Slander claim excluded from coverage in commercial liability policy where lawsuit arose out of an alleged breach of contract

A District court in California recently found an insurer had no duty to defend or indemnify under a commercial liability insurance policy where a claim of slander arose out of an alleged breach of contract. Penn-Star Ins. Co. v. Caden Cos., No. CV 17-02369 AB (PLAx), 2017 U.S. Dist. LEXIS 213387 (C.D. Cal. Dec. 28, 2017).

In the underlying lawsuit, Caden entered into a contract with Pixior to store, warehouse, and fulfill customer orders of its products. When the warehousing company raised its prices, Caden sued for breach of contract. In response, Pixior countersued, alleging Caden stole trade secrets, violated an agreement not to poach Pixior employees, as well as a claim for slander. Caden then tendered its claim to its insurer, Penn-Star, to defend it in the countersuit.

It is important to note that Caden and Penn-Star both agree that the only potential claim covered by the Penn-Star policy was Pixior’s claim for slander. Nevertheless, Penn-Star opted to defend the lawsuit under a reservation of rights, but shortly after filed a suit for declaratory judgment asserting that it had no duty to defend or indemnify Caden.

The relevant policy language stated:

SECTION I—COVERAGES
* * *
COVERAGE B. PERSONAL AND ADVERTISING INJURY LIABILITY
1. Insuring Agreement
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "personal and advertising injury" to which this insurance applies. We will have the right and duty to defend the insured any against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "personal and advertising injury" to which this insurance does not apply. We may, at our discretion, investigate any offense and settle any claim or "suit" that may result.
* * *
COVERAGE B. PERSONAL AND ADVERTISING INJURY LIABILITY
* * *
2. Exclusions
This insurance does not apply to:
* * *
c. Material Published Prior To Policy Period
"Personal and advertising injury" arising out of oral or written publication, in any manner, of material whose first publication took place before the beginning of the policy period.
* * *
f. Breach Of Contract
"Personal and advertising injury" arising out of a breach of contract, except an implied contract to use another's advertising idea in your "advertisement".
* * *

The court agreed with Penn-Star that the policy provided no coverage. The court noted that while at first glance the policy would seem to indicate coverage for slander, the policy’s exclusions must also be considered. The policy excluded coverage for a slander claim (termed an “advertising injury”) when “arising out of a breach of contract.” Caden initiated the suit alleging Pixior breached its contract. Thus, the slander claim, even though in many respects a distinct claim, essentially arose out of the same set of facts that gave rise to Caden’s initial suit against Pixior and therefore excluded coverage.   

In a last-ditch effort to keep Penn-Star on the hook for its defense, Caden argued that the doctrine of concurrent causation applied and therefore did not trigger the policy’s exclusion. The concurrent causation doctrine states when two risks “constitute concurrent proximate causes of an accident,” and where one risk is covered under a policy and the other not covered, an insurer will still be required to defend the claim so long as one of the risks is covered under the policy.

The court rejected Caden’s argument because doctrine was inapplicable to the case. First, the doctrine requires that the risks would need to arise out of independent acts that when combined give rise to the injury. Here, Caden’s claims for breach of contract were one and the same with the slander claim and thus the doctrine could not apply.

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