Down To Cases

Agent not responsible for uncovered patent infringement claim against farmers
Intellectual property rights exposures can affect a surprising variety of clients. Farm agents may be surprised to learn that they may have an exposure if they don't talk to their clients about this risk.)

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

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

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

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

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

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

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

“We agree with the trial court that the contract of insurance does not obligate (the carrier) in this case,” the appellate court said. “Although we find the (insureds) arguments to be intriguing…(the seed seller) did not bring an action against the (insureds) for property damage, disparagement or damages resulting from the (insured's) advertising, but for patent infringement and breach of contract.

“We agree with the trial court that an action for patent infringement is not equivalent to an action for damages to tangible property or for personal injury as defined by this contract of insurance,” the appellate court continued. Rather, the court said the seed seller's claim was based on wrongful misappropriation of an intellectual property right: the seed seller's right to a monopoly over its innovation under the patent.

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

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

The insureds did not dispute that the agent procured a standard commercial farmers liability policy. They claimed, however, that they did not understand what kind of coverage they had purchased, or the extent of coverage they might need. The agent stated in his affidavit that he had “never understood that it was the insurance customer's responsibility to know of all the risks to which he is exposed. … I know that other people and their lawyers will sue you over a lot of different things.”

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

The appellate court found it unnecessary to address the agent's assertion that insurance against patent infringement and the actions alleged by the seed seller was not available. Rather, the court said, it could not be reasonably argued that the seed seller's claim against the farmers was foreseeable at the time the policy was issued in 1996 or when it was renewed in 1998. The judgment 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 CGL coverage 'illusory'

In this case from the state of Washington, the owners of an apartment building hired a restoration company to make repairs and improvements to the building in 1996. In the course of completing the work, the restoration company applied two types of waterproofing sealants to the surface of a deck. Both contained a toxic substance called toluene diisocyanate, whose fumes can irritate the respiratory tract and, in high concentrations, cause central nervous system depression.

A tenant in the apartment adjacent to the deck, not warned that the restorer would be applying the sealant, alleged that fumes entered her apartment as the deck dried, making her ill enough to require hospitalization. The woman died in 1998, and her estate claimed that exposure to the fumes caused “exacerbation of her preexisting chronic obstructive pulmonary disease” and led to her “debilitating and declining health.” Her estate filed a lawsuit against the restorer and the building owners, claiming personal injury and property damage. The lawsuit was dismissed without prejudice, but in 1999 her estate filed a second lawsuit. The defendants settled the lawsuit for $30,000, then claimed their liability insurance policies should cover the loss.

The restorer's policy had a standard pollution exclusion. The building owners had a CGL policy with a similar exclusion. The two insureds filed an action, claiming their insurers wrongfully denied their request for defense and indemnity, and that the scope of the pollution exclusion was so great as to make coverage under their policies illusory. A trial court issued summary judgment in favor of 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 from partial to absolute, the Supreme Court concluded that a majority of courts have held that absolute pollution exclusions unambiguously exclude coverage for damages caused by the release of toxic fumes.

“In this case, the policy language clearly states that the liability coverage does not apply to bodily injury or property damage arising out of the dispersal, seepage, migration, release or escape of a gaseous irritant, including vapors, fumes and chemicals, at any premises owned by the insured or any premises onto which a contractor or subcontractor hired by the insured has brought a pollutant,” the court noted. “The language clearly applies to bodily injury and property damage; it is not limited to actions for cleanup costs. Unlike the earlier 'qualified pollution exclusion' the clause at issue here does not limit coverage to a release of pollutants upon the land, atmosphere or water. The exclusion specifically includes injuries at any premises owned by the insured and injuries resulting from pollutants brought onto the premises 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 was interpreted broadly, it would swallow all covered occurrences, making the policy illusory. (The court cited Peoples Law Dictionary, which defined “illusory” in part as an agreement to do something that is so indefinite one cannot tell what is to be done or that the performance is optional.)

The Supreme Court held that although the unambiguous language of the absolute pollution exclusion excludes some claims that would arise out of the work of a typical restoration company, thereby limiting the scope of its business liability policy, the restoration company had not presented a valid argument that the policy was illusory. It said that because the pollution exclusion does not preclude coverage for many accidents that could occur on the building owners' property, the exclusion did not render the insurance contracts illusory. For example, slip and fall injuries clearly would fall outside the pollution exclusion. Therefore the covered “occurrences and excluded incidents are not mutually exclusive, and the exclusion did not render the insurance contracts illusory,” the court concluded.

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

Insurer ordered to turn over claim file to insureds litigating bad-faith claim

The insureds in this Florida case bought an Oldsmobile Cutlass a month after securing coverage on their Chevrolet Blazer. They instructed their agent to add the Cutlass to their policy. The agent did so but incorrectly deleted coverage for the Blazer at the same time. The insureds were not notified that the Blazer was no longer covered.

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

After resolving the basic coverage issue, the insureds asked a trial court to compel the insurer to produce certain documents in connection with the pending bad-faith claim. The documents included the carrier's claim and investigative file and materials, internal manuals and the agent's file. The trial court ordered the documents produced, determining they were relevant and reflected the carrier's handling of the underlying claim. The court said the documents did not constitute work product or attorney-client communications, which could be concealed from disclosure.

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

The appeals court rejected this argument. “Generally, an insurer's claim and litigation files constitute work product and are protected from production,” the appellate court said. The analysis differs, however, when an insurance company is sued for bad faith.”

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

The appeals court reversed the trial court's determination with regard to the balance of the documents sought, however, determining that such items were prepared in anticipation of litigation and thus 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-party bad-faith actions. “Third-party bad-faith actions have a long and established pedigree, having been recognized at common law in this state since 1938,” the court said. “Third-party bad-faith actions arose in response to the argument that there was a practice in the insurance industry of rejecting without sufficient investigation or consideration claims presented by third parties against an insured, thereby exposing the insured individual to judgments exceeding the coverage limits of the policy, while the insurer remained protected by a policy limit. … With no actionable remedy, insureds in this state and elsewhere were left personally responsible for the excess judgment amount. … This concern gave life to the concept that insurance companies had an obligation of good faith and fair dealing. …

“Traditionally and historically, the courts in this state did not, however, recognize a corresponding common law first-party action that would protect insured individuals and enable them to seek redress of harm against their insurers for the wrongful processing or denial of their own first-party claims or failure to deal fairly in claims processing. … However, with the enactment of (Florida code) Section 624.155 in 1982 … the Florida Legislature resolved this inequity and recognized the power disparity as it created a statutory first-party bad-faith cause of action. …

“Florida courts have determined: It is clear that in an action for bad faith against an insurance company for failure to settle a claim 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 original litigation, should be produced.”

The Supreme Court concluded that because the pertinent issues are the same, there is no basis for distinguishing between types of bad-faith insurance cases with respect to the present question. It held that “the claim file is and was properly held producible in this first-party case.”

“In a 'first-party' action against an insurance carrier founded upon Section 624.155(1)(b), which affirmatively creates a company duty to its insured to act in good faith in its dealings under the policy, liability is based upon the carrier's conduct in processing and paying a given claim,” the high court said. Thus, the action is totally unlike an ordinary 'insured vs. insurer' action brought only under the policy, in which the carrier's claim file is deemed not producible essentially because its contents are not relevant to the only issues involved, those of coverage and damages. … In contrast, a case like this one is totally indistinguishable from the familiar 'bad faith' failure to settle or defend a third-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 at drenau@thepoint.com.