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Insurance Law

When Is an Exclusion “Conspicuous, Plain and Clear”: There Is No Duty to Defend if There Is No Potential for Coverage

Insurance policies must be interpreted with care. Since they are contracts of adhesion they are usually interpreted with a bias towards providing coverage for the insured. When an insured provides the information necessary to convince a court that there is a potential for coverage unless the insurer can prove that a conspicuous, plain and clear exclusion defeats coverage.

When a toymaker used Mr. Fuller’s name and designs without permission – or payment of a license fee – to build and sell toys based on the geodesic dome design and other efforts of Mr. Fuller owned by its estate, the estate sued the toy maker. The toymaker sought coverage from its insurer who refused to defend or indemnify the toymaker. It dissolved and assigned its rights against its insurer to the estate who tried to get insurance funds in Alterra Excess and Surplus Insurance Company v. Estate of Fuller, — Cal.Rptr.3d —-, 2015 Cal. App. LEXIS 216 (Cal.App. 1 Dist., 3/9/15), [enhanced version available to lexis.com subscribers].

The Estate of Buckminster Fuller (Estate) appealed from a judgment on the pleadings holding that Alterra Excess and Surplus Insurance Company (Alterra) had no duty to defend, and therefore no duty to indemnify, its insured in an action brought by the Estate against the insured. The basis of the judgment was that an exclusion in the Alterra policy, referred to by all below as the “intellectual property” exclusion, applied to preclude any obligation on the part of Alterra. We reach the same conclusion, and we affirm.

BACKGROUND

R. Buckminster Fuller, nicknamed “Bucky” (Fuller), was a celebrated designer, author, and inventor. He was credited with many, and diverse, creations, and was particularly well known for popularizing the geodesic dome. He died in 1983. According to the Estate’s own pleadings, in 1985 it registered its claim as the successor-in-interest to all of Fuller’s rights, and has “licensed those rights on many occasions. In 2004, the U.S. Postal Service licensed the rights to Bucky’s image for a postage stamp. In 2003, Xerox Corporation licensed rights to Bucky’s name and likeness.” In short, it appears that various commercial enterprises have used Fuller, and perhaps his nickname, to assist in the marketing of their product.

At some point, Maxfield & Overton Holdings, LLC (Maxfield) entered the picture, attempting to do just that—apparently without permission or payment. Specifically: Beginning at least as early as 2009, Maxfield manufactured and distributed several products under the Buckyball and related trademarks. Again according to the Estate’s pleadings, these items included several variations on Buckyballs, Buckyball gift packs, Buckycubes, Bucky sidekick, and The Big Book of Bucky. Buckyballs are 216 round rare earth magnets packaged in a cube shape. The packaging states: Buckyballs by Zoomdoggle. The included Quick State Guide demonstrates several shapes that can be made with the round magnets.

The Big Book of Bucky is a paperback book which provides instructions on how to make various shapes with Buckyballs. The book states: ‘Buckyballs were named for Buckminster Fuller.’ After briefly summarizing Bucky’s accomplishments, it states: ‘He was smart, He was crazy. He was fun. Remind you of anything?’

The Underlying Action

On May 18, 2012, the Estate filed an action against Maxfield in the United States District Court, Northern District of California: Estate of Buckminster Fuller v. Maxfield & Oberton Holdings, LLC, Case No.: 5–12–CV–02570, [enhanced version available to lexis.com subscribers].

Maxfield tendered defense of the underlying action to Alterra, which agreed to defend under a reservation of rights and appointed Cumis counsel to defend the case. Soon thereafter Alterra filed the second lawsuit involved here: the action for declaratory relief. The Estate received an Assignment of Claims as part of a settlement with the [Maxfield] Liquidating Trust.

Pursuant to the Delaware Limited Liability Act (6 Del. C. § 18-803), [enhanced version available to lexis.com subscribers], Maxfield’s dissolution prohibited it from defending any action. In light of this, Cumis counsel withdrew, leaving Maxfield unrepresented. At this point, Alterra intervened in the underlying action to defend Maxfield’s position, [enhanced version available to lexis.com subscribers]. The underlying action has since been stayed pending resolution of this coverage action.

DISCUSSION

A duty to defend exists whenever the lawsuit against the insured seeks damages on any theory that, if proved, would be covered by the policy. Thus, a defense is excused only when the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. Thus, an insurer may have a duty to defend even when it ultimately has no obligation to indemnify, either because no damages are awarded in the underlying action or because the actual judgment is for damages not covered by the policy.

Those liberal, pro-insured rules notwithstanding, there is no duty to defend if there is no potential for coverage. As the leading California insurance treatise puts it, “The insurer’s duty to defend does not extend to claims for which there is no potential for liability coverage. This includes claims falling outside the scope of the insuring clause, or within an express exclusion from coverage, or barred by statutory or public policy limitations. ‘The insurer need not defend if the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage’ [Citations.].” (Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2014) § 7:537, pp. 7B–16–17 (Croskey).)

As our Supreme Court put it in its most recent pronouncement on the subject: “In determining whether a claim creates the potential for coverage under an insurance policy, ‘we are guided by the principle that interpretation of an insurance policy is a question of law.’ [Citation.] ‘Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. (Civ. Code, § 1636.)’ [Citation.] [enhanced version available to lexis.com subscribers]. In determining this intent, ‘[t]he rules governing policy interpretation require us to look first to the language of the contract in order to ascertain its plain meaning or the meaning a layperson would ordinarily attach to it.’ [Citation.] We consider the ‘ “clear and explicit” meaning of these provisions, interpreted in their “ordinary and popular sense,” unless “used by the parties in a technical sense or a special meaning is given to them by usage.” ’ [Citation.] We must also ‘interpret the language in context, with regard to its intended function in the policy.’ [Citation.]” (Hartford Casualty Ins. Co. v. Swift Distribution, Inc. (2014) 59 Cal.4th 277, 288, 172 Cal.Rptr.3d 653, 326 P.3d 253.), [enhanced version available to lexis.com subscribers].

The Policy

The policy contained, as part of a standard form:

“2. Exclusions

“i. Infringement Of Copyright, Patent, Trademark Or Trade Secret

“ ‘Personal and advertising injury’ arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. Under this exclusion, such other intellectual property rights do not include the use of another’s advertising idea in your ‘advertisement’. [¶] However, this exclusion does not apply to infringement, in your ‘advertisement’, of copyright, trade dress or slogan.”

Trial Court Decision

The trial court held that Alterra had no obligation under the policy because exclusion i, which the court called the “intellectual property exclusion,” applied here.

DECISION

The exclusion is on an Insurance Services Office (ISO) industry form (CG 00 01 12 07). The exclusion appears under a bold-faced heading “Exclusions,” with each exclusion having its own bold-faced title.

These factors satisfy the “conspicuous, plain and clear” test for exclusions, i.e., that they be positioned in a place and printed in a form that will attract the reader’s attention. (Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 184, 231 Cal.Rptr. 791, [enhanced version available to lexis.com subscribers], disapproved on other grounds in Buss v. Superior Court (1997) 16 Cal.4th 35, 50, fn. 12, 65 Cal.Rptr.2d 366, 939 P.2d 766, [enhanced version available to lexis.com subscribers]; see National Ins. Underwriters v. Carter (1976) 17 Cal.3d 380, 384, 131 Cal.Rptr. 42, 551 P.2d 362, [enhanced version available to lexis.com subscribers], [exclusion located under a bold-faced heading entitled “Exclusions” and appearing in the same style of print found elsewhere in the policy].)

Finally, the Estate asserts the words “other intellectual property rights” in the exclusion cannot apply as they are “buried in an inconspicuous part of a single paragraph in small type in a 39 page contract.” This ignores that courts applying the exclusion have never criticized the exclusion on this basis. And, as noted, the title of the exclusion starts with the word “Infringement”—in boldface yet—the very conduct the Estate itself alleged against Maxfield. Exclusion i. is conspicuous, plain, and clear.

ZALMA OPINION

Conspicuous, plain and clear exclusions must be enforced. The California court did just that. Although the estate was harmed by Maxfield’s actions they are judgment proof since the corporation was dissolved and the only possibility for recovering damages was the insurance policy. They made a yeoman-like effort to gain the insurance coverage but could not, nor should it, be allowed in face of the conspicuous, plain and clear policy exclusion.

    By Barry Zalma, Attorney and Consultant

Reprinted with Permission from Zalma on Insurance, (c) 2015, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.

Mr. Zalma can be contacted at or zalma@zalma.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

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