The Wisconsin Court of Appeals has held that a “known loss” provision in an E&O policy barred coverage for a lawsuit filed against an insured because the lawsuit previously was threatened in a cease and desist letter that the insured received almost four years earlier. Vistelar, LLC v. Cincinnati Specialty Underwriters Ins. Co., 2020 WL 891017 (Wis. Ct. App. Feb. 25, 2020).
In October 2010, a conflict-resolution institute granted the insured company an exclusive license to use certain intellectual property. The license expired in October 2013, and shortly thereafter, the institute sent a letter to the insured stating that the institute would not be renewing the licensing agreement and demanding that the insured immediately cease use of the institute’s intellectual property. The letter warned that the insured’s failure to do so would result in “immediate legal action.” The insured acknowledged receipt of the cease and desist letter and responded that any continued use of the institute’s intellectual property was accidental.
Almost four years later, in July 2017, the institute sued the insured for trademark infringement. The institute alleged that the insured continued to use the institute’s intellectual property as late as 2017. The insured tendered its defense to its insurer under its claims-made E&O policy, which had a commencement date of August 8, 2016 and a retroactive date of August 8, 2011. The insurer denied coverage, stating, among other things, that the allegations against the insured showed that it knowingly engaged in the unauthorized use of the institute’s trademarks after the cease and desist letter was sent in October 2013.
The insured filed suit against the insurer seeking coverage under the policy. The insurer moved for summary judgment that the institute’s complaint did not trigger the policy’s insuring agreement because (1) it did not allege a covered “wrongful act” under the policy; and (2) the insured knew that the alleged injuries began prior to the policy period. The circuit court held that the policy provided an initial grant of coverage because the lawsuit alleged a “wrongful act” and the events giving rise to the lawsuit occurred subsequent to the retroactive date in the policy. The circuit court held, however, that the policy’s “known loss exclusion” barred coverage.
In the ensuing appeal, the insured argued that the circuit court erred in finding that the “known loss” exclusion barred coverage. The insurer argued that, although the circuit’s court’s finding of no coverage was ultimately correct, it erred in finding that the policy provided an initial grant of coverage. The insurer maintained that the “known loss” provision was an element of the insuring agreement, and not a policy exclusion.
The court of appeals concluded that the insured’s conduct fell squarely within the “known loss” provision, which stated that no coverage applied if the insured “[b]ecomes aware, or reasonably should have become aware, of a condition from which injury is substantially certain to occur.” The court determined that the insured knew that any continued use of the institute’s property beyond the date of the cease and desist letter was ripe for a lawsuit – as the letter specifically threatened legal action if the insured did not cease use. The court of appeals held that, because it agreed with the circuit court that the “known loss” provision barred coverage, it did not need to determine whether the provision was an element of the insuring agreement or an exclusion. The court of appeals thus affirmed, holding that the insurer had no duty to defend.