ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Tuesday, April 27, 2010

Insurance Contracts: Two Duty to Defend Cases

9th Circuit Seal  On April 5, 2010, the Ninth Circuit ruled in favor of Hyundai in Hyundai Motor America v. National Union Fire Ins. Co. of Pittsburgh.  The case followed a patent infringement judgment against Hyundai after it placed features on its website.  In 2005, Orion IP, LLC sued Hyundai and 19 other car manufacturers for their "build your own vehicle" and parts catalogue features.  Orion holds a patent for electronic methods that generate customized product proposals for potential automobile purchasers.  Hyundai sought a defense from its insurers, claiming that Orion's suit was covered under the "advertising injury" clause in its contract with National Union.  National Union refused to provide a defense, and Hyundai eventually was found liable to Orion for $34 million in damages.  

Hyundai then filed suit against its insurer.  The district court granted summary judgment to National Union, finding among other things, that patent infringement is not an "advertising injury" as defined in the policy.  The Ninth Circuit reversed.  Hyundai claimed that Orion's claims fell under the contractual provision obligating National Union to defend Hyundai against claims alleging the "misappropriation of advertising ideas."  The Ninth Circuit first found that the challenged features constituted "advertising" for the purposes of California law.  Next, the Ninth Circuit found that while California courts had in the past rejected claims that patent infringements constituted advertising injuries, they had done so through a fact specific inquiry, acknowledging that infringement of a patented advertising method could constitute misappropriation of advertising ideas.  Finally, because the court found that the "build your own" feature was itself an infringement of Orion's patent, the use of the feature caused Orion's harm.  The court thus found a direct causal connection between the advertisement and the advertisement injury.

7th Cir Meanwhile, on the same day, the Seventh Circuit decided that Ace American Insurance Company had no duty to defend RC2, the manufacturer of the Thomas & Friends toys, against class action lawsuits alleging negligence in connection with use of lead paint on RC2 toys that had been recalled. The case is Ace American Insurance Co. v. RC2 Corp., Inc.  In this case, the policies in question excluded coverage for occurrences that took place within the United States.  The district court nonetheless rules that Ace had a duty to defend RC2 based on the theory that the policies extended coverage to injuries that occurred in the U.S. but were caused by negligence in the product's manufacture that occurred abroad.  The Seventh Circuit found that Illinois law does not permit such an extension of coverage where the policy exclusion is clear and thus reversed the district court.

RC2 had separate insurance to deal with domestic occurrences.  Unfortunately for RC2, those policies had a lead paint exclusion.  RC2 thus had to turn to its international insurer.  The Seventh Circuit held that under Illinois law "an accident occurs when and where all the factors come together at once to produce the force that inflicts injury and not where some antecedent negligence takes place."  Since the plaintiffs in the underlying litigation all alleged injury from exposure to lead paint in the United States, the claims clearly were not covered under RC2's policy with Ace.  

[Jeremy Telman]

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