Argument Preview: The Causation Requirement for Liability Insurance Policies
[Update: The Court’s April 21 opinion ruled for the insurer on the causation issue and declined to reach the other questions presented.]
On February 5, 2015, the Court of Appeals of Maryland will hear argument in an insurance coverage action, Maryland Casualty Co. v. Blackstone International. If you’re not an insurance coverage practitioner, the questions presented are not likely to make much sense to you. Whichever way the Court of Appeals rules, however, the opinion is likely to draw national attention in insurance coverage circles.
Blackstone seeks coverage for a lawsuit regarding its sales of low-vision lamps through Wal-Mart. RMG sued Blackstone, alleging that the two companies jointly developed the concept and marketing for a “Vision Enhance” line of lamps, including distinctive packaging. According to RMG, Blackstone violated their agreement by failing to sell all of the lamps under the “Vision Enhance” brand, instead selling millions of dollars of lamps under the name “Mainstay,” which used the same distinctive packaging. Additionally, RMG sued for unjust enrichment, on the premise that Blackstone obtained reputational benefits that opened other business opportunities.
Blackstone’s liability insurer filed suit in circuit court, seeking a declaration that it had no duty to defend or indemnify Blackstone against RMG’s lawsuit. The circuit court granted the insurer’s motion for summary judgment. But the Court of Special Appeals, in since-retired Judge Mattriciani’s penultimate published opinion, reversed and found coverage.
The question that is likely to draw national interest is whether, under the relevant insuring agreement – to “pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies” – RMG alleged “personal and advertising injury.” That phrase is defined in relevant part as “injury . . . arising out of one or more of the following offenses: . . . f. The use of another’s advertising idea in your ‘advertisement’ . . . ; or g. Infringing upon another’s copyright, trade dress or slogan in your ‘advertisement.’” It’s an interesting question, and I think the insurer has the better of the argument.
But that’s not why I’m blogging about the case. Rather, I happen to find the second question more interesting: “Did the COSA err in applying this Court’s binding precedent requiring an insured to establish all three elements of coverage for ‘advertising injury’ to trigger the duty to defend by concluding that the ‘causal relationship’ element was not necessary in this case?” The “binding precedent” in question is Walk v. Hartford Casualty Ins. Co., 382 Md. 1, 17 (2004), in which the Court of Appeals held that materially identical policy language “requires that the underlying plaintiffs allege the potential for three things: (1) an ‘advertisement’; (2) an ‘advertising injury,’ which entails the copying of an advertising idea or style into an advertisement; and (3) a causal relationship between the advertising injury and the alleged damages.”
The Court of Special Appeals addressed that third element only in footnote 6 of its opinion: “That delineation . . . is not suited to the present discussion” because “‘causation’ in this case is subsumed within the contractual definition of ‘advertising injury,’ leaving only the first two issues.”
Looking only to the definition of “personal and advertising injury,” the Court of Special Appeals held that the “duty to defend Blackstone depends only on whether RMG’s claims ‘arose out of’ the use of RMG’s advertising ideas in Blackstone’s advertisements.” Relying on cases interpreting the “arising out of” language, the Court of Special Appeals held that, because “RMG alleged that Blackstone was unjustly enriched by retaining the benefit flowing from its use of RMG’s ideas in advertisements for Blackstone’s products, the unjust enrichment claim “bore a ‘direct and substantial’ relationship to the use of RMG’s advertising ideas in Blackstone’s advertisements.”
This analysis fundamentally misunderstood Walk and how Blackstone’s policy worked. The definition of “personal and advertising injury” does employ broad “arising out of” language. But that’s not enough under the policy’s insuring agreement. Rather, even if such injury were alleged, the insurer agrees only to defend a lawsuit that seeks “damages because of [such] ‘personal and advertising injury’” (emphasis added).
I’ve been practicing insurance coverage for more than 13 years now, and my first project was to research what “because of” meant. It was (and still is) a brutally difficult research project. These are the kinds of words that online search tools ignore in searches. But they are fundamental to liability insurance coverage. Virtually every insuring agreement for any type of liability insurance coverage says that the insurer pays “damages because of” defined types of injury.
Throughout the country, courts often speak of the requirement of causation, but rarely do they focus on the key words “because of.” Through the years, I’ve kept a running tab of the rare cases I come across that appropriately center the analysis on those two key words. Although my long-ago research project was for a non-Maryland case, it just so happens that Maryland is one of the few states with on-point appellate authority.
In Pyles v. Pennsylvania Manufacturers Ass’n Insurance Co., 90 Md. App. 320, cert. denied, 326 Md. 662 (1992), the underlying lawsuit alleged fire-related “property damage” within a general-liability policy’s definition of that term. But the claim against the policyholder, a homebuilder, was that it purchased only $250,000 in builder’s-risk coverage, not the $750,000 required under its contract with the plaintiffs. The panel in Pyles was impressive. It consisted of Judge Charles Moylan, future Court of Appeals Judge Glenn Harrell, and future Fourth Circuit Judge Diana Motz. The court, speaking through Judge Harrell, held:
By their terms, the policies cover only liability for damages because of property damage. The policies thus require a direct causal link or nexus between an insured’s liability and property damage. [The builder’s] liability to appellant was not, however, a direct result of property damage. Rather, its liability was a direct result of its negligence and breach of contract in failing to obtain the agreed upon amount of builder’s risk insurance on the house. The basis of [the underlying] claim against [the builder] in the earlier action was not property damage, but instead [its] alleged breach of contract and negligence. Property damage was, of course, a factual predicate for [the builder’s] liability to [the homeowners]. The fact that property damage occurred in connection with [the builder’s] liability, however, is simply not sufficient to bring its liability within the terms of the policies. As [the builder’s] liability to [the homeowners] was not because of, or a direct result of, property damage, it is not within the terms of the policies.
This analysis is dead-on. It’s consistent with the sparse (but consistent) authority on what “because of” means.[†] But only three published opinions have ever cited Pyles, and none for the “because of” proposition. Had Walk cited Pyles – or at least emphasized “because of” when it quoted the policy language in that case– the Court of Special Appeals likely would have realized that causation was not “subsumed” within the definition of “personal and advertising injury.”
A “direct and substantial relationship” is not enough to satisfy “because of.” The injury must directly cause the damages. By way of illustration, imagine that, following the sale of a home, the purchaser sued the seller for the failure to disclose that a gruesome murder had occurred in the home – negatively affecting the home’s value. Though the homebuyer’s complaint would allege “bodily injury,” as typically defined in a liability insurance policy, it would not seek damages because of that bodily injury. Although the murder would be a necessarily factual predicate, the homebuyer’s damages would be one step removed from that bodily injury.
To its credit, the Court of Special Appeals recognized that RMG’s breach-of-contract damages were uncovered, since the allegation was merely that Blackstone failed to pay RMG its share of profits. But it was a bridge too far for the Court of Special Appeals to hold that RMG’s unjust enrichment claim gave rise to a defense obligation. According to the Court of Special Appeals, it was sufficient that Blackstone’s misconduct increased Blackstone’s corporate goodwill, which financially benefitted Blackstone through further business opportunities with Wal-Mart. Even though Blackstone’s alleged misconduct as to the “Vision Enhance” brand was a factual predicate for the unjust enrichment claim, the benefits to Blackstone were at least one step too far removed from RMG’s injury. Such benefits to Blackstone were not themselves “injury” to RMG by any definition, and “because of” does not stretch to such collateral matters down the causal chain.
It was a strange ruling indeed that the only potentially covered claims by RMG were the claims furthest removed from the alleged misconduct itself. I hope that the Court of Appeals will reverse, and that, in the process, it will recognize the critical “because of” holding in Pyles.
[*] Because I am commenting on a pending case, I would like to provide a disclaimer. Although I frequently represent insurance companies in insurance coverage litigation, and sometimes submit amicus briefs on behalf of insurer associations, I am not writing this post on behalf of any client. I have never represented the insurers who are the petitioners in Blackstone. The opinions expressed in this post are solely my own and do not necessarily reflect the views of my firm or its clients.
[†] See generally Allan D. Windt, Insurance Claims and Disputes §§ 11:1-2; Pac. Emps. Ins. Co. v. Cesnik, 219 F.3d 1328, 1331-32 (11th Cir. 2000).