The Playstation 2 entertainment system and a multimedia liability policy were the focal points in a federal appeal decided recently in which a divided court determined what the policy meant when it covered “negligent publication” and also held that coverage was not created by a carve-back in an exclusion.
The case involved Sony Computer Entertainment America, Inc. (Sony) and its marketing of the Playstation 2 as being an entertainment system capable of playing audio and video CDs and DVDs as well as video games. A class action complaint against Sony alleged that the device had an inherent design defect that rendered it incapable of playing DVDs and some game discs. The complaint was in California and alleged a litany of torts, including false advertising and negligent misrepresentation for saying the device played DVDs.
Sony had purchased a $10 million media policy from American International Specialty Lines Insurance Company (AISLIC). The insurer disclaimed coverage and Sony sued, alleging breach of contract and bad faith.
The policy excluded claims “arising out of false advertising or misrepresentation in advertising,” but the carve-back said AISLIC would “defend suits alleging [false advertising or misrepresentation in advertising] until there is a judgment, final adjudication, adverse admission or finding of fact against [Sony] at which time [Sony] shall reimburse [AISLIC] for claim expense.” Sony argued that the carve-back created a duty to defend until there was an adverse judgment, finding or admission.
This is a subject we have written about before, and the court made short work of that argument. “[P]roper coverage analysis begins by considering whether the policy’s insuring agreements create coverage,” the court said. A carve-back in an exclusion cannot create coverage that does not exist in the coverage grant. “A ‘carve back’ within an exclusionary provision merely restores already-existing coverage. ‘[T]here is no cure for a lack of coverage under the insuring clause,’” the court wrote.
The greater discussion was about the insuring agreement, and the court began with a review of principles of contract interpretation in California:
· The interpretation of a contract must give effect to the mutual intent of the parties as of the time the contract was formed.
· If the contract language is clear and explicit, it governs.
· Terms of a policy must be read in context and in reference to the policy as a whole and in the circumstances of the case, not in the abstract.
· A provision is ambiguous only if it has two or more reasonable meanings despite the plain meaning of its terms within the context of the policy as a whole.
· Unresolved ambiguities in insurance policies “are generally” construed against the insurer, but only if the meaning of a term is ambiguous in light of the policy as a whole and only if coverage is within the “objectively reasonable expectations” of the insured.
The key question was whether the policy’s coverage for defective advice, incitement or “negligent publication” (which together constituted item (g) in a list of items the policy covered) extended coverage to claims for negligent misrepresentation and false advertising.
“Negligent publication” was not a defined term in the policy and was not used in legal or common dictionaries or in any California statute. Because no technical meaning was given to the term by the parties, the “ordinary and popular” meaning of the term would govern.
Sony argued it meant “a communication of information to the public, lacking or exhibiting a lack of due care or concern.” But the court looked to the context of the policy and saw it was contained in a section stating coverage also extended to “defective advice” and “incitement.” The court felt that any careless communication of information to the public was too broad an interpretation in the context of a policy that says it covers “defective advice, incitement or negligent publication.” The court felt that grouping those terms together gave context to the policy’s intent and that Sony’s proposed interpretation would be too broad.
Moreover, if Sony’s interpretation were correct, many of the coverage items listed in items (a) through (f) would have been unnecessary because they would be subsumed by covering “negligent publication.” Defamation, for example, would be “negligent publication,” so why would the policy also say in item (a) that defamation was covered? Finally, the court found case law interpreting the term to mean a claim where plaintiffs try to hold a publisher liable for material that led readers to engage in harmful conduct.” That interpretation fit better with the context of other elements of coverage (g), incitement and defective advice. And since the case against Sony didn’t involve a claim that Sony led others to engage in harmful conduct, the policy provided no coverage.One judge on the panel dissented in part. Although parts of his opinion seem inconsistent, he agreed with Sony’s interpretation of “negligent publication.” He felt that the exclusion and the carve-back themselves provided context indicating that coverage for false advertising claims was granted in the insuring agreement by the term “negligent publication.” Otherwise, he argued, why was the exclusion with the carve-back even in the policy? He was not willing to accept the majority’s view that the carve-back was in the policy for a situation where a mixed claim was made, when some claims in the suit were covered and others were not.