Western States Insurance Company and United Security Insurance Company v. Wisconsin Wholesale Tire, Inc., Third-Party Plaintiff v. Richard Friedenberg, Klafter Insurance Agency Co. (Doing Business as Degeus & Klafter), and Abc Insurance Company, Third-Party
Docket: 97-3918
Court: Court of Appeals for the Third Circuit; August 27, 1999; Federal Appellate Court
In the case of Western States Insurance Company v. Wisconsin Wholesale Tire, the Seventh Circuit addressed a dispute over insurance coverage following a settlement between MITA Enterprises and Wisconsin Wholesale Tire. MITA sued its former sales representatives for misappropriating customer lists, leading to a settlement where Wisconsin Tire paid $100,000 for the right to use these lists. Two insurance companies sought a declaration of non-indemnification based on their policies. Western States denied coverage entirely, while United Security Insurance acknowledged issuing a policy but claimed it did not cover the dispute regarding customer lists.
The district court identified factual disputes about Wisconsin Tire's status as an "insured" under Western States' policies but ultimately granted summary judgment to both insurers, concluding that the policies did not cover the risk involved. United Security's "garage policy" included coverage for "personal injury," defined to encompass defamation, but the court found that MITA's allegations did not meet the criteria for defamation. The court noted that simply alleging harm to MITA's reputation, without showing that the customer lists were used to falsely represent MITA's products, did not trigger coverage under the defamation clause. The ruling clarified that misappropriation of customer lists does not equate to slander or libel, making the insurers not liable for indemnification.
A thief could potentially misuse customer contact lists to slander MITA, but MITA's complaint solely addresses the unauthorized taking and use of these lists under a trade-secret theory, not the nature of conversations with customers. Any reputational harm suffered by MITA likely stems from perceptions regarding its ability to maintain confidentiality. Under modern pleading rules, MITA could later expand its claims to include defamation or disparagement, but until it does so, insurance coverage is not automatically triggered. Both Wisconsin and Illinois reject a broad interpretation of claims that would activate all insurance policies for any potential theory a plaintiff might later introduce. MITA's initial complaint did not adequately align with the insurance policy's coverage.
Western States' umbrella policy includes coverage for "advertising injury," defined as harm arising from advertising activities related to Wisconsin Tire's products or services, specifically encompassing defamation, privacy violations, piracy, unfair competition, and copyright infringement. Since the complaint's allegations did not demonstrate that Wisconsin Tire's actions constituted advertising injury as defined in the policy, the district court concluded that the allegations fell outside the policy's scope. Wisconsin Tire argued that MITA accused it of "piracy" and "unfair competition," but the policy only covers such claims arising from Wisconsin Tire's own advertising. The court found that MITA's complaint did not link Wisconsin Tire's alleged wrongdoing to its advertising activities. Wisconsin Tire's reliance on Wisconsin case law did not address the necessity for the claims to arise from its own advertising, and even under Wisconsin law, the claims were unsupported.
Wisconsin Tire contends that "advertising" should be interpreted as synonymous with "marketing," suggesting that sales activities constitute advertising. However, the court argues this interpretation is unreasonable, emphasizing that ambiguities in insurance contracts should not distort the ordinary meaning of terms. Wisconsin Tire's complaint does not indicate any actual advertising activities, and the "advertising injury" coverage is limited to injuries directly arising from advertising, such as those related to the theft of trade secrets, which is not the case here.
Two recent Wisconsin cases reinforce the principle that "advertising injury" clauses are to be interpreted in plain language. In Bruner v. Heritage Cos., a claim of conversion of business assets was found not to qualify for coverage under an advertising injury clause. Similarly, in Diversified Investments Corp. v. Regent Insurance Co., coverage was denied when the harm arose from copying a design rather than any wrongful advertising. The courts maintain that an "advertising injury" clause applies only when the advertising itself constitutes a tortious act, cautioning against overly broad interpretations that could encompass all business-related injuries.
The majority opinion concludes that Wisconsin Tire's claim is not supported by the allegations in the complaint, which do not assert any advertising-related wrongs. Therefore, under Erie principles, the federal court must rule against Wisconsin Tire.
In dissent, Judge Ilana Diamond Rovner argues that the majority's focus on core allegations overlooks other aspects of the complaint that could fall within the policy's coverage. She cites previous rulings that necessitate a defense if any allegations align with the insurance policy, regardless of their prominence in the complaint. Thus, she expresses reluctance to fully align with the majority's decision.
The case primarily addresses the insurer's duty to defend rather than the duty to indemnify, with the duty to defend being broader and activated by arguable coverage. In evaluating this duty, the court examines the factual allegations in the complaint against the terms of the insurance policy, interpreting those allegations liberally and resolving any doubts in favor of the insured.
The complaint alleges that Wisconsin Tire engaged in direct competition with MITA by contacting customers through various means and conspired to harm MITA's reputation, leading to significant reputational damage. These allegations potentially fall within the "personal injury" provision of United Security's garage policy, which includes injuries arising from slander or disparagement of an organization. The actions described, such as telephone contact and print advertising, meet the criteria for oral or written publication, supporting an inference that Wisconsin Tire disparaged MITA’s goods or services.
Additionally, Wisconsin Tire has shown potential coverage under Western States' umbrella policy's "advertising injury" provision, despite the majority's rejection based on a lack of alleged advertising. The complaint specifically mentions "print advertising," which, along with other actions, suggests an injury resulting from advertising, thus supporting Wisconsin Tire's claims for coverage.
The interpretation of policy clauses should be broad, aligning with precedents in previous cases. In Doyle, the Wisconsin Supreme Court determined that allegations of "emotional distress" fell under the policy's definition of "bodily injury," which included "any physical harm, including sickness or disease." This liberal construction acknowledged emotional and psychological harm as part of the coverage. Similarly, in Production Stamping Corporation v. Maryland Casualty Co., the Wisconsin Court of Appeals emphasized that even vague allegations could necessitate a duty to defend if they suggest a reasonable inference of policy coverage. In that case, the court found sufficient allegations regarding land contamination to imply the corporation's liability prior to a specified date, thus triggering the duty to defend. In contrast to these cases, the allegations in the current case are more directly aligned with the policy provisions, indicating a clearer basis for coverage. Consequently, considering both the explicit language of the allegations and reasonable inferences, the complaint should have triggered the duty to defend, leading to a dissenting opinion.
