an insured may not manufacture

coverage by speculating about extraneous facts or ways

in which the third party claimant might amend its

complaint at some future date to bring the claim within

the policy's coverage. From this predicate, Fireman's

argues it had no duty to defend because the third

party complaint did not allege appellants' liability for

defamation and required speculation about extraneous

facts that the third party might or might not assert by

amendment. However, Gunderson recognized that the

test for the duty to defend is whether the facts known to

the insurer at the time of tender of the defense, both from

the allegations on the face of the third party complaint

and from extrinsic information available to it at the time,

created a potential for coverage under the terms of the

policy. (Id. at p. 1114.) Gunderson held merely that on

the facts before it the third party complaint alleged claims

for which there was no possibility of coverage, there

were no extrinsic facts known at the time of the tender

that would give rise to a covered claim, the extrinsic

facts cited by the insured would not, even if true, have

established a covered claim, and the insurer did not have

a continuing duty to investigate whether there was a

potential for coverage after making an informed decision

that there was no potential for coverage. (Id. at pp.

1115-117.)

However, the duty to defend arises when the facts alleged inthe underlying complaint give rise to a potentially coveredclaim regardless of the technical legal cause of action pleaded























by the third party. (CNA Casualty of California v. SeaboardSurety Co. (1986) 176 Cal.App.3d 598, 606-607 [222Cal.Rptr. 276], disapproved on another point in MontroseChemical Corp. v. Superior Court, supra, 6 Cal.4th at pp.296-298.) The complaints in the underlying action allegedappellants told third persons that MedPartners' methods ofdoing business were flawed and would result in its failureand made other representations that disparaged and damagedMedPartners and SCMC. These allegations trigger at least apotential for coverage under the personal injury coverage for

defamation provided by the CGL policy. 5 *511

5 Fireman's asserts a defamation claim requires that the

plaintiff allege the defendant made statements that are

published, untrue, impugn the plaintiff's integrity, and

are statements of fact rather than opinion, and that these

elements were not pleaded in the underlying action. In

California, however, the plaintiff need only plead that

the defendant published specified types of defamatory

statements; the plaintiff need not specially allege

the statements were false. (5 Witkin, Cal. Procedure

(4th ed. 1997) Pleading, §§ 694-696, pp. 154-156.)

The underlying complaint alleged publication to third

persons, and the content of the statements were allegedly

disparaging. These allegations sufficed to give rise to a

potentially covered claim.

B. The Complaint Stated Sufficient Facts to AllegeFireman's Breached a Duty to Defend Barnett

and G. Mayer Against MedPartners' Complaint([6]) Our discussion of the coverage afforded by the CGLpolicy to appellants for any defamation claim treated theunderlying action as having been filed by parties with norelationship to the CGL policy. However, the underlyingaction by MedPartners is a claim by the named insured underthe CGL policy. Appellants are covered as additional insuredsunder that policy (subject to any applicable exclusionarylanguage) to the extent they were engaged in discharging theirduties as corporate officers or acted within the scope of theiremployment.

When a person seeks coverage as an additional insuredunder a policy issued to a corporation as the named insured,an officer or employee of the corporation is entitled to adefense if he or she was acting in an insured capacity whenallegedly engaged in the injury-producing conduct. (Seegenerally Olson v. Federal Ins. Co. (1990) 219 Cal.App.3d252, 260-262 [268 Cal.Rptr. 90].) Section II of the CGLpolicy identifies who qualifies as additional insureds underthe CGL policy; it provides that executive officers of

MedPartners are “insureds, but only with respect to theirduties as your officers ....” The allegations of the complaint,

which we accept as true on demurrer, 6 were that Barnettand G. Mayer “[a]t all times relevant ... were executiveofficers of MedPartners, acting with respect to their duties asMedPartners executive officers,” and that they “were actingto advance the interests of MedPartners” when they expressedconcerns that the changes implemented by MedPartnerswould violate California's prohibition against the corporatepractice of medicine. These allegations, if true, could showthat Barnett's and G. Mayer's defamatory statements (e.g.,that MedPartners' methods of doing business were flawed andwould result in MedPartners' failure and other representationsthat disparaged and damaged MedPartners) were made intheir capacities as executive officers seeking to dischargetheir duties to assure that MedPartners fulfilled its legalobligations. Accordingly, there exists a potential that Barnettand G. Mayer were acting in an insured capacity whenthey allegedly engaged in the injury-producing conduct, and*512 therefore Barnett and G. Mayer have stated a cause of

action against Fireman's for breach of the duty to defend theMedPartners' complaint.

6 Fireman's argues that a court does not on demurrer accept

as true allegations contradicted by exhibits attached to

the complaint, but makes no effort to demonstrate the

relevance of this principle. Fireman's does not explain

how the exhibits contradict appellants' allegation that

they were acting as officers or employees seeking to

further the interests of their corporation at the time of

making the statements.

However, the claim by T. Mayer stands on a differentfooting because, unlike the protection afforded to officers,the employee subdivision of section II of the CGL policy thatextends coverage to T. Mayer as an employee of MedPartnersexpressly excludes or limits coverage based on the identityof the party making the claim. The employee section (§ II,subd. 2.a.), which covers employees “for acts within thescope of their employment,” specifies in pertinent part that“no employee is an insured for: [¶] ... [b]odily injury orpersonal injury: [¶] ... [t]o you ....” (Italics added.) Becausedefamation is covered only by virtue of the personal injurycoverages of the CGL policy, the limitation contained insection II, subdivision 2.a.(1)(a) excludes from coverageany claim against an employee for defaming the namedinsured. Because the only covered offense potentially raisedby the MedPartners' complaint against T. Mayer was that hedefamed MedPartners, the policy exclusion eliminates any














potential that T. Mayer would be covered for MedPartners'sclaim against him.

Fireman's cites several cases to support its argument thatwhen an individual is an additional insured under a policyissued to an entity and the entity sues the individual forconduct detrimental or injurious to the entity, as a matterof law there can be no duty to defend under the primaryinsured's policy. However, the cases cited by Fireman's donot support that broad proposition. The principal case citedby Fireman's is Milazo, supra, 224 Cal.App.3d 1528, inwhich a partnership was insured under a comprehensivegeneral liability policy, and a partner was an additionalinsured “ 'with respect to his liability as [a partner].' ” (Id.at pp. 1535-1536, italics omitted.) The partnership suedMilazo, an individual partner, alleging that he breached hisfiduciary duty by misappropriating a partnership opportunity;the insurer defended Milazo under a reservation of rights.The jury verdict held Milazo liable for misappropriating thepartnership opportunity, and the issue on appeal was whetherthe insurer was obligated to indemnify Milazo. (Id. at pp.1531-1533.) The Milazo court, after concluding the policycovered the partnership's liabilities and provided coverageto Milazo as an additional insured only to the extent hehad derivative liability for the partnership's liabilities, heldthere was no obligation to indemnify him in his insuredcapacity. The Milazo court reasoned that a partner whoacts to misappropriate a partnership asset or opportunity isnecessarily engaged in conduct adverse to the partnership, andbecause the partnership entity could not be liable for suchmisconduct, Milazo could have no derivative liability and*513 therefore the insurance did not cover the claim against

him. 7 (Id. at pp. 1537-1539.)

7 The Milazo court also noted that a partner who acts

to misappropriate a partnership asset or opportunity

is necessarily engaged in conduct contrary to, rather

than on behalf of, the partnership, and thus necessarily

was acting in his capacity as an individual rather than

as a partner. (Milazo, supra, 224 Cal.App.3d at pp.

1531-1533.)

Milazo is distinguishable from the instant case in importantaspects. First, unlike the insuring language that the Milazocourt construed as providing coverage for only derivativeliability, the insuring language of the CGL policy doesnot appear to condition coverage for executive officers onthe requirement that the corporation have direct liabilityfor their misconduct. Second, and more importantly, theMilazo court evaluated the duty to indemnify after a

trial that established the additional insured's misconduct

was necessarily committed in his individual capacity. 8 Incontrast, Fireman's duty to defend is tested by whether therewas any potential that Barnett's and G. Mayer's allegedconduct was committed with respect to their duties asexecutive officers. (Accord, Farr v. Farm Bureau Ins. Co.of Nebraska (8th Cir. 1995) 61 F.3d 677, 681, fn. 4 [test forcoverage is not whether slander falls within scope of dutiesof officer, but whether officers “were acting on behalf of thecorporation (as opposed to themselves) when they engagedin the alleged behavior”].) Because the complaint allegesBarnett and G. Mayer were seeking to further the corporateinterests when they criticized MedPartners, it is possible theywere engaged with respect to their duties as executive officerswhen they committed the alleged misconduct and therefore apotential for coverage exists.

8 The procedural posture of the present case likewise

distinguishes it from the recent decision in Lomes v.

Hartford Financial Services Group, Inc. (2001) 88

Cal.App.4th 127 [105 Cal.Rptr.2d 471]. In Lomes, the

named insured corporation sued the plaintiff alleging, in

part, that he had defamed it during conversations with a

lender in April 1996; at the time of the defamation, he

had already been fired as an officer but had remained

a director of the corporation. The insurer declined

to defend the plaintiff (an additional insured) in the

corporation's lawsuit; the plaintiff then sued the insurer

(the coverage lawsuit). In the papers filed in support of

cross-motions for summary adjudication in the coverage

lawsuit, the undisputed evidence included admissions by

the plaintiff that, at the time of the defamatory comments,

he was not an officer of the corporation, he was working

elsewhere, and he had not performed any services for

the corporation after August 1995. Because he clearly

had not been acting as an officer at the time of the

defamation, and because the Lomes court concluded

he could not have been acting as a director because

there was no evidence the board had authorized him

to contact the lender, he was not acting in any insured

capacity. (Id. at pp. 132-133.) Lomes's analysis revolved

around the absence of any evidence that the plaintiff

was discharging his corporate duties when he defamed

the entity. Here, however, we must assume the truth

of Barnett's and G. Mayer's allegations that they were

acting as officers seeking to further the interests of the

corporation.

The other California cases cited by Fireman's do not supportFireman's broad contention. For example, in *514 Olson v.Federal Ins. Co., supra, 219 Cal.App.3d 252, the plaintiffargued he was entitled to a defense as an additional insured















under a policy issued to Olson Farms; the court rejected theclaim because the dispute did not arise out of his conductas a director of Olson Farms but instead involved a disputeover the management of a different corporation. (Id. at pp.260-262.) In Plate v. Sun-Diamond Growers (1990) 225Cal.App.3d 1115 [275 Cal.Rptr. 667], the court did notconsider the interpretation of an insurance policy or the dutyto defend; the issue was whether the corporate agents wereentitled to indemnity from their employer under CorporationsCode section 317. In Transamerica Ins. Co. v. Sayble (1987)193 Cal.App.3d 1562 [239 Cal.Rptr. 201], the court heldmerely that an errors and omissions policy issued to anattorney required allegations of negligence while renderingservices to his clients and did not provide coverage for adispute arising from dissolution of a law partnership. Finally,in Republic Indemnity Co. v. Schofield, supra, 47 Cal.App.4th220, the court held only that a workers' compensation policydid not protect the employer's officers against a claimfor constructive discharge because the policy insured theemployer, and the officers were not the employer.

The authorities from other jurisdictions cited by Fireman's arenot persuasive. In Farr v. Farm Bureau Ins. Co. of Nebraska,supra, 61 F.3d 677, the named insured corporation sued theplaintiffs (former directors or officers of the corporation),alleging they breached their fiduciary duty by trying tothwart a sale of the corporation. The insurer rejected theplaintiffs' tender of the defense to the insurer, the plaintiffssued the insurer, and the trial court ruled after a benchtrial that there was no duty to defend the plaintiffs under acomprehensive general liability policy worded similarly tothe CGL policy. (Id. at pp. 678-679.) Farr noted the officerswere insureds “ 'only with respect to their duties' ” as officers,and concluded the insurer had no duty to defend becausean officer cannot be acting with respect to his or her dutieswhen that fiduciary duty to the corporation is breached, andall torts pleaded against the officers in the underlying actionnecessarily involved breaching their fiduciary obligationsto the corporation. (Id. at pp. 680-681.) The Farr courtbuttressed its conclusion by noting the purpose and intent ofthe policies were to cover the corporation's liability to thirdpersons rather than internal disputes among shareholders. Tothe extent this observation contains an implicit interpretationof the policies in Farr as providing protection to officers onlywhen the claim against them is lodged by third persons, theCGL policy does not limit coverage for officers based on theidentity of the claimant.

We decline to apply Farr to this case. First, Farr is silenton what precise conduct the officers in Farr were accusedof committing and “assume [d] without deciding that the[conduct] giving rise to the [underlying lawsuit] *515 wouldsatisfy the policy's definition of 'personal injury.' ” (Farrv. Farm Bureau Ins. Co. of Nebraska, supra, 61 F.3d atp. 680.) This assumption contributed to an incomplete, andin our opinion, erroneous, analysis of the duty to defendbecause deciding whether an officer's conduct occurred withrespect to his duty as an officer cannot be determined in avacuum. Although the (undisclosed) conduct of the officersin Farr may have been outside the duties of an officer,Fireman's cites no authority suggesting that an officer whoseeks to further the interests of his corporation by criticizingmanagement changes, or by erroneously suggesting thesechanges could violate the law or result in the failure of thecorporation, is as a matter of law acting outside of his dutiesor in breach of his fiduciary obligations. Second, a centraltenet of Farr's analysis that “each of the torts pleaded [in theunderlying action] requires a breach of one or more fiduciaryduties” shows the Farr court focused on the causes of actionpleaded rather than the operative misconduct, which is notthe approach used in California for purposes of evaluatingthe duty to defend. (CNA Casualty of California v. SeaboardSurety Co., supra, 176 Cal.App.3d at pp. 606-607 [it isfacts, not a technical, legal cause of action pleaded by thirdparty, that give rise to a potential for a covered claim].)Finally, Farr states that the insurance policies were intendedto protect officers when they are “properly carrying out theirduties ... and are designed to protect the officer who actsto advance the business interests of the corporation, not theofficer who acts in a manner that is antagonistic toward the

corporation's business interests.” 9 (Farr v. Farm Bureau Ins.

Co. of Nebraska, supra, 61 F.3d at p. 681.) The Farr courtconcluded the officers there were not acting in an insured

manner. 10 Here, Barnett and G. Mayer alleged they werecarrying out their duties as officers and were acting to furtherMedPartners' interests.

9 This observation was confirmed when the Farr court,

rejecting the insurer's claim that there could be no

coverage because defamation is not within the scope of

an officer's duties, stated that: “this is not the proper

inquiry. Rather, the proper inquiry is whether [the

officers] were acting on behalf of the corporation (as

opposed to themselves) when they engaged in the alleged

behavior.” (Farr v. Farm Bureau Ins. Co. of Nebraska,

supra, 61 F.3d at p. 681, fn. 4.)




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10 The other out-of-state authority, Winther v. Valley Ins.

Co. (1996) 140 Or.App. 459 [915 P.2d 1050], is less

persuasive than Farr. There, the court concluded that the

language of the policy, providing coverage “ 'only with

respect to the conduct of your business,' ” covered only

liabilities arising out of activities necessary or incidental

to buying and selling the goods and services sold by the

entity, and that disputes between partners related to their

rights in the entity were not part of the “ 'conduct of

[the] business.' ” (Id. at p. 1052, italics omitted.) Winther

has no application to either the policy language or the

conduct of the officers in this case.

We conclude that, at least for purposes of demurrer, Barnettand G. Mayer, but not T. Mayer, have stated facts sufficientto state a cause of action against Fireman's for breach of theduty to defend them against MedPartners' complaint in theunderlying action. *516

C. The Complaint Stated Sufficient Facts toAllege Fireman's Breached a Duty to Defend

All Appellants Against SCMC's Complaint([7]) Fireman's does not dispute that the CGL policy insuresappellants against claims for defamation made by third partiesif appellants were acting in their insured capacity at the timethe alleged defamatory comments were made. Accordingly,if Barnett and G. Mayer were sued for defaming a third partywhile executing their “duties as [MedPartners] officers,” or ifT. Mayer was sued for defaming a third party while “act[ing]within the scope of [his] employment,” Fireman's would havea duty to defend and indemnify appellants. Both elements areadequately alleged here. First, in the underlying action, theSCMC complaint alleged facts creating a potential claim fordefamation against appellants. Second, appellants' complaintalleged they were at all relevant times acting with respect totheir duties as MedPartners' executive officers or within the

scope of their employment by MedPartners. 11

11 Fireman's argues it had no duty to defend because the

SCMC lawsuit demonstrates SCMC sought recovery

against Barnett for acts he committed as an owner

or officer of SCMC, and sought recovery against the

Mayers as Barnett's coconspirators, rather than for acts

they committed as officers or employees of MedPartners.

Although the SCMC complaint does allege misfeasance

by Barnett as an owner or officer of SCMC, it does

not renounce any claims it had against either Barnett

or the Mayers for acts they may have committed as

officers or employees of MedPartners. (Horace Mann

Ins. Co. v. Barbara B., supra, 4 Cal.4th at p. 1084 [where

facts alleged by the third party create any potential

for indemnity under the policy, insurer must provide a

defense even though noncovered acts are also alleged by

the third party].)

Fireman's argues SCMC cannot be treated as a third partyclaimant because SCMC, as a subsidiary of a named insured

under the CGL policy, 12 is deemed to be an additional namedinsured under the CGL policy, and therefore the same analysisapplicable to the duty to defend MedPartners' claim shouldbe applied to the duty to defend SCMC's claim. However,the CGL policy specifies a subsidiary of a named insuredcorporation qualifies as an additional named insured underthe CGL policy only if a series of conditions are met. Oneof the conditions is that the specifically named insured parentcorporation owns ”a controlling interest in [the subsidiary] ofgreater than 50 [percent] of the stock or assets.“ There are noallegations or extrinsic facts that establish SCMC bears therequisite relationship to Caremark that would qualify SCMCas an additional named insured, and we therefore rejectFireman's claim that SCMC was a named insured, excusingFireman's from its duty to defend appellants against SCMC's*517 claim. (Montrose Chemical Corp. v. Superior Court,

supra, 6 Cal.4th at p. 300 [to be entitled to a defense ”theinsured need only show that the underlying claim may fallwithin policy coverage; the insurer must prove it cannot“],original italics.)

12 Caremark was added as a named insured to the CGL

policy. The precise relationship between Caremark

and SCMC is hazy: the MedPartners' complaint

characterized SCMC as an “indirect subsidiary” of

Caremark, and the SCMC complaint labeled their

relationship as a “Friendly PC or ”indirect subsidiary“ of

Caremark.

DispositionThe judgment is reversed. Appellants are entitled to costs onappeal.

Kremer, P. J., and Huffman, J., concurred.Appellant's petition for review by the Supreme Court wasdenied August 29, 2001. Kennard, J., was of the opinion thatthe petition should be granted. *518








E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co., 590 F.Supp.2d 1244 (2008)



Distinguished by Bullpen Distribution, Inc. v. Sentinel Ins. Co., Ltd.,

N.D.Cal., June 1, 2012

590 F.Supp.2d 1244United States District Court,

N.D. California,San Jose Division.

E.PIPHANY, INC., Plaintiff,v.

ST. PAUL FIRE & MARINEINSURANCE CO., Defendant.

No. C 08-02621 JW. | Dec. 16, 2008.

SynopsisBackground: Insured filed suit against liability insurer,asserting breach of contract claim and seeking declarationthat insurer had duty to defend insured in underlyinglitigation, pursuant to policy's technology global companioncommercial liability protection. Insured moved for partialsummary judgment, and insurer moved for summaryjudgment.

[Holding:] The District Court, James Ware, J., held thatduty to defend in underlying trade libel suit was triggered byallegations of disparagement by implication.

Plaintiff's motion granted.

West Headnotes (17)

[1] Federal Civil ProcedureAbsence of Genuine Issue of Fact in

General

Federal Civil ProcedureRight to Judgment as Matter of Law

As with a motion for summary judgment, partialsummary judgment is proper if the pleadings,depositions, answers to interrogatories, andadmissions on file, together with the affidavits,if any, show that there is no genuine issue as to

any material fact and that the moving party isentitled to judgment as a matter of law. Fed.RulesCiv.Proc.Rule 56(c), 28 U.S.C.App.(2000 Ed.)

[2] Federal Civil ProcedureBurden of Proof

The party moving for summary judgment alwaysbears the initial responsibility of informingthe district court of the basis for its motion,and identifying the evidence which it believesdemonstrates the absence of a genuine issue ofmaterial fact, and then the non-moving partymust identify specific facts that might affect theoutcome of the suit under the governing law, thusestablishing that there is a genuine issue for trial.Fed.Rules Civ.Proc.Rule 56(c, e), 28 U.S.C.App.(2000 Ed.)

[3] Federal Civil ProcedureWeight and Sufficiency

When evaluating a motion for partial or fullsummary judgment, the district court views theevidence through the prism of the evidentiarystandard of proof that would pertain at trialby drawing all reasonable inferences in favorof the non-moving party, including questionsof credibility and of the weight that particularevidence is accorded. Fed.Rules Civ.Proc.Rule56(c), 28 U.S.C.App.(2000 Ed.)

[4] Federal Civil ProcedurePartial Summary Judgment

District court determines whether the non-moving party's specific facts, coupled withdisputed background or contextual facts, aresuch that a reasonable jury might return averdict for the non-moving party, and in such acase, partial summary judgment is inappropriate.Fed.Rules Civ.Proc.Rule 56(c), 28 U.S.C.App.(2000 Ed.)

[5] Federal Civil ProcedureMateriality and Genuineness of Fact Issue

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Where a rational trier of fact could not find forthe non-moving party based on the record as awhole, there is no genuine issue for trial as woulddefeat the motion for partial summary judgment.Fed.Rules Civ.Proc.Rule 56(c), 28 U.S.C.App.(2000 Ed.)

[6] Federal Civil ProcedureBy Both Parties

The filing of cross-motions for partial summaryjudgment or summary judgment does notnecessarily mean that the material facts are,indeed, undisputed. Fed.Rules Civ.Proc.Rule56(c), 28 U.S.C.App.(2000 Ed.)

[7] Federal Civil ProcedurePartial Summary Judgment

Upon filing of cross-motions for partial summaryjudgment or summary judgment, the denial ofone motion does not necessarily require the grantof another. Fed.Rules Civ.Proc.Rule 56(c), 28U.S.C.App.(2000 Ed.)

[8] Federal Civil ProcedureBy Both Parties

Upon filing of cross-motions for partial summaryjudgment or summary judgment, the motionsmust be evaluated in accordance with the claimor defense which is the subject of the motion andin accordance with the burden of proof allocatedto each party. Fed.Rules Civ.Proc.Rule 56(c), 28U.S.C.App.(2000 Ed.)


[9] InsuranceIn General; Standard

Under California law, a liability insurer has abroad duty to defend its insured against claimsthat create a potential for indemnity.


[10] Insurance

In General; Standard

Under California law, the liability insurer mustdefend insured against a suit which potentiallyseeks damages within the coverage of the policy.


[11] InsuranceIn General; Standard

Since the duty to defend is broader than the dutyto indemnify, under California law, an insurermay have a duty to defend the insured eventhough no damages are ultimately awarded.


InsuranceMatters Beyond Pleadings

When analyzing an insurer's duty to defend theinsured, under California law, district court looksto the underlying complaint and all facts knownto the insurer from any source.



InsuranceMatters Beyond Pleadings

InsuranceTermination of Duty; Withdrawal

Under California law, if any facts stated or fairlyinferable in the complaint, or otherwise knownor discovered by the insurer, suggest a claimpotentially covered by the policy, the insurer'sduty to defend the insured arises and is notextinguished until the insurer negates all factssuggesting potential coverage.

[14] Libel and SlanderNature and Elements in General

In California, a disparaging statement about acompetitor's product that causes the competitorto suffer pecuniary damages is actionable astrade libel.















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“Trade libel” and “product disparagement” areinjurious falsehoods that interfere with business.


Unlike classic defamation, trade libel andproduct disparagement are not directed at theplaintiff's personal reputation but rather at thegoods a plaintiff sells or the character of his otherbusiness.

[17] InsuranceDefamation or Disparagement

InsuranceDefamation or Disparagement

Liability insurer's duty to defend insured inunderlying trade libel suit was triggered, underCalifornia law, by disparagement allegations inunderlying complaint that implicated potentialfor personal injury and advertising injurycoverage, under policy's technology globalcompanion commercial liability protection, eventhough insured's publication did not expresslyidentify disparaged product or business, whereunderlying complaint alleged that insured madefalse claims about superiority of insured's ownproducts that clearly and necessarily impliedinferiority of competitor's products, resultingin pecuniary and reputational damages tocompetitor.



*1246 David A. Gauntlett, James A. Lowe, Christopher Lai,Gauntlett & Associates, Irvine, CA, for Plaintiff.

Bruce D. Celebrezze, Michael A. Topp, Sedgwick, Detert,Moran & Arnold LLP, San Francisco, CA, for Defendant.

Opinion

*1247 ORDER GRANTING PLAINTIFF'SMOTION FOR PARTIAL SUMMARY

JUDGMENT ON DEFENDANT'S DUTY TODEFEND; DENYING DEFENDANT'S CROSS-

MOTION FOR SUMMARY JUDGMENT

JAMES WARE, District Judge.

I. INTRODUCTION

E.piphany (“Plaintiff”) brings this diversity action against St.Paul Fire & Marine Insurance Co. (“Defendant”), allegingbreach of contract and seeking declaratory relief under 28U.S.C. § 2201. Plaintiff insurance policyholder alleges thatDefendant insurance carrier had a duty to defend Plaintiff

in an underlying litigation (“Underlying Action”), 1 pursuantto the terms of the parties' insurance policy (“Policy”), andthat Defendant violated the terms of the Policy by failing toprovide a defense.

1 Sigma Dynamics, Inc. v. E.piphany, Inc., Case No.

C 04-0569 MJJ, 2004 WL 3669840 (N.D. Cal. filed

February 10, 2004).

Presently before the Court are the parties' cross-motions for

summary judgment. 2 The Court conducted a hearing onOctober 27, 2008. Based on the papers submitted to dateand oral argument, the Court GRANTS Plaintiff's Motion forPartial Summary Judgment and DENIES Defendant's Cross-Motion for Summary Judgment.

2 (Plaintiff's Motion for Partial Summary Judgment on

St. Paul Fire & Marine Insurance Company's Duty to

Defend and Breach of Its Duty to Defend, hereafter,

“Motion,” Docket Item No. 5; Defendant's Cross-

Motion for Summary Judgment, hereafter, “Defendant's

Motion,” Docket Item No. 27.)

II. BACKGROUND

A. Undisputed FactsStarting on June 24, 2002, Plaintiff was covered byTechnology Global Companion Commercial Liability

















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Protection, as part of an overall Policy 3 taken out with

Defendant. 4 Coverage under the Policy continued until June24, 2003. (Id.) In relevant parts, the Policy provided asfollows:

3 Policy number TE09405602.

4 (Declaration of James C. Zacharski in Opposition to

Plaintiff's Partial Motion for Summary Judgment and

in Support of Defendant's Cross-Motion for Summary

Judgment, Ex. A, hereafter, “Zacharski Decl.,” Docket

Item No. 29.)

Personal injury liability. We'll pay amounts any protectedperson is legally required to pay as damages for coveredpersonal injury that:

• results from your business activities

• is caused by a personal injury offense committed whilethis agreement is in effect.

Personal injury means injury, other than bodily injuryor advertising injury, that's caused by a personal injuryoffense.

Personal injury offense means any of the followingoffenses ...

• Libel, or slander, in or with covered material

• Making known to any person or organization coveredmaterial that disparages the business, premises,products, services, work, or completed work ofothers ...

Covered material means any material in any form ofexpression, including material made known in or withany electronic means of communication, such as theInternet.

Advertising Injury Liability. We'll pay amounts anyprotected person is *1248 legally required to pay asdamages for covered advertising injury that:

• results from the advertising of your products, yourwork, or your completed work; and

• is caused by an advertising injury while this agreementis in effect ...

Advertising Injury means injury, other than bodily injuryor personal injury, that's caused by an advertising injuryoffense.

Advertising injury offense means any of the followingoffenses:

• Libel, or slander, in or with covered material.

• Making known to any person or organization coveredmaterial that disparages the business, premises,products, services, work, or completed work ofothers ...

Advertising means attracting the attention of others byany means for the purpose of:

• seeking customers or supporters; or

• increasing sales or business.

Advertising material means any covered material that:

• is subject to copyright law; and

• others use and intend to attract attention in theiradvertising ...

Right and duty to defend a protected person. We'llhave the right and duty to defend any protected personagainst a claim or suit for injury or damage covered bythis agreement. We'll have such right and duty even ifall of the allegations of the claim or suit are groundless,false, or fraudulent. But we won't have a duty to performany other act or service ...

Exclusions-What This Agreement Won't Cover ...

Poor quality or performance. 5 We won't coveradvertising injury that results from the failure of yourproducts, your work, or your completed work to conformwith advertised quality or performance ... (Id.)

5 The Court notes Defendant's contention that this

“failure to conform” exclusion eliminates a potential

for coverage. (Defendant's Memorandum of Points and

Authorities (1) in Opposition to Plaintiff's Motion for

Partial Summary Judgment and (2) in Support of St.

Paul's Cross-Motion for Summary Judgment at 14,

hereafter, “Opposition,” Docket Item No. 28.) This case,

however, is not related to the performance of Plaintiff's

products. Rather, this action is based on alleged trade

libel committed by Plaintiff, with respect to negative



comparisons Plaintiff made about competitors vis-a-vis

Plaintiff's products. It is irrelevant whether Plaintiff's

products actually possessed the attributes advertised by

Plaintiff.

On February 10, 2004, Plaintiff was sued by SigmaDynamics, Inc. (“Sigma”) in the Northern District ofCalifornia. On July 15, 2004, Sigma filed a First AmendedComplaint (“Underlying Complaint”), which alleged causesof action for false advertising and unfair competition under15 U.S.C. § 1125(a) and California Business & Professions

Code §§ 17200, 17500. 6 The Underlying Complaint alleged,in relevant part:

6 (Declaration of Ryan J. Padden in Support of Plaintiff's

Motion for Partial Summary Judgment, Ex. 1, hereafter,

“Padden Decl.,” Docket Item No. 7.)

Sigma Dynamics and E.piphany are direct competitors inthe market for software products that enable businessesto more efficiently manage and optimize their customerinteractions. One important *1249 differentiator betweencompeting products in this market is whether the softwareis written in Java and is fully compliant with J2EEapplication server technology ... Since at least mid-2002,E.piphany has been falsely advertising its product suiteas “all Java” and “fully J2EE.” E.piphany's productsare not “all Java” or “fully J2EE,” and E.piphany'smisrepresentations about the underlying architecture andimplementation of its products have given it an unfair andundeserved advantage over competitors, some of whichdo offer, “all Java” and “fully J2EE” software solutions.E.piphany's misleading statements have caused prominentindustry and financial analysts to publish unfair productcomparisons and reviews, which have compounded theconfusion by E.piphany's direct statements to customersand prospective customers ... (Underlying Complaint ¶ 1.)

Using every channel at its disposal, E.piphany has made,and continues to make, false and misleading statementsabout its products and their performance. For example,at some point in 2002, E.piphany began advertising thatits product suite is “all Java” and “fully J2EE.” (Id.¶ 16.) E.piphany has made its claim to be “all Java”and “fully J2EE” a core part of its positioning in themarket, and claims a competitive advantage over othersoftware makers based on that alleged differentiator.(Id. ¶ 17.) Despite making public claims ... that it “isthe first full suite CRM vendor to market a completeproduct suite built on J2EE” and that it has released “the

only component-based, fully-J2EE complete CRM suiteavailable,” E.piphany's products have never been “allJava” nor “fully J2EE.” (Id. ¶ 18.)

On October 17, 2002, E.piphany issued its Q302earnings press release [which stated] “the launch ofE.6 Service in August completed the E.6 platform, theonly component-based, fully-J2EE complete CRM suiteavailable.” (Id. ¶ 23.) On October 23, 2003, duringE.piphany's Q303 earnings conference call, E.piphany'sCEO claimed that E.Phiphany is “the only full-footprintvendor who actually has a full J2EE architecture ... we'rethe only vendor that has that, and I think we have acouple year lead.” (Id. ¶ 26.) On January 14, 2003,E.piphany published a press release entitled E.piphanyAdvances Relationship with IBM by Delivering Open-Standards CRM, which claimed that the E.piphany E.6CRM suite provides “a fully integrated and certified one-vendor solution that delivers a true J2EE, standards-based architecture.” (Id. ¶ 28.)

On August 4, 2003, E.piphany published a press releaseentitled E.piphany Announces Support of BEA WeblogicPlatform 8.1, which claimed that “E.piphany offers theonly full-footprint CRM suite natively built on a service-oriented J2EE architecture.” (Id. ¶ 29.) E.piphany issueda worldwide press release on August 20, 2002, whichstated that “E.piphany is the first end-to-end CRMsuite designed and built on a unified J2EE-basedplatform.” (Id. ¶ 35.)

The foregoing literally false, deceptive, and misleadingrepresentations by E.piphany about its technologyhave damaged, and continue to present the likelihoodof damage, to Sigma Dynamics. E.piphany's literallyfalse, deceptive, and misleading representations havedamaged Sigma's market share, sales, profits, businessrelationships, reputation, and goodwill, and havecaused potential purchasers of Sigma's products andservices to choose E.piphany's instead of Sigma's. Suchrepresentations *1250 have caused E.piphany to gain,and Sigma to lose, profits, market share, reputation, andgoodwill. (Id. ¶ 43.)

On July 22, 2004, Plaintiff sent a letter to Defendant, whichtendered to Defendant the defense of claims asserted in theUnderlying Complaint. (Padden Decl., Ex. 3.) On July 27,2004, Defendant informed Plaintiff that Defendant did nothave a duty to defend Plaintiff under the terms of the Policy,on the grounds that the Underlying Complaint did not allegeany covered “personal injury” or “advertising injury.” (Id.,


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Ex. 4.) On September 21, 2005, Plaintiff attempted, throughcounsel, to re-tender the defense of Sigma's claims, whichDefendant again denied on February 17, 2006. (Id., Exs. 8, 9.)

Presently before the Court are Plaintiff's Motion for PartialSummary Judgment on Defendant's Duty to Defend andBreach of Its Duty to Defend and Defendant's Cross-Motionfor Summary Judgment.

III. STANDARDS

[1] [2] Although motions for partial summary judgmentare common, Rule 56 of the Federal Rules of Civil Procedure,which governs summary judgment, does not contain anexplicit procedure entitled “partial summary judgment.”As with a motion under Rule 56(c), partial summaryjudgment is proper “if the pleadings, depositions, answersto interrogatories, and admissions on file, together with theaffidavits, if any, show that there is no genuine issue as to anymaterial fact and that the moving party is entitled to judgmentas a matter of law.” Fed.R.Civ.P. 56(c). The purpose of partialsummary judgment “is to isolate and dispose of factuallyunsupported claims or defenses.” Celotex v. Catrett, 477U.S. 317, 323-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).The moving party “always bears the initial responsibility ofinforming the district court of the basis for its motion, andidentifying the evidence which it believes demonstrates theabsence of a genuine issue of material fact.” Id. at 323, 106S.Ct. 2548. The non-moving party must then identify specificfacts “that might affect the outcome of the suit under thegoverning law,” thus establishing that there is a genuine issuefor trial. Fed.R.Civ.P. 56(e).

[3] [4] [5] When evaluating a motion for partial or fullsummary judgment, the court views the evidence throughthe prism of the evidentiary standard of proof that wouldpertain at trial. Anderson v. Liberty Lobby Inc., 477 U.S.242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The courtdraws all reasonable inferences in favor of the non-movingparty, including questions of credibility and of the weightthat particular evidence is accorded. See, e.g. Masson v. NewYorker Magazine, Inc., 501 U.S. 496, 520, 111 S.Ct. 2419,115 L.Ed.2d 447 (1991). The court determines whether thenon-moving party's “specific facts,” coupled with disputedbackground or contextual facts, are such that a reasonable jurymight return a verdict for the non-moving party. T.W. Elec.Serv. Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626,631 (9th Cir.1987). In such a case, partial summary judgment

is inappropriate. Anderson, 477 U.S. at 248, 106 S.Ct. 2505.However, where a rational trier of fact could not find for thenon-moving party based on the record as a whole, there is no“genuine issue for trial.” Matsushita Elec. Indus. Co. v. ZenithRadio, 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538(1986).

[6] [7] [8] The filing of cross-motions for partialsummary judgment or summary *1251 judgment doesnot necessarily mean that the material facts are, indeed,undisputed. The denial of one motion does not necessarilyrequire the grant of another. See Atl. Richfield Co. v. FarmCredit Bank of Wichita, 226 F.3d 1138, 1147 (10th Cir.2000).The motions must be evaluated in accordance with theclaim or defense which is the subject of the motion and inaccordance with the burden of proof allocated to each party.

IV. DISCUSSION

Plaintiff contends that the Complaint in the UnderlyingAction triggered Defendant's duty to defend, because theUnderlying Complaint alleged “disparagement,” and thustriggered the potential for coverage under the terms of thePolicy. (Motion at 4-5.)

[9] [10] [11] Under California law, a liability insurer hasa broad duty to defend its insured against claims that create apotential for indemnity. Montrose Chem. Corp. v. Sup.Ct., 6Cal.4th 287, 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153 (1993)(internal citations omitted). “The carrier must defend a suitwhich potentially seeks damages within the coverage of thepolicy.” Gray v. Zurich Ins. Co., 65 Cal.2d 263, 275, 54Cal.Rptr. 104, 419 P.2d 168 (1966). Since the duty to defendis broader than the duty to indemnify, an insurer may havea duty to defend even though no damages are ultimatelyawarded. Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th1076, 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792 (1993).

[12] [13] When analyzing the duty to defend underCalifornia law, a court looks to the underlying complaintand “all facts known to the insurer from any source.” SeeMontrose Chem.Corp., 6 Cal.4th at 300, 24 Cal.Rptr.2d 467,861 P.2d 1153. This is because “the duty to defend, althoughbroad, is not unlimited; it is measured by the nature andkinds of risks covered by the policy.” Waller v. Truck Ins.Exchange, Inc., 11 Cal.4th 1, 19, 44 Cal.Rptr.2d 370, 900 P.2d619 (1995). However, “[i]f any facts stated or fairly inferablein the complaint, or otherwise known or discovered by the




































insurer, suggest a claim potentially covered by the policy, theinsurer's duty to defend arises and is not extinguished untilthe insurer negates all facts suggesting potential coverage.”Scottsdale Ins. Co. v. MV Transp., 36 Cal.4th 643, 655, 31Cal.Rptr.3d 147, 115 P.3d 460 (2005).

In this case, the Policy covers the offenses of “personalinjury” and “advertising injury,” which are defined inthe Policy as “[m]aking known to any person ororganization covered material that disparages the business,premises, products, services, work, or completed work ofothers.” (Zacharski Deck, Ex. A.) The parties do not disputethat the Policy, by its explicit terms, covers “disparagement.”Rather, the parties contest whether the Underlying Complaintmade allegations sufficient to demonstrate a potentialfor “disparagement” coverage, because the E.piphanypublications alleged in the Underlying Complaint did notspecifically identify Sigma or any Sigma products, but rathermade allegedly false representations about E.piphany's ownproducts.

[14] [15] [16] In California, a disparaging statementabout a competitor's product that causes the competitor tosuffer pecuniary *1252 damages is actionable as trade

libel. 7 See Microtec Research, Inc. v. Nationwide Mut.Ins. Co., 40 F.3d 968, 972-73 (9th Cir.1994). Californiacourts have held that to state a disparagement claim withinthe meaning of the Policy here at issue, the underlyingplaintiff must allege that defendant made false, injurious,or derogatory statements about a plaintiff's products, whichcaused it to suffer pecuniary damages. See, e.g., id.; Truck Ins.Exchange v. Bennett, 53 Cal.App.4th 75, 89, 61 Cal.Rptr.2d497 (1997). Trade libel and product disparagement are“injurious falsehoods that interfere with business. Unlikeclassic defamation, they are not directed at the plaintiff'spersonal reputation but rather at the goods a plaintiff sells orthe character of his other business.” Aetna Cas. & Sur. Co. v.Centennial Ins. Co., 838 F.2d 346, 351 (9th Cir.1988).

7 But see National Union Fire Ins. Co. of Pittsburgh, Pa.

v. Seagate Technology, Inc., 233 Fed.Appx. 614 (9th

Cir.2007) (finding under California law that a carrier had

a duty to defend when the relevant policy provided for

trade libel coverage, and where the underlying complaint

alleged statements by the policy holder that compared

its products to those of competitors without specifically

identifying the competitors or their products).

California courts have not explicitly determined whethera cause of action for disparagement can exist where

a publication does not expressly identify a disparagedproduct or business. Precedent does suggest, however, thatdisparagement by implication is actionable under Californialaw. In Blatty v. New York Times Co., the California SupremeCourt addressed First Amendment limits on defamationclaims, including claims for trade libel. 42 Cal.3d 1033,232 Cal.Rptr. 542, 728 P.2d 1177 (1986). The Court notedthat, as a threshold matter, “in defamation actions the FirstAmendment ... requires that the statement on which the claimis based must specifically refer to, or be ‘of and concerning,’the plaintiff in some way.” Id. at 1042, 232 Cal.Rptr. 542,728 P.2d 1177. The Court went on to clarify that “to bereferred to specifically, we emphasize, the plaintiff neednot be mentioned by name, but may be identified by clearimplication.” Id. at 1044 n. 1, 232 Cal.Rptr. 542, 728 P.2d1177.

At least one other jurisdiction has specifically addressed theissue of whether disparagement coverage can be triggeredwhen a policy holder was not alleged to have disparageda specifically identified product or business. See KnollPharmaceutical Co. v. Automobile Ins. Co. of Hartford, 152F.Supp.2d 1026, 1037-38 (N.D.Ill.2001) (applying Illinois

law). 8 In Knoll, the policy holder was insured for advertisinginjury and personal injury, which were defined as “oral orwritten publication of material that slanders or libels a personor organization or disparages a person's or organization'sgoods, products or services.” Id. at 1034. In the litigationunderlying the insurance coverage dispute in Knoll, theplaintiffs alleged that the policyholder had advertised itsthyroid drug as “more effective than or superior to theother drugs available to treat hyperthyroidism” and hadwrongly claimed that its drug was “not bioequivalent tocompeting products,” thereby disparaging *1253 competingmanufacturers. Id. at 1036. Although the complaint in theunderlying litigation did not allege disparagement of anyspecific competitors or products, the court in Knoll founda duty to defend because allegations of statements thatthe policyholder's drug was superior to other drugs were“disparaging in that they criticize the quality of othercompanies' ... products as being inferior.” Id. at 1038. In otherwords, by claiming that its own product was not bioequivalentto competitor products, the policyholder had, by necessaryimplication, suggested that competitors' products possesseddifferent and inferior indicia of biological activity.

8 The Court is aware that Knoll is distinguishable from

this case in that Knoll dealt with a situation in which

the plaintiffs in the underlying litigation were not the


































parties at whom the alleged disparaging statements

were directed. Instead, the plaintiffs were consumers

who sought lower-priced thyroid drugs, and not the

manufacturers of those drugs. Nonetheless, the Court

finds the analysis of disparagement law instructive to the

issue presently before the Court.

[17] In this case, the Underlying Complaint makesnumerous allegations that suggest a claim for disparagement

by implication. 9 The Underlying Complaint alleges thatPlaintiff falsely stated that it was the “only” producer of“all Java” and “fully J2EE” software solutions, which wasan “important differentiator” between competing products,even though some competitors offered products with theseexact features. (Underlying Complaint ¶ 1.) The UnderlyingComplaint goes on to enumerate a host of specific instancesin which Plaintiff made these allegedly false claims, and inwhich Plaintiff purportedly stated that it was the “first end-to-end CRM suite designed and build on a unified J2EE-basedplatform” and had “a couple of year lead” on competitorsin this particular product market. (Id. ¶¶ 16-18, 23-35.) TheUnderlying Complaint further alleges that Plaintiff and Sigmawere direct competitors in this market and that Sigma's marketshare, sales, and reputation were damaged as a result ofPlaintiff's allegedly false statements. (Id. ¶¶ 1, 43.)

9 The fact that the Underlying Complaint does not

specifically allege a disparagement cause of action is

of no moment, because the scope of the duty to defend

“does not depend on the labels given to the causes

of action” and can be found merely by “comparing

the allegations of the complaint with the terms of the

policy.” Atlantic Mutual Ins. Co. v. J. Lamb, Inc., 100

Cal.App.4th 1017, 1034, 123 Cal.Rptr.2d 256 (2002);

Montrose, 6 Cal.4th at 295, 24 Cal.Rptr.2d 467, 861

P.2d 1153. Indeed, the duty to defend exists “until it has

been shown that there is no potential for coverage.” Id.

(emphasis in original).

Taken together, these allegations show a claim fordisparagement by “clear implication.” Blatty, 42 Cal.3dat 1044 n. 1, 232 Cal.Rptr. 542, 728 P.2d 1177. Thatis, Plaintiff's alleged statement that it was, for example,“the only component-based, fully-J2EE complete CRM suiteavailable” necessarily suggests that competitor productsdid not have such capabilities. Plaintiff's alleged claimof having “a couple of year lead” on competitors alsonecessarily suggests that competitors were well behindPlaintiff in terms of technology development. In addition,the Underlying Complaint alleges that Plaintiff and Sigma

were competitors, that Plaintiff's competitors actuallywere selling “all Java” and “fully J2EE” software atthe time of Plaintiffs misrepresentations, and that Sigmasuffered pecuniary and reputational damage as a result ofthese purported misrepresentations. The gravamen of theUnderlying Complaint, therefore, is that Plaintiff made falseclaims about the superiority of its own products, which clearlyand necessarily implied the inferiority of Sigma's competingproducts, resulting in damages to Sigma. The Court findsthat the statements alleged in Underlying Complaint had thepotential to give rise to disparagement liability if ultimatelyproven to be “injurious falsehoods that interfere[d] with[Sigma's] business.” Aetna, 838 F.2d at 351. The fact that the“injurious *1254 falsehoods” alleged were only directed atSigma by implied comparison with Plaintiff's products doesnot alter this outcome.

In sum, the Court finds that the Underlying Complaintcontained disparagement allegations that implicated thepotential for “personal injury” and “advertising injury”coverage under the Policy, and thus triggered Defendant'sduty to defend. Montrose, 6 Cal.4th at 295, 24 Cal.Rptr.2d467, 861 P.2d 1153. Since Defendant undisputedly refusedPlaintiff's tender of the defense in the Underlying Action, theCourt finds that Defendant breached its duty to defend.

Accordingly, the Court GRANTS Plaintiff's Motion forPartial Summary Judgment on Defendant's breach of itsduty to defend and DENIES Defendant's Cross-Motion forSummary Judgment.

V. CONCLUSION

The Court GRANTS Plaintiff's Motion for Partial SummaryJudgment on Defendant's duty to defend. The Court DENIESDefendant's Cross-Motion for Summary Judgment.

The Court sets a Case Management Conference for January12, 2009 at 10 a.m. On or before January 5, 2009, the partiesshall file a Joint Case Management Statement. The Statementshall include, among other things, the parties' position withrespect to claims remaining in this case. If the parties agreethat the case is ripe for a Final Judgment, the parties shallinclude their proposed forms of Judgment as part of their JointStatement.











Michael Taylor Designs, Inc. v. Travelers Property Cas...., 761 F.Supp.2d 904...



Distinguished by Bullpen Distribution, Inc. v. Sentinel Ins. Co., Ltd.,

N.D.Cal., June 1, 2012

761 F.Supp.2d 904United States District Court,

N.D. California,San Francisco Division.

MICHAEL TAYLOR DESIGNS, INC., Plaintiff,v.

TRAVELERS PROPERTY CASUALTYCOMPANY OF AMERICA, Defendant.

No. C 10–2432 RS. | Jan. 20, 2011.

SynopsisBackground: Insured furniture retailer sued commercialliability insurer for declining to defend insured in underlyingtrade dress infringement action, until underlying complaintwas amended to expressly allege claim for disparagement.Parties cross-moved for summary judgment.

Holdings: The District Court, Richard Seeborg, J., held that:

[1] allegations of original underlying complaint gave rise toduty to defend, and

[2] insurer was permitted to limit fee reimbursement forindependent counsel.

Plaintiff's motion granted in part; defendant's motion denied.

West Headnotes (18)

[1] Federal Civil ProcedureHearing, evidence, and presentation of

arguments

Under local rule permitting statements of recentdecisions, submitted prior to the hearing in agood faith belief as to their relevance, withoutargument or counter-argument, district courtmay invite argument at the hearing, or even

solicit further briefing, should a submittedopinion so warrant. U.S.Dist.Ct.Rules N.D.Cal.,Civil Rule 7–3(d).


arguments

After a hearing on a motion to submitstatement of recent decision, under localrule, a party may only submit additionalauthority upon obtaining leave of district court.U.S.Dist.Ct.Rules N.D.Cal., Civil Rule 7–3(d).


arguments

Local rule governing motions concerningmiscellaneous administrative matters, nototherwise governed by a federal statute, federalor local rule, or standing order of the assignedjudge, is an appropriate vehicle for seekingleave to submit additional authority, afterhearing has been conducted on prior motion forleave to submit statement of recent decision,because rule permitting statements of recentdecisions submitted prior to hearing does notbar the submission of such cases, but onlyrequires district court's permission and doesnot otherwise govern procedure for obtainingthat court approval. U.S.Dist.Ct.Rules N.D.Cal.,Civil Rules 7–3(d), 7–11.


arguments

Although local rule governing administrativemotions permits a party to seek leave to submitadditional newly-released authorities after amatter has been heard, it is a right that should beexercised sparingly. U.S.Dist.Ct.Rules N.D.Cal.,Civil Rule 7–11.

[5] Federal Civil Procedure

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Hearing, evidence, and presentation ofarguments

On administrative motion for leave to submitadditional newly-released authorities after amatter has been heard, if a decision is not anon-point, controlling precedent, it must at leastbe a highly persuasive decision on an issueof particular importance, that is not otherwisecumulative of the cases that have already beensubmitted; the administrative motion shouldconcisely explain why these criteria are satisfied,while avoiding arguing the merits to the extentpossible. U.S.Dist.Ct.Rules N.D.Cal., Civil Rule7–11.

[6] CourtsSupreme Court decisions

CourtsConclusiveness of decisions of Court of

Appeals within its circuit

CourtsParticular questions or subject matter

Federal CourtsInferior state courts

District Court for the Northern District ofCalifornia is bound only by (1) opinions of theSupreme Court, (2) opinions of the Ninth Circuit,(3) opinions designated as precedential by theFederal Circuit as to matters of patent law, and(4) opinions of each state's highest court as tomatters of state law.

[7] Federal CourtsInferior state courts

Where a California high court has not decideda specific issue of California law, and theNinth Circuit has not declared how it believesthe California high court would rule, anyintermediate California appellate court rulingson the point are generally entitled to greatweight.

[8] Federal Civil Procedure

Hearing, evidence, and presentation ofarguments

Any opposition to an administrative motionfor leave to submit additional newly-releasedauthorities after a matter has been heard shouldfocus, to the extent possible, on why theproffered authority does not meet the criteria forpost-hearing consideration, rather than arguingthe merits. U.S.Dist.Ct.Rules N.D.Cal., CivilRule 7–11.

[9] Federal Civil ProcedureHearing and Determination

On administrative motion for leave tosubmit additional newly-released authoritiesafter hearing had been conducted on motionfor summary judgment, insured's submissionof recent decision would be approved, onground that decision was circuit court's mostrecent articulation of many central principlesimplicated in insured's suit challenging insurer'srefusal to defend insured in underlying actionuntil amendment of underlying complaint, eventhough insured failed to explain relevance ofdecision that appeared consistent with authoritiespreviously cited and did not arise from sonearly-identical facts as to make decisionundisputedly controlling to outcome of motion.U.S.Dist.Ct.Rules N.D.Cal., Civil Rule 7–11.


Under California law, a liability insurer owes abroad duty to defend its insured against claimsthat create a potential for indemnity.


Under California law, implicit in the rule that aliability insurer owes a broad duty to defend itsinsured against claims that create a potential forindemnity is the principle that the duty to defendis broader than the duty to indemnify; an insurermay owe a duty to defend its insured in an actionin which no damages ultimately are awarded.



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InsurancePleadings

InsuranceBurden of proof

Under California law, even though an insurerhas a duty to defend only if it becomes awareof, or if the third party lawsuit pleads, factsgiving rise to the potential for coverage under theinsurance policy, the insured need only show thatthe underlying claim may fall within the policycoverage; the insurer must prove it cannot.

[13] InsuranceQuestions of law or fact

Under California law, whether an insurancepolicy provides the potential for coverage and,thus, a duty to defend exists, is a question of lawfor district court to decide; such a determinationis typically made by comparing the allegations ofthe complaint to the policy terms.


InsuranceMatters beyond pleadings

Under California law, an insurer's duty to defenddoes not depend on the labels given to the causesof action in the third party complaint; instead theduty rests on whether the alleged facts or knownextrinsic facts reveal a possibility that the claimmay be covered by the policy.


Underlying complaint's factual allegationsagainst insured for purportedly infringingsupplier's trade dress created possibility thatinsured would be found liable for disparagementof supplier's goods, triggering insurer's dutyto defend insured, under California law,

in underlying action prior to amendmentof complaint to expressly allege claim fordisparagement that was covered by Web XtendLiability endorsement in insured's commercialliability policy, since very essence of injuryalleged in original complaint was damage toreputation of supplier's goods by insured'sallegedly infringing actions of offering inferiorimitations of supplier's goods.


[16] Federal Civil ProcedureInsurance cases

To extent that insured requested determinationthat commercial liability insurer wasrequired to pay all attorney fee invoicesgenerated by insured's independent counsel,in defending insured against underlying tradedress infringement and disparagement claims,insured's request was denied, on motion forsummary judgment, since insured had not evenattempted to establish absence of any triableissue of fact as to reasonableness of fees.


[17] InsuranceConflicts of interest; independent counsel

InsuranceUnderlying defense costs

After an insurer has agreed to, or been foundobligated to, provide a defense to an insured,the insurer who wrongfully denied coveragemay not rely on California law, permittinginsurer to limit amount of fee reimbursementobligation for insured's independent counsel.West's Ann.Cal.Civ.Code § 2860.


[18] InsuranceConflicts of interest; independent counsel

Commercial liability insurer's obligation toreimburse insured for fees of independentcounsel, incurred after underlying complaintalleging trade dress infringement was amendedto expressly allege disparagement claim until















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insurer's counsel took over insured's defense,was limited to panel rates, under California law,permitting insurers to pay insured's independentcounsel at panel rates actually paid to insurer'sattorneys in ordinary course of business indefending similar actions in community whereclaim arose or was being defended, even thoughinsurer had refused to defend insured prior toamendment of original complaint to allege claimcovered by policy. West's Ann.Cal.Civ.Code §2860.



*906 Andrew M. Sussman, David A. Gauntlett, James A.Lowe, Gauntlett & Associates, Irvine, CA, for Plaintiff.

Matthew Clark Lovell, Sedgwick Detert Moran & Arnold,LLP, San Francisco, CA, for Defendant.

Opinion

ORDER RE CROSS–MOTIONSFOR SUMMARY JUDGMENT

RICHARD SEEBORG, District Judge.

I. INTRODUCTION

This is an insurance coverage dispute. Plaintiff MichaelTaylor Designs, Inc. (“MTD”), a furniture retailer, was suedin an underlying action for allegedly infringing the trade dressof one of its former suppliers by offering “cheap syntheticknockoffs” of that supplier's wicker furniture products.Defendant Travelers Property Casualty Company declinedto defend MTD under a commercial liability policy it hadissued, until after the complaint in the underlying action wasamended to allege expressly a claim for “disparagement,” aswell as trade dress infringement. In this action, MTD seeks adetermination that Travelers had a duty to defend even underthe original allegations of the underlying complaint.

*907 The insurance policy at issue includes an endorsemententitled “Web Xtend Liability,” that expressly deletes aprovision found in the body of the policy form that otherwisewould have provided coverage for trade dress infringement,

and instead promises coverage only where the insured has“disparaged” the goods, products, or services of another. Theprimary question presented in this case, therefore, is whetherthe factual allegations of the original complaint filed againstMTD were sufficient to give rise to a duty defend, despitethe claims having been couched in language of trade dressinfringement rather than in terms of disparagement.

In their cross-motions for summary judgment, MTD andTravelers agree that the material facts are not in dispute as tothe central question; what remains is to decide which party isentitled to judgment in its favor given those undisputed facts.Because the facts alleged in the original complaint againstMTD raised the possibility of a disparagement claim, therebytriggering a duty to defend, Travelers' motion will be denied,and MTD's will be granted, in part. MTD's request for anadjudication in its favor on certain issues relating to attorneyfees and costs will be denied.

II. BACKGROUND

For many years MTD had a business relationship withfurniture designer Ivy Rosequist, in which MTD acted as theexclusive sales agent for Rosequist's line of wicker furniture.In 2008, a dispute arose between MTD and Rosequist overMTD's plans to begin selling synthetic wicker products thatRosequist contended were unlawful copies of her designs.In March of 2008, Rosequist filed a two count complaint inthis district against MTD, alleging breach of contract andviolation of the Lanham Act. See Rosequist v. Michael TaylorDesigns, Inc., C 08–1588 SBA (“the Rosequist action”).

Rosequist's Lanham Act claim alleged, in essence, that MTDhad distributed promotional materials to its customers thatcontained photographs of Rosequist's distinctive and high-quality furniture. MTD pulled a “bait-and-switch” on itscustomers, however, by displaying in its showroom “cheapsynthetic knock-offs” of Rosequist's products, running therisk that consumers would be confused and misled, as to theorigin of the items on display. Rosequist claimed this conductwould “dilute and tarnish” her trade dress.

MTD tendered defense of the Rosequist action to Travelerson March 31, 2008. By letter dated April 15, 2008, Travelersdeclined coverage, on grounds that “none of Rosequist'sclaims implicate any of the offenses enumerated in thedefinition of ‘personal injury’, ‘advertising injury’ or ‘website injury’ ” in the insurance policy. Traveler's letter












specifically noted that the Web Xtend Liability endorsementexpressly deletes the provisions found in the body of thegeneral policy form entitled “Coverage B—Personal andAdvertising Injury Liability” in their entirety and replacesthem with language set out in the endorsement.

Some ten months later, MTD, by letter dated February27, 2009, re-tendered defense of the Rosequist action toTravelers. The retender letter included substantial legalargument that the Rosequist complaint stated a claim fortrade dress infringement, and faulted Travelers for refusingto provide a defense, given that Coverage B in the body ofthe policy form expressly defined “personal and advertisinginjury” to include “infringing upon another's ... trade dress.”The re-tender letter appears to have been prepared withoutrecognizing that the Web Xtend Liability endorsement is partof the policy, and that Traveler's letter denying coveragehad pointed out that the endorsement deletes Coverage Bentirely. The re-tender *908 letter relied exclusively onthe assumption that Coverage B was in effect and explicitlyprovided for coverage of trade dress claims—it did notargue that the Rosequist complaint implicated a claim fordisparagement that would be covered even under the Web

Xtend Liability endorsement. 1

1 As part of its opposition to Travelers' cross-motion,

MTD has submitted a letter dated March 9, 2009, that

it contends was sent to Travelers and that presented, for

the first time, the assertion that the original Rosequist

complaint implicated a disparagement claim covered

under the Web Xtend Liability endorsement. The March

9th letter appears to be an incomplete draft—it includes

notes for further edits, and its substantive discussion

largely repeats verbatim the trade dress analysis of the

February 27, 2009 re-tender letter. The authenticating

declaration hedges as to whether it actually was ever

transmitted to Travelers.

Travelers did not respond in writing to the re-tender letter.On October 21, 2009, an amended complaint was filed inthe Rosequist action, which MTD immediately provided to

Travelers. 2 The amended complaint includes a claim forrelief entitled “Slander of Goods/Slander of Title,” whichrepeatedly asserts that MTD “disparaged the quality andorigin” of Rosequist's goods.

2 The amended complaint substituted Rosequist's

successor-in-interest as plaintiff, due to her intervening

death. For convenience, this order will continue to refer

to Rosequist and the Rosequist action, rather than to her

successor and the present name of that action.

On December 15, 2009, Travelers advised MTD that, basedon the claims of the amended complaint, it would defendthe Rosequist action, subject to a reservation of rights, andthat it was appointing Ropers, Majeski, Kohn & Bentley toserve as MTD's counsel. Travelers stated that MTD wouldbe reimbursed for the reasonable and necessary defenseexpenses its then-counsel incurred between tender of theamended complaint and the time the Ropers firm took over,as well as reasonable expenses incurred in the transition ofcounsel. The Ropers firm ultimately assumed responsibilityof MTD's defense in the Rosequist action on January 12, 2010.

III. LEGAL STANDARD

Summary judgment is proper “if the pleadings and admissionson file, together with the affidavits, if any, show that there isno genuine issue as to any material fact and that the movingparty is entitled to judgment as a matter of law.” Fed.R.Civ.P.56(c). The purpose of summary judgment “is to isolate anddispose of factually unsupported claims or defenses.” Celotexv. Catrett, 477 U.S. 317, 323–324, 106 S.Ct. 2548, 91 L.Ed.2d265 (1986).

Here, as noted, on the primary issue of whether Travelers hada duty to defend under the allegations of the original Rosequistcomplaint, the parties are in agreement that no material factsare in dispute. The legal question, therefore, is which party isentitled to judgment in its favor on those facts.

IV. DISCUSSION

A. MTD's Motion for Leave to Submit Statement of RecentDecisionOn two occasions after this motion was heard, MTD fileda “statement of recent decision,” purportedly under theauthority of Civil Local Rule 7–3(d), attaching a court rulingthat had issued after the hearing. That rule, however, permitssubmission of newly-published authorities without prior courtapproval only, “[b]efore the noticed hearing date.” At somepoint, MTD apparently became aware of this limitation, andtherefore seeks leave by a motion filed under Rule 7–11to submit yet a third newly-issued decision that it contendsis relevant to the issues presented *909 here. Specifically,MTD wishes to submit for consideration Hudson Ins. Co.v. Colony Ins. Co., 624 F.3d 1264(9th Cir.2010). Travelers

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opposes the motion, arguing that Rule 7–11 cannot be usedto seek relief where the issue is “otherwise governed” byanother local rule. Travelers also contends that Hudson (andthe two cases MTD previously submitted without first seekingleave), are not in fact relevant to the pending disputes. Inturn, MTD objects to Travelers' opposition, noting that Rule7–3(d) forbids a party from including any argument as tothe relevance of a case it is submitting under a “statementof recent decision,” and complaining that it would thereforebe unfair for the Court to consider the arguments made byTravelers that the cases it has offered are irrelevant.

[1] [2] [3] The local rules are structured to deter anendless cycle of filings and counter-filings while preservingthe Court's ability to render a decision that is fully-informedby any particularly germane legal authority that may emerge.To that end, Rule 7–3(d) permits statements of recentdecisions, submitted prior to the hearing in a good faith beliefas to their relevance, without argument or counter-argument.Should an opinion so submitted warrant it, the Court mayinvite argument at the hearing, or even solicit further briefing.After the hearing, in contrast, a party may only submitadditional authority upon obtaining leave of court. Contraryto Travelers' argument, a motion brought under Rule 7–11is an appropriate vehicle for seeking such relief, becauseRule 7–3(d) does not bar the submission of such cases; itonly requires court permission. Furthermore, Rule 7–11 isapplicable because Rule 7–3 does not “otherwise govern” theprocedure for obtaining that court approval.

[4] [5] [6] [7] [8] Although it is thereby permissiblefor a party to seek leave to submit additional, newly-released,authorities after a matter has been heard, it is a right thatshould be exercised sparingly. If a decision is not an on-point,

controlling precedent, 3 it must at least be a highly persuasivedecision on an issue of particular importance, that it is nototherwise cumulative of the cases that have already been

submitted. 4 While any motion seeking leave to file additionalauthority after a hearing should still avoid arguing the meritsto the extent possible, it should concisely explain why the

criteria above is satisfied. 5

3 This court is bound only by (1) opinions of the Supreme

Court, (2) opinions of the Ninth Circuit, (3) opinions

designated as precedential by the Federal Circuit as to

matters of patent law, and (4) opinions of each state's

highest court as to matters of state law. Where a state high

court has not decided a specific issue of state law, and the

Ninth Circuit has not declared how it believes the state

high court would rule, any intermediate state appellate

court rulings on the point are generally entitled to great

weight.

4 Neither of the first two cases MTD submitted after the

hearing without seeking leave to do so satisfies these

guidelines. The first was a state appellate decision that

at best is cumulative, and which was designated as not

citable under the rules of the court that issued it. The

second, decided in this district, merely recites the general

legal principles that were fully briefed and not disputed

in this motion, and then applies those principles in a

manner that breaks no new legal ground, on facts not

sufficiently similar to those here to be enlightening.

Thus, while both cases may tangentially support MTD's

positions, neither advances the analysis such that party or

court resources should have been expended to give them

special consideration after the hearing.

5 Similarly, any opposition to the motion should focus,

to the extent possible, on why the proffered authority

does not meet the criteria for post-hearing consideration,

rather than arguing the merits. Because a party is entitled

to present arguments in opposition to a Rule 7–11

motion, however, MTD's objections based on Rule 7–

3(d) to Travelers' opposition brief are not well-taken.

*910 [9] Here, attempting to honor the prohibition againstargument that applies when a party submits a statement ofrecent decision under Rule 7–3(d), MTD did not explain whyit believes Hudson is particularly relevant to the pendingissues. Hudson in fact appears consistent with the authoritiespreviously cited, and does not arise from so nearly-identicalfacts as to make it undisputedly controlling to the outcomeof this motion. Nevertheless, because Hudson represents themost recent articulation by the Ninth Circuit of many of thecentral principles implicated here, it was arguably appropriateto call it to the attention of the Court. Accordingly, MTD'smotion under Rule 7–11 for leave to submit Hudson isgranted, and it has been considered. As the discussion belowwill reflect, however, the decision in this case does not dependon the holding of, or any language in, Hudson.

B. Traveler's duty to defend under the original Rosequistcomplaint[10] [11] [12] The California Supreme Court has held

that “a liability insurer owes a broad duty to defend its insuredagainst claims that create a potential for indemnity.” HoraceMann Ins. Co. v. Barbara B., 4 Cal.4th 1076, 1081, 17Cal.Rptr.2d 210, 846 P.2d 792 (1993) (citing Gray v. ZurichInsurance Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168(1966)). “Implicit in this rule is the principle that the duty















to defend is broader than the duty to indemnify; an insurermay owe a duty to defend its insured in an action in which nodamages ultimately are awarded.” Montrose Chemical Corp.v. Superior Court, 6 Cal.4th 287, 24 Cal.Rptr.2d 467, 861P.2d 1153 (1993). Even though “an insurer has a duty todefend only if it becomes aware of, or if the third party lawsuitpleads, facts giving rise to the potential for coverage under theinsurance policy,” Lomes v. Hartford Fin. Svcs. Group, Inc.,88 Cal.App.4th 127, 105 Cal.Rptr.2d 471 (2001), “the insuredneed only show that the underlying claim may fall within thepolicy coverage; the insurer must prove it cannot.” Montrose,6 Cal.4th at 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153.

[13] [14] “Whether an insurance policy provides [the]potential for coverage and, thus, a duty to defend exists,is a question of law for the court to decide.” Lomes,88 Cal.App.4th at 132, 105 Cal.Rptr.2d 471. Such adetermination is typically made by comparing the allegationsof the complaint to the policy terms. Id. at 132, 105Cal.Rptr.2d 471. Importantly, the duty to defend, “does notdepend on the labels given to the causes of action in the thirdparty complaint; instead it rests on whether the alleged factsor known extrinsic facts reveal a possibility that the claimmay be covered by the policy.” Atlantic Mutual Ins. Co. v.J. Lamb, Inc., 100 Cal.App.4th 1017, 1034, 123 Cal.Rptr.2d256 (2002) (emphasis in original).

[15] With these general principles, MTD and Travelersare in agreement. They also concur that under the WebXtend Liability endorsement of the policy issued to MTD,it was entitled to a defense if the factual allegations ofthe original Rosequist complaint created a possibility that itwould be found liable for “disparagement”—defined in theendorsement as, “[o]ral, written or electronic publication ofmaterial that slanders or libels a person or organization ordisparages a person's or organization's goods, products orservices.” The issue, then, is whether the original Rosequist

complaint implicated such a claim.

The complaint alleged:

• “The promotional materials widely circulated by MichaelTaylor Designs, Inc. for the patrons of Westweek includes[sic] photographs of [Rosequist's] actual furniture (whichMichael Taylor Designs, Inc. has removed from its showroomand is no *911 longer selling), compounding the high riskthat customers will visit Michael Taylor Designs, Inc. lookingfor [Rosequist's] furniture, only to be unknowingly steeredinstead to cheap imitation knock-offs.” [Emphasis added].

• “Consumers are likely to be confused and will naturallyassume that the knock-offs currently being displayed inMichael Taylor Design's showrooms are plaintiff's products.”

• “Defendant's action, unless enjoined, will cause irreparableharm and injury to plaintiff and to consumers, in that it willsubstantially dilute and tarnish plaintiff's established tradedress and mislead consumers about the true origins and natureof the cheap synthetic knockoffs.” [Emphasis added].

Undoubtedly, at the time Rosequist's complaint wasoriginally filed, her lawyers did not have a claim fordisparagement or trade libel at the forefront of their legaltheories. Nevertheless, the very essence of the injury theywere alleging was damage to the reputation of Rosequist'sproducts that would result from consumers encountering“cheap synthetic knock-offs” and believing them to beproducts manufactured and marketed by Rosequist. Travelersoffers two basic arguments as to why these allegations do not,in its view, suggest the possibility of a disparagement claimthat would give rise to coverage under the policy.

First, Travelers contends that case law has unequivocallyrejected the notion that facts constituting tradedress infringement, standing alone, can ever constitutedisparagement. Relying first on a patent infringement case,Travelers asserts that the very nature of a claim based onimitation of another's product forecloses any disparagement.“It does not follow that because an entity imitated the designof a product, it is, therefore, disparaging it. In point of fact, it'squite the opposite-as has been oft said: imitation is the highestform of flattery.” Homedics, Inc. v. Valley Forge Ins. Co., 315F.3d 1135, 1142 (9th Cir.2003). There was no suggestion inHomedics, however, that the defendant had ever advertisedits “imitation” products in a way that would lead consumersto believe that they were the originals. Thus, the imitationin Homedics indeed could only have been “flattery” that inno way reflected badly on the reputation of the plaintiff'sproducts.

Travelers also lays heavy emphasis on Aetna Cas. & SuretyCo., Inc. v. Centennial Ins. Co., 838 F.2d 346 (9th Cir.1988),in which, as here a defendant had been accused of trade dressinfringement. As opposed to this case, however, in Aetnathere were no allegations in the underlying complaint thatthe infringer was damaging the reputation of the plaintiff'sgoods by passing off copies of inferior quality. 838 F.2d at352. Moreover, as described in Aetna, the “gravamen” of



























the underlying claims against the alleged infringers was “thatthey ‘palmed off’ [the plaintiffs'] products as their own.”838 F.2d at 351 (emphasis added). Here, in stark contrast,Rosequist's original complaint made clear that her charge wasthat MTD was leading people to believe its “cheap synthetics”were Rosequist's own products. Accordingly, while Travelers'reliance on Aetna is understandable, given language in theopinion implying that copying the goods of another anddisparagement are simply disparate wrongs, it does not standas clear authority that advertising an inferior item as if it werethe product of another invariably falls outside disparagement.

Similarly, in Microtec Res. v. Nationwide Mutual Ins. Co., 40F.3d 968 (9th Cir.1994), the court cited Aetna in concludingthat an alleged software pirate had not disparaged the qualityof the purportedly stolen code by selling it as its own. Thefact that such conduct, akin to reverse *912 palming off,carried no connotation that the plaintiff's code was of poorquality, has little instructive value here. Because Rosequistwas expressly alleging that the reputation of her goods washarmed by MTD's conduct, the mere fact that it was labeledas trade dress infringement does not preclude the possibilityof a disparagement claim.

Traveler's second basic argument is that the original Rosequistcomplaint at most alleged conduct with a potentiallynegative effect on consumer perceptions, not “oral, writtenor electronic publication of material” containing disparagingstatements about Rosequist's furniture. While the questionis somewhat close, this contention rests on an overlyrestrictive reading of the complaint. To be sure, the primary“publications” described in the complaint did not, in and ofthemselves, constitute disparagement. Marketing brochurescontaining pictures of Rosequist's actual products cannot besaid to impugn the quality of her furniture, standing alone.The complaint, however, explained that the alleged purposeof those brochures was to entice customers interested inRosequist's products into MTD's showrooms, where theywould then be “steered instead” to the imitation products.The term “steered” fairly implies some further statements,presumably oral, were being made by MTD personnel toconvey the information that the imitation products were the

Rosequist furniture depicted in the brochures. 6

6 Elsewhere the complaint alleged that customers would

“naturally assume” the imitations were Rosequist's

products. The allegation that some customers might

reach the same conclusion even absent additional

“steering” statements, does not permit the steering

allegation to be disregarded.

While Travelers' decision to extend coverage under theamended Rosequist complaint cannot be used as an admissionthat it was obligated to provide coverage under anycomplaint containing the same basic facts, a comparisonof the two complaints is nonetheless instructive. Theamended complaint may have articulated the new legaltheory of “Slander of Goods,” and liberally sprinkled theterm “disparagement” throughout, but it did so withoutadding substantially new or different allegations as to thefactual circumstances, or fundamentally altering the natureof the injury being alleged. The express “disparagement”in the amended complaint arises from consumers allegedlybeing led to believe that Rosequist had designed and wasdistributing the “cheap synthetic knock-offs” displayed inMTD's showrooms.

The only factual change of any note was the expansion ofthe somewhat vague term “steered,” into “sales employeesorally told potential customers....” Making this one pointexplicit rather than implicit, however, does not represent

a distinction of significant import. 7 Accordingly, even thefactual allegations of the original Rosequist complaint weresufficient to reveal the possibility of a covered claim, andTravelers had a duty to provide MTD a defense from the time

that complaint was tendered. 8

7 Travelers also points to allegations in the amended

complaint that MTD's marketing brochures and website

“disparaged” Rosequist's products by depicting the

actual goods. Although Travelers may not have been

entitled to disregard those conclusory statements when

making its coverage decision on the amended complaint,

they added nothing of substance to the question of

whether the marketing materials contained disparaging

statements.

8 MTD argues that Travelers' duty to defend also arose

from “extrinsic evidence” made available in the re-tender

letter in February of 2009, but it has failed to explain

how that purported extrinsic evidence added anything

material beyond what was alleged in the complaint. In

light of the conclusion that the duty to defend arose

from the complaint itself, further consideration of the

argument is unnecessary. MTD also offers a separately-

headed argument that it is entitled to coverage from the

date of tender of the original complaint under what it

labels a “relation-back doctrine.” The cases it cites in

support of this contention, however, stand only for the








unremarkable proposition that if an original complaint

gives rise to a duty to defend, the obligation dates to

the tender of that complaint. As MTD does not appear

to be making the untenable argument that an insured is

entitled to coverage from tender of an original complaint

even where coverage is triggered only by an amended

complaint, its invocation of a “relation-back” concept is

unnecessary.

*913 C. Enforceability of the Web Xtend LiabilityendorsementIn its opposition to Traveler's cross-motion, MTD belatedlyraises an argument that the Web Xtend Liability endorsementshould be deemed unenforceable because Travelers didnot provide adequate and conspicuous disclosure thatthe endorsement eliminates the coverage for trade dressinfringement claims listed in the body of the policy form.It may not be a model of clarity to remove coverage forone well-established and common type of potential liabilitythrough an endorsement that is titled and otherwise givesthe appearance of being an attempt to provide additionalcoverage or clarification in the internet sphere. All of theauthorities on which MTD relies, however, involve situationswhere an insurer attempted to limit coverage in a renewalpolicy without giving adequate notice that the insured wouldreceive less than under the original policy. Here, there is nodispute that the Web Xtend Liability endorsement was partof the policy package originally offered to, and accepted by,MTD. Accordingly, while the issue is largely mooted by theconclusions above, MTD has failed to establish that the WebXtend Liability endorsement should be held unenforceable as

a matter of law. 9

9 The apparent practice of providing policy holders with

pages and pages of provisions that may or may not be in

force, depending on what endorsements apply, is not to

be commended. Given current technology, there would

appear to be little practical impediment to preparing

customized policy documents for each policy holder that

either omit deleted verbiage entirely or plainly identify

it as having been removed by endorsement. Imposing a

requirement that insurers do so, however, is a matter for

legislative or regulatory consideration, contrary to the

implication of MTD's request for a judicial declaration

of unenforceability.

D. Attorney Fees and Interest[16] MTD's motion also seeks an adjudication that it is

entitled to reimbursement for the attorney fees it incurredfrom the inception of the Rosequist action until the Ropers

firm actually assumed its defense on January 12, 2010.The precise relief MTD seeks is unclear—on the onehand it appears to acknowledge that it is at most entitledto recover reasonable attorney fees, but on the other itseems to be requesting a ruling that Travelers must simplypay all the attorney fee invoices MTD's counsel generated(and prejudgment interest thereon), without any furtherexamination of whether the claimed fees were reasonable andnecessary to MTD's defense. To the extent MTD is requestinga determination that Travelers must pay the amounts actuallyinvoiced, its motion is denied, because it has not evenattempted to establish the absence of any triable issue of factas to the reasonableness of the fees.

Given the conclusion that Travelers' duty to defend arosefrom the original Rosequist complaint, it follows thatMTD is entitled to reimbursement of the attorney fees itreasonably and necessarily incurred between the time ittendered that complaint, and October 21, 2009, when theamended complaint was filed and provided to Travelers.While Travelers disputes *914 that its duty to defend arosefrom the original complaint, it does not appear to challengethis proposition.

[17] The remaining dispute is whether Travelers is entitledto rely on California Civil Code § 2860 to limit the amount ofits fee reimbursement obligation between October 21, 2009when the amended complaint was tendered, and January 12,2010, when the Ropers firm took over the defense. Section2860 permits insurers to pay an insured's independent counselso-called “panel rates”—those rates “actually paid by theinsurer to attorneys retained by it in the ordinary course ofbusiness in the defense of similar actions in the communitywhere the claim arose or is being defended.” MTD is correctthat an insurer who wrongfully denies coverage may not relyon section 2860 after the fact, once it has agreed to—or beenfound obligated to—provide a defense. Travelers, however,is not contending that it is entitled to the benefit of section2860 for the fees MTD incurred before October 21, 2009.

[18] Travelers is correct that it is entitled to the benefit ofsection 2860 as to the fees incurred by MTD's independentcounsel after October 21, 2009. See Karsant FamilyLtd. Partnership v. Allstate Ins. Co., 2009 WL 188036,*5 (N.D.Cal.2009) (finding provisions of section 2860applicable to independent counsel fees after assumptionof defense, notwithstanding prior refusal to defend). MTDcomplains that Travelers failed to reference section 2860when it advised that it was providing coverage and that















it would reimburse fees incurred until the Ropers firmtook over. That argument is unpersuasive, as Travelersexpressly advised MTD that section 2860 would apply whenit acknowledged receipt of the amended complaint.

Once Travelers accepted the defense, its only contractualand statutory obligation was to provide a defense at “panelrates,” whether that happened to be through a law firm ofits own choosing or counsel previously employed by theinsured. Accordingly, while there might be an argument thatTravelers should not be entitled to the benefits of section 2860until it actually communicated to MTD that it was assumingthe defense (rather than retroactively to the date of tender),MTD has not presented such a contention and it will not bedecided here. To the extent that MTD seeks an adjudicationthat Travelers may not rely on section 2860 at all, its motionis denied.

Finally, in light of the conclusion that MTD has failed toshow it is entitled to reimbursement of any particular dollar

amount of attorney fees, its request for a determination thatit is entitled to prejudgment interest is rejected as premature,at best.

V. CONCLUSION

Travelers' motion for summary judgment is denied. MTD'smotion is granted insofar as it seeks an adjudication thatTravelers' duty to defend arose upon tender of the originalRosequist complaint, and that it is entitled to reimbursementof the reasonable and necessary attorney fees it incurredbetween that date and October 21, 2009. MTD's motionis otherwise denied. The parties shall appear for a CaseManagement Conference on February 24, 2011, at 10:00 a.m.

IT IS SO ORDERED.





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