Personal and Advertising Injury Insurance:

The Fortuity Requirement Revisited*

Todd S. Schenk

Andrew S. Boris

I.

Introduction

The concept of fortuity is an indispensable component of any form of insurance. “The fortuity doctrine arises from the basic concept that insurance covers risks, rather than losses that were planned, intended, or anticipated by the insured.”[1] Experts and commentators have long agreed that “a fundamental principle of insurance law is that insurance contracts should not provide coverage when a loss is not fortuitous.”[2] In fact, the fortuity requirement, first enunciated in the common law, has been codified by several jurisdictions.[3] Also, the essence of an actuarial premium rating is based upon an assumption that risks covered by an insurance policy are only possibilities, not certainties.[4] As one court has explained: “The concept of ‘fortuity’ is basic to insurance law. Insurance typically is designed to protect contingent or unknown risks of harm, not to protect against harm that is certain or expected. Insurance protects against risks of loss, not certainties of loss.”[5]

When an insured intends to cause damage or injury to property or another person, the insured directly controls the risk of loss. Insurance for such non-fortuitous damage or injury is against public policy because it eliminates the socially critical deterrent effect of financial responsibility. In addition, insurance for intentional harm violates public policy because it produces the undesirable effect of shifting the burden of loss from the intentional wrongdoer to other, innocent insureds who are forced to pay higher premiums.

For many years now, most commercial general liability (“CGL”) policies have provided coverage for “advertising injury” and “personal injury.” The terms “advertising injury” and “personal injury” are usually defined in the CGL policy by reference to a list of offenses, including a number of so-called “intentional torts,” such as slander and libel, invasion of privacy, infringement of copyright, and malicious prosecution. The CGL form published in 1985 by the Insurance Services Office (“ISO”) contains the following “advertising injury” and “personal injury” definitions:

“Advertising Injury” means injury arising out of one or more of the following offenses:

a. Oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services;

b. Oral or written publication of material that violates a person’s right of privacy;

c. Misappropriation of advertising ideas or style of doing business; or

d. Infringement of copyright, title or slogan.

“Personal Injury” means injury … arising out of one or more of the following offenses:

a. False arrest, detention or imprisonment;

b. Malicious prosecution;

c. Wrongful entry into, or eviction of a person from, a room, dwelling or premises that the person occupies;

d. Oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organizations goods, products or services; or

e. Oral or written publication of material that violates a person’s right of privacy. [6]

In 1998, ISO introduced revised CGL language, which uses the following combined definition of “personal and advertising injury”:

a. Oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services;

b. Oral or written publication of material that violates a person’s right of privacy;

c. The use of another’s advertising idea in your “advertisement”;

d. Infringing upon another’s copyright, trade dress or slogan in your “advertisement”;

e. False arrest, detention or imprisonment;

f. Malicious prosecution; or

g. The wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies committed by or on behalf of its owner, landlord or lessor.[7]

Notice that, the 1998 ISO form language includes certain “intentional torts,” such as trade dress infringement, false arrest, and wrongful eviction, within the definition of “personal and advertising injury.”

At first blush, the term “intentional tort” seems to suggest that any resulting losses are not caused by fortuitous events and are, therefore, uninsurable as a matter of fundamental insurance law. But upon closer examination, it is evident that coverage for these “intentional torts” does not necessarily violate the concept of fortuity because, while the intent to act is an essential element of such torts, the intent to injure typically is not. Unfortunately, many courts addressing advertising injury and personal injury (“AI/PI”) insurance have failed to appreciate this distinction between an intent to act and an intent to injure.

Other courts have refused to give effect to such a distinction, even when expressly set forth in the policy language. For example, some AI/PI insurance policies require that the injury result from an “occurrence,” typically defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions, that results in injury neither expected nor intended from the standpoint of the insured.” Many courts have refused to enforce such an “occurrence” requirement, citing a perceived conflict between providing coverage for intentional torts and, at the same time, limiting coverage to injuries that are “accidental” and “neither expected nor intended from the standpoint of the insured.” These courts have concluded that a strict application of the “occurrence” requirement would result in “illusory” AI/PI coverage, and therefore, they interpret the policy against the insurer. Similarly, courts have found ambiguity or the potential for illusory coverage in AI/PI policies containing an exclusion for intentional injury. Consequently, courts frequently refuse to enforce “occurrence” requirements and intentional injury exclusions in AI/PI insurance. All too often, this unfortunate trend has resulted in an extension of insurance coverage to losses caused intentionally by the insured, in direct violation of the fortuity principle. The adverse public policy implications of these decisions are readily apparent.

Although in the minority, some courts have found “occurrence” requirements or intentional injury exclusions of AI/PI policies to be unambiguous. By distinguishing between an intent to act and an intent to injure, these courts have correctly concluded that such provisions merely make explicit the concept of fortuity that is implicit in all forms of insurance. Since coverage remains available for intentional acts resulting in unexpected and unintended injury, this approach neatly disposes of the illusory coverage argument, which so many other courts have found troubling. More importantly, this approach vindicates the compelling public policy concerns underlying the fortuity principle.

The failure by certain courts to properly apply the fortuity doctrine has led to an expansion of AI/PI coverage beyond its intended boundaries. The 1998 ISO form attempts to directly address this problem by introducing an exclusion for personal and advertising injury “caused by or at the direction of the insured with knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury.’”[8] This exclusion, setting forth in clear terms the distinction between insurable intentional acts and uninsurable intentional injury, should lay to rest all arguments of ambiguity or illusory coverage. There are no reported decisions interpreting this exclusion, but the authors predict courts will enforce it as written and thereby preserve the element of fortuity necessary to all forms of insurance.

The next section of this article, Section II, discusses the common exclusion in AI/PI policies for injuries caused by the publication of material known by the policyholder to be false. Courts have consistently interpreted this “knowing falsehoods” exclusion in accordance with the fortuity principle. Sections III and IV provide a survey of cases in which courts have addressed an “occurrence” requirement or intentional injury exclusion within the context of an AI/PI policy. In Section V it is argued that all insurance policies, by definition, contain an implied fortuity requirement. Therefore, courts should never construe AI/PI policies to cover injuries that the insured intended to cause, even when no express “occurrence” requirement or intentional injury exclusion is included in the policy language. Finally, Section VI briefly discusses the intended injury exclusion introduced by the 1998 ISO form.

II.

“Knowing Falsehoods” Exclusion

The standard ISO CGL policy form expressly excludes coverage for advertising injury or personal injury that “[arises] out of oral or written publication of material, if done by or at the direction of the insured with knowledge of its falsity.”[9] Sometimes referred to as the “knowing falsehoods” exclusion, courts have generally held that it bars coverage only when the policyholder actually knew of the falsity of the material at the time of its publication. For example, in Callas Enterprises, Inc. v. Travelers Indemnity Co.,[10] Callas sought a declaration that its AI/PI insurer was obligated to defend and indemnify Callas in connection with an underlying suit alleging that it had uttered defamatory remarks. More specifically, the underlying complaint included allegations that Callas had uttered the defamatory remarks by engaging in deceptive sales practices while in the process of knowingly violating a distribution contract. Noting that the district court was bound to compare the allegations in the complaint to the policy at issue in order to determine whether a duty to defend existed, the court determined that the complaint included allegations that Callas had acted with knowledge when it made its defamatory statements.[11] Thus, the court summarily held that the “knowing falsehoods” exclusion precluded any duty to defend or indemnify under the personal injury insurance for the allegations of defamation in the underlying complaint.

Two other decisions from the same federal court in Texas further demonstrate the proper application of the “knowing falsehoods” exclusion. In Potomac Insurance Co. v. Peppers,[12] Peppers sought a declaration as to the insurer’s duty to defend and indemnify her against a suit brought by her former business partner. The complaint filed by the former business partner alleged Peppers had knowingly spread defamatory lies about the partner, thereby damaging his reputation and business relations. Accordingly, the court held the “knowing falsehoods” exclusion precluded any duty for the insurer to defend or indemnify under the personal injury insurance.[13]

In American Guarantee & Liability Insurance Co. v. Shel-Ray Underwriters, Inc.,[14] the Eighth Circuit Court of Appeals held the “knowing falsehoods” exclusion relieved American Guarantee & Liability Insurance Company (“AGLIC”) of the duty to defend Bunker Hill Insurance Agency under an AI/PI policy. In the underlying complaint, Surplus Underwriters Casualty Insurance Company (“SUCIC”) alleged that Bunker Hill disparaged SUCIC’s business reputation by “knowingly disseminating false, misleading, and damaging information” about SUCIC.[15] The court explained its holding as follows:

The exclusion contains language that unambiguously states that AGLIC would not insure for injury if done by or at the direction of the insured with knowledge of its falsity. Since SUCIC’s petition alleges causes of actions based on knowingly fraudulent statements and since AGLIC’s duty to defend and indemnify is based on the allegations of the complaint when viewed in light of the insurance policy, AGLIC is clearly entitled to a declaratory judgment.[16]

In contrast to the holdings in Callas, Peppers, and Shel-Ray, a majority of courts addressing the effect of the “knowing falsehoods” exclusion have concluded that, while this exclusion may often prevent any indemnity obligation on the part of an insurer, it typically does not relieve an insurer of the duty to defend an otherwise potentially covered claim. The courts have based their holdings on two distinct theories. First, many courts will find a duty to defend against complaints pled in the alternative, i.e. those complaints alleging the insured’s false statements were made either with knowledge of their falsity or with reckless or negligent disregard for their truth or falsity. Imposing a duty to defend against complaints pled in the alternative is neither surprising nor unwarranted since complaints pled in this manner leave open the possibility that the “knowing falsehoods” exclusion is not applicable and, thus, will not bar coverage under the AI/PI policy.[17]

Second, in order to avoid the effect of the “knowing falsehoods” exclusion when addressing the duty to defend, courts will often interpret the underlying complaint broadly, creating the possibility that the offending statements were made without knowledge of their falsity. In other words, whenever possible, courts have tried to read the allegations of the underlying complaint as implicitly pled in the alternative. For example, in Amerisure Insurance Co. v. Laserage Technology Corp.,[18] the underlying complaint alleged that the insured made certain false statements about the underlying plaintiff intentionally, knowingly, in bad faith, and with knowledge of the falsity of the statements. Two of the more than two hundred paragraphs in the underlying complaint alleged that the insured made disparaging statements without any mention of whether the insured had knowledge of their falsity. The Amerisure court seized upon this inconsistency in the allegations of the underlying complaint and imposed a duty to defend on the insurer. Amerisure is an excellent example of the willingness of courts to engage in strained legal reasoning in order to avoid application of the “knowing falsehoods” exclusion when adjudicating an insurer’s duty to defend its insured.

Courts appear especially willing to apply this strained legal reasoning when confronted with defamation claims. For example, in Total Petroleum, Inc. v. Hartford Accident & Indemnity Co.,[19] the Sixth Circuit Court of Appeals broadly interpreted the defamation count in an underlying complaint to find that the insurer had a duty to defend. In Total Petroleum, the insured sought a declaratory judgment against its commercial general liability insurer for costs incurred in defending and resolving a complaint filed against it for injurious falsehood and tortious interference with business relations. While the underlying complaint was pending, the insurer refused to defend or indemnify Total Petroleum, relying on the “knowing falsehoods” exclusion. Although the court recognized that the underlying complaint specifically alleged that Total Petroleum knew the statements at issue were false when they were published, the court stressed that the insurer had a duty to defend because the insured’s liability could have been premised on a reckless act that would not be excluded under the policy.[20]

This same approach has also been applied in cases dealing with AI/PI claims other than defamation. In Massachusetts Bay Insurance Co. v. Penny Preville, Inc.,[21] the policyholder was sued for copyright infringement and sought coverage under an AI/PI policy. The underlying complaint alleged that the policyholder intentionally reproduced the copyrighted jewelry designs of a competitor, thereby creating confusion within the consuming public. Nonetheless, the court ruled that the insurer had a duty to defend because, under the applicable copyright statute, the policyholder could be found liable for infringement “without being found to have acted knowingly, willfully and intentionally.”[22] According to the court, the insurer was unable to demonstrate that the claims fell “solely and entirely” within the “knowing falsehoods” exclusion.[23] Other courts have reached similar results concerning defamation claims.[24]

All these reported cases reveal a clear pattern. Courts are not inclined to absolve an insurer of the duty to defend based upon the “knowing falsehoods” exclusion. Instead, they have required the insurer to defend the underlying case, reasoning that there is a possibility of coverage even when the underlying complaint alleges only knowingly false publications because the claimant may ultimately recover for reckless or even negligent statements made by the insured. However, courts are willing to apply the “knowing falsehoods” exclusion with respect to an insurer’s duty to indemnify the insured when the insured’s knowledge of the falsity of the offending material is established by pre-trial discovery, during trial of the underlying case or by way of a declaratory judgment action. An insurer should be aware that if it voluntarily or by compulsion undertakes the defense of an insured, it should reserve its rights to later disclaim any indemnity obligation on the grounds of the “knowing falsehoods” exclusion to prevent waiver. Also, close scrutiny of potential conflicts-of-interest is advisable. In some states, where a conflict-of-interest between insurer and insured arises, the insured is entitled to select and retain its own defense counsel, at the insurer’s expense.

The fortuity doctrine dictates that losses resulting from the publication of materials known to be false are not insurable because insureds who know of the falsity of materials they publish are in direct control of the risk of loss. The typical language of a “knowing falsehoods” exclusion simply makes explicit what is already implicit in any contract of insurance – namely, that the fortuity requirement flatly precludes insurance coverage for knowing defamation, knowing disparagement, knowing infringement, knowing invasion of privacy, knowing misappropriation, as well as any other activities done with an intent to injure. Therefore, judicial enforcement of the “knowing falsehoods” exclusion is appropriate and consistent with the fortuity principle.

III.

Occurrence

Courts have upheld the “knowing falsehoods” exclusion, correctly understanding it as an expression of the concept of fortuity. A few of these same courts, however, have misunderstood other expressions of the fortuity principle sometimes found in AI/PI policies. For example, some insurance companies have amended the language of their AI/PI policies to include “occurrence” requirements, similar to those commonly found in bodily injury and property damage insurance contracts. Thus, these amended policies provide coverage only when the personal injury or advertising injury is both caused by an “accident” and “unexpected and unintended from the standpoint of the insured.”

The “occurrence” definition is wholly consistent with the fortuity concept and other general insurance principles. First, only possibilities, as opposed to certainties, are insurable. Second, unless injury is unexpected and unintended from the standpoint of the insured, the policyholder inappropriately controls the risk and the goal of actuarial premium rating is frustrated. Thus, the “occurrence” definition simply makes express the fortuity requirement implicit in all forms of insurance.

A problem seems to arise, however, when courts are asked to analyze an “occurrence” definition used in an AI/PI policy. One of the first reported cases to address this situation was Liberty Life Insurance Co. v. Commercial Union Insurance Co.[25] In Liberty Life, Metropolitan Life Insurance Company sued Liberty Life for conspiring to put it out of business by hiring away its employees and illegally obtaining its trade secrets. Liberty Life sought coverage from numerous carriers, including Mission Insurance who issued an AI/PI policy providing coverage on an occurrence basis. The Fourth Circuit Court of Appeals found that the Mission policy was ambiguous and potentially offered only “illusory” coverage. The court stated:

The excess policy issued by defendant, Mission, is on a somewhat different footing as it purported to require an unexpected or unintended occurrence to trigger coverage in any risk category. Since the allegations of the complaints in the Metropolitan suits cannot reasonably be construed as alleging an occurrence as defined in this policy, Mission, at first glance, might seem to owe no duty to Liberty to defend the actions. Mission did, however, specifically insure for injuries arising out of the insured’s actions which included libel, slander, defamation or unfair competition in connection with its advertising activities. Actions of that nature are not usually deemed unintentional or unexpected. To allow Mission to escape coverage at this stage of the proceeding under its definition of occurrence would make much or all of the advertising liability coverage illusory. At the least there may well be a conflict or ambiguity between those provisions, which under South Carolina law, should be resolved in favor of the insured.[26]

Accordingly, the Fourth Circuit reversed the lower court’s grant of summary judgment in favor of Mission and remanded the case for further proceedings.

A similar result was reached in Imperial Casualty & Indemnity Co. v. State.[27] In Imperial, several third parties sued the State of Connecticut alleging that state employees violated their individual rights when they were the subjects of illegal wiretaps. Connecticut sought coverage from its insurer under a policy providing PI coverage, but requiring an “occurrence” to trigger the coverage. In addressing whether the insurer had a duty to defend, the court found the policy ambiguous since many of the personal injury offenses were intentional torts, while the “occurrence” definition attempted to exclude coverage for intentional injury with the inclusion of an “accident” requirement. Therefore, the court resolved the perceived ambiguity in favor of the policyholder and imposed a duty to defend.[28]

Despite these decisions, numerous courts faced with the task of construing AI/PI policies incorporating “occurrence” definitions have done so in a more reasonable and thoughtful manner. By focusing upon the critical distinction between intentional acts and intentional injuries, most courts have found nothing objectionable, ambiguous, contradictory, or illusory about the presence of an “occurrence” requirement in AI/PI policies. Perhaps the best example of this superior approach is found in Monumental Life Insurance Co. v. United States Fidelity & Guarantee Co.[29] The underlying action involved two large, competing life insurance companies. Monumental allegedly undertook an extensive campaign of hiring away the employees of Peoples Security Life in order to obtain confidential information that those employees had gained during their employment at Peoples. In addition, Monumental allegedly made defamatory and disparaging statements to third parties about Peoples’ financial stability. Peoples filed a suit against Monumental, for which Monumental sought coverage from Reliance Insurance Company under an AI/PI policy that provided coverage only for “occurrences,” defined as accidents resulting in injury unexpected and unintended from the standpoint of the insured. In the coverage action, Monumental argued the “occurrence” requirement created illusory coverage, citing Liberty Life. The court, however, rejected this position, stating:

We believe that, by so arguing, Monumental is confusing an intentional act (which forms the basis of much tort liability) with intended results (which precludes coverage under Reliance’s policy). . . .

The distinction between intentional acts and intended results is both subtle and significant. An intentional act can result in both intended and unintended consequences. Moreover, the “intentional” torts of defamation and unfair competition (both of which are at issue presently) can be committed without the actor intending to cause harmful results.

Consequently, there is nothing illusory about a liability policy that only provides coverage for activities that yield unintended results.[30]

Similarly, in Edquist v. Insurance Co. of North America,[31] the court rejected the policyholder’s contention that the AI/PI policy was ambiguous and upheld the “occurrence” requirement. The court reasoned that, since the enumerated offense of false imprisonment does not require a showing of intent to harm, there was no “irreconcilable conflict” in the policy. The “occurrence” definition was interpreted to exclude from coverage only intended injuries, not unintended injuries resulting from intentional acts. However, under the particular circumstances of the case, the court found it clear the policyholder intended to harm or injure the claimant, thus the insurer was absolved of the duty to defend.[32]

The approach adopted in Edquist is equally applicable to other enumerated offenses in the typical AI/PI policy. For example, an action for defamation of a private person may be occasioned by mere negligence on the part of the publisher.[33] With respect to the enumerated offense of invasion of privacy, a prima facie case does not require a showing of expectation or intent to injure, but rather a showing of conduct offensive to a reasonable person in the position of the victim.[34] Nor does an action for malicious prosecution imply an expected or intended injury, rather, an unreasonable belief in the validity of an action may form the basis of liability.[35] An action for defamation of a public official or public figure requires at least recklessness on the part of the publisher, but recklessness still does not necessarily amount to a subjective expectation or intent to injure.[36] Similarly, recklessness can give rise to actions for disparagement of goods, products, or services.[37] As these examples illustrate, a prohibition of advertising injury and personal injury coverage for expected or intended injuries does not create “illusory” coverage. A broad area of liability for the enumerated offenses remains eligible for coverage because none of the offenses necessarily entails an expectation of injury or an intent to injure. Therefore, no court should find the occurrence requirements in AI/PI policies as creating “illusory” coverage.

IV.

Intentional Injury Exclusion

Another expression of the fortuity concept, occasionally added to some AI/PI policies, is the “intentional injury exclusion.”[38] A typical intentional injury exclusion provides that coverage shall not apply “to any act committed by or at the direction of the insured with intent to cause personal injury or advertising injury.” Although a limited number of courts have concluded that an “occurrence” definition within the context of AI/PI policies creates an ambiguity or contradiction in the policy language, courts have generally agreed that the “intentional injury exclusion” does not cause such problems.[39] This is somewhat surprising, given the substantial similarities in both language and purpose of these two provisions. In any event, courts have upheld intentional injury exclusions within AI/PI policies, holding that they bar coverage where an intent to injure is present. This judicial treatment retains an element of fortuity within AI/PI policies by disallowing coverage when the insured has improperly controlled the risk by intentionally causing a loss. As one court has explained:

At first glance, Selective’s coverage of personal injuries arising out of defamation and its exclusion for acts intended to cause personal injury appear to be in direct conflict, particularly when one recognizes that defamation is commonly classified as an “intentional tort.” For this reason, some courts have gone as far as to conclude that where, as in this case, the policy specifically provides coverage for defamation but excludes coverage for intentional acts, the policy is inherently ambiguous and, therefore, must be construed in favor of coverage. . . .

We believe that the most reasonable interpretation of this clause is the one Selective champions: coverage for injuries arising from defamation claims is excluded when the insured intends to cause that injury.[40]

Again, a pattern is evident from a review of the case law in this area. Like their treatment of the “knowing falsehoods” exclusion, courts often hesitate to apply the intentional injury exclusion to an insurer’s duty to defend unless the allegations of the underlying complaint make it absolutely certain that the exclusion applies. Courts will, however, readily apply the exclusion to the duty to indemnify once it is established that the insured actually intended to cause injury.[41]

Clearly, the intentional injury exclusion raises some troublesome evidentiary hurdles for insurers since the insured’s subjective state of mind is at issue. In certain cases, however, the insurer may be relieved of the burden of proving the policyholder’s actual state of mind. The intent to injure may be established by legal inference or by presumption. One commentator has explained that: “[u]nder some circumstances, an intent to injure may be presumed, inferred, or constructed upon the basis of certain kinds of intentional conduct. For example, forcible sex with an adult, and any sex with a child, implies the intent to injure as a matter of law.”[42]

It is not clear under what circumstances an intent to injure may be presumed, inferred or constructed in the context of claims for the enumerated personal injury or advertising injury offenses. Nonetheless, it is likely such circumstances do exist and will arise.[43] Accordingly, coverage counsel and claims professionals are well advised to always consider the possibility of inferred intent when dealing with intentional injury exclusions or occurrence requirements.

V.

Public Policy and Fortuity

As discussed, many courts have upheld “occurrence” requirements or intentional injury exclusions in AI/PI policies, finding such provisions consistent with the grant of coverage for enumerated offenses. The fortuity principle -- which states that injuries an insured intends to cause are not properly the subject of a policy of insurance -- lends support to the holdings of those courts. Importantly, the dictates of the fortuity principle go beyond merely upholding express provisions; they also lead directly to the conclusion that an implied fortuity requirement is contained in every policy of insurance. This conclusion, however, is not a novel one. As former Professor Keeton aptly stated: “A requirement that loss be accidental in some sense in order to qualify as the occasion for liability of an insurer is implicit, when not express, because of the very nature of insurance.”[44]

Courts and legislatures in many states have since enunciated a public policy against allowing insurance for intentional injury, reading an implied intentional injury exclusion into all contracts of insurance.[45] Importantly, none of these public policies creates an exception for AI/PI policies. The public policy against insurance for intended injuries flows logically from the requirement that every policy of insurance contain an element of fortuity. Truly, the public policy against intentional injury and the fortuity principle appear to be two expressions of a single concept that an “implied” intentional injury exclusion is contained in every insurance contract, including those providing coverage for advertising injury and personal injury.

The interplay between public policy concerns and the concept of fortuity is illustrated in two recent cases. In State Farm Mutual Automobile Insurance Co. v. Wertz,[46] the South Dakota Supreme Court held that insurance for intentionally caused injuries violates public policy. The court provided two justifications for its conclusion, both of which evidence its sophisticated understanding of the principles of insurance. First, the court explained, “[w]ere a person able to insure himself against [the] economic consequences of his intentional wrongdoing, the deterrence attributable to financial responsibility would be missing.”[47] Second, the court accurately noted, “if a single insured is allowed through intentional or reckless acts to consciously control risks covered by the policy, the central concept of insurance is violated.”[48] These dual goals of the public policy against insurance for intentional injury are equally applicable to all types of insurance, including personal injury and advertising injury insurance.

In Essex Insurance Co. v. Redtail Products, Inc.,[49] the District Court for the Northern District of Texas considered public policy concerns in finding that an insurer did not have a duty to defend. In Essex, the policy was issued two weeks after the insured received a demand to stop using certain trademarks in conjunction with its products. The court emphasized that the insured was engaged in activity for which it could be found liable at the time it purchased insurance, and it summarily held that the insurer had no duty to defend because the insured had violated the principle of fortuity, “an inherent requirement of all risk insurance policies.”[50]

Since AI/PI policies do not contain express fortuity requirements, some policyholders may argue that there is no such requirement, either express or implied, in the policy. That position is untenable. Courts first enunciated the concept of fortuity long ago, in the context of first-party marine insurance policies, which did not contain an express fortuity requirement.[51] The absence of explicit fortuity language, however, did not impede the development of the principle of fortuity because it is a function of both sound public policy and basic insurance law, not private contract. Accordingly, a court can and should read an intentional injury exclusion into an AI/PI policy as a matter of law.

The public policy against insurance for intentional injuries, however, may not relieve an insurer of the duty to defend. Some courts have concluded that public policy is not offended by requiring an insurer to defend an action founded upon allegations of intended injury, recognizing the possibility that such allegations may be false. For example, in Nortek, Inc. v. Liberty Mutual Insurance Co.,[52] Nortek sought advertising injury coverage for a suit alleging misappropriation of a competitor’s product line. Liberty Mutual argued it was not obligated to defend the action since there was no possibility of ultimate recovery under the policy, pointing to the public policy against insurance for “intentional torts.” The court rejected Liberty Mutual’s position, stating:

Thus, even if coverage for one of the “designated offenses” would constitute a violation of public policy, it is important to distinguish between public policy as it relates to the duty to indemnify for intentional wrongs and public policy as it relates to the duty to defend against a complaint alleging intentional wrongs. The public policy behind prohibiting indemnification for intentional wrongs is clear -- society does not wish to “encourage” people intending harm by allowing them to escape ultimate monetary liability. However, public policy does not counsel against an insurance company providing a defense against claims of intentional conduct especially where, as here, the insurance company itself drafted coverage for “intentional” torts in the policy and there has been no determination yet of “intentional conduct” -- only allegations.[53]

As the forgoing case law suggests, the insurance coverage attorney or claims handler should always consider the possibility of a public policy argument when faced with a dispute over personal injury or advertising injury coverage for intended injuries. Where the facts demonstrate the insured acted with the intent to cause injury, thereby controlling the risk and eliminating the element of fortuity from the insurance contract, the insurer should be relieved of the duty to indemnify. Whether a duty to defend exists in such a situation will likely depend upon the specific facts and applicable law. Again, recall that an inferred intent to injure may be a possibility under certain circumstances.

VI.

The 1998 ISO Form Exclusion For Intentional Injury

As discussed in the Introduction, the definitions of personal injury and advertising injury have been combined into a single definition of “personal and advertising injury” under the 1998 ISO form. The 1998 ISO form also includes a new exclusion, quite similar to the intentional injury exclusion discussed in Section IV, which bars coverage for personal and advertising injury: “caused by or at the direction of the insured with knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury.’”[54] Although there are no reported cases that construe this intentional injury exclusion, ISO has commented on it as follows:

An exclusion has been added to paragraph a. to preclude coverage under circumstances in which the personal or advertising injury is caused by the insured with the knowledge that the act would violate another’s rights and inflict “personal and advertising injury.” Although Coverage B is essentially an “intentional acts” coverage, this exclusion serves the purpose of excluding the intention to commit an offense under “personal and advertising injury.” This is similar to the current exclusion pertaining to the commitment of libel or slander against another intentionally with knowledge of its falsity.[55]

The scope of the new exclusion is limited to those situations where the insured commits or directs another to commit an act with knowledge that such act will violate the rights of another and inflict “personal or advertising injury.” The language of the new exclusion also makes clear the underwriting intent to exclude coverage for any non-fortuitous losses. Since the language does not extend to intentional acts resulting in unintended injury, there is no threat of illusory coverage. In other words, the coverage grant and the exclusionary language are easily harmonized when read in a reasonable fashion and with an eye toward the fortuity doctrine. The authors believe courts will uphold this exclusion on a consistent basis. Thus, this exclusion should eliminate much of the debate and litigation stemming from earlier policy forms that used “occurrence” definitions or less precise intentional injury exclusions.

VII.

CONCLUSION

Fortuity is a critical component of all forms of insurance. As such, it can play an important role in resolving insurance coverage disputes, particularly those involving AI/PI policies that contain “occurrence” requirements or intentional injury exclusions, because it favors the enforcement of such policy provisions. In order to maintain the essential element of fortuity in AI/PI policies, an intentional injury exclusion should be implied in all policies of insurance covering advertising injuries and personal injuries. Although courts have not fully embraced it, fundamental insurance principles and the public policy of numerous states support this conclusion. The authors believe it is likely that the recent modifications to the standard CGL form will eliminate most of the uncertainty in this area, leading to a more consistent application of the fortuity doctrine to AI/PI policies.

ENDNOTES

---

* A version of this article was first published in the Insurance Litigation Reporter on February 1, 1997, Vol. 19, No. 2, p. 28. It has been substantially updated and modified for this publication.

[1] Intermetal Mexicana, S.A. v. Ins. Co. of North America, No. 84-6179, 1988 WL 71250, slip op. at 3 (E.D. Pa. June 30, 1988), rev’d on other grounds, 866 F.2d 71 (3d Cir. 1989).

[2] R.E. Keeton & A.I. Widiss, Insurance Law §5.3(a), at 475 (1988).

[3] Long ago, Judge Cardozo announced the simple principle that “no one shall be permitted to take advantage of his own wrong.” Messersmith v. American Fid. Co., 133 N.E. 432 (N.Y. 1921). Since then, many state legislatures have adopted the fortuity principle. See, e.g., N.Y. Ins. Law §1101(A)(1) (McKinney 1985) (defining “insurance contract” as an obligation to confer a benefit of pecuniary value upon another party “dependent upon the happening of a fortuitous event”); Cal. Ins. Code §22 (West 1972) (stating “[i]nsurance is a contract whereby one undertakes to indemnify another against loss, damage or liability arising from a contingent or unknown event”).

[4] C. Raymond Davis & Sons, Inc. v. Liberty Mut. Ins. Co., 467 F. Supp. 17, 20 (E.D. Pa. 1979) (stating that, “[i]ntentional harm is entirely under the control of the insured; ‘expected’ harm is far more likely to occur than is the ‘feared’ harm (risk) with which normal actuarial calculations are designed to deal.”).

[5] Chu v. Canadian Indem. Co., 274 Cal. Rptr.2d 20, 25 (Ct. App. 1990) (citations omitted).

[6] Form CGL 0001 11 85. This language was amended slightly in 1988, but the changes are inconsequential to the analysis in this article and, therefore, are not discussed.

[7] Form CGL 0001 07 98.

[8] Id.

[9] Id.

[10] 193 F.3d 952 (8th Cir. 1999) (applying Minnesota law).

[11] The underlying complaint did not specifically allege that the insured had knowingly made a false oral or written publication of materials. However, the court noted that each of the nine claims in the underlying complaint began by re-stating allegations that the insured had engaged in “bait and switch” tactics. Thus, the court correctly understood that “[i]t would defy logic to interpret this language as alleging anything other than the insured acted falsely and with knowledge of that falsity.” Id. at 957 n.5.

[12] 890 F. Supp. 634 (S.D. Tex. 1995).

[13] The court limited this holding to the extent that the complaint alleged the defamatory statements made by Peppers were known to be false. To the extent there were no specific allegations that Peppers made defamatory statements with knowledge of their falsity, however, the court held that an employment practices exclusion applied. See id. at 644-45.

[14] 844 F. Supp. 325 (S.D. Tex. 1993).

[15] Id. at 326.

[16] Id. at 331 (citations omitted).

[17] See, e.g., E.E.O.C. v. Southern Pub. Co., Inc., 894 F.2d 785 (5th Cir. 1990) (applying Mississippi law) (stating that an insurer had a duty to defend a sexual harassment suit tendered under the personal injury clause because the “knowing falsehoods” exclusion was not clearly implicated where the complaint, which included claims for slander, alleged both knowledge and negligence on the part of the insured).

[18] 2 F. Supp.2d 296 (W.D.N.Y. 1998).

[19] 1997 WL 704932 (6th Cir. Nov. 7, 1997) (applying Michigan law). This case is an unpublished decision and is listed in the Table of Decisions Without Reported Opinions at 129 F.3d 1265 (6th Cir. 1997).

[20] The court further held that Hartford had a duty to defend “until the claims against Total were restricted to exclusively deliberate intentional falsehoods.” Id. at *2.

[21] No. 95-4845, 1996 WL 389266 (S.D.N.Y. July 10, 1996).

[22] Id. at *10.

[23] Id.

[24] See, e.g., Bay Elec. Supply, Inc. v. Travelers Lloyds Ins. Co., 61 F. Supp.2d 611 (S.D. Tex. 1999) (holding that “knowledge of falsity” exclusion did not apply to claims for trademark or trade dress infringement because the plaintiffs in the underlying action could have been found liable under a reckless or negligent standard); Simply Lite Food Corp.. v. Aetna Cas. & Sur. Co. of America, 666 N.Y.S.2d 714 (Sup. Ct. 1997) (finding that presence of allegations involving unfair business practices did not require knowledge of falsity and insurer was obligated to defend suit).

[25] 857 F.2d 945 (4th Cir. 1988) (applying South Carolina law).

[26] Id. at 950-51.

[27] 714 A.2d 1230 (Conn. 1998).

[28] Id. at 1237; see also, Tews Funeral Home, Inc. v. Ohio Cas. Ins. Co., 832 F.2d 1037 (7th Cir. 1987) (applying Illinois law) (stating that the internal inconsistency of providing coverage for numerous advertising injury offenses that were intentional torts and excluding coverage for intentional conduct by way of “occurrence” definition must be construed against insurer); North Bank v. Cincinnati Ins. Cos., 125 F.3d 983 (6th Cir. 1997) (applying Michigan law) (holding that the definition of “occurrence” that limits coverage for intentional acts and the definition of “personal injury” that provides coverage for intentional acts is ambiguous and must be construed against the insurer); Hurst-Rocshe Engineers, Inc. v. Commercial Union Ins. Co., 51 F.3d 1336 (7th Cir. 1995) (applying Illinois law) (holding the definition of “personal injury” which includes intentional torts and the “occurrence” requirement which limits personal injury coverage to accidents that result in the unexpected or unintentional injury create an internal inconsistency that must be resolved in favor of the insured); Missouri Prop. & Cas. Ins. Guar. Assoc. v. Petrolite Corp., 918 S.W.2d 869 (Mo. Ct. App. 1996) (invalidating the “occurrence” requirement in a personal injury policy because purported insurance for “unintentional intentional torts” was deemed ambiguous and illusory).

[29] 617 A.2d 1163 (Md. Ct. Spec. App. 1993).

[30] Id. at 1177 (citations omitted).

[31] No. C6-95-1111, 1995 WL 635179 (Minn. Ct. App. Oct. 31, 1995). This is an unpublished decision.

[32] See also, Transamerica Ins. Group v. Rubens, No. 97-8911, 1999 WL 673338 (S.D.N.Y Aug. 27, 1999) (finding that the insurer’s duty to defend a false imprisonment claim was negated by the accident based definition of “occurrence”); David Kleis, Inc. v. Superior Court, 44 Cal. Rptr.2d 181 (Ct. App. 1995) (stating that since an occurrence requirement is included in the personal injury insurance, the policy obviously contemplates that the enumerated offenses of false imprisonment, defamation, and invasion of the right of privacy may be occasioned by an occurrence, otherwise it would be surplusage to include these acts within the grant of coverage).

[33] Restatement (Second) of Torts §§558(c), 577 (1), and 580B (1977).

[34] Id. at §652B-E.

[35] Id. at §§674(a) and 675.

[36] Id. at §580A.

[37] Id. at §§623A (b), 624, 626, and 630.

[38] This exclusion is sometimes mistakenly referred to as an “intentional acts exclusion.” This misnomer can lead to the mistaken conclusion that this exclusion is inconsistent with the coverage grant for certain personal injury and advertising injury offenses that require an intentional act. Counsel for and representatives of insurers must, therefore, remain cognizant of this important distinction, and clarify any confusion by policyholders or their counsel on this issue. In the context of bodily injury and property damage coverage, where intentional injury exclusions have appeared more frequently, the distinction is explained as follows:

Most liability policies are not only “occurrence” based, and therefore, “accident” based, but they also contain an exclusion for bodily injury or property damage intended, or expected, from the standpoint of the insured. Sometimes the exclusion covers bodily injury or property damage intentionally caused by, or at the direction of the insured. Obviously, these exclusions are not quite the same because of the meaning of the term “expected,” but they are very close. Some adjusters are accustomed to thinking of this exclusion as an “intentional acts” exclusion. It is not. It is an “intentional, or expected, injuries” exclusion. This may seem like an obvious point. However, it causes much confusion among lawyers and claims people.

Michael Sean Quinn & L. Kimberly Steele, Insurance Coverage Opinions, 36 S. Tex. L. Rev. 479, 526 (1995).

[39] Some courts have interpreted personal umbrella policies that contain “expected or intended” exclusions as providing illusory coverage when dealing with claims for intentional torts. See, e.g., Bailer v. Erie Ins. Exchange, 687 A.2d 1375 (Md. 1997) (finding a personal umbrella policy ambiguous for providing coverage for invasion of privacy and excluding personal injuries that are expected or intended); and Purrelli v. State Farm Fire & Cas. Co., 698 So. 2d 618 (Fla. Dist. Ct. App. 1997) (stating that a personal umbrella policy was at best unclear and ambiguous when the policy defined personal injury to include the intentional tort of invasion of privacy but excluded personal injuries that were expected or intended). A court could certainly extend the logic contained in these cases to intentional injury exclusions contained in advertising injury or personal injury insurance policies.

[40] Fuisz v. Selective Ins. Co. of Am., 61 F.3d 238 (4th Cir. 1995) (applying Virgina law); See also Transamerica Ins. Group v. Rubens, No. 97-8911, 1999 WL 673338 (S.D.N.Y. Aug. 27, 1999) (granting summary judgment in favor of insurer on issue of duty to defend and indemnify where underlying complaint alleged intentional tort of false imprisonment and insurer issued policies with intentional injury exclusions).

[41] See, e.g., Federal Ins. Co. v. Applestein, 377 So. 2d 229 (Fla. Dist. Ct. App. 1979) (finding the intentional injury exclusion to personal injury coverage clearly applied and precluded any duty to defend a defamation action based upon alleged statements made “with malice” and in an “attempt to discredit”); Shapiro v. Glens Falls Ins. Co., 347 N.E.2d 624 (N.Y. 1976) (holding an insurer had no duty to defend an action for defamation alleging willful and malicious intent to injure because intentional injury exclusion applies).

[42] Quinn & Steele, supra. note 38 at 526-27.

[43] Most courts nationally have adopted the inferred-intent approach to claims of sexual abuse. See, Fire Ins. Exchange v. Diehl, 545 N.W.2d 602 n.4 (Mich. 1996) (noting thirty-six jurisdictions have found that the intent to injure is inferred as a matter of law when an adult sexually assaults a minor). Courts, at the same time, have been quite reluctant to extend the inferred-intent approach to other types of claims. See Western States Ins. Co. v. Bobo, 644 N.E.2d 486, 517 (Ill. App. Ct. 1994), appeal denied, 649 N.E.2d 427 (Ill. 1995) (noting that Illinois follows the majority inferred-intent approach with respect to sexual abuse cases, but only specific intent to injure on the part of the insured will suffice to trigger an intentional injury exclusion in non-sexual abuse cases); but see, Phoenix Control Systems, Inc. v. Insurance Co. of N. Am., 796 P.2d 463, 468 (Ariz. 1990) (holding that “[c]ourts may infer intent as a matter of law where an insured’s actions are unprovoked and the primary desire is to injure the victim,” which seems to indicate that situations other than sexual abuse may give rise to an inferred intent to injure).

[44] Robert E. Keeton, Insurance Law § 5.4(a), at 288 (1988); see also, Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance Coverage Disputes § 8.02(a), at 412-23 (10th ed. 2000) (listing numerous authorities for the proposition that fortuity is inherent in the nature of insurance).

[45] See, e.g., Cal. Civ. Code 1668 (West 1994); S.D. Codified Laws Ann. §53-9-3 (Michie 1993); St. Paul Fire and Marine Ins. Co. v. Shernow, 610 A.2d 1281 (Conn. 1992) (discussing public policy prohibiting insurance for intended injury, as opposed to injury caused by a volitional act); Solo Cup Co. v. Federal Ins. Co., 619 F.2d 1178 (7th Cir.), cert. denied, 449 U.S. 1033 (1980) (applying Illinois law) (illustrating that public policy dictates that courts will construe insurance policies such that coverage is not extended to the knowledgeable and intentional, or the criminal wrongdoer); Allstate Ins. Co. v. Stone, 876 P.2d 313 (Or. 1994) (enunciating the public policy prohibition against insurance for acts committed with the purpose of inflicting injury or where the nature of acts is such that intent to injure is presumed).

[46] 540 N.W.2d 636 (S.D. 1995).

[47] Id. at 640 (quoting City of Fort Pierre v. United Fire & Cas. Co., 463 N.W.2d 845, 849 (S.D. 1990)).

[48] Id. at 641 (quoting Tri-State Co. of Minn. v. Bollinger, 476 N.W.2d 697, 705 (S.D. 1991) (Wuest, J., concurring in part and dissenting in part)).

[49] No. 3:97-CV-2120-D, 1998 WL 812394 (N.D. Tex. Nov. 13, 1998).

[50] Id. at *4 (citing Two Pesos, Inc. v. Gulf Ins. Co., 901 S.W.2d 495, 501 (Tex. App. 1995)).

[51] Harold M. Provizer & Noel F. Beck, Making Sense of the Fortuity Doctrine, For the Defense, Feb. 1996, at 21.

[52] 858 F. Supp. 1231 (D.R.I. 1994).

[53] Id. at 1239-40.

[54] Form CGL 0001 07 98.

[55] Insurance Services Office, Inc., 1998 General Liability Multistate Forms Revision, Commercial General Liability Forms Filing GL-97-097FR, at 19.

(Authors’ bios)

Todd S. Schenk is a partner with the law firm of Tressler Soderstrom Maloney & Priess. His practice concentrates on counseling and representing insurance companies with respect to advertising and personal injury and technology claims. He is a member of the DRI Young Lawyers, Insurance, and Industrywide Litigation Committees, and a frequent author and lecturer on insurance coverage topics.

Andrew S. Boris is an associate with the law firm of Tressler Soderstrom Maloney & Priess. His practice concentrates on counseling and representing insurance companies with respect to a variety of insurance claims. He has authored numerous articles addressing insurance coverage and reinsurance issues.