adult venue's insurer did not successfully exclude ads from ad injury coverage

Princeton Excess & Surplus Lines Ins. Co. v. R.I. Cranston Entertainment Inc.; 2024 WL 1285631, C.A. No. 21-63-JJM-PAS (D.R.I. Mar. 26, 2024)

Defendant, d/b/a Wonderland, operated an adult entertainment club and was one of the many such sued by various models for using their images in advertising without their consent from 2015 to 2019. Princeton insured Wonderland from 2016-2018 (with a broad exclusion for defamation, invasion of privacy, and various forms of advertising injury in the second year called the Exhibitions and Related Marketing Exclusion), and agreed to defend the club but reserved the right to deny insurance coverage. After settlement negotiations (including Wonderland’s separate counsel), Wonderland agreed to a judgment for $1.895 million, with a covenant not to execute and an assignment of rights against Princeton to the models in lieu of payment. Princeton then sued Wonderland and the models, seeking a declaratory judgment that it has no obligations under the Consent Judgment. Defendants counterclaimed for payment and damages for breach of contract and bad faith.

If policy terms are “ambiguous or capable of more than one reasonable meaning, the policy will be strictly construed in favor of the insured and against the insurer.”

Princeton argued that (1) no coverage was available for claims during the 2017 to 18 Policy Period; (2) Wonderland breached the insurance contract by agreeing to the Consent Judgment in violation of the cooperation and non-assignment clauses; and (3) the Consent Judgment was unreasonable, and thus unenforceable, as a matter of law.

The consent judgment was a lump sum and, Princeton argued, included uncovered claims; most of the images fell within the 2017-18 period. The policy excluded personal and advertising injury, including “publication, in any manner, of material that violates a person’s right of privacy,” disparagement, use of advertising ideas, and trade dress infringement, if such activities “arise out of or are part of ‘exhibitions and related marketing,’ ” which are broadly defined.

The underlying claim alleged false advertising and false association under the Lanham Act, misappropriation, violation of the Models’ common-law and statutory privacy rights, and defamation, “all of which fall squarely under Personal and Advertising Injury. So the burden falls to Princeton to show that its exclusion is valid.”

The problem was that the policy and the exclusion were “clearly worded, specific, and directly contradictory to each other. Under Rhode Island law, policy exclusions must be unambiguous, and ‘contract provisions subject to more than one interpretation are construed strictly against the insurer.’” Also, “Rhode Island courts will not uphold an exclusion that leads to unreasonable results, particularly if doing so will make another part of the coverage illusory.” The court found that definition of “Exhibitions and Related Marketing” was so broad as to “preclude coverage in almost any circumstance.” The Fifth Circuit recently found that, even if all “advertising injury” was excluded by this exact policy language, “personal and advertising injury” was an umbrella provision and not illusory because there was still personal injury coverage. Princeton Excess & Surplus Lines Ins. Co. v. A.H.D. Houston, Inc., 84 F.4th 274 (5th Cir. 2023); but see Princeton Express v. DM Ventures USA LLC, 209 F. Supp. 3d 1252, 1258 (S.D. Fla. 2016) (declining to uphold a “field of entertainment” exclusion on the grounds that it would exclude “anything listed in (d) through (g) listed under Personal and Advertising Injuries” and would thus make the Policies illusory as to advertising coverage).

The court here disagreed with the Fifth Circuit. By its plain language, “exhibitions” encompass almost all forms of production and advertising: “motion pictures, television programs, commercials, web or internet productions, theatrical shows, sporting events, music, promotional events, celebrity image or likeness, literary works and similar productions or work ....” including social media, as well as material produced “in any medium including videos, phonographic recordings, tapes, compact discs, DVDs, memory cards, electronic software or media, books, magazines, social media, webcasts and websites”— “a broad-ranging definition that contradicts Princeton’s purported coverage” for “advertising” (defined as “a notice that is broadcast or published to the general public ... about your goods, products or services”). And the exclusion also withdrew coverage for all related forms of marketing. Rhode Island doesn’t allow insurers to make whole sections of a policy illusory.

It also didn’t save Princeton that exceptions purportedly restored coverage for advertising related to Wonderland’s food and liquor services. Princeton argued that these exceptions preserve coverage for “use of another’s advertising idea or infringement of copyright, slogan, or trade dress in an advertisement for any aspect of Wonderland’s business other than exhibitions or marketing for exhibitions (such as its food or liquor service).” “But the Exhibitions and Related Marketing Exclusion precludes coverage for any commercial, web production, or promotional event, regardless of whether the advertisement relates to a show, a theatrical performance, or purchase of a hamburger. It would exclude the advertising examples that Princeton cites to make its case.”

Thus, Princeton owed Wonderland a duty to indemnify for advertising injury arising out of Exhibitions and Related Marketing under the 2017 to 18 Policy. Moreover, there was no evidence that the consent judgment purported to settle claims outside the policy period; it was based on Princeton’s denial of claims for that period, and its plain language suggested that it was limited to that period.

The policy didn’t apply to “[a]ny punitive damages, exemplary damages, or the multiplied portion of any award, because of any ‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’.” But again, there was no evidence that the consent judgment included these.

Princeton argued that Wonderland breached the terms of the insurance contract by interfering with its right to defend and settling the case in violation of the cooperation and non-assignment clauses. But it was uncontested that Princeton knew about the Models’ offer and took no steps to preserve its rights over the course of many months, so it waived any objection to the terms of the settlement. Also, there was a cooperation clause requiring cooperation in investigation and settlement; this is a reciprocal obligation, and no reasonable jury could look at Princeton’s conduct and find that it used “reasonable diligence” to obtain Wonderland’s cooperation.

Finally, Princeton waived its right to object based on the non-assignment clause:

We think the insured should be allowed, as soon as the insurer denies coverage, to protect its interest by negotiating a settlement. The only valuable asset the insured may have is its cause of action against the insurer and the insured should be able to assign this right to the injured party to protect itself from further liability.

Also, “because an insured’s rights to proceeds vests at the time of loss ... restrictions on the insured’s right to assign its proceeds are generally rendered void.”

Was the consent judgment collusive and unreasonable and thus unenforceable? No, there was no evidence of misconduct. (Princeton was bound because the judgment fixed Wonderland’s liability, triggering the duty to indemnify, and Wonderland properly assigned its claims to the models.) Princeton pointed to statements made by Wonderland’s manager, who stated that the offer of $10,000 per model was “crazy” and was upset that Princeton “did not want to fight it.” It argued that this was incompatible with Wonderland’s decision to settle all claims for $1.895 million, and that the manager hadn’t read the consent judgment so Wonderland could not have truthfully stated that it was reasonable.

“That a party may have opposed a settlement does not render a settlement fraudulent or collusive. And a party’s failure to read a contract does not render it unenforceable. A party may rely on their attorney in drafting settlement documents, and the attorney can be presumed to speak for them regardless of whether they have read the documents.” Any concerns about collusion were “further assuaged by the fact that the judgment was negotiated under the supervision and guidance of a seasoned Magistrate Judge and that other courts have repeatedly found liability on similar facts.”

But the complaint included other policy exclusions that were not yet before the court (exclusions for knowing falsity and the like), so defendants only got partial summary judgment.  They were entitled to summary judgment on liability for breach of contract (the duty to indemnify), but not on damages.