A Minnesota District Court ruled against an insurer that claimed they had no duty to defend a nightclub that faced a lawsuit over the unauthorized use of models' images. The case is Ill. Cas. Co. v. Kladek, Inc., 792 F. Supp. 3d 930 (D. Minn. 2025).
Background and Underlying Suit
In a separate underlying lawsuit, Kladek Inc., doing business as King of Diamond's Gentlemen's Club, was sued by a group of professional models. The models alleged that the Club used their photos in advertisements on the Club's Facebook, Instagram, and Twitter accounts without consent or authorization from the models.
The models sued for violations of the Lanham Act (false endorsement, unfair competition, and false advertising), violation of Minnesota Common Law of Publicity Through Appropriation, Negligence, and violation of Minnesota's Deceptive Trade Practices Act (MDTPA).
Businessowners Insurance Policy
At the time of the lawsuit, Kladek was insured under a businessowners policy with Illinois Casualty Company (ICC). ICC filed for summary judgment, seeking a declaration that it did not owe a duty to defend or indemnify Kladek in the underlying lawsuit brought by the group of models.
ICC argued that three exclusions found in the businessowners policy precluded coverage for the claim—the law exclusion, the electronic chatroom exclusion, and the multimedia exclusion. Kladek argued that the claims fell within the personal and advertising injury coverage of the policy and are not subject to the exclusions.
Duty to Defend
The filing for summary judgment was brought before the Minnesota District Court. The court first explained that an insurer's duty to defend is broader than its duty to indemnify. If a claim is arguably covered under a policy, then the insurer has a duty to defend. For an insurer to establish it has no duty to defend, it must show that each claim asserted in a lawsuit clearly falls outside the policy.
The Three Exclusions
The court looked at the underlying suit filed by the models and whether any of the three exclusions cited by ICC were applicable.
The first exclusion cited is the law exclusion of the businessowners policy. The exclusion states, in part, that coverage is precluded for any liability or legal obligation of an insured with respect to personal or advertising injury arising from an action that violates or is alleged to violate any federal, state, or consumer fraud protection law that forbids fraud, unfair competition, or deceptive business practices.
ICC argued that because the underlying lawsuit asserted violations of consumer protection laws, the claims were excluded. Kladek argued that the Lanham Act and MDTPA applied to many different types of conduct, and not solely to consumer fraud.
The court found that in the underlying lawsuit, the models alleged Kladek was liable for false endorsement, unfair competition, and false advertising violations. The models had their images used without permission on Kladek's social media accounts and without compensation. They also alleged that it gave the false impression of an affiliation between them and the club.
The court found that there is no allegation of consumer fraud in the underlying lawsuit. The models alleged that they suffered personal injury from the use of their images. Because there is no claim of consumer fraud, the court ruled that the law exclusion was not applicable.
The second exclusion is the electronic chatroom exclusion. The exclusion states that coverage is precluded for personal and advertising injury that arises out of any electronic chat room, bulletin board, or blog the insured hosts, owns, or over which any insured exercises control.
ICC argued that the exclusion applied since Kladek's Facebook, Instagram, and Twitter pages were essentially bulletin boards that Kladek hosted and controlled. The terms were not defined in the policy, so the court turned to the plain meanings of bulletin board and electronic chat room.
Chat room was defined as "an online platform that enables users to communicate with each other in real time" and is "typically hosted on a server with an internet connection, enabling members from around the world to hold conversations about various topics." Electronic bulletin board was defined as "an online communication system where one can share, request, or discuss information on just about any subject."
The court rejected that these definitions applied to Facebook, Instagram, and Twitter, which are considered to be social media platforms. Kladek did not host, own, or exercise control over the platforms. Since the images were not used on a chatroom or bulletin board, the exclusion did not apply.
The final exclusion cited is the multimedia exclusion. The exclusion stated that coverage did not apply to multimedia liability under the Cyber Protection Form BL EC 06, except to the extent that coverage may be provided under form BL EC 06.
ICC argued that the multimedia liability exclusion barred coverage from the businessowners policy because the claims fell under the BL EC 06 endorsement as a multimedia peril.
However, the court found that there were many ambiguities in the cyber endorsement. It was unclear how the endorsement interacted with the main policy. In one section, the endorsement states, "this form amends your policy to provide Cyber Protection insurance," and in another section, "various provisions in this form restrict coverage." In contrast, it states that coverage is, "in addition to, and will not erode, the limits of insurance provided elsewhere under your Policy."
Additionally, the main form was written on an occurrence basis, while the cyber endorsement was a claims-made policy.
Kladek argued that the wording on the exclusion was circular and contradictory. The court agreed: "The Businessowners Liability Coverage states that the personal and advertising injury coverage does not apply to, among other things, 'Multimedia Liability' except to the extent that coverage may be provided under the Cyber Endorsement. This language suggests that a claim covered by the multimedia liability coverage is excluded from Businessowners Liability Coverage unless the claim is covered by the Cyber Endorsement, i.e., once coverage under the Cyber Endorsement is established, there is coverage under the Businessowners Liability Coverage."
The court found that this exclusion was also not applicable, and, finding that none of the three exclusions applied, ruled that ICC has a duty to defend Kladek in the underlying lawsuit.
Editor's Note: The court ruled that neither the law exclusion, the electronic chatroom exclusion, nor the multimedia exclusion was applicable in this case, and ruled ICC had a duty to defend. With the electronic chatroom exclusion, since the terms were not defined, the court turned to a plain definition of the terms and found they were not applicable to Facebook, Instagram, and Twitter. The final exclusion was deemed contradictory and ambiguous, and as we know with insurance contracts, ambiguities are typically construed against the insurer and in favor of coverage.
(Photo credit: Drazen/Adobe Stock)
This article originally appeared on FC&S Expert Coverage Interpretation and may not be reprinted.
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