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Lynch and Kennedy Dry Goods, Inc. v. American Fire and Casualty Co.

United States District Court, D. Alaska

January 2, 2018





         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.


         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.


         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]


         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 ...

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