While the most important provision of a commercial general liability policy is the insured’s right to indemnity for a covered claim, sometimes the policy’s provision providing that the insurance company will defend the insured is paramount
A recent Appeals Court case highlights the legal rules for finding a duty to defend
The appellate decision, EL Group, LLC, et al. v. Utica National Insurance Group, et al. began in 2014, when the EL Group had sued a former partner, Frank Clegg, for various breaches arising out of a failed joint business venture. When the partner filed a thirteen-count counterclaim in response to the initial complaint, the EL Group sought coverage from Utica under its commercial liability policy’s personal injury and advertising injury coverage, claiming that the counterclaim alleged a possible personal injury that required Utica to defend. After Utica denied that any of the counterclaims’ counts raised any possibility of coverage, and after having had to pay $750,000 to defend the counterclaim’s allegations, the EL Group settled the original suit and counterclaim with the former partner.
Before the EL Group settled its litigation with its former partner, the EL Group sued Utica for breach of its duty to defend in a separate Superior Court action. After the Superior Court ruled in favor of Utica, the EL Group appealed. In a relatively short opinion, the Appeals Court laid out the liberal rules that broadly construe an insurer’s duty to defend in Massachusetts and found that the counterclaim in question while not alleging defamation (a covered personal injury) “alleged that the plaintiffs’ false statements “impugn[ed] the professional reputation of Frank Clegg as a designer and manufacturer [and], whether they have merit or not, were enough to raise the possibility that the complaint alleged a ‘personal and advertising injury,’ as defined by the policies.”
The EL Group decision demonstrates how broadly a Massachusetts court will interpret the duty to defend, and for that reason, the facts of the case and legal principles applied by the court provide useful advice to agents and claims persons about the duty to defend under a liability policy.
A failed joint business venture causes a suit and countersuit
In 2008, the EL Group (which for this article is a collective name of the plaintiffs) and Frank Clegg entered into a business arrangement to develop, manufacture, and market high-end leather accessories under the trade name “Lotuff & Clegg.
Per the agreement, Mr. Clegg would manufacture the design and manufacture the leather products, and the EL Group would market and sell the products through exclusive retailers and a website.
Although the venture had initial success, in October 2011, Mr. Clegg terminated the agreement with the EL Group. Thereafter, the EL Group and Mr. Clegg established competing businesses. In May 2014, after several years of the parties legally skirmishing about the rights of the competing businesses to use tradenames, domain names, and trademarks, the EL Group sued Mr. Clegg in the Bristol County Superior Court alleging damage claims for breach of contract, breach of the covenant of good faith and fair dealing, declaratory and equitable relief under the Massachusetts Uniform Partnership Act, unjust enrichment, conversion, misappropriation of confidential and proprietary information, violations of the Massachusetts trade secrets act, breach of fiduciary duty and, of course, violations of Chapter 93A, the unfair business practices act.
In response to the EL Group’s lawsuit, Mr. Clegg countersued the EL Group, filing a thirteen-count counterclaim which he subsequently amended to fourteen counts, claiming that the EL Group:
(1) falsely stated to customers that they had contributed to the design and production of Mr. Clegg’s products.
(2) stole Mr. Clegg’s designs and manufacturing techniques.
(3) charged personal expenses to the business.
(4) infringed on Mr. Clegg’s trademark; and
(5) “imputed” his professional reputation but subsequently corrected to “impugned.”
Utica’s policy for The EL Group and its personal and advertising injury coverage
Utica Mutual Insurance Company issued to “EL Group LLC dba Lotuff Leather” a commercial general liability insurance policy, effective from August 1, 2013, to August 1, 2014 (“the Policy”). The Policy provided “bodily injury” and “property damage” liability coverage under Section I, Coverage A.
Besides Coverage A, the Policy provides “personal and advertising injury” liability insurance under Section I, Coverage B.
The Insuring Agreement for Coverage B provided that Utica “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury to which this insurance applies.” The policy also provided Utica “will have the right and duty to defend the insured against any ‘suit’ seeking those damages.” However, the policy also provided that Utica had “no duty to defend the insured against any ‘suit’ seeking damages for ‘personal and advertising injury.’ The policy defined a “suit’ as “a civil proceeding in which damages because of… ‘personal and advertising injury to which this insurance applies.”
The policy’s provisions of what constituted “personal and advertising injury” included suits claiming damages allegedly arising out of:
Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products, or services.
EL Group’s request for defense coverage for Mr. Clegg’s counterclaim and Utica’s denial
In November 2014, the EL Group put Utica on notice of the counterclaim and demanded a defense and indemnification. On December 10, 2014, Utica denied coverage. Utica took the position that “the date of loss precedes the effective date of your policy.” Utica also notified the EL Group that even if the loss occurred within the policy period, it was excluded from coverage.
EL Group renewed its coverage demand in April 2016, specifically directing Utica’s attention to the personal and advertising injury insuring agreement, including “slander, libel, and disparagement.”
To bolster its coverage claim with Utica, the EL Group noted that the counterclaim explicitly alleged that Mr. Clegg was a “renowned designer and manufacturer of bespoke leather briefcases, bags, and other products.” The El Group pointed out that the counterclaim further alleged that “[d]ue to the high quality of the design and craftsmanship associated with the leather goods sold under the “FRANK CLEGG” Marks, Mr. Clegg is also widely known and well-respected by his peers and others in the leather industry.” (Emphasis in original).
The EL Group argued that based on Mr. Clegg’s claimed renown and reputation, the counterclaim allegations that one or more of the EL Group allegedly told third parties that a “design team” was responsible for leather bags designed and built by Mr. Clegg was disparagement. Likewise, the counterclaim’s allegation that the EL Group allegedly “falsely represented in the industry” that an order backlog “was due to the improper actions of Mr. Clegg” disparaged his professional reputation.
Finally, the EL Group observed that the initial counterclaim accused the EL Group of “imputing” Mr. Clegg’s professional reputation, but that an amendment to the counterclaim corrected this incorrect usage by changing “imputing” to “impugning his professional reputation.”
To Utica, the counterclaim’s statements still did not trigger any duty to defend for any personal and advertising injury because, according to Utica, the counterclaim “does not explicitly contain claims which could be construed as disparagement, slander, or libel.”
After Utica’s continual denial of coverage, the EL Group plaintiffs eventually sued Utica in the Superior Court in 2018, alleging that Utica’s refusal to defend the counterclaim was a breach of contract, a breach of the duty of good faith and fair dealing, and an unfair claim settlement practice.
The EL Group sought, among other relief, for Utica to repay the over $750,000 in attorney’s fees and costs it had incurred defending against the Clegg counterclaim, which it claimed Utica should have defended.
Superior Court rules for Utica and the EL Group appeals
In the Superior Court, Utica and the EL Group filed cross-motions for summary judgment since the question of a duty to defend poses only a question of law. The duty of the court is to compare the allegations of the complaint or, in this case, the counterclaim with the policy. If the allegations of the complaint or any count of the complaint are “reasonably susceptible of an interpretation that they state or adumbrate a covered claim,” the insurer has the duty to defend the whole complaint.
In Massachusetts, the threshold for defense coverage is low since “adumbrate” means “intimate, “foreshadow vaguely,” or “suggest.”
The Superior Court judge deciding the summary judgment motions of Utica and the EL Group found that, in her opinion, the Clegg counterclaim did not state, which was not disputed, a covered claim, nor adumbrate any interpretation reasonably susceptible of a covered claim. Accordingly, the judge granted Utica summary judgment against EL Group’s claim.
The EL Group appealed to the Appeals Court, which summarily found that the allegations of the counterclaim were reasonably susceptible of an interpretation “adumbrating” a disparagement claim.
The Appeals Court decision restates the rules for determining a carrier’s duty to defend
After first outlining the factual allegations concerning the underlying lawsuit and counterclaim, the Appeals Court described the legal principles that would apply to the allegations of the counterclaim to determine if Utica had a duty to defend. The principles stated by the Court were:
- An insurance company’s duty to defend an insured is much broader than its duty to indemnify.
- An insurer’s duty to defend the insured is triggered where the allegations in the complaint ‘are reasonably susceptible of an interpretation that states or roughly sketches a claim covered by the policy terms
- For the Court to assess whether the allegations in Mr. Clegg’s amended counterclaim are reasonably susceptible of such an interpretation, the Court compares those allegations with the policy language.
- It is irrelevant in assessing the duty to defend that there is the possibility that the underlying claim may ultimately fail or that the merits of the claim are weak or even frivolous.
- The complaint “need only show, through general allegations, a possibility that the liability claim falls within the insurance coverage.
- There is no requirement that the facts alleged in the complaint specifically and unequivocally make out a claim within the coverage.
- Any uncertainty as to whether the pleadings include or are reasonably susceptible to an interpretation that they include a claim covered by the policy terms is resolved in favor of the insured.
After stating these principles, the Court parsed the counterclaims’ 155 paragraphs and fourteen separate causes of action (as amended). The Court noted that:
The amended counterclaim referred to Mr. Clegg’s reputation as a “renowned designer and manufacturer of bespoke leather briefcases, bags, and other products.”
The amended counterclaim alleged that the EL Group falsely told third parties that Mr. Clegg’s products were the result of a “design team” rather than having been designed by Mr. Clegg alone.
Mr. Clegg alleged that one of the [El Group members], falsely told potential consumers that he designed or contributed to the design of Mr. Clegg’s products and that the backlog of orders for their products was due to “improper actions of the Clegg parties.”
The Court agreed with Utica that these allegations did not explicitly state a claim for slander or libel; however, the Court found that the statements “[were] reasonably susceptible of an interpretation that states or roughly sketches a claim” for defamation.
The Court held that these statements of the amended counterclaim alleged that the EL Group’s false statements “impugn[ed] the professional reputation of Frank Clegg as a designer and manufacturer.”
To the Court, these allegations, “whether they have merit or not, are enough to raise the possibility that the complaint alleged a ‘personal and advertising injury,’ as defined by the policies.”
Appeals Court reverses denial of defense decision and remands
The final order of the Appeals Court remanding the case to the Superior Court was:
Accordingly, the judgment is vacated. We remand the case to the Superior Court for further proceedings consistent with this memorandum and order. Because the judge did not reach [Utica’s] alternative arguments that they had no duty to defend because the alleged conduct predated the policy period and was subject to various exclusions, those arguments, about which we express no opinion, should be addressed on remand.
Based on this order of remand, Utica will have liability for not only the defense costs of the EL Group but also for the legal costs of the EL Group in establishing that Utica had a duty to defend unless Utica can avoid liability because of an exclusion or policy condition.
Agency Checklists will keep its readers posted on any developments in this case on its remand to the Superior Court.
Owen Gallagher
Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists
Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.
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