United States: Insurance Coverage For Settlements Or Judgments In Lawsuits That Assert Claims That Are Only Covered In Part

This article addresses a common problem which arises addressing the insurance coverage implications of intellectual property litigation – a number of distinct claims are asserted, some of which may fall within coverage, others of which fall outside coverage. The question arises – what rights does an insured have to compel its insurer to fund a settlement of "mixed" claims against it? The answer will certainly depend in part on what forum’s law will apply. This in turn depends on what law the court chooses to apply. This determination will turn on where suit initiated over coverage issues is pursued, as well as what choice of law rules that forum will apply.

Nevertheless, not all jurisdictions follow this rule. In Warfield-Dorsey Co. v. The Travelers Cas. & Sur. Co. of Illinois, 66 F. Supp. 2d 681, 686-687 (D. Md. 1999), the underlying action was settled within three months of Travelers’ denial of a defense to its insured. Analyzing the insurer’s obligation to fund the settlement, the court stated:

Applying this "alternate exposure to liability" test, the court found that there might be "fact" issues precluding determination of whether the claims asserted permitted the insured to charge the insurer with the full obligation of the settlement. However, without specifying what methods might be adopted or who might bear the burden of proof in such a context, the court leaves little guidance for such a determination.

As a practical matter, the rule which holds the insurer accountable for the full amount of any reasonable and non-collusive settlement reached by the parties so long as covered claims were asserted makes the most sense. This rule is consistent with the law that governs when an insurer denies a defense and seeks to obtain reimbursement for that portion of the defense fees which it claims are uncovered claims. In those few jurisdictions that have recognized an insurer’s right to reimbursement, a refusal to defend deprives the insurer of any right to seek allocation of defense fees.

B. Case Study Of The Insurer’s Obligation To Pay Entirety Of Settlement Of Mixed Claims

With this backdrop, it is useful to analyze a recent decision finding that design patent claims as well as trade dress claims in a conjoined lawsuit are both subject to indemnity. In EKCO Group, Inc. v. Travelers Indem. Co. of Illinois, Civil No. 99-236-JD, Opinion No. 2000 DNH 249, 2000 U.S. Dist. LEXIS 17702 (D.N.H. Nov. 29, 2000), the underlying case had settled. The parties adopted an order which clarified that both the trade dress and design patent infringement cases were covered by the agreement. In addressing indemnity for the design patent, the court felt compelled to assess whether there was independent coverage for the claim. This, despite its finding that it need not address this issue in analyzing the duty of defense because the duty to defend extended to the entire lawsuit. The burden of proof is, however, on the insurer where it denies a defense.

Addressing the causal nexus between the EKCO advertising and design patent infringement claim as well as the requirement that the allegations constitute "misappropriation of an advertising idea," the court stated:

This latter analysis would have been unnecessary in jurisdictions such as Wisconsin, where a non-defending insurer could not interject coverage issues to challenge its obligation to pay a non-collusive, reasonable settlement.

Equally critical is whether the insurer has agreed to defend under a reservation of rights or simply refused to defend. In the latter case policyholders in many jurisdictions may be able to establish that the full amount of any settlement is due to the insured once the insurer is given notice of the fact of settlement and given an opportunity to participate and refuses to do so or does not participate in the settlement.

In U.S. Fire Ins. Co. v. Green Bay Packaging, Inc., 66 F. Supp. 2d 987, 998-999 (E.D. Wis. 1999), the court, having found that claims bearing the label "interference with prospective economic advantage" triggered the defense for acts of disparagement within the policy’s "personal injury" coverage for "oral or written publication of material that disparaged the goods, products or services of another." In finding that indemnity was proper for the entire settlement based on those claims, it stated:

Although the court addressed indemnity for a damage award, it is clear that in a settlement, the same rule would be treated in the same fashion under its logic.

Based on these cases, the following observations are in order. First, under the law of some jurisdictions, an insurer will be obligated to completely fund any noncollusive and reasonable settlement following its denial of a defense. Second, in other jurisdictions that require a showing that all claims must fall within coverage, the standard for establishing a defense and for establishing indemnity under settlement may not be equivalent. Thus, facts beyond those in the pleadings and settlement agreement may be pertinent. Third, because of these factors, coverage counsel should participate in the structuring of a settlement, as well as monitoring of a case as it proceeds to trial, since jury instructions, special verdicts, and interrogatories may address fact issues that determine coverage for any judgment that could arise in the underlying action.