Opinion
No. 99 C 7378
June 27, 2000
MEMORANDUM OPINION AND ORDER
Platinum technology, inc. (" Pti") brought this action seeking declaratory relief that defendant Federal Insurance Company ("Federal") had a duty to defend it against an advertising injury claim brought by a company then known as Platinum Software Corporation ("PSC") in litigation filed in California and subsequently transferred to Illinois. Pti has filed a motion for judgment on the pleadings as to whether Federal had a duty to defend. For the following reasons, Pti's motion for judgment on the pleadings as to Counts I and II is GRANTED.
BACKGROUND
Federal issued a primary general commercial liability insurance policy ("primary policy") and a commercial umbrella policy ("umbrella policy"), insuring Pti. Those policies define the circumstances under which Federal is to defend and indemnify Pti against covered claims. of relevance to this litigation, the question is whether the umbrella policy covered damages based on Pti's alleged infringement of another company's "advertising materials." The umbrella policy covers "advertising injury" as long as it took place during the policy period from February 1, 1995 through February 1, 1996, in the course of Pti's own advertising activities, and no underlying insurance or other insurance applies.
On July 3, 1997, PSC filed a complaint in the United States District Court for the Central District of California against Pti. On October 14, 1997, a first amended complaint was filed in the Northern District of Illinois. In that lawsuit, PSC alleged that it registered "Platinum" as its trademark on August 9, 1988. At some point in late 1989, PSC claimed it learned that Pti was marketing computer software under the mark "Platinum" and Pti was attempting to register the mark in other countries around the world. Shortly Thereafter, PSC demanded Pti to cease all further use of the mark "Platinum" as it was likely to cause confusion in the marketplace. The parties then engaged in extensive negotiations which ultimately led to a written agreement entered into on August 10, 1993 which prohibited Pti from using, among other things, the mark "Platinum." Count I of the first amended complaint asserts a breach of contract action allegedly from Pti's repeated violation of the written agreement. Count II of the first amended complaint asserts a trademark infringement action.
After being served with the complaint and first amended complaint, Pti tendered them to Federal and requested a defense and indemnification. By a letter dated June 24, 1998, Federal unqualifiedly refused and declined to defend and/or indemnify Pti against the claims. In January of 1999, Pti and PSC settled the lawsuit. As part of the settlement agreement, Pti is required to pay PSC four million dollars and provide a six million dollar credit towards the purchase of products and services from Pti.
Pti's complaint against Federal contains four counts. Count I seeks a declaration that Federal breached its duty to defend and its duty to indemnify. Count II seeks money damages for Federal's alleged breach of its contractual duty to defend. Count III seeks money damages for Federal's alleged breach of its contractual duty to indemnify. Count IV, Pti seeks money damages pursuant to Section 155 of the Illinois Insurance Code, claiming Federal's breach of its contractual duties was vexatious and unreasonable. Federal's alleged duty to defend Pti against those claims is the only issue in the pending motion for judgment on the pleadings. Thus, Pti requests that this court find Federal breached its duty to defend and enter judgment accordingly under Counts I and II.
STANDARD OF REVIEW
A party may move for a judgment on the pleadings after the pleadings are closed. Fed.R.Civ.P. 12(c). A motion for judgment on the pleadings is subject to the same standards as a Rule 12(b)(6) motion to dismiss.Northern Indiana Gun Outdoor Shows, Inc. v. City of South Bend, 163 F.3d 449, 452 (7th Cir. 1998). Thus, the court must presume all of the well-pleaded allegations of the complaint to be true. Miree v. DeKalb County, 433 U.S. 25, 27 n. 2, 97 S.Ct. 2490, 2492 n. 2 (1977). In addition, the court must view those allegations in the light most favorable to the nonmoving party. Northern Indiana, 163 F.3d at 452. Dismissal is proper only if it appears "beyond doubt that the (non-moving party] can prove no set of facts in support of his [or her] claim which would entitle him [or her] to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102 (1957).
ANALYSIS
I. Procedural Issue: Documents Attached to Opposition Memorandum
Before proceeding to the merits, the court must first determine what documents may be considered by the court in deciding this motion for judgment on the pleadings because defendant Federal has attached two exhibits to its memorandum in opposition to the motion. In deciding a motion under Rule 12(c), the court may consider only the pleadings, that is, "the complaint, the answer, and any written instruments attached as exhibits." Northern Indiana, 163 F.3d at 452 (citing Fed.R.Civ.P. 10(c)). Federal claims that the court must deny the motion, even without resort to the exhibits. In reply, Pti asks the court not to convert the motion into a motion for summary judgment. Instead, Pti believes it is entitled to judgement on the pleadings based solely on the four corners of the insurance policy and underlying complaint. Because neither party specifically requests that this court convert the motion into a motion for summary judgment and the exhibits are not part of the pleadings, this court will not consider the exhibits attached to Federal's memorandum in opposition to the motion in deciding this motion.
II. Duty to Defend (Counts I II)
A. Trademark Action Triggered Federal's Duty to Defend Under Illinois Law
Under Illinois law, "[t]he construction of an insurance policy and a determination of the rights and obligations thereunder are questions of law for the court" and thus appropriate for this motion. Crum Forster Managers Co. v. Resolution Trust Co., 156 Ill.2d 384, 390, 620 N.E.2d 1073, 1077 (1993); see also Roman Catholic Diocese of Springfield v. Maryland Cas. Co., 139 F.3d 561, 565 (7th Cir. 1998) (citing Illinois law). The legal principles governing the construction of insurance policies and an insurance companies obligations are well settled. An insurer's duty to defend is broader than its duty to indemnify. Outboard Marine Corp. v. Liberty Mut. Ins. Co., 154 Ill.2d 90, 124, 607 N.E.2d 1204, 1220 (1992);Tews Funeral Home, Inc. v. Ohio Cas. Ins. Co., 832 F.2d 1037, 1042 (7th Cir. 1987) (citing Illinois law).
The parties apparently agree that Illinois law controls this case since both parties cite to cases surrounding the duty to defend under Illinois law. This court does not need to look behind the parties' agreement that the substantive law of Illinois applies to this because it is reasonable. Spinozzi v. ITT Sheraton Corp., 174 F.3d 842, 849 (7th Cir. 1999).
"In determining whether an insurer has a duty to defend its insured, the court must look to the allegations in the underlying complaint and compare these allegations to the relevant coverage provisions of the insurance policy." Crum Forster, 156 Ill. 2d at 393, 620 N.E.2d at 1079; see also Roman Catholic, 139 F.3d at 565 (citing Illinois law). When making this comparison, the court should not simply look to the particular legal theories pursued by the claimant, but must focus on the alleged conduct on which the lawsuit is based. Pipefitters Welfare Educ. Fund, 976 F.2d 1037, 1039 (7th Cir. 1992) (citing Western Cas. Sur. Co. v. Adams County, 179 Ill. App.3d 752, 534 N.E.2d 1066, 1068 (1989)). "If the complaint states a claim that is within, or even potentially or arguably within, the scope of coverage provided by the policy," the insurer is obligated to provide the insured a defense. Id. (citing United States Fidelity Guar. Co. v. Wilkin Insulation Co., 144 Ill.2d 64, 73, 578 N.E.2d 926, 930 (1991)). An insurer is obligated to defend its insured if the allegations in a complaint give rise to the possibility of recovery under the policy; "[t]here need not be a probability of recovery." Tews, 832 F.2d at 1042 (quoting 7 C.J. Appleman, Insurance Law Practice § 4683.01 at 67 (1979)).
The insurer may properly refuse to defend its insured only if it is clear from the face of the complaint that the wrongdoing alleged is not covered under the policy. Pipefitters, 976 F.2d at 1040 (citing Conway v. Country Gas. Ins. Co., 92 Ill.2d 388, 392, 442 N.E.2d 245, 247 (1982)). The threshold a complaint must meet to present a claim for potential coverage, and thereby raise a duty to defend, is minimal. West Bend Mutual Insurance Co. v. Sundance Homes, Inc., 238 Ill. App.3d 335, 337-38, 606 N.E.2d 326, 328 (1992). If any one claim potentially falls within the scope of coverage, the insurer must provide a defense. Id. (citing Maryland Cas. Co. v. Peppers, 64 Ill.2d 187, 355 N.E.2d 24, 28 (1976)). The court "must read the underlying complaint liberally and in favor of the insured." Travelers Ins. Cos. v. Penda Corp., 974 F.2d 823, 829 (7th Cir. 1992) (citing Wilkin Co., 144 Ill. 2d at 74, 578 N.E.2d at 930).
1. Advertising Injury Offense
Because only one of the counts of the underlying complaint potentially fall within the scope of coverage in order to trigger Federal's duty to defend, this court focuses solely upon Count II of PSC's complaint. Additionally, because only one of the insurance policies, the umbrella policy, potentially covers the claims set forth in Count II of PSC's complaint, this court focuses solely on the language of that policy. In this court's view, Count II, read liberally and applying the above stated standards, triggered Federal's duty to defend Pti because at least some of the claims stated in Count II potentially fail within the scope of the umbrella policy.
Federal first argues that it had no duty to defend against the claims because an "advertising injury" was not alleged in the underlying complaint. Indeed, PSC did not specifically allege that Pti caused an "advertising injury" by infringing an "advertising material" anywhere in its underlying complaint. However, a complaint "need not allege or use language affirmatively bringing the claims within the scope of the policy, as the question of coverage should not hinge exclusively on the draftsmanship skills or whims of the plaintiff in the underlying action."Western Cas Sur. Co., 179 Ill. App.2d at 756, 534 N.E.2d at 1068 (citing International Minerals Chem. Corp. v. Liberty Mut. Ins. Co., 168 Ill. App.3d 361, 522 N.E.2d 758, 768 (1988)). As previously stated, what is determinative is the misconduct alleged. Hurst-Roche Engineers Inc. v. Commercial Union Ins. Co., 51 F.3d 1336, 1344 (7th Cir. 1995).
Here, Count II of PSC's complaint alleges Pti infringed on PSC's trademark by extensively using it to advertise Pti's own goods and services. Federal contends that the plain language of the umbrella policy requires an infringement of a copyrighted advertisement material and that is not what occurred. Pti argues, however, that "other advertising materials" need not be copyrighted because the word "copyrighted" in the policy only modifies the word "titles," not the phrase "other advertising materials." Pti points to Federal's initial coverage denial letter which Pti claims belies Federal's current interpretation. Pti further argues that a review of Federal's primary policy supports its position that infringement need not have been of copyrighted advertising materials.
Coverage B of the umbrella policy defines "advertising injury" as "injury, other than bodily injury or personal injury, arising solely out of one or more of the following offenses committed in the course of advertising your goods, products or services: 3. Infringement of copyrighted titles, slogans or other advertising materials." (Complaint, Ex. F, at 11-12). The policy defines "advertising" as "any paid: advertisement, publicity article, broadcast or telecast." (Complaint, Ex. F, at 12).
This court agrees with Pti and finds that the term "copyrighted" does not modify "other advertising materials." A reading of the plain language of the umbrella policy does not support a requirement that "advertising material" be copyrighted. Moreover, Federal's prior interpretation of the umbrella policy only further supports this court's finding. Federal specifically denied coverage because it found that the PSC's trademark was not an "advertising material" as defined by the umbrella policy and never mentioned that the "advertising material" needed to be copyrighted. (Complaint, Ex. H, at 11). More importantly, the umbrella policy states the "umbrella liability adds a broadening measure of coverage against many of the gaps in and between the underlying coverages" of the primary policy. (Complaint, Ex. F, at Introduction). The primary policy covers only infringement of copyrighted advertising materials as an advertising injury. (Complaint, Ex. B, at 19). Thus, based on the fact that the umbrella policy broadens the coverage, it is consistent with this court's finding that advertising materials need not be "copyrighted" in order to be covered under the umbrella policy.
Federal further argues that PSC's trademark is not an "advertising material." The policy, however, does not define "other advertising material." While it does define advertising as any paid advertisement, publicity article broadcast, or telecast, it is still necessary for the court to determine the scope of the terms together and based on the common and ordinary meaning of the phrase. Outboard Marine, 154 Ill. 2d at 115, 607 N.E.2d at 1215-16 (citation omitted). "Material" has been defined as "substance or substances out of which a thing is or can be constructed" or "something. . . to be refined and made or incorporated in to a finished effort." American Heritage Dictionary (2d College ed. 1991). Webster's Third New Int'l Dictionary (1986) also defines material as "the whole or a notable part of the elements constituents or substances of something. . . ." Based on these definitions, this court finds that one can reasonably construe the phrase, "other advertising materials," to include PSC's trademark. While the underlying complaint may not state in what medium of advertising PSC used its trademark, it certainly could have been in any one of the advertising mediums stated in the umbrella policy: "a paid advertisement, publicity article, broadcast or telecast." (Complaint, Ex. F, at 12).
Moreover, Federal admitted in its coverage denial letter that a trademark is readily featured in advertising. (Complaint, Ex. H., at 11). Therefore, it follows that a trademark could also be considered an "other advertising material." Finally, PSC does also unequivocally state in the underlying complaint that Pti infringed PSC's trademark "Platinum" extensively to advertise its own goods and services. (Complaint, Ex. C. at ¶ 10). Thus, construing the underlying complaint and the umbrella policy liberally and in favor of the insured, this court finds that PSC had alleged that Pti infringed upon an PSC's advertising material and thereby potentially caused Pti an "advertising injury."
This court is not alone in concluding that trademark infringement could potentially be an advertising injury which warrants coverage. See American Employers' Ins. Co. v. DeLorme Publishing Co., Inc., 39 F. Supp.2d 61, 77 (D. Me. 1999) (citing cases). Those courts have consistently held that, while "trademark infringement" is not listed as a offense under "advertising injury," it is still an "advertising injury" covered by that section of the policy. See id. (collecting cases). This court also believes that the fact "trademark infringement" is not listed warrants a finding of no liability is also untenable, especially in relation to the umbrella policy at issue in this case. As the DeLorme court noted, "there is no such separate offense entitled "infringement of . . . title or slogan" thus supporting the interpretation that this section is a list of separate offenses from which "trademark infringement" could potentially be included. Thus, as this court previously noted, other advertising materials could arguably cover PSC's trademark "Platinum."
Therefore, applying Illinois law and construing the umbrella policy and underlying complaint broadly, in favor of the insured, and in accordance with the plain and ordinary meaning of the terms used, this court finds that the underlying action for infringement of PSC's trademark fell within Federal's coverage for actions for advertising injury arising out of "infringement of . . . other advertising materials." Consequently, because Federal did not defend Pti in the underlying action, Federal breached its duty to defend unless a policy exclusion applies.
2. No Other Insurance Applied
Federal also argues that, even if PSC's claims allege a covered advertising injury, Federal still does not have a duty to defend the claims because other insurance applied, and thus, the insuring agreement and duty to defend were not triggered. Whether Pti has other insurance coverage may be in dispute. Yet, as previously noted, this court is not considering evidence presented which is not properly before the court on this motion for judgment on the pleadings. Nevertheless, resolution of this dispute has no bearing on the outcome of this motion. As Illinois courts have repeated stated, the duty to defend is broader than the duty to indemnify. Outboard Marine, 154 Ill. 2d at 124, 607 N.E.2d at 1220. "Other" insurance clauses have been recognized as not applying to the duty to defend because "`unless stated otherwise, that obligation is independent of liability and any limitations thereon.'" Covington Township v. Pacific Employers Ins. Co., 639 F. Supp. 793, 801 (M.D. Pa. 1986) (quoting Pacific Idem. Co. v. Linn, 590 F. Supp. 643, 651 n. 10 (E.D. Pa. 1984), aff'd, 766 F.2d 754 (3d Cir. 1985)).
This is especially true considering a court is limited, when determining whether the insurer had a duty to defend an insured, to the allegations in the underlying complaint and comparing those allegations to relevant provisions of the insurance policy. Outboard Marine, 154 Ill. 2d at 107-08, 607 N.E.2d at 1212. If the facts alleged in the underlying complaint even potentially fall within the policy's coverage, the insurer's duty to defend arises and the refusal to defend is unjustifiable. Id. at 108, 607 N.E.2d at 1212. Because it is rather unlikely that an insurance company would be listed in the underlying complaint, whether another insurance company may have potential coverage is not pertinent to a court's determination that an insurance company had a duty to defend. Thus, this court need not determine whether other insurance covered the advertising injury claims alleged in the underlying complaint in determining whether Federal had a duty to defend.
B. Application of Policy Exclusions
When an exclusionary clause in an insurance policy is relied upon to deny coverage, its application must be clear and free from doubt.Hurst-Rosche Engineers, Inc. v. Commercial Union Ins. Co., 51 F.3d 1336, 1342 (7th Cir. 1995) (citing Transamerica Ins. Co. v. South, 975 F.2d 321, 327 (7th Cir. 1992) (applying Illinois law)). The insurer has the burden of showing that a claim falls within an exclusion. Hurst-Rosche, 51 F.3d at 1342. The Seventh Circuit has held as such for two reasons: "(1) the insured's intent in purchasing an insurance policy is to obtain coverage, therefore any ambiguity jeopardizing such coverage should be construed consistent with the insured's intent, and (2) the insurer is the drafter of the policy and could have drafted the ambiguous provision to be clear and specific." Id. (citing Transamerica, 975 F.2d at 327). A court must construe any ambiguities in the policy in favor of the insured, but must not create an ambiguity when none exists. Id. (citation omitted). With these standards in mind, the court now turns to the interpretation of the provisions relied upon by Federal to deny coverage.
1. Prior Publication Exclusion
Federal argues that the prior publication exclusion in the umbrella policy precludes coverage. The relevant exclusion states that the insurance does not apply to an "advertising injury arising out of . . . oral or written publication of material whose first publication took place before the beginning of the policy period." (Complaint, Ex. F., at 9). Federal makes a rather convoluted argument that since PSC and Pti entered into a written agreement prohibiting Pti from using the mark "Platinum, " among other terms, and Pti subsequently breached that agreement, this exclusion applies. A plain and ordinary reading of the exclusion states, however, that an advertising injury arising out of an oral or written publication of material whose "first publication" took place before the beginning of the policy period is not covered. PSC states throughout the underlying complaint that Pti first used and registered a number of allegedly infringing trademarks between February 1, 1995 and February 1, 1996. There are no allegations in the complaint which Federal could have construed that these allegedly infringing trademarks were first published prior to the policy period. Thus, construing the language of the underlying complaint and umbrella policy in favor of Pti, this court cannot say that the application of this exclusion is free and clear from doubt. Therefore, this court finds that this exclusion should not have precluded coverage by Federal.
2. Breach of Contract Exclusion
Federal next argues that the breach of contract exclusion also precludes coverage. Federal states that because PSC alleged that Pti breached a written agreement when it began using the trademark in August of 1993, the breach of contract exclusion is applicable. Yet, as pointed out by Pti, a mere cursory review of PSC's underlying complaint shows that PSC had a number of other claims unrelated to the breach of contract claim in the underlying complaint, namely the trademark infringement claim in Count II which is relevant to this action. Additionally, Federal acknowledged this fact in its coverage denial letter. (Complaint, Ex. H, at 3). Therefore, this court cannot say that the application of the breach of contract exclusion is free and clear from doubt. Thus, this court finds that this exclusion also should not have precluded coverage by Federal.
C. Estopped from Asserting Coverage Defenses
Federal also asserts a number of policy defenses to avoid liability coverage. Under settled Illinois law, however, once an insurer violates its duty to defend, it is estopped from relying on policy defenses to avoid coverage in a subsequent lawsuit by the insured. Employers Insurance of Wusau v. Ehlco Liquidating Trust, 186 Ill.2d 127, 150-54, 708 N.E.2d 1122, 1134-37 (1999). Because this court has found that Federal breached its duty to defend and no policy exclusions' applications were free and clear from doubt, the estoppel doctrine applies and bars Federal from asserting any policy defenses.
D. Bad Faith
Lastly, Pti asks this court for a finding of bad faith on the part of Federal for denying its duty to defend Pti in the underlying suit. Damages in duty to defend cases are generally limited to the policy limits. Conway v. Country Casualty Ins. Co., 92 Ill.2d 388, 396-98, 442 N.E.2d 245, 248 (1982); see also Green v. J.C. Penney Auto Ins. Co., Inc., 806 F.2d 759, 762 (7th Cir. 1986). Illinois, however, recognizes an exception to this general rule if the insurer committed the breach of the duty to defend in bad faith. Id. An honest dispute as to the legal obligations of the parties, however, does not qualify as bad faith. See Bernstein v. Genesis Ins. Co., 90 F. Supp.2d 932, 940 (N.D. Ill. 1999) (citing Johnson v. Safeco Ins. Co. of Am., 809 F. Supp. 602, 608 (N.D. Ill. 1992); Cummings Foods, Inc. v. Great Cent. Ins. Co., 108 Ill. App.3d 250, 439 N.E.2d 37, 42 (1982)). Pti has not presented any evidence to suggest that Federal did anything but have an honest dispute as to whether it had a legal duty to defendant Pti in the underlying action. Accordingly, because the court is limited to the record before it, this court does not find Federal engaged in bad faith conduct in breaching its duty to defend Pti in the underlying action under the umbrella policy.
CONCLUSION
For the reasons stated, plaintiff Pti's motion for judgment on the pleadings as to Counts I and II is GRANTED. Reading PSC's claims against Pti liberally and in favor of the insured, Pti, this court must conclude that Count II is arguably within the scope of coverage for an advertising injury resulting from Pti's infringement of PSC's trademark. Additionally, this court finds that neither of the policy exclusions precludes coverage of the underlying action. Nevertheless, while Federal had a duty to defend Pti against PSC's underlying claims, this court does not find that Federal acted in bad faith in breaching its duty to defend. The parties are strongly urged to discuss settlement and report on status thereof on July 11, 2000 at 10:00 a.m. The court will set further dates in the case at the July 11, 2000 status hearing.