Findings of Fraud, Oppression and Malice Rendered both Compensatory Damage Award and Punitive Damage Award Excluded from Indemnity Coverage

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In Cohen v. Berkley National Ins. Co., __ Fed.Appx.3d __ (2019), 2019 WL 3235076 (9th Cir. July 18, 2019) (unpublished), the Ninth Circuit Court of Appeals held that findings of fraud, oppression and malice by a jury rendered both the compensatory and punitive damages components of the Judgment excluded from coverage.  The Ninth Circuit concluded that there was no coverage for the compensatory damages portion of the Judgment because, “the jury and district court did not distinguish between compensatory and punitive damages in finding that [insureds’] conduct amounted to fraud, oppression, and malice.”  The Ninth Circuit thus upheld the district’s court’s dismissal of the action against the insurer pursuant to Fed. R. Civ. Proc. Rule 12(b)(6).

In Cohen, Plaintiffs sued the insureds for allegedly creating websites containing defamatory statements about Plaintiffs that compared them to notorious Ponzi scheme operator Bernie Madoff and  implying they were financial fraudsters.  Counts for defamation and “false light” invasion of privacy were tried to a jury, which returned a verdict for Plaintiffs and awarded them $38 million in compensatory and punitive damages.  In their liability findings on each count, the jury specified each insured had engaged in the wrongful conduct with fraud, oppression and malice.

Plaintiffs requested Berkeley National pay its policy limit to partially indemnify the insureds for the verdict, but Berkeley National declined. Plaintiffs then filed a direct action under Nevada law against Berkley National for breach of contract, seeking to collect the Judgment up to the policy limit.  The Berkley National policy covered “personal and advertising injury,” but contained an exclusion for such injury, “caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury.’”

Berkeley National moved to dismiss the direct action for failure to state a claim. In opposition, Plaintiffs argued that neither defamation nor invasion of privacy required they prove the insureds knew their acts would violate the rights of another.

The district court found the “knowing violation” exclusion applies when an insured violates the rights of another “with some level of intent amounting to ‘knowledge.’” Cohen, 2017 WL 3925418 (D. Nev. Sept. 6, 2017) (not reported).  The district court further found that, in order for the jury to have awarded punitive damages, Plaintiffs must have proven the insureds committed fraud, oppression or malice by clear and convincing evidence.  Thus, the district court concluded that knowledge of a violation is implicit in the jury’s findings that each defendant had acted with fraud, oppression and malice in committing the defamation and invasion of privacy.

The district court also rejected Plaintiffs’ argument that the jury’s findings of fraud, oppression and malice should only apply to the punitive damages, not the compensatory damages, portion of the Judgment.  The district court held the “knowing violation” exclusion applied to the entire Judgment, based on the facts alleged in the underlying Complaint and  the direct action Complaint, and the determinations at trial.

Although unpublished, the Ninth Circuit’s decision affirming the district court may be cited in federal court cases and perhaps in other state cases. The decision successfully applying the “knowing violation” exclusion to personal and advertising injury coverage gives insurers solid grounds to resist indemnity coverage in punitive damages cases where: (1) there is a finding of fraud, oppression or malice on each count; and (2) against each insured defendant.  If the jury ultimately makes those findings, the necessary knowledge exists to render all of the damages uncovered.  In a mixed results case, however, where punitive damages are imposed on one count, but not on another, or where one or more insureds are not found to have acted with fraud, oppression or malice, insurers will still owe indemnity coverage for the compensatory damages awarded on the count or against the defendant as to which no finding of fraud, oppression and malice was made.