The art of drafting a meaningful policy exclusions is an exercise in precision. When an insurer has broadly interpreted an imprecise exclusion to deny a defense, courts are routinely called upon to parse the policy’s exact wording and structure.
In a recent decision out of the United States District Court for the District of Massachusetts, Nichole Sliney Realty Team, Inc. v. Mount Vernon Fire Insurance Company, Judge F. Dennis Saylor IV provided a sharp, textbook analysis of insurance contract interpretation.” The Court forcefully rejected an insurer’s attempt to stretch a standard misappropriation of funds exclusion to cover a statutory copyright infringement claim, ordering the insurer to defend its insured and pay the insured’s attorney’s fees.
Here is a closer look at the decision, the policy provisions at play, and the important lessons it holds for the P&C industry.
The Underlying Claim: Architectural Copyright Infringement
The insured, Nichole Sliney Realty Team, Inc. (NSRT), is a Massachusetts residential real estate brokerage. NSRT was engaged to market a newly built home in Bridgewater, Massachusetts.
In September 2024, an architectural firm, Kieran Joseph Liebl, Inc. (d/b/a Royal Oaks Design, Inc.), filed a federal lawsuit against the homebuilder and NSRT. The architect alleged that the defendants obtained their copyrighted technical drawings and marketing materials and reproduced them without authorization to market the new home. The complaint asserted a single cause of action for copyright infringement.
The Policy Provisions and the Insurer’s Denial
NSRT held a Real Estate Agents Errors and Omissions Liability Policy issued by Mount Vernon Fire Insurance Company. The policy’s insuring agreement offered broad coverage, obligating the insurer to defend and indemnify NSRT for:
[A]ny Claim arising out of any negligent act, error, omission, or Personal Injury committed by the Insured in the rendering or failure to render Professional Services for others.
The policy further required Mount Vernon to defend any covered claim “even if any of the allegations of the Claim are groundless, false, or fraudulent.”
Upon receiving the lawsuit, NSRT tendered the claim to Mount Vernon. The insurer denied the defense. Interestingly, Mount Vernon’s rationale shifted over time—a fact the Court later noted as strong evidence that the policy language was ambiguous. Initially, the insurer cited exclusions for “deceptive trade practice laws” and claims for “personal profit or advantage”.
Eventually, Mount Vernon abandoned those arguments and planted its flag on Exclusion A.8(d), which precludes coverage for claims arising out of:
[D]isputes involving . . . (d) conversion, misappropriation, commingling, improper use, theft, embezzlement or defalcation of funds, account information or other property . . . .”
Mount Vernon argued that the architect’s copyright infringement claim was essentially a claim for the “misappropriation” or “improper use” of “other property” (specifically, the architect’s intellectual property).
The Court’s Analysis: Words Are Known by the Company They Keep
Judge Saylor granted NSRT’s motion for partial judgment on the pleadings, ruling that Mount Vernon breached its broad duty to defend. In disposing of the insurer’s argument, the Court relied on fundamental canons of contract interpretation that apply to every contract, whether it is an insurance policy or not.
1. Context Matters (Noscitur a Sociis and Ejusdem Generis): The Court refused to read the phrase “other property” in a vacuum. Under the legal doctrines of noscitur a sociis (a word is known by its associates) and ejusdem generis (general words following specific ones are limited to things of the same kind), the Court looked at the preceding terms: “funds” and “account information”.
Judge Saylor noted that these specific terms clearly refer to financial assets. Therefore, “other property” must be interpreted to mean “other types of property that are similar to the ones enumerated—that is, other forms of financial assets”. To read “other property” so broadly as to encompass intellectual property like a copyright would render the words “funds” and “account information” entirely superfluous.
2. Intentional Torts vs. Statutory Violations: The Court applied the same contextual analysis to the verbs in the exclusion. Mount Vernon focused on “misappropriation” and “improper use”. However, the Court pointed out that the accompanying words—“conversion,” “commingling,” “theft,” “embezzlement,” and “defalcation”—all refer to “forms of intentionally tortious conduct”.
Consequently, the Court ruled that “misappropriation” and “improper use” should not be construed to cover non-intentional conduct like negligence or statutory violations, such as a strict liability copyright infringement claim. The Court stated the obvious: “If the insurer intended that the exclusion covered claims alleging copyright infringement, it could have said so in plain language.”
3. The Reasonable Expectations of the Insured: Finally, the Court stepped back to look at the practical purpose of a Real Estate Agent E&O policy. Real estate brokers extensively use marketing materials, floor plans, and photographs in their daily business. By doing so, they run the risk of inadvertently infringing on a photographer’s or architect’s intellectual property.
If any unauthorized use of a photograph or floor plan was deemed the “improper use” of “property,” the exclusion would eliminate a substantial portion of the core risks the insured reasonably expected to be covered. Finding that an exclusion should not be read so broadly that it “effectively swallow[s] the coverage,” the Court concluded that no reasonable policyholder would read Exclusion A.8(d) to bar a copyright infringement claim.
Takeaways from the Court’s decision
This decision serves as a case study of how courts strictly construe exclusions against insurers, especially when policy language is applied outside of its natural commercial context. For P&C professionals navigating coverage questions or explaining policy language to insureds, the decision provides several helpful insights:
The Broad Scope of the Duty to Defend: The decision reinforces the principle that an insurer’s duty to defend is triggered if the allegations in an underlying lawsuit are even “reasonably susceptible” to an interpretation that falls within the policy’s coverage. Because Mount Vernon failed to meet this broad obligation, the Court adhered to settled Massachusetts law and ordered the insurer to pay the insured’s reasonable attorney’s fees and expenses incurred in bringing the declaratory judgment action.
Explicit Language is Key for IP Exclusions: The ruling highlights that courts are extremely reluctant to read intellectual property infringement into general property exclusions. Judge Saylor noted that if an insurer intends for an exclusion to bar claims alleging copyright infringement, it should say so in plain language. When a policy relies on catch-all phrases like “other property” to encompass intellectual property, courts are likely to find the language ambiguous and rule in favor of the policyholder.
Evolving Coverage Positions Can Indicate Ambiguity: The Court explicitly noted in a footnote that Mount Vernon’s shifting rationale for denying coverage during the claims process was “itself strong evidence, at a minimum, that the exclusion is ambiguous and should be construed narrowly”. This serves as an informative reminder that courts may view an insurer’s changing justifications for denial as proof that the policy language lacks clarity.
