S.B.C.C., Inc. v. St. Paul Fire & Marine Insurance

Opinion

In this action for insurance bad faith, plaintiff S.B.C.C., Inc., doing business as South Bay Construction Company (South Bay), alleged that its insurer, defendant St. Paul Fire & Marine Insurance Company (St. Paul),

The central issue between the parties was whether the liability policy potentially covered SIC’s lawsuit, thereby giving rise to St. Paul’s duty to defend South Bay in the action. As this is a question requiring interpretation of the policy provisions, it is determined independently by the reviewing court. (Powerine Oil Co., Inc. v. Superior Court (2005) 37 Cal.4th 377 , 390 [ 33 Cal.Rptr.3d 562 , 118 P.3d 589 ]; cf. MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635 , 641 [ 3 Cal.Rptr.3d 228 , 73 P.3d 1205 ].)

Established rules assist in that interpretation. Whether an insurer has a duty to defend “depends, in the first instance, on a comparison between the allegations of the complaint and the terms of the policy. [I] ... [f] ... If any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurer’s duty to defend arises and is not extinguished until the insurer negates all facts suggesting potential coverage. On the other hand, if, as a matter of law, neither the complaint nor the known extrinsic facts indicate any basis for potential coverage, the duty to defend does not arise in the first

“While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply. [Citation.] The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties. (Civ. Code, § 1636.) If contractual language is clear and explicit, it governs. (Civ. Code, § 1638.) On the other hand, ‘[i]f the terms of a promise are in any respect ambiguous or uncertain, it must be interpreted in the sense in which the promisor believed, at the time of making it, that the promisee understood it.’ [Citations.] This rule, as applied to a promise of coverage in an insurance policy, protects not the subjective beliefs of the insurer but, rather, ‘the objectively reasonable expectations of the insured.’ [Citation.] Only if this rule does not resolve the ambiguity do we then resolve it against the insurer.” (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254 , 1264-1265 [ 10 Cal.Rptr.2d 538 , 833 P.2d 545 ] (Bank of the West), quoting AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807 , 822 [ 274 Cal.Rptr. 820 , 799 P.2d 1253 ].)

Policy terms will be considered ambiguous if they are “capable of two or more constructions, both of which are reasonable. [Citation.] But language in a contract must be interpreted as a whole, and in the circumstances of the case, and cannot be found to be ambiguous in the abstract. (Bank of the West, supra, 2 Cal.4th at p. 1265.) Courts will not strain to create an ambiguity where none exists.” (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1 , 18-19 [ 44 Cal.Rptr.2d 370 , 900 P.2d 619 ]; see also TRB Investments, Inc. v. Fireman’s Fund Ins. Co. (2006) 40 Cal.4th 19 , 27-28 [ 50 Cal.Rptr.3d 597 , 145 P.3d 472 ].)

2. Comparison of the Policy Terms and the Underlying Complaint

The disputed policy provisions pertain to “Advertising Injury Liability” and “Personal Injury Liability,” the grounds of South Bay’s complaint and summary adjudication motion. The coverage provision of the first ground states: “Advertising injury liability. We’ll pay amounts any protected person is legally required to pay as damages for covered advertising injury that:

“• results from the advertising of your products, your work, or your completed work; and

“• is caused by an advertising injury offense committed while this agreement is in effect.”

“Advertising injury” is defined as “injury, other than bodily injury or personal injury, that’s caused by an advertising injury offense.” “Advertising

“• Copyright

“• Patent.

“• Trade dress.

“• Trade name.

“• Trade secret.

“• Trademark.

“• Other intellectual property rights or laws.

“Nor will we cover any other injury or damage that’s alleged in any claim or suit which also alleges any such infringement or violation, [f] But we won’t apply this exclusion to bodily injury or property damage that results from your products or your completed work, [f] Nor will we apply this exclusion to advertising injury that results from the unauthorized use of any:

“• copyrighted advertising material;

“• trademarked slogan; or

“• trademarked title;

“of others in your advertising.”

a. Advertising Injury

In its motion for summary judgment St. Paul argued that SIC’s confidential customer information could not reasonably be considered advertising material or an advertising idea; hence, there could have been no advertising injury offense. St. Paul further asserted that South Bay would not be able to show causation between the solicitation and the injury, because it was the misappropriation that caused the alleged damage to SIC. In opposition to St. Paul’s summary judgment motion and in its own summary adjudication motion, South Bay contended that its conduct amounted to “advertising” and “advertising injury” because it was accused of having used the confidential information obtained from Foust to solicit SIC’s customers. The trial court agreed with South Bay that triable issues of fact existed on the questions of

On appeal, the parties describe the efforts of numerous courts that have analyzed policy coverage of advertising injury. Even though several of these decisions arose in the same context—that is, misappropriation and use of the plaintiff’s confidential customer information to solicit the plaintiff’s customers—the policy terms relating to advertising injury are not identical. In Hameid v. National Fire Insurance of Hartford (2003) 31 Cal.4th 16 [ 1 Cal.Rptr.3d 401 , 71 P.3d 761 ], for example, the policy did not define advertising, but defined “advertising injury” to include “ ‘ [misappropriation of advertising ideas or style of doing business.’ ” (Id. at p. 22.) Confronting the term “advertising” itself, the Supreme Court adopted the interpretation relied on by the majority of courts in other jurisdictions—that is, “widespread promotional activities usually directed to the public at large.” (Id. at p. 24; see also Bank of the West, supra, 2 Cal.4th at p. 1276, fn. 9 [recognizing majority definition].) This definition comported with the commonly understood sense of the word “advertising.” It precluded personal solicitations of individual customers, the basis of the underlying plaintiff’s lawsuit.

The court in We Do Graphics v. Mercury Casualty Co. (2004) 124 Cal.App.4th 131 [ 21 Cal.Rptr.3d 9 ] did not identify any definition of advertising in the policy, but only explained why “advertising injury” as defined in the policy did not include the alleged use of stolen customer information to solicit a former employer’s customers. The court further held that the stolen customer information did not constitute advertising ideas, though again it did not define that term. And in Peerless Lighting Corp. v. American Motorists Ins. Co. (2000) 82 Cal.App.4th 995 [ 98 Cal.Rptr.2d 753 ], the policy did not define “advertising”; consequently, the appellate court used the majority definition and held that advertising did not include soliciting a single customer with a tailormade product in the course of a competitive bidding process. (Id. at p. 1012.) Likewise, the policy considered in Sentex Systems, Inc. v. Hartford Accident & Indemnity Co. (9th Cir. 1996) 93 F.3d 578 defined neither “advertising” nor “advertising idea.” The Ninth Circuit did “not necessarily agree” with the district court’s broad interpretation of these concepts to permit coverage for allegations of misappropriating a customer list, but it nonetheless held that there was potential coverage given the broader scope of the underlying action, which included misappropriation of marketing techniques. (Id. at pp. 580, 581; see also Sentex Systems, Inc. v. Hartford Accident & Indemnity Co. (C.D.Cal. 1995) 882 F.Supp. 930 .)

Likewise, we cannot reasonably conclude that South Bay used SIC’s “advertising idea” when it participated in Foust’s recruitment of project owners and subcontractors. First, no “[u]nauthorized use of any advertising idea” is implicated when the advertising idea consists in “information used to identify or record customers or supporters, such as a list of customers or supporters.” SIC alleged that Foust had brought to South Bay a list of names and telephone numbers for several hundred subcontractors whom SIC had used over the years, along with a list of “preferred vendors” and client information. Clearly these names and numbers were not “advertising ideas” within the meaning of the policy, in light of the exclusion for “information used to identify or record customers or supporters, such as a list of customers or supporters.”

Furthermore, there are no facts suggesting that the misappropriated information was used “to attract attention” in SIC’s advertising. Foust had developed project details with numerous subcontractors who had already submitted bids on pending SIC projects; some projects were “ready to go,” and at least one other was delayed but was viewed with some urgency by the project owner. (See San Jose Construction, Inc. v. S.B.C.C., Inc., supra, 155 Cal.App.4th at p. 1531.) During the last two weeks of his employment at SIC, Foust took project information contained in more than 200 documents related to five prospective jobs on which SIC had bid. The documents included project budgets and proposals made to the owners, correspondence between owner and architect, all subcontractor bids, cost estimates, requests for information by subcontractors or project managers, and responses to those requests from the owner or architect. This information, which Foust uploaded onto South Bay’s computer system, gave Foust “everything he needed to begin work right away on at least three projects for South Bay.” (Ibid.) On his first day of work at South Bay, Foust invited subcontractors to a meeting at which he persuaded all but two to move with him to South Bay. South Bay’s project proposals submitted soon thereafter were “in large part the same” as those produced by SIC the previous month. (Id. at p. 1533.) South Bay was alleged to have cooperated in Foust’s efforts to transfer client patronage and subcontractor loyalty from SIC to South Bay.

None of this information can reasonably be said to constitute advertising by SIC. All of the project details, together with the list of contacts, represent

South Bay correctly points out that exclusions must be stated in clear and unmistakable language and are interpreted narrowly against the insurer. (TRB Investments, Inc. v. Fireman’s Fund Ins. Co., supra, 40 Cal.4th at pp. 27-28; MacKinnon v. Truck Ins. Exchange, supra, 31 Cal.4th at p. 648.) But even exclusionary language must be construed in the context of the policy as a whole, and in the circumstances of that case, and “cannot be found to be ambiguous in the abstract.” (Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986) 41 Cal.3d 903 , 916, fn. 7 [ 226 Cal.Rptr. 558 , 718 P.2d 920 ].) Here the challenged exclusion is clear and explicit; it expressly states that in addition to the listed forms of intellectual property infringement, there is no coverage for “any other injury or damage that’s alleged in any claim or suit which also alleges any such infringement or violation.” (Italics added.) (Cf. Molecular Bioproducts, Inc. v. St. Paul Mercury Ins. Co. (S.D.Cal., July 9, 2003, No. 03-0046-IEG(LSP)) 2003 WL 23198852 , p. *5 [where underlying suit contains patent infringement claim, intellectual property exclusion eliminates coverage for claims “ ‘alleged in . . . suit that also alleges any such . . . infringement’ ”]; compare Align Technology, Inc. v. Federal Ins. Co. (N.D.Cal. 2009) 673 F.Supp.2d 957 , 970-971 [defamation and unfair competition claims not clearly within reach of intellectual property exclusion] and KLA-Tencor Corp. v. Travelers Indem. Co. of Illinois (N.D.Cal., Apr. 11, 2003, No. C-02-05641 RMW) 2003 WL 21655097 , pp. *5-*6 [disparaging statements not “directly or indirectly related to” intellectual property infringement within the meaning of exclusion language].)

In summary, we conclude that the CGL policy St. Paul issued to South Bay did not offer coverage against the types of claims brought by SJC. Although an insurer’s duty to defend is broader than its duty to indemnify, “ ‘the insurer need not defend if the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage.’ ” (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287 , 300 [ 24 Cal.Rptr.2d 467 , 861 P.2d 1153 ], quoting Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263 , 275, fn. 15 [ 54 Cal.Rptr. 104 , 419 P.2d 168 ].) Thus, “where the extrinsic facts eliminate the potential for coverage, the insurer may decline to defend even when the bare allegations in the complaint suggest potential liability. [Citations.] This is because the duty to defend, although broad, is not unlimited; it is measured by the nature and kinds of risks covered by the policy.” (Waller v. Truck Ins. Exchange, Inc., supra, 11 Cal.4th at p. 19; see Pardee Construction Co. v. Insurance Co. of the West (2000) 77 Cal.App.4th 1340 , 1350 [ 92 Cal.Rptr.2d 443 ].) Here St. Paul has demonstrated, “by reference to undisputed facts, that the claim cannot be covered.” (Ringler Associates Inc. v. Maryland Casualty Co. (2000) 80 Cal.App.4th 1165 , 1186 [ 96 Cal.Rptr.2d 136 ], italics omitted.) Given the

Disposition

The judgment is affirmed. Costs on appeal are awarded to St. Paul.

Rushing, P. I., and Premo, I., concurred.