Insurers have been filing declaratory judgment actions against policyholders for all of the wrong reasons for years. This legal procedure, once sanctioned by certain courts in certain instances, is now widely being used by insurers as a sword to ward off legitimate claims. Case in point, an insurer recently sued the beloved Hollywood star, Reese Witherspoon. See Maryland Casualty v Reese Witherspoon ComplaintMaryland Casualty Company, v. Reese Witherspoon, Case No. CV13-7847 (C.D. Cal. 2013).
The underlying facts in the Witherspoon Case set the stage for what transpired. A business was alleged to have improperly used Reese Witherspoon’s “name, photograph, image, identity and persona” in advertisements. Believing that she had been wronged, Reese Witherspoon sued the company that she believed was improperly benefiting from the use of her image and identity in their advertisements. That company counterclaimed against her. Reese Witherspoon, in turn, tendered the lawsuit to her insurance carrier, Maryland Casualty.
Reese Witherspoon made the claim against her insurance carrier for good reason. The policy at issue is a General Liability Insurance policy with “advertising Injury” protection. Core protections afforded for advertising injury include, among other things, coverage for disputes arising out of: (1) 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, (2) oral or written publication of material that violates a person’s right of privacy, and (3) infringement of copyright, title or slogan. The underlying Witherspoon lawsuit appears to fall squarely within this broad advertising injury grant of coverage.
When an insurance carrier is presented with a claim like this, it only has two legitimate choices: defend the claim, or deny coverage. The defense obligation is commonly determined under the “eight corners” rule. There, the insurer looks at what is written in the four corners of the underlying complaint, and what is written in the four corners of the policy. If there is any possibility of coverage, the insurer must defend. There is no need for additional information, and the decision can and should be made in a matter of hours in someone’s office, without deliberation or delay. The beauty of this rule is that it is fair, clear and easy to follow.
The problem is that insurers are not following the rule. Insurers are using declaratory judgments to attack the most basic principle of the duty to defend – that a defense must be provided if there is any doubt as to coverage. In this instance, Maryland Casualty filed the lawsuit against Reese Witherspoon because, by its own admission, it believed that there was doubt as to coverage. If Maryland Casualty believed that there was legitimate doubt as to coverage, it should have defended the underlying Witherspoon lawsuit.
The solution, we believe, is to hold insurers accountable for their actions. If an insurer sues, and it is wrong, the insurer must pay the policyholder the foreseeable damages associated with its breach and wrongful decision to sue. This includes attorneys’ fees paid to outside coverage counsel hired to defend the insurer’s wrongful suit. In addition, corporate policyholders should not overlook bad faith laws, as these laws are designed to protect large corporate policyholders and individuals alike.
Unfortunately, this problem is much bigger than one lawsuit against one famous person. We have an epidemic of lawsuits filed by insurers for all of the wrong reasons that never should have been filed.
Miller Friel, PLLC is a specialized insurance coverage law firm whose sole purpose is to help corporate clients maximize their insurance coverage. Our Focus of exclusively representing policyholders, combined with our extensive Experience in the area of insurance law, leads to greater efficiency, lower costs and better Results. Further discussion and analysis of insurance coverage issues impacting policyholders can be found in our Miller Friel Insurance Coverage Blog and our 7 Tips for Maximizing Coverage series. For additional information about this post, please email or call Mark Miller (MillerM@MillerFriel.com, 202-760-3161).