United States District Court, D. Alaska
ORDER AND OPINION [RE: MOTION AT DOCKET 8]
JOHN
W. SEDWICK SENIOR JUDGE, UNITED STATES DISTRICT COURT
I.
MOTION PRESENTED
At
docket 8, Plaintiff Lynch and Kennedy Dry Goods, Inc.
(L&K) filed a motion for partial summary judgment,
arguing that Defendant American Fire and Casualty Company
(American), pursuant to the insurance policy it issued to
L&K (the Policy), had a duty to defend L&K and its
owner Rosemary Libert (Libert) in a criminal matter brought
against Libert by the U.S. Government (Government). It seeks
reimbursement for the attorney's fees and costs it
incurred in successfully defending Libert. American filed an
opposition and a cross-motion for summary judgment at docket
21, arguing that American owes no coverage to L&K under
the Policy for various reasons, including untimely notice,
assumed voluntary payments, and the criminal nature of the
underlying legal action for which L&K seeks coverage.
L&K filed a joint response and reply at docket 25.
American replied a docket 28. Oral argument was requested but
would not be of additional assistance to the court.
II.
BACKGROUND
In
2016, the Government brought criminal charges against Libert
“dba Lynch and Kennedy Dry Goods, Inc.” under
federal statute 18 U.S.C. § 1159(a), which makes it
unlawful to knowingly display or sell any good “in a
manner that falsely suggests it is Indian produced . . .
.” The criminal information alleged that U.S. Fish and
Wildlife Service (USFWS) performed an undercover operation at
L&K in July of 2014 and again in June of 2015. It alleged
that during the 2014 visit an L&K employee misrepresented
to an undercover USFWS agent that a bone sculpture had been
made by an Alaska Native artist and that during the
subsequent 2015 visit Libert herself falsely represented to
an agent that a carving had been made by an Alaska Native
artist.[1] The potential penalties under the statute
consist of imprisonment and/or a fine.
L&K
hired defense counsel, including an attorney from Washington
D.C. The case against Libert ultimately proceeded to trial in
Juneau for two days in September of 2016. The jury acquitted
Libert of the misdemeanor charges. The successful defense of
Libert cost L&K over $100, 000. It subsequently notified
American of the litigation, asking for recovery of its
attorneys' fees based on the Policy's liability
coverage for advertising injury. American denied coverage,
and L&K followed with this declaratory judgment action,
asking the court to find that American had a duty to defend
Libert and must cover the defense costs associated with her
criminal trial. Each party now requests summary judgment on
the issue of coverage.
III.
STANDARD OF REVIEW
Summary
judgment is appropriate where “there is no genuine
dispute as to any material fact and the movant is entitled to
judgment as a matter of law.”[2] The materiality requirement
ensures that “only disputes over facts that might
affect the outcome of the suit under the governing law will
properly preclude the entry of summary
judgment.”[3] Ultimately, “summary judgment will
not lie if the . . . evidence is such that a reasonable jury
could return a verdict for the nonmoving
party.”[4] However, summary judgment is mandated
“against a party who fails to make a showing sufficient
to establish the existence of an element essential to that
party's case, and on which that party will bear the
burden of proof at trial.”[5]
The
moving party has the burden of showing that there is no
genuine dispute as to any material fact.[6] Where the
nonmoving party will bear the burden of proof at trial on a
dispositive issue, the moving party need not present evidence
to show that summary judgment is warranted; it need only
point out the lack of any genuine dispute as to material
fact.[7] Once the moving party has met this burden,
the nonmoving party must set forth evidence of specific facts
showing the existence of a genuine issue for
trial.[8] All evidence presented by the non-movant
must be believed for purposes of summary judgment, and all
justifiable inferences must be drawn in favor of the
non-movant.[9] However, the non-moving party may not rest
upon mere allegations or denials, but must show that there is
sufficient evidence supporting the claimed factual dispute to
require a fact-finder to resolve the parties' differing
versions of the truth at trial.[10]
Alaska
substantive law applies here. The interpretation of an
insurance contract is a question of law for the
court.[11] The court must construe an insurance
policy in accordance with ordinary and customary usage and in
such a way as to give effect to an insured's reasonable
expectations. “Ambiguities in an insurance policy are
to be construed most favorably to an insured, but ambiguities
only exist when there are two or more reasonable
interpretations of particular policy
language.”[12]
IV.
DISCUSSION
L&K
argues that the Policy covers the fees and costs she incurred
in defending against the Government's charges. It relies
on the business liability provision in the Policy, which
covers “advertising injury.” It states as
follows:
(1) Business liability
(a) We will pay those sums that the insured becomes legally
obligated to pay as damages because of “bodily
injury”, property damage” or “personal and
advertising injury” to which this insurance applies. We
will have the right and duty to defend the insured against
any “suit” seeking those damages. However, we
will have no duty to defend the insured against any
“suit” seeking damages for “bodily
injury”, “property damage” or
“personal and advertising injury”, to which this
insurance does not apply.[13]
Personal and advertising injury is defined under the Policy
as injury “arising out of . . . [the] use of
another's advertising idea in [the insured's]
advertisement.”[14]Advertisement is defined as “a
notice that is broadcast or published to the general public
or specific market segments about [the insured's] goods,
products or services for the purpose of attracting customers
or supporters.”[15]
L&K
argues that the Government's charges against Libert arise
from Libert's and L&K employees' use of
another's advertising idea, bringing the charges within
the scope of business liability coverage. Parsing through the
definition, L&K provides a drawn-out argument that the
definition of advertising injury has been met here because
there is no requirement that the insured must be accused of
wrongfully using or misappropriating another's specific
idea; rather, L&K argues that it suffices if the insured
used an idea that should not have been used in conjunction
with its goods. It argues that the Government's
underlying action against Libert involved her use of the
general concept of Alaska Native products as a way to sell
goods. It also argues that to trigger the duty to defend the
person bringing the suit against the insured does not need to
be the person whose idea was used.
American
disagrees that the Policy covers the Government's
criminal complaint against Libert. It sets forth five reasons
for its denial of coverage: (1) L&K's notice was
untimely, and L&K had already voluntarily assumed the
defense expenses as its own before giving any notice to
American; (2) the potential fines stemming from the action do
not constitute “damages” under the Policy; (3)
the Policy only encompasses the duty to defend civil matters;
(4) the Policy's “criminal act” exclusion
applies; and (5) the Government's criminal charges do not
allege any advertising injury.
American's
Notice of Denial
L&K
argues that American cannot now deny coverage based on
provisions and reasons not mentioned in its coverage
correspondence with L&K. Specifically, it argues that
American cannot now base its denial on 1) the criminal act
exclusion, 2) the argument that only civil lawsuits are
covered under the Policy, or 3) the voluntary payment
provision because those grounds were not mentioned in any of
American's letters to L&K. In support, L&K cites
Lutz v. First Financial Insurance
Company.[16]
However,
that case does not stand for the proposition that an insurer
is limited to coverage arguments that were expressly
articulated in its denial letter to the insured. Rather, the
court in Lutz recognized that equitable estoppel
principles may prevent an insurer from relying on a valid
coverage defense that was not mentioned to the insured.
Equitable estoppel requires “the assertion of a
position by conduct or word, reasonable reliance thereon by
another party, and resulting prejudice.”[17]
Here,
there has been no showing by L&K of reliance or any
prejudice stemming from American's correspondence. There
can be no prejudice from American's failure to state
every possible ground for denying coverage because L&K
did not notify American of the Government's charges
against its owner, Libert, until after it had hired counsel,
defended the charges, and incurred all the expenses for which
it now seeks reimbursement.
L&K
argues that American's failure to raise all of its
possible defenses has prejudiced it not in the underlying
action but in this specific lawsuit because coverage could
now be denied on grounds not previously stated. In other
words, the new grounds for denial have made this declaratory
judgment action harder. The court agrees with American's
assessment of this position:
If this argument is correct, then any time an insurer fails
to mention a valid coverage defense in its first
correspondence, the insurer will be forever estopped form
raising that defense because the subsequent reliance on that
defense - especially a valid one - would harm the plaintiff.
Plaintiff's argument becomes a tautology. Anytime an
insurer fails to articulate a coverage defense, it will be
forever estopped from ever raising it again; raising it the
future will be harmful to the insured.[18]
Indeed,
L&K's argument does not square with Alaska law. The
Alaska Supreme Court has held that coverage defenses not
stated in denial correspondence are not deemed
waived.[19] Furthermore, American ...