Intellectual Property Exclusions and Trends in Insurance Coverage Law in Massachusetts
At this point, I think we are entering a new era in Massachusetts law concerning insurance coverage, one different than any I have seen before in my decades of litigating such cases in the Commonwealth. In this brave new world, policies are apparently applied as written, and insureds cannot just claim ambiguities or that they had expectations - somehow reasonable despite being contrary to the actual wording of the policy - of coverage somehow different than that actually provided. That, at least, is the moral of Finn v. National Union, decided last week by the Supreme Judicial Court. In essence, the court enforced the plain language of an intellectual property exclusion in the policy, despite attempts by the insured to argue that it did not necessarily encompass some of the factual variation of the particular claim at issue, and the court expressly held as well that the reasonable expectations doctrine is inapplicable because the exclusion unambiguously precluded coverage. The court, interestingly, didn’t even elect to stop there, deciding to also hammer home the point that the plain language of unambiguous policy provisions controls, by pointing out that extrinsic evidence supporting a contrary reading of the policy cannot be considered in the absence of ambiguity; this is contrary to decades of actual practice in the state’s trial courts, where lawyers for policyholders would regularly toss anything and everything possibly pointing towards coverage into their arguments. The novelty of this idea in Massachusetts practice is illustrated by the fact that the court actually had to go back almost 40 years and then another 40 years more to find two Massachusetts cases to cite to that effect, despite how widely accepted and uncontroversial this idea is in other jurisdictions. A new day dawning? Maybe, but it certainly fits with my sense of the development of insurance coverage case law in this state over the past few years.
Life Insurance, Good Health, and the Reasonable Expectations Doctrine
Permalink | Wow, here is a great insurance coverage story out of the Massachusetts Lawyers Weekly, concerning a state trial court decision over the impact of a particular clause in a life insurance policy. The case involved a life insurance policy containing a clause under which the policy only became effective if the insured was in good health at the time of issuance. The life insurer had a medical exam conducted on the applicant for the coverage, and found him to be healthy enough for the policy to be issued. Two weeks later, however, he was found by his own physicians to have a terminal disease. The life insurer sought to deny the claim, after his death, for the life insurance proceeds on the ground that the good health requirement was not met.
The state trial court, probably rightly so, ruled against the insurer, restricting the good health clause to limiting coverage if the insured knew or should have known that he was not in good health, and rejected the insurer’s argument that the clause instead applies on an objective level and precludes coverage if the insured was not in good health at the time of issuance, without regard to what the insured or anyone else actually knew at that time. The court’s choice seems to me to be a reasonable and fair result. But what is really interesting about it is that in doing so, the trial court rejected 85 year old precedent to the contrary, finding that it was outdated and that changing the rule to instead apply in the manner selected by the trial court better conformed to the reasonable expectations of the insured.
I have talked before in this blog about the reasonable expectations doctrine, and about the idea that it can be understood as a tool for the court to look at an insurance contract and give it the most realistic and sensible interpretation for the parties given that the parties themselves at the time of contracting are limited in their ability to anticipate the future events over which they are contracting and have only a finite capacity for capturing all possible contingencies in the policy language. This case represents a perfect example of that use of the doctrine, particularly so given the extraordinary rarity of the fact pattern at issue. Really, what reasonable insured or insurer - particularly after the insurer had arranged for a pre-coverage medical examination of the applicant - would have anticipated this exact fact pattern? And for that matter, what applicant would buy coverage, after being examined and having his medical records reviewed by the insurer prior to coverage being approved, if the coverage would vanish if, contrary to the knowledge of both the insurer and the insured, he was thereafter found to be terminally ill?
Massachusetts Insurance Coverage Law in a Nutshell
Permalink | I wanted to pass on to you a case out of the United States District Court for the Northern District of Ohio that was issued about the time I was trying a patent infringement case last month, and which I wasn’t able to comment on then as a result. With a little more time now, however, I wanted to go back to it and mention it here, because, despite being out of Ohio, it applies Massachusetts law on the duty to defend under insurance policies and on the rules for interpreting insurance policies. The court provides a terrific, and easily quoted, summation of the rules in this state on those issues:
Under Massachusetts law, as in most jurisdictions, "the question of the initial duty of a liability insurer to defend third-party actions against the insured is decided by matching the third-party complaint with the policy provisions . . ." Sterilite Corp. v. Continental Cas. Co., 17 Mass. App. Ct. 316, 318, 458 N.E.2d 338 (1984). The duty to defend arises if, in comparing the policy terms with the third-party complaint, "the allegations of the complaint are 'reasonably susceptible' of an interpretation that they state or adumbrate a claim covered by the policy terms . . . Otherwise stated, the process is one of envisaging what kinds of losses may be proved as lying within the range of the allegations of the complaint, and then seeing whether any such loss fits the expectation of protective insurance reasonably generated by the terms of the policy." Id. (quoting Vappi & Co., Inc. v. Aetna Cas. & Sur. Co., 348 Mass. 427, 431, 204 N.E.2d 273 (1965)) (citations omitted); see also Simplex Techs., Inc. v. Liberty Mut. Ins. Co., 429 Mass. 196, 197-98, 706 N.E.2d 1135 (1999) (quoting same). The insured bears the initial burden of proving that a claim falls within the grant of coverage. See Camp Dresser & McKee, Inc. v. Home Ins. Co., 30 Mass. App. Ct. 318, 321, 568 N.E.2d 631 (1991).
"It is well settled in [Massachusetts] that a liability insurer owes a broad duty to defend its insured against any claims that create a potential for liability." Simplex, 429 Mass. at 199 (quoting Doe v. Liberty Mut. Ins. Co., 423 Mass. 366, 368, 667 N.E.2d 1149 (1996)) (emphasis supplied by Simplex court). The cause of action stated in the complaint need only give rise to a possibility of recovery, "there need not be a probability of recovery." Id. (citation omitted) (emphasis added). Indeed, a duty to defend may arise "even if the claim is baseless." Mt. Airy Ins. Co. v. Greenbaum, 127 F.3d 15, 19 (1st Cir. 1997) (applying Massachusetts law); see also Sterilite, 17 Mass. App. Ct. at 324 ("the insurer stands in breach of its duty even if the third party fails in the end to support any such claim of liability by adequate proof."). In addition, "[t]hat some, or even many, of the underlying claims may fall outside the coverage does not excuse [the insurer] from its duty to defend the actions." Simplex, 429 Mass. at 199 (quoting Camp Dresser & McKee, Inc. v. Home Ins. Co., 30 Mass. App. Ct. 318, 322, 568 N.E.2d 631 (1991)).
Massachusetts courts have explained that, "when construing the language of an insurance policy, it is appropriate 'to consider [whether] an objectively reasonable insured, reading the relevant policy language, would expect to be covered." Nashua Corp. v. First State Ins. Co., 420 Mass. 196, 200, 648 N.E.2d 1272 (1995) (quoting Hazen Paper Co. v. U.S. Fidelity & Guar. Co., 407 Mass. 689, 700, 555 N.E.2d 576 (1990). Further, "an insured is entitled to the most favorable interpretation of the policy language when there is more than one rational interpretation of the policy language, or where the policy language is ambiguous." Id.; see also Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7, 12, 545 N.E.2d 1156 (1989) ("Where the language permits more than one rational interpretation, that most favorable to the insured is to be taken.").
The case is Royal Insurance Company v. Boston Beer Company, 2007 U.S. Dist. LEXIS 25513 (D. Ohio 2007). The decision comes out of a court that, unfortunately, does not make all of its opinions available for free on line, something that all courts frankly should do, and so I cannot provide a link to the opinion.
Contract Law and Insurance Coverage
Although we treat insurance coverage cases as contract disputes, I am not altogether convinced that the law of contracts really is the animating principle behind insurance coverage decisions. Certainly, at the very least, one can't take a gander at a standard contracts hornbook (that is lawyer talk for a book that provides a readers digest type summary of an entire legal subject) and really have any idea from it how to resolve an insurance coverage dispute. At a minimum, it is certainly the case that only by adding quasi-contractual principles - such as the reasonable expectations doctrine - to the traditional rules of contract law that the contract law regime can be seen as explaining the outcome of insurance coverage cases.
Whatever the case may be on that front, one of my favorite blogs, covering decisions out of the First Circuit, has the story of a recent decision from the First Circuit that applies the old law school contracts class chestnut of mutual mistake to an insurance coverage dispute. The post and the case are interesting reading, for those of us who like either contract law or insurance coverage, or worse yet, like me, both.
Pollution Exclusions and the Reasonable Expectations Doctrine
There is an interesting decision out of the Massachusetts Supreme Judicial Court concerning the application of a policy endorsement and its mirror image exclusion to coverage of an oil leak from an oil delivery truck. The spill occurred while the truck was parked overnight, in between two separate days of delivering oil. The Supreme Judicial Court found that the oil leak fell within the coverage granted by the endorsement for the release of pollutants while being transported by the insured, and not within the exclusion for pollutants released while being stored. Neither the facts themselves nor the finding is particularly noteworthy, other than as a classic example of the traditional approach of Massachusetts courts to the interpretation of insurance policies. The court interpreted the plain language of the endorsement, and found that, particularly in light of the strict construction normally given to exclusionary language in the Commonwealth, the events at issue fit within the coverage grant and not within the language of the exclusion.
What was of more interest to me was the court's reliance on the reasonable expectations doctrine to buttress its reasoning and conclusion. The court stated:
This interpretation of the indorsement is consistent with what an "objectively reasonable insured, reading the relevant policy language, would expect to be covered." Hakim v. Massachusetts Insurers' Insolvency Fund, 424 Mass. 275, 283 (1997), quoting Trustees of Tufts Univ. v. Commercial Union Ins. Co., 415 Mass. 844, 849 (1993). As noted above, City Fuel is in the business of delivering oil to residential customers. In purchasing an indorsement that covers the oil it delivers both while it is "[b]eing transported" and, more broadly, while it is "[o]therwise in the course of transit by" the insured, an objective purchaser in City Fuel's position would reasonably believe that a release of the oil would be covered from the time the oil is loaded onto its trucks until the time it is delivered to the customer, at least in the ordinary course.
For many years, Massachusetts courts assumed the existence and application of the reasonable insured doctrine in interpreting policies. Regardless of whether and how long it has been recognized in the Commonwealth, of interest to me is the intellectual rationale for this approach to interpretation. Is it legitimate? Is it intellectually defensible?
An insurance policy is a contract, so what warrants deviating from the actual language of it, and basing an interpretation instead on the supposedly reasonable expectations of only one of the parties to the contract? A while back, at a seminar for business and particularly real estate lawyers, I responded to an inquiry from a lawyer who represents real estate developers, and who objected to the idea that the policy was a contract that should be applied as written; his objection was premised on the assertion that what was written in the policy was not always consistent with the insured's purposes in acquiring the insurance. Now there are many ways to respond to such an argument, not the least of which is that, like any contract, it is the contracting party's responsibility to insure, pun intended, that the terms as reduced to writing are consistent with the actual agreement reached by the parties.
But the inquiry got me thinking about a more fundamental question. When I was in law school, more years ago than I care to admit to, Ronald Dworkin's writings on judicial reasoning and interpretation (generally of statutes) were a terrific starting point for much thought and consternation. His key point in one of his books, which one escapes me now, was the idea of the judge as just the next person in the course of reading and understanding the particular statute, or in this case contract, at issue. As extended to a contract, the idea was that the original contracting parties were the initial authors of the contract, but the words themselves in the agreement could not possibly encompass every possible scenario to which they might apply or account for every factual variable. As a result, strict constructionism, so to speak, of the contract is impossible; there is no original intent to the document that will cover all situations. The judge, however, becomes the next author, responsible for making a principled decision as to how to expand the understanding of the contract to make it properly fit the newest events to which the contract is being applied.
At the end of the day, isn't this how we should understand the reasonable expectations doctrine, as the court inserting itself into the role of being the latest author of the policy - rather than the policy and its meaning having been fixed in stone when the contracting parties entered into it? I am not convinced this is necessarily the right way to interpret policies, and I have some truck with the reasonable expectations doctrine itself (more on that some other time), but isn't that exactly what the Supreme Judicial Court was doing in this case, and isn't that exactly what courts are doing when they declare that the reasonable expectations of one party or another dictate that the policy be interpreted today in a particular manner?
The case, incidentally, is City Fuel Corp. Vs. National Fire Insurance Company of Hartford, SJC-09623 (May 10, 2006), available here, http://www.masslawyersweekly.com/signup/opinion.cfm?page=ma/opin/sup/1007806.htm