Summaries of the principles of the duty to defend lawsuits often note that the merits of the underlying action are irrelevant.[1] The duty extends even to seemingly frivolous claims if they could potentially result in covered liability. Example: a cause of action barred on its face by the statute of limitations would still trigger a defense if it otherwise might be covered. In that case, the insured still would be required to appear and raise the affirmative defense to secure a dismissal. Accordingly, an insurer could not deny a defense on the ground that its investigation shows the plaintiff could not prove up the claim asserted.
Last month, the Ninth Circuit seemed to apply this core principle, but its opinion addressed what the Court called “non-existent” risks or causes of action that are not cognizable under California law. The Court ruled the duty to defend does not extend that far. The Court framed the issue as the difference between the defense of a recognized ground for relief and the defense of a purported cause of action that is unsupported by common or statutory law.
The Court addressed these issues in Big 5 Sporting Goods Corp. v. Zurich American Ins. Co., 2015 WL 8057228 (Dec. 7, 2015). Big 5 was sued in several lawsuits for allegedly requiring credit cardholders to provide personal information on the credit card transaction form. Specifically, the Court referred to the action against Big 5 as a “zip code case.” Two of Big 5’s insurers (Zurich and Hartford) had specific exclusions in their CGL policies for injury arising out of violations of statutory provisions against the “sending, transmitting, communicating, or distribution of material or information.” The plaintiffs asserted a claim against Big 5 for violation of California’s Song-Beverly Act and it fell squarely within the insurers’ exclusions. Big 5 did not appear to challenge the application of the exclusions to the statutory cause of action in the lawsuits.
The Court affirmed that the exclusions barred the statutory claim and also addressed Big 5’s argument that “the lawsuits it was forced to defend contained common law and California constitutional right to privacy claims separate and apart from any Song-Beverly Act zip code violations.” But did the underlying lawsuits actually include those non-statutory claims? The opinion does not say. Instead, the Court said it had “scoured the legal landscape” looking for support for a common law claim based on the securing or distribution of zip codes. Why the Court deemed the merits of a common law claim relevant is unclear. After all, if Big 5 was in fact sued for alleged common law violations and was required to mount a defense against such claims, it should not matter whether the claims are cognizable under California law. Big 5 still would need counsel to file a demurrer, judgment on the pleadings, or some motion to challenge whether any of the common law counts stated a claim upon which relief could be granted.
Indeed, if Big 5 actually did have to respond to common law counts for the misuse of zip code information, the Ninth Circuit’s ruling suggests it ignored the very rule it acknowledged, i.e., the duty to defend does not distinguish between meritorious and frivolous liability claims. Thus, if the Court concluded that Big 5 should be left to defend itself simply because it was sued for “non-existent” liability, the ruling would appear inconsistent with long-standing California insurance law. The opinion is unclear in this regard.
Conversely, if the underlying actions against Big 5 were explicitly limited to the Song-Beverly Act count, the Court would have been left with the issue of whether a defense was owed because the factual allegations – Big 5 misused zip codes – might result in amended complaints for common law violations. In that case, the insurers could assert that the duty to defend cannot be triggered by speculation about the possible assertion of unrecognized claims.2 In that case, the Court could properly conclude that it would be fanciful to “manufacture” a duty to defend by guessing that the plaintiff may try to raise a frivolous or “non-existent” claim. While it’s true that the defense obligation is measured by factual allegations, not liability theories, it’s also true that the duty to defend is tied to allegations that might actually result in covered indemnity.
In short, in the face of Big 5’s assertion that it was forced to defend against common law invasion of privacy “personal injury” claims, the Court could have ruled that (i) no, such claims were not actually alleged; and (ii) the chance that such claims might be made in the future is insufficient to trigger a duty to defend unless California law supports such a claim. To that extent, the merits of the prospective unpled claim would warrant consideration. Otherwise, if the lawsuits against Big 5 were multi-count complaints actually alleging causes of action for common law invasions of the right of privacy, Big 5 would still need to defend against such “loser” (as the Ninth Circuit called them) claims. The Court’s ruling that the duty to defend does not encompass “non-existent’ claims should not apply to claims that actually are alleged in a Complaint.
David A. Tartaglio is a partner at Musick, Peeler & Garrett at its Los Angeles office. His full bio and contact information can be found at: http://www.musickpeeler.com/professional/David_Tartaglio.
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1 E.g., Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 19, citing Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 267 [duty extends to claims that are “groundless, false, or fraudulent”]; North American Building Maintenance v. Fireman’s Fund (2006) 137 Cal. App. 4th 627, 639-640.
2 E.g., Gunderson v. Fire Ins. Exchange (1995) 37 Cal.App.4th 1106, 1114.
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