United States District Court, N.D. California
December 1, 2005.
SONY COMPUTER ENTERTAINMENT AMERICA INC., Plaintiff,
AMERICAN HOME ASSURANCE COMPANY; and AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE COMPANY, Defendants.
The opinion of the court was delivered by: PHYLLIS HAMILTON, District Judge
ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT; DENYING
PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
The parties' cross-motions for summary judgment came on for
hearing on November 16, 2005 before this court. Plaintiff Sony
Computer Entertainment America Inc. ("Sony") appeared through its
counsel, Martin H. Myers, and defendant American International
Specialty Lines Insurance Company ("AISLIC") appeared through its
counsel, Thomas H. Sloan. Having read all the papers submitted
and carefully considered the relevant legal authority, the court
hereby GRANTS defendant AISLIC's motion for summary judgment and
DENIES plaintiff Sony's motion for partial summary judgment, for
the reasons stated at the hearing, and as follows.
A. Factual Background
In 2001, AISLIC sold Sony a "Multimedia Professional Liability
Policy" covering liability for certain specified "wrongful acts,"
provided such acts arose and were tendered during the period
covering July 1, 2001 through July 1, 2002. See Declaration of
Norman Rafsol in Support of AISLIC's Motion for Summary Judgment ("Rafsol Decl."),
In July 2002, Sony was sued in state court in two class actions
(the Kim/Kaen actions), in which the class plaintiffs alleged
that Sony's Playstation 2s ("PS2"s) suffered from a design defect
that rendered them unable to play DVDs and certain game discs.
See Declaration of Jennifer Liu in Support of Sony's Motion for
Summary Judgment ("Liu Decl."), Exs. A-B. Specifically, the
Kim/Kaen complaints alleged causes of action for breach of
warranty, negligent misrepresentation, unfair business practices
(Cal. Bus. & Professions Code § 17200), and false advertising
(Cal. Bus. & Professions Code § 17500), among other claims. Id.
Sony tendered the Kim/Kaen claims to AISLIC for coverage
pursuant to the AISLIC policy. On June 17, 2003, AISLIC denied
B. Insurance Policy
The AISLIC policy has the following relevant provisions:
Wrongful Act: AISLIC agrees to pay "for each wrongful act or
series of continuous, related or repeated wrongful act(s) . . .".
See Rafsol Decl., Ex. C at 00102 (Policy, Declarations).
"`Wrongful act' means the following committed by the insured in
the business of the insured: . . . (g) defective advice,
incitement, or negligent publication, including bodily injury or
property damage or death arising out of the foregoing." See
Rafsol Decl., Ex. C at 00122-23 (Policy, section VII
Certain exclusions have also been singled out in the policy.
First, the AISLIC policy excludes coverage for any claim
"arising out of . . . unfair or deceptive business practices
including but not limited to, violations of any local, state or
federal consumer protection laws . . .". Rafsol Decl., Ex. C at
00105-109 (Policy, section II (Exclusion C)).
Second, the policy also excludes coverage for any claim
"alleging or arising out of a breach of any express warranties, representations or guarantees."
Id. (Policy, section II (Exclusion J)).
Finally, the policy excludes coverage for any claim "arising
out of false advertising or misrepresentation in advertising."
Id. (Policy, section II (Exclusion P)). Significantly, however,
this exclusion has an important "exception", which provides:
"However, we will defend suits alleging any of the foregoing
conduct until there is a judgment, final adjudication, adverse
admission or finding of fact against you as to such conduct at
which time you shall reimburse us for claim expense . . .". Id.
C. Procedural History
On February 5, 2004, Sony filed the instant action against
AISLIC (along with several other insurers), alleging that AISLIC
had improperly refused to tender a defense to Sony in the
Kim/Kaen actions. Specifically, Sony asserts five causes of
action against AISLIC: (1) breach of contract for failure to
defend Sony; (2) breach of contract for failure to indemnify
Sony; (3) breach of the implied covenant of good faith and fair
dealing; (4) declaratory relief as to AISLIC's duty to defend
Sony; and (5) declaratory relief as to AISLIC's duty to indemnify
Both parties now move for summary judgment. Sony seeks summary
judgment on the duty to defend claims only (first and fourth
causes of action), and AISLIC seeks summary judgment as to all
A. Legal Standard
1. Summary Judgment
Summary judgment is appropriate when the evidence shows there
is no genuine issue of material fact and the moving party is entitled to judgment as
a matter of law. Fed.R.Civ.P. 56(c); Anderson v. Liberty
Lobby, Inc., 477 U.S. 242 (1986).
2. Duty to Defend
An insurance carrier's duty to defend its insured from a
third-party lawsuit extends broadly to require that the carrier
defend all suits which even potentially seek damages that are
within the scope of the policy. Montrose Chemical Corp. v.
Superior Court, 6 Cal.4th 287, 299 (1993); see also, e.g.,
Lebas Fashion Imports v. ITT Hartford Ins. Grp.,
50 Cal. App. 4th 548, 5567 (1996) (duty to defend may only be excused "when
third-party complaint can by no conceivable theory raise a single
issue which would bring it within the policy coverage."). In
evaluating whether coverage under the policy and a
corresponding duty to defend exists, the insurance carrier must
base its decision on the facts presented to it at the time of
tender. Gunderson, 37 Cal. App. 4th at 1114; Montrose,
6 Cal.4th at 295. The carrier must consider the allegations raised
in the third-party complaint and any extrinsic evidence presented
by the insured. Anthem Electronics, Inc. v. Pacific Employers
Ins. Co., 302 F.3d 1049, 1054-55 (9th Cir. 2002) (citations
B. Coverage Under the AISLIC Policy
With these principles in mind, the first issue to be decided in
determining AISLIC's duty to defend is whether the AISLIC policy,
in its affirmative coverage provisions, covers the claims
asserted in the Kim/Kaen complaints. See, e.g., Palmer v.
Truck Ins. Exch., 21 Cal. 4th 1109, 1115-16 (1999) (coverage
determined by comparing allegations of third party complaint with
coverage language of policy). Sony asserts that it does, arguing
that the Kim/Kaen claims are covered under the "negligent
publication" definition for "wrongful acts." AISLIC, by contrast,
disputes the meaning given to the term "negligent publication" by
Sony, and argues that the Kim/Kaen complaints do not allege
claims for "negligent publication" as the term should properly be
understood, thereby prohibiting coverage.
The court's determination of coverage can therefore be
distilled into two inquiries: (1) the proper meaning to be given
the term "negligent publication" under the policy; and (2) whether the Kim/Kaen complaints allege claims for "negligent
publication," as properly defined.
1. "Negligent Publication"
The AISLIC policy obligates AISLIC to provide coverage for
claims alleging Sony's "defective advice, incitement, or
negligent publication, including bodily injury or property
damage or death arising out of the foregoing." See Rafsol
Decl., Ex. C at 00123 (Policy, section VII (Definitions))
(emphasis added). The policy does not, in and of itself, provide
a definition for "negligent publication." Sony contends that the
term has a plain meaning and should be read to mean simply the
"communication of information to the public, lacking or
exhibiting a lack of due care or concern." AISLIC, by contrast,
argues that the term cannot be construed so broadly, and really
refers to a category of torts that typically seek redress for
bodily injury or harm.
The interpretation of insurance policies follows the general
rules of contract interpretation. See MacKinnon v. Truck Ins.
Exch., 31 Cal. 4th 635, 647 (2003); Waller v. Truck Insurance
Exch., Inc., 11 Cal. 4th 1, 18 (1995). Contract interpretation
is based on the premise that it must give effect to the mutual
intention of the parties. See MacKinnon, 31 Cal. 4th at 647.
This intent, if possible, should be inferred solely from the
written provisions of the contract, as interpreted in their
"ordinary and popular sense." Id. at 648. An exception to this
"ordinary and popular" rule arises, however, where the parties
have used a given term in a "technical sense" or where a "special
meaning" is given to a term "by usage." Id. In that case, the
term should be read with reference to that special meaning or
technical sense, and extrinsic evidence is allowed in to support
such a reading. Id. If the term is capable of more than one
meaning, it is ambiguous, and the court must resolve the
Applying these rules, the term "negligent publication" should
be read according to its plain meaning i.e., in light of its
"clear and explicit" meaning, under its ordinary and popular
sense unless the term is used by the parties in a technical
sense or a special meaning is given to it by usage. There is no
evidence here that the parties attached any technical or special meaning to the term "negligent publication" in the AISLIC
policy; accordingly, its plain meaning should apply.
To arrive at the term's plain meaning, Sony urges the court to
reference the dictionary definitions of the words "negligent" and
"publication," and string them together to arrive at a definition
for "negligent publication" that means "communication of
information to the public, lacking or exhibiting a lack of due
care or concern." Sony is correct that, under the plain meanings
ascribed to it by the dictionary, the term "negligent
publication" has such a meaning. Moreover, such a reading is, at
first blush, a plausible reading of the term as it is used in the
This conclusion, however, does not resolve the issue. For in
interpreting the plain meaning of a policy provision, the court
must construe the language of the policy "in the context of that
instrument as a whole, and in the circumstances of the case
. . .". See, e.g., ACL Technologies, Inc. v. Northbrook Property and
Casualty Ins. Co., 17 Cal. App. 4th 1773, 1785 (1993); see also
MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 649 (2003)
("Although examination of various dictionary definitions of a
word will no doubt be useful, such examination does not
necessarily yield the "ordinary and popular" sense of the word if
it disregards the policy's context."). Here, the context of the
policy as a whole and the circumstances of the case indicate that
the term "negligent publication" cannot be read as broadly as
First, Sony itself admits that under the broad definition for
"negligent publication" that it advocates, the term necessarily
covers claims for negligent misrepresentation and false
advertising. Indeed, Sony must concede that point, for the
dictionary definition upon which it bases its interpretation of
the term bears a striking resemblance to the ordinary legal
definition of negligent misrepresentation. See, e.g., Black's
Law Dictionary 1016 (7th ed. 1999) (Defining "negligent
misrepresentation" as "a careless or inadvertent false statement
in circumstances where care should have been taken"). But the
AISLIC policy specifically excludes claims for negligent
misrepresentation, as well as claims for false advertising. See Rafsol Decl., Ex. C at 00105-109 (Policy, section II (Exclusion
P)). Accordingly, to adopt Sony's definition of "negligent
publication" is to read into the policy coverage for that which
the policy specifically excludes.*fn2 Such a result would be
Moreover, analysis of the case law, though it fails to provide
a well-established meaning for the term "negligent publication,"
nonetheless indicates that it is not a term that has generally
been accorded the broad definition advanced by Sony. As Sony
correctly points out, the term has been used more narrowly by the
Ninth Circuit to refer to tort claims such as misappropriation
and defamation, rather than the false advertising or negligent
misrepresentation claims such as those the parties assert are
alleged in the Kim/Kaen actions. See, e.g., Newcombe v. Adolf
Coors Co., 157 F.3d 686, 695 (9th Cir. 1998) (holding that "a
claim for negligent publication is essentially the same as either
a claim for misappropriation or for defamation"). Indeed, as both
parties conceded at the hearing, there is no case that has ever
extended the term "negligent publication" to cover claims such as
negligent misrepresentation and false advertising. In sum,
existing case law does not support the expansive definition of
the term "negligent publication" that Sony offers.
Finally, the undisputed evidence also demonstrates that the
parties did not intend for the term "negligent publication" to be
construed as broadly as Sony argues. Sony's broad dictionary
definition of the term would, as stated above, cover the false
advertising and negligent misrepresentation allegations asserted
in Kim/Kaen. However, Sony's own insurance brokers, as well as
the risk-manager for Sony's affiliated entity, Sony Corporation
of America, testified that they did not believe the AISLIC policy
was designed to cover the Kim/Kaen allegations. See
Declaration of Thomas Sloan in Support of AISLIC's Motion for
Summary Judgment, Ex. B at 164:17-165:14; Ex. C at 22:2-23:7;
110:15-17; 113:10-114:2; 133:3-133:15; see also Declaration of
Martin Myers in Support of Sony's Opposition to Motion for Summary Judgment, Ex. J at 23:2-23; 126:11-14.
Although Sony asserts that this evidence is irrelevant, since
Sony never relied on it in making coverage decisions, the court
disagrees. The evidence is relevant to a consideration of the
meaning of the term "negligent publication" in the context of the
policy and under the factual circumstances of the case.
As such, the evidence supports what the cases conclude: that
the term "negligent publication" cannot be broadly defined to
mean a "communication" lacking "due care or concern," such that
the term subsumes within it claims for false advertising and
negligent misrepresentation.*fn3 Rather, the term should be
more narrowly construed to refer to that category of tort claims
typified by defamation and misappropriation claims.
2. Allegations in Kim/Kaen Complaints
Having construed the term "negligent publication," the next
issue for the court is whether the Kim/Kaen complaints allege
claims for "negligent publication." This determination must be
made by comparing the allegations of the Kim/Kaen complaints
with the coverage language of the policy. See, e.g., Palmer v.
Truck Ins. Exch., 21 Cal. 4th 1109, 1115-16 (1999)
(determination of coverage to be made via comparison of third
party complaint with policy provisions).
Here, none of the Kim/Kaen allegations that Sony relies on
can be read to allege claims for "negligent publication." The
allegations on their face disclose claims for false advertising,
misrepresentation, breach of warranty, and other fraudulent
claims, not for defamation or misappropriation, as negligent
publication claims are commonly read to cover. See, e.g., Liu
Decl., Ex. B at ¶¶ 54-56, 59, 83, 88, 94; Id. at Ex. A at ¶¶ 2-8,
15(a)-(g), 36-44, 56, 61(a)-(c), 62, 71, 78-81. Moreover, read as
a whole, it is apparent that the Kim/Kaen complaints are really
alleging product defect claims; fundamentally, plaintiffs' claims
stem from allegations that the PS2s designed by Sony were
inherently defective, and that any advertising or press publications failing to acknowledge the defect are
actionable.*fn4 Since claims alleging product defect are
distinct from claims alleging "negligent publication," this also
counsels against a finding that the Kim/Kaen complaints allege
"negligent publication" claims.
In short, it simply cannot be said that the Kim/Kaen
allegations, which give rise to false advertising, negligent
misrepresentation, and other fraud-based claims, also give rise
to the possibility of coverage under the "negligent publication"
provision of AISLIC's policy, which relates to claims associated
with defamation and misappropriation. As such, coverage for the
Kim/Kaen claims cannot be invoked under the "negligent
publication" provision, and no duty to defend exists under the
affirmative coverage provisions of the policy.
D. Exclusion "P"
Sony next argues that, even if the court finds that the
"negligent publication" provision does not cover the false
advertising and misrepresentation claims alleged in the
Kim/Kaen actions, coverage should still be found for these
claims under Exclusion P to the policy. Exclusion P excludes both
false advertising and misrepresentation claims from coverage, but
also contains an "exception" to the exclusion, which states that
AISLIC will nonetheless "defend suits alleging [false advertising
or misrepresentation in advertising] until there is a judgment,
final adjudication, adverse admission or finding of fact against
[Sony] as to such conduct . . .". See Rafsol Decl., Ex. C at
00108 (Policy, section II (Exclusion P)). AISLIC argues that
neither Exclusion P, nor the "exception" to Exclusion P, can
create coverage since there is no coverage under the insuring
"wrongful act" provisions of the policy.
AISLIC is correct. An exclusion to a policy cannot create
coverage that does not otherwise exist. See, e.g., Old Republic
Ins. Co. v. Superior Court, 66 Cal. App. 4th 128, 144 (1998)
("An exclusion cannot act as an additional grant or extension of
coverage"), overruled on other grounds in Vandenburg v. Superior
Court, 21 Cal. 4th 815 (1999). Nor can an exception to an
exclusion. See, e.g., id. at 145 ("there is no cure for a lack
of coverage under the insuring clause. Even if the effect of an exception is to
render a particular exclusion inoperative, the insured must still
prove the loss is covered."); see also Scottsdale Ins. Co. v. OU
Interests, Inc., 2005 WL 2893865, *8 (N.D. Cal. 2005)
(exceptions to exclusions remain "subject to and limited by all
other related exclusions contained in the policy"). And since the
court has found that no coverage exists here under the insuring
provisions of the AISLIC policy (i.e., the "wrongful act"
provision for "negligent publications"), neither Exclusion P nor
the "exception" to exclusion P can be used to support a duty to
defend the false advertising or misrepresentation claims alleged
in the Kim/Kaen actions.
Sony's attempts to argue otherwise are unpersuasive. Sony first
adopts the well-established premise that exclusions serve to
limit the coverage granted by an insuring clause, and then argues
that if this is so, the false advertising claims covered by
Exclusion P must necessarily be interpreted as covered by the
insuring provisions else, the exclusion would be unnecessary.
Not so. If this were true, every exclusion in an insurance
contract would always be read to imply coverage for the very same
claims which the exclusions purport to disclaim. Such a result
turns the interpretation of insurance contracts on its head. This
cannot be the way to read Exclusion P, nor any other exclusion
for that matter.
Sony next turns its attention to the "exception" contained
within Exclusion P, and employing similar reasoning to that
above, argues that even if false advertising claims are excluded
from coverage, the exception to Exclusion P promises a defense
for false advertising claims nonetheless, and creates coverage
for false advertising and misrepresentation claims. For support,
Sony relies on Nat'l Union Fire Ins. Co. V. Lynette C, and
Marie Y. v. General Star Indemnity Co., 228 Cal. App. 3d 1073
(1991), and 110 Cal. App. 4th 928 (2003), respectively. In both
those cases, argues Sony, the court held that an exception to an
exclusion can create an independent, legally enforceable
obligation to defend. Specifically, Sony contends that in Nat'l
Union, the court affirmatively held that an exception to an
exclusion can broaden coverage, and in Marie Y., an exception
to an exclusion remarkably similar to the one at issue here was
held to "create" coverage which did not otherwise exist under the policy in question.
Sony's reliance on these cases is misplaced. While Sony
correctly recites the holding of the Nat'l Union court, Sony
ignores the court's reasoning, which specifically acknowledged
(1) "that coverage cannot be found in an exclusion clause"; and
(2) that it was reading the exception to the exclusion clause at
issue "in light of the basic coverage clause." See
228 Cal. App. 3d at 1079-80. Here, by contrast, the basic coverage
provisions of the AISLIC policy do not support coverage, and
neither can the exception to Exclusion P. As for Marie Y.,
contrary to what Sony argues, that case did not hold that
coverage could be "created" under an exception to an exclusion
clause. Rather, Marie Y. held that an exception to an exclusion
clause supported a duty to defend where coverage otherwise
existed under the insuring provisions of the policy. See
110 Cal. App. 4th at 960 (concluding that allegations of amended
complaint stated "dental incident" falling within policy's
coverage provisions). Again, a different result is compelled
here, since the Kim/Kaen allegations do not allege a "wrongful
act" such that the exception to Exclusion P would support
Moreover, in arguing for coverage under the "exception" to
Exclusion P, Sony overlooks two fundamental principles: first,
that exceptions to exclusions "remain `subject to and limited by
all other related exclusions contained in the policy.'" Nat'l
Union, 228 Cal. App. 3d at 1081. Second, that the underlying
inquiry guiding the court is whether the insured "could
objectively and reasonably expect a defense under" any exception
to an exclusion. See, e.g., Marie Y., 110 Cal. App. 4th at 960.
Reading Exclusion P here in conjunction with Exclusion C and
Exclusion J, it simply cannot be said that Sony "could
objectively and reasonably expect a defense under" Exclusion P's
"exception" for claims alleging false advertising or
misrepresentation. Exclusion C excludes coverage for all claims
alleging "unfair or deceptive business practices", including
"violations of any local, state or federal consumer protection
laws." See Rafsol Decl., Ex. C at 00105-109 (Policy, section II
(Exclusions)). Exclusion J, for its part, excludes coverage for
all claims "alleging or arising out of a breach of any express
warranties, representations or guarantees". Id. Both exclusions
can be read to cover the false advertising and misrepresentation allegations of the Kim/Kaen
complaints: the false advertising claims asserted in Kim/Kaen
are made pursuant to California's unfair business practices
statute, thereby implicating Exclusion C. See Liu Decl., Ex. A
at ¶¶ 61-62, 78-80; Ex. B at ¶¶ 83, 88-90, 93-94. As for the
misrepresentations asserted in the Kim/Kaen actions, they are
as to "the quality, character and performance" of Sony's PS2s and
were contained in "various advertising, packaging and
correspondence," thereby implicating at a minimum the
"representation" prong of Exclusion J. See id.; see also Liu
Decl., Ex. B at ¶¶ 21-27, 44, 54, 59, 83, 94.
In sum, as both the case law and review of the policy language
makes clear, neither Exclusion P nor the so-called "exception" to
Exclusion P applies unless coverage under the AISLIC policy may
be invoked in the first instance. And as described above, no such
coverage under the "negligent publication" provision may be
invoked here. Accordingly, it cannot be said that Sony could have
"objectively and reasonably" expected a defense under Exclusion P
or its "exception", and the court finds that no duty to defend
existed under either.
Summary judgment is therefore GRANTED to AISLIC on Sony's
claims for breach of the duty to defend and for declaratory
relief regarding AISLIC's duty to defend. Sony's motion for
summary judgment as to both claims is DENIED.
E. Remaining Claims
Because summary judgment has been granted on the duty to defend
claims, judgment must also be granted on Sony's claims for
failure to indemnify. Because no breach of contract has been
shown, the bad faith claim fails as well. Love v. Fire Insurance
Exch., 221 Cal. App. 3d 1136, 1153 (1990). Accordingly, AISLIC's
motion for summary judgment as to Sony's claims for breach of the
duty to indemnify, declaratory relief regarding AISLIC's duty to
indemnify, and for breach of the implied covenant of good faith
and fair dealing, is GRANTED.
AISLIC's motion for summary judgment on all claims is GRANTED,
and Sony's motion for summary judgement on the duty to defend
claims, as pled in the first and fourth causes of action, is DENIED.
Summary judgment having been previously granted to American
Home Assurance Co., it appears to the court that there are no
remaining defendants or claims in this case. If any defendants
disagrees, it shall notify the court in writing requesting a case
management conference no later than December 9, 2005.
IT IS SO ORDERED.
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