Insurer had duty to defend against its own claim against former agent

Gustafson v. American Family Mut. Ins. Co., 901 F. Supp. 2d 1289 (D. Colo. 2012)

Here’s one you don’t see every day: insurer trying to deny coverage to its former agent.  The facts have to make you wonder (as with the mortgage industry): what other clerical errors are insurers making, and how do they affect policyholders?

Gustafson worked for American Family for about 26 years, then voluntarily resigned in 2008.  He insured his business with American Family as an insurance agency, which included advertising injury coverage.  Advertising injury included “use of another's advertising idea in your ‘advertisement.’”  Knowing infliction of advertising injury was excluded. 

Gustafson had a general umbrella policy insuring about 20 other business ventures, and consolidated them under one general umbrella policy, which required changing the policy number for his insurance agency. Though this should have had no effect on the substance, due to a clerical error, American Family described his business as a rental dwelling rather than as an insurance agent/broker office, which arguably cancelled coverage for insurance activities he conducted there.  American Family didn’t alert Gustafson to this change and he was otherwise unaware of it.  The court ruled that, under the circumstances, the previous coverage continued, given Gustafson’s reasonable expectations.

One day after he resigned from American Family, Gustafson opened his own insurance agency, Advantage Insurance, in the same location. He covered an American Family lawn sign in front of the office with a temporary vinyl sign he designed.   Because the lawn sign was backlit, “you could still see ‘American Family Insurance, Barry Gustafson Agency’ through” the temporary vinyl sign at night.  Shortly thereafter, hundreds of policyholders canceled their American Family policies and bought coverage with Advantage.  American Family alleged that Gustafson had broadly searched its customer database before resigning, and that at least one former American Family policyholder obtained coverage through Advantage before Gustafson resigned; Gustafson disputed American Family’s characterizations.

In late 2008, American Family sued Gustafson, including a claim for violation of the Colorado Consumer Protection Act, alleging that he falsely advertised to and solicited American Family customers by bringing them to his office and then redirecting them.  One of American Family’s witnesses said at his deposition that the CCPA claim was based on the fact that, at night, Gustafson’s temporary vinyl sign illuminated parts of the old American Family sign.

Gustafson requested that American Family defend him.  Because of the conflict of interest, American Family hired outside counsel to provide an opinion letter on coverage. The opnion letter said that there was no duty to defend because (1) the policy change had excluded the insurance business from coverage, (2) there was no advertising injury, and (3) the underlying complaint didn’t establish a causal link between the ad and American Family’s damages.

After the underlying action terminated in Gustafson’s favor, he sued American Family for breach of contract and claims related to bad faith refusal to defend.

The court found that American Family had a duty to defend him. As noted above, his insurance activities were covered by his policy.  Looking at the complaint, Gustafson had to show that it could be read to allege the use of another’s advertising idea in his ad, and that Gustafson’s advertising caused the injury forming the basis for the underlying action.  Most courts have held that “use of another's idea” means the “wrongful taking of the manner by which another advertises its goods or services.”   The underlying complaint could be read to allege “advertising injury”—falsely advertising, directing insureds to come into his office, and redirecting them to American Family offices could be read to allege that Gustafson used American Family’s advertising idea by falsely advertising himself as an American Family agent in an attempt to induce them to purchase from Advantage. 

The next question was whether the injury arose in the course of advertising—whether the advertising activities caused the injury, not merely exposed it.  The injury American Family claimed was redirection of business and loss of customers.  That established a direct link between Gustafson’s allegedly false advertising and American Family’s injury.  American Family thus had a duty to defend.

American Family raised three exclusions: injury caused with the knowledge that it would inflict advertising injury; injury arising from a breach of contract; and injury arising out of copyright, patent, trademark or trade secret infringement or other intellectual property rights.  Not so. The underlying complaint didn’t allege that Gustafson’s false advertising was done with the knowledge that it would inflict advertising injury; the consumer protection claim wasn’t based on breach of any contract; and the underlying complaint didn’t raise a claim for trademark or trade secret infringement.  So none of the exclusions applied.

However, American Family escaped liability for bad faith breach of contract etc. because it used outside counsel and Gustafson didn’t show that it had violated industry standards, as required to show that an insurer acted unreasonably with respect to a claim brought by a third person (here, American Family is also the third person) against an insured.