Eleventh Circuit Rules That Policyholder’s Failure To Allocate Settlement Between Covered And Non-Covered Claims Precludes Indemnification
05.31.17
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(Article from Insurance Law Alert, May 2017)
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The Eleventh Circuit rejected a policyholder’s demand for indemnification based on its failure to allocate an underlying settlement between covered and non-covered claims. Highland Holdings, Inc. v. Mid-Continent Cas. Co., 2017 WL 1628953 (11th Cir. May 2, 2017).
Home Design sued Highland Holdings for copyright infringement of architectural designs. The suit alleged that Highland infringed upon Home Design’s copyright by advertising, designing, and constructing residences with house plans that were exact duplicates of plans registered by Home Design. Mid-Continent, Highland’s liability insurer, initially defended the action. Thereafter, Highland rejected the defense and settled with Home Design, agreeing to pay $650,000 as a full and final settlement of “all claims raised or that could have been raised.” When tendered the settlement, Mid-Continent refused to indemnify because Highland failed to allocate its damages between covered and non-covered claims. A Florida district court agreed with Mid-Continent’s denial, granting its summary judgment motion. The Eleventh Circuit affirmed.
The Eleventh Circuit explained that the settlement encompassed both covered claim (for advertising injury) as well as non-covered claims (for copyright infringement and advertising injuries committed knowingly, after receipt of a cease and desist order). Because the settlement did not address allocation to each category of claims, the court concluded that Mid-Continent had no duty to indemnify. In so holding, the court rejected Highland’s argument that all of its liability “arose out of” covered advertising injury because the schematic house plans were advertisements, whose very purpose was to attract customers, distinguishing Mid-Continent Cas. Co. v. Kipp Flores Architects, L.L.C., 602 F. App’x 985 (5th Cir. 2015) (discussed in our March 2015 Alert). In Kipp Flores, the court held that houses, with a design based on an infringed copyright, constituted advertisements for the purposes of liability coverage. However, in that case, the policyholder established that it used its model homes as its primary marketing means.
The Eleventh Circuit also rejected Highland’s argument that a logical method of allocating the settlement is to divide the payment among the number of homes constructed using an infringing house plan. That method is inadequate, the court explained, because it fails to account for the portion of the settlement that reimbursed Home Design for its attorneys’ fees or for the excluded “knowing” advertising injuries that occurred after Highland’s receipt of the cease and desist letter from Home Design.