Agent not responsible for uncovered patent infringementclaim against farmers
Intellectual property rights exposures can affect a surprisingvariety of clients. Farm agents may be surprised to learn that theymay have an exposure if they don't talk to their clients about thisrisk.)

A seed seller in Tennessee brought a claim against a group offarmers for patent infringement and breach of contract. In theiroperations, they routinely saved seed from their cotton and soybeancrops and planted them in subsequent years. The seed seller allegedthat the farmers “knowingly and intentionally used, saved,transferred, made, sold and/or offered for sale” the patentedseed.

The farmers' insurer refused to defend under its farm liabilitypolicy, saying its policy did not cover patent infringement. Thefarmers sought a declaratory judgment against the insurer. They didnot contend that their policy would protect them against liabilityfor damage to intangible, intellectual property, but they assertedthe seed seller's claim was covered under other policyprovisions:

–They argued that the seed seller's damages resulted from theloss of use of tangible property (gene sequences or the “traits”contained in the seeds), which they said should be covered underproperty damage liability.

–They also said that damages resulting from disparagement fellwithin their policy's personal injury liability coverage.

–Finally, they said damages arising from infringement of theseed seller's “title” in the seeds were covered under the policy'sadvertising liability provisions.

In the alternative, they also asserted a claim against theiragency and agent for breach of contract, negligent failure toprocure coverage and professional liability in tort.

A trial court granted summary judgment to both the carrier andthe agent/agency. The farmers appealed

“We agree with the trial court that the contract of insurancedoes not obligate (the carrier) in this case,” the appellate courtsaid. “Although we find the (insureds) arguments to beintriguing…(the seed seller) did not bring an action against the(insureds) for property damage, disparagement or damages resultingfrom the (insured's) advertising, but for patent infringement andbreach of contract.

“We agree with the trial court that an action for patentinfringement is not equivalent to an action for damages to tangibleproperty or for personal injury as defined by this contract ofinsurance,” the appellate court continued. Rather, the court saidthe seed seller's claim was based on wrongful misappropriation ofan intellectual property right: the seed seller's right to amonopoly over its innovation under the patent.

The farmers also claimed that the agent and agency negligentlyfailed to procure coverage that would cover them “100%,” aspromised by the agent. The appellate court noted that the insuredsdidn't contend their policy was not a standard commercial farmersliability policy. They also didn't claim they specificallyrequested insurance against claims of patent infringement. Instead,the insureds said they requested coverage against all foreseeablerisks and that by 1996 the risk of an action for patentinfringement arising from area farmers' increased use of seedcontaining patented technologies was known and foreseeable by theagent, who held himself out to be experienced and knowledgeable inthe industry. Consequently, they said the agent negligently failedto provide “100%” coverage against all foreseeable risks.

In response, the agent argued that insurance for breach ofcontract, patent infringement, intentional acts and fraud could notbe purchased from insurance companies. He asserted the insuredssought and received a standard commercial farmers liability policy.He said they first obtained the policy in 1996 and renewed the samepolicy from 1997 through 2000. He added that he could not be heldliable for the insureds' failure to read and understand thepolicy.

The insureds did not dispute that the agent procured a standardcommercial farmers liability policy. They claimed, however, thatthey did not understand what kind of coverage they had purchased,or the extent of coverage they might need. The agent stated in hisaffidavit that he had “never understood that it was the insurancecustomer's responsibility to know of all the risks to which he isexposed. … I know that other people and their lawyers will sue youover a lot of different things.”

The insureds claimed they relied on their agent to procurecoverage against any civil action. They didn't allege that theagent misrepresented the coverages of the policy he sold them orthat he failed to procure coverages requested. They argued onlythat they did not know whether the policy protected them againstliability for patent infringement, but that it should have. Theyclaimed that the agent was negligent in failing to provide suchcoverage because it was foreseeable–an essential element ofduty–that farmers such as themselves would be exposed topatent-infringement claims arising from the saving of seed.

The appellate court found it unnecessary to address the agent'sassertion that insurance against patent infringement and theactions alleged by the seed seller was not available. Rather, thecourt said, it could not be reasonably argued that the seedseller's claim against the farmers was foreseeable at the time thepolicy was issued in 1996 or when it was renewed in 1998. Thejudgment in favor of the agency and agent was upheld.

Ralph vs. Pipkin, No. W2004-0179-COA-R3-CV (Tenn.App.05/17/2005) 2005.TN.0000778 (www.versuslaw.com).

Absolute pollution exclusion upheld; does not render CGLcoverage 'illusory'

In this case from the state of Washington, the owners of anapartment building hired a restoration company to make repairs andimprovements to the building in 1996. In the course of completingthe work, the restoration company applied two types ofwaterproofing sealants to the surface of a deck. Both contained atoxic substance called toluene diisocyanate, whose fumes canirritate the respiratory tract and, in high concentrations, causecentral nervous system depression.

A tenant in the apartment adjacent to the deck, not warned thatthe restorer would be applying the sealant, alleged that fumesentered her apartment as the deck dried, making her ill enough torequire hospitalization. The woman died in 1998, and her estateclaimed that exposure to the fumes caused “exacerbation of herpreexisting chronic obstructive pulmonary disease” and led to her“debilitating and declining health.” Her estate filed a lawsuitagainst the restorer and the building owners, claiming personalinjury and property damage. The lawsuit was dismissed withoutprejudice, but in 1999 her estate filed a second lawsuit. Thedefendants settled the lawsuit for $30,000, then claimed theirliability insurance policies should cover the loss.

The restorer's policy had a standard pollution exclusion. Thebuilding owners had a CGL policy with a similar exclusion. The twoinsureds filed an action, claiming their insurers wrongfully deniedtheir request for defense and indemnity, and that the scope of thepollution exclusion was so great as to make coverage under theirpolicies illusory. A trial court issued summary judgment in favorof the insurers. The ruling was affirmed by a Court of Appeals,then appealed to the state Supreme Court.

After discussing the evolution of the pollution exclusion frompartial to absolute, the Supreme Court concluded that a majority ofcourts have held that absolute pollution exclusions unambiguouslyexclude coverage for damages caused by the release of toxicfumes.

“In this case, the policy language clearly states that theliability coverage does not apply to bodily injury or propertydamage arising out of the dispersal, seepage, migration, release orescape of a gaseous irritant, including vapors, fumes andchemicals, at any premises owned by the insured or any premisesonto which a contractor or subcontractor hired by the insured hasbrought a pollutant,” the court noted. “The language clearlyapplies to bodily injury and property damage; it is not limited toactions for cleanup costs. Unlike the earlier 'qualified pollutionexclusion' the clause at issue here does not limit coverage to arelease of pollutants upon the land, atmosphere or water. Theexclusion specifically includes injuries at any premises owned bythe insured and injuries resulting from pollutants brought onto thepremises by contractors working on behalf of the insured.”

The court didn't accept the insured's contention that only“traditional pollution” was excluded or that, if the exclusion wasinterpreted broadly, it would swallow all covered occurrences,making the policy illusory. (The court cited Peoples LawDictionary, which defined “illusory” in part as an agreement to dosomething that is so indefinite one cannot tell what is to be doneor that the performance is optional.)

The Supreme Court held that although the unambiguous language ofthe absolute pollution exclusion excludes some claims that wouldarise out of the work of a typical restoration company, therebylimiting the scope of its business liability policy, therestoration company had not presented a valid argument that thepolicy was illusory. It said that because the pollution exclusiondoes not preclude coverage for many accidents that could occur onthe building owners' property, the exclusion did not render theinsurance contracts illusory. For example, slip and fall injuriesclearly would fall outside the pollution exclusion. Therefore thecovered “occurrences and excluded incidents are not mutuallyexclusive, and the exclusion did not render the insurance contractsillusory,” the court concluded.

Quadrant Corp. vs. American States Insurance Co., 110 P.3d733 (Wash. 04/28/2005) 110 P.3d 733, 2005. WA.0000708(www.versuslaw.com)

Insurer ordered to turn over claim file to insuredslitigating bad-faith claim

The insureds in this Florida case bought an Oldsmobile Cutlass amonth after securing coverage on their Chevrolet Blazer. Theyinstructed their agent to add the Cutlass to their policy. Theagent did so but incorrectly deleted coverage for the Blazer at thesame time. The insureds were not notified that the Blazer was nolonger covered.

Later, one of the insureds was involved in an accident whiledriving the Blazer and submitted a claim for collision coverage.Initially, the carrier simply denied coverage, asserting that theBlazer was not covered under the policy. The insureds sued thecarrier, alleging it had engaged in bad faith and unfair claimsettlement practices in violation of Sec. 624.155 of the FloridaStatutes. The complaint also contained one count of negligenceagainst the agent and one count of vicarious liability against thecarrier. About a month after legal action commenced, the carrieradmitted its obligation to provide benefits to the insureds underthe collision coverage.

After resolving the basic coverage issue, the insureds asked atrial court to compel the insurer to produce certain documents inconnection with the pending bad-faith claim. The documents includedthe carrier's claim and investigative file and materials, internalmanuals and the agent's file. The trial court ordered the documentsproduced, determining they were relevant and reflected thecarrier's handling of the underlying claim. The court said thedocuments did not constitute work product or attorney-clientcommunications, which could be concealed from disclosure.

The carrier took the matter to a state appellate court, whichgranted relief in part. The carrier argued that because a disputewas immediately apparent when it refused to make payment,litigation was anticipated at all pertinent times associated witheach of the insured's discovery requests from even the very outsetof their interactions. Therefore, the insurer said, none of thematerial was subject to disclosure.

The appeals court rejected this argument. “Generally, aninsurer's claim and litigation files constitute work product andare protected from production,” the appellate court said. Theanalysis differs, however, when an insurance company is sued forbad faith.”

The court then attempted to distinguish between “materialprepared during the normal course of evaluating a claim andmaterials … prepared 'in anticipation of litigation.'” Based onthat distinction, the district court determined that several itemswere not protected work product and were properly discoverable,including a statement by the agent, computer diaries and entriesfrom the date the insured reported the accident on Dec. 28, 1996,through Jan. 10, 1997, and an internal memorandum from theinsurance adjuster to her boss.

The appeals court reversed the trial court's determination withregard to the balance of the documents sought, however, determiningthat such items were prepared in anticipation of litigation andthus were protected work product not subject to discovery.

The insureds appealed that decision to the state Supreme Court,which drew a distinction between first-party and third-partybad-faith actions. “Third-party bad-faith actions have a long andestablished pedigree, having been recognized at common law in thisstate since 1938,” the court said. “Third-party bad-faith actionsarose in response to the argument that there was a practice in theinsurance industry of rejecting without sufficient investigation orconsideration claims presented by third parties against an insured,thereby exposing the insured individual to judgments exceeding thecoverage limits of the policy, while the insurer remained protectedby a policy limit. … With no actionable remedy, insureds in thisstate and elsewhere were left personally responsible for the excessjudgment amount. … This concern gave life to the concept thatinsurance companies had an obligation of good faith and fairdealing. …

“Traditionally and historically, the courts in this state didnot, however, recognize a corresponding common law first-partyaction that would protect insured individuals and enable them toseek redress of harm against their insurers for the wrongfulprocessing or denial of their own first-party claims or failure todeal fairly in claims processing. … However, with the enactment of(Florida code) Section 624.155 in 1982 … the Florida Legislatureresolved this inequity and recognized the power disparity as itcreated a statutory first-party bad-faith cause of action. …

“Florida courts have determined: It is clear that in an actionfor bad faith against an insurance company for failure to settle aclaim within policy limits, all materials, including documents,memoranda and letters, con- tained in the insurance company's file,up to and including the date of judgment in the originallitigation, should be produced.”

The Supreme Court concluded that because the pertinent issuesare the same, there is no basis for distinguishing between types ofbad-faith insurance cases with respect to the present question. Itheld that “the claim file is and was properly held producible inthis first-party case.”

“In a 'first-party' action against an insurance carrier foundedupon Section 624.155(1)(b), which affirmatively creates a companyduty to its insured to act in good faith in its dealings under thepolicy, liability is based upon the carrier's conduct in processingand paying a given claim,” the high court said. Thus, the action istotally unlike an ordinary 'insured vs. insurer' action broughtonly under the policy, in which the carrier's claim file is deemednot producible essentially because its contents are not relevant tothe only issues involved, those of coverage and damages. … Incontrast, a case like this one is totally indistinguishable fromthe familiar 'bad faith' failure to settle or defend athird-party's action against a liability carrier's insureds.”

Allstate Indemnity Co. vs. Ruiz, No. SC01-893 (Fla.04/07/2005) 2005.FL. 0001438(www.versuslaw.com).

Readers can get in touch with Don Renau via e-mail [email protected].