The article in the Personal Lines Volume provides case law on the subject as well as information on the development and applicability of the reasonable expectations doctrine. See Reasonable Expectations.

Knowing Misconduct or Occurrence

This matter was before the United States District Court on cross-motions for summary judgment. The case is Liberty Mut. Fire Ins. Co. v. J.M. Smith Corp., C/A No. 7:12-2824-TMC, 2013 WL 5372768 (D. S.C. Sept. 24, 2013).

J.M. Smith is a pharmaceutical drug distributor incorporated in South Carolina. It distributed medications to three pharmacies in West Virginia and in June 2012, the West Virginia Attorney General sued Smith alleging that between 2000 and 2011, Smith had illegally distributed controlled substances by distributing drug quantities in excess of legitimate medical need; this in turn, allegedly caused harm to the state.

Smith sought defense and indemnification from its insurer, Liberty Mutual. The insurer filed a declaratory judgment action seeking a declaration that it had no duty to defend or indemnify. Smith filed a cross-motion for summary judgment on the duty to defend claim.

The U.S. District Court, South Carolina, noted that the pivotal issue was whether the underlying complaint against J.M. Smith alleges a covered occurrence. Liberty Mutual contended that the underlying complaint alleges facts that support only knowing misconduct. Smith countered that the complaint sounded in negligence and alleged an occurrence.

The court reviewed the underlying complaint and found that the Attorney General alleged that Smith, by its acts and omissions, inserted itself as an integral part of the pill mill and that it knowingly or while acting grossly negligent, did prescribe, dispense, or distribute prescription medicine for illegitimate purposes. The Attorney General also charged that Smith acted negligently, recklessly and at times illegally, all in contravention of West Virginia law.

The court decided that the underlying complaint contained specific allegations of negligence. While the Attorney General alleged that Smith willfully and repeatedly violated West Virginia law, he also alleged that Smith should have been aware of suspicious or unusually large orders to pharmacies and should have recognized that the controlled substances were being dispensed for non-legitimate medical purposes. Thus, the court ruled the facts alleged did not support only knowing misconduct.

Liberty Mutual also contended that, even assuming that the complaint could be read to allege that Smith negligently contributed to the drug abuse in the state, it does not allege an occurrence because harm caused by an insured's intentional acts is not accidental if it is the natural and probable consequence of those acts. The court responded that the creating of a pill mill with widespread addiction cannot be said to be a normal consequence of distributing prescription drugs to three pharmacies in a state over a limited time.

The insurer also said that the Attorney General claimed Smith broke the law, and this was based on the intentional acts by Smith of distributing the prescription drugs. However, the court decided that the conduct of distributing prescription drugs based upon orders placed by pharmacies is not, in and of itself, illegal, and the violation of laws cannot be reasonably anticipated, especially as to Smith which had been distributing prescription drugs in West Virginia for only a short time and to only three pharmacies.

The court ruled that the underlying complaint alleged an occurrence and the insurer had a duty to defend Smith. Accordingly, Liberty Mutual's summary judgment motion was denied and the motion for summary judgment by J.M. Smith was granted.

Editor's Note: The U.S. District Court, South Carolina, examined the allegations of the complaint against the insured and ruled that the facts did not support the insurer's contention that there was knowing misconduct on the part of the insured. The insured certainly intentionally supplied the prescription drugs as per orders placed by various pharmacies, but there was no intention on the part of the insured to create a mill pill or to break the law.

Slogans and Trademark Infringement

The insurer commenced this action in diversity against the insured, seeking a declaratory judgment that it did not have a duty to defend or indemnify the insured in an underlying action alleging claims for infringement of trademark. This case is Selective Ins. Co. of America v. Smart Candle, LLC, 781 F.3d 983 (8th Cir. 2015).

Smart Candle sells light-emitting diode (LED) flameless candles and commercial lighting systems internationally. Excell Consumer Products sued Smart Candle alleging that, among other things, Smart Candle's use of the trade name and trademark “Smart Candle” infringed rights that Excell had over use of that name and trademark.

Selective Insurance insured Smart Candle and Smart Candle requested a defense. The insurer denied coverage based on an exclusion pertaining to any injury arising out of the infringement of copyright, patent, trademark, trade secret, or other intellectual property rights. The exclusion did clarify that it does not apply to infringement of copyright, trade dress, or slogan used in the named insured's advertisement. Selective said that since the policy required a defense only for lawsuits claiming infringement of copyright, trade dress, or slogan, and since Excell did not claim infringement of a slogan or copyright, there was no duty to defend in this instance.

Selective filed an action seeking a declaratory judgment that it had no duty to defend. The district court granted summary judgment to Selective and this appeal followed.

The United States Court of Appeals, Eighth Circuit, noted that the Selective policy excludes coverage for lawsuits based on trademark infringement but grants coverage for lawsuits based on infringement of slogan. The word “slogan” was not defined in the policy so the court looked to the dictionary for the meaning of the word. Slogan was defined as a word or phrase used to express a characteristic position or stand or goal to be achieved, and as a brief attention-getting phrase used in advertising or promotion. Thus, the court said, the question is whether any of Excell's claims arguably were based on Smart Candle's use of “Smart Candle” as a brief attention-getting phrase or to express a characteristic position or stand or goal.

Smart Candle argued that it was entitled to indemnification for costs to defend against Excell's claims because the lawsuit was arguably based on the use of the phrase “Smart Candle” as a slogan or as both a trademark and a slogan. The appeals court disagreed. The court said that the words “Smart Candle” on their own do not express a position or stand or goal. Nor were the words, alone, attention-getting. The words are simply the trademarked named of the company, used for product recognition. The words do not educate about the company's purported goal to promote a line of battery-operated candles as a safe, economical alternative to a real wax candle.

The court did say that in some circumstances, it is possible that a trademark could also be a slogan, but that is not the case here. The claim against Smart Candle specifically alleged trademark and trade-name infringement; there was no mention of slogan infringement or anything that resembles a claim of slogan infringement. Because there were no allegations in the complaint in either substance or form regarding misuse of a slogan, the court ruled that Selective properly concluded that it had no duty to defend and so, no duty to indemnify Smart Candle.

The ruling of the district court was affirmed.

Editor's Note: The U.S. Court of Appeals, Eighth Circuit, rules that a claim of infringement of mark or trademark is not an infringement of a slogan and so, the insurer owed no duty to defend the insured. A claim for infringement of slogan would be covered under the personal and advertising injury insuring agreement, but the policy excluded coverage for lawsuits based on trademark infringement.

Principles for Effective Cybersecurity: Insurance Regulatory Guidance

The following principles have been derived from the Securities Industry and Financial Markets Association's (SIFMA) “Principles for Effective Cybersecurity Regulatory Guidance.” This article is republished with the permission of the National Association of Insurance Commissioners (NAIC) and is copyrighted material by the NAIC.

Due to ever-increasing cybersecurity issues, it has become clear that it is vital for state insurance regulators to provide effective cybersecurity guidance regarding the protection of the insurance sector's data security and infrastructure. The insurance industry looks to state insurance regulators to aid in the identification of uniform standards, to promote accountability across the entire insurance sector, and to provide access to essential information. State insurance regulators look to the insurance industry to join forces in identifying risks and offering practical solutions. The guiding principles stated below are intended to establish insurance regulatory guidance that promotes these relationships and protects consumers.

Principle 1: State insurance regulators have a responsibility to ensure that personally identifiable consumer information held by insurers, producers and other regulated entities is protected from cybersecurity risks. Additionally, state insurance regulators should mandate that these entities have systems in place to alert consumers in a timely manner in the event of a cybersecurity breach. State insurance regulators should collaborate with insurers, insurance producers and the federal government to achieve a consistent, coordinated approach.

Principle 2: Confidential and/or personally identifiable consumer information data that is collected, stored and transferred inside or outside of an insurer's, insurance producer's or other regulated entity's network should be appropriately safeguarded.

Principle 3: State insurance regulators have a responsibility to protect information that is collected, stored and transferred inside or outside of an insurance department or at the NAIC. This information includes insurers' or insurance producers' confidential information, as well as personally identifiable consumer information. In the event of a breach, those affected should be alerted in a timely manner.

Principle 4: Cybersecurity regulatory guidance for insurers and insurance producers must be flexible, scalable, practical and consistent with nationally recognized efforts such as those embodied in the National Institute of Standards and Technology (NIST) framework.

Principle 5: Regulatory guidance must be risk-based and must consider the resources of the insurer or insurance producer, with the caveat that a minimum set of cybersecurity standards must be in place for all insurers and insurance producers that are physically connected to the Internet and/or other public data networks, regardless of size and scope of operations.

Principle 6: State insurance regulators should provide appropriate regulatory oversight, which includes, but is not limited to, conducting risk-based financial examinations and/or market conduct examinations regarding cybersecurity.

Principle 7: Planning for incident response by insurers, insurance producers, other regulated entities and state insurance regulators is an essential component to an effective cybersecurity program.

Principle 8: Insurers, insurance producers, other regulated entities and state insurance regulators should take appropriate steps to ensure that third parties and service providers have controls in place to protect personally identifiable information.

Principle 9: Cybersecurity risks should be incorporated and addressed as part of an insurer's or an insurance producer's enterprise risk management (ERM) process. Cybersecurity transcends the information technology department and must include all facets of an organization.

Principle 10: Information technology internal audit findings that present a material risk to an insurer should be reviewed with the insurer's board of directors or appropriate committee thereof.

Principle 11: It is essential for insurers and insurance producers to use an information-sharing and analysis organization (ISAO) to share information and stay informed regarding emerging threats or vulnerabilities, as well as physical threat intelligence analysis sharing.

Principle 12: Periodic and timely training, paired with an assessment, for employees of insurers and insurance producers as well as other regulated entities and other third parties, regarding cybersecurity issues is essential.