Contract and Willful Acts Exclusions Do Not Preclude Duty to Defend Tortious Interference and Copyright Infringement Claims

The United States District Court for the Northern District of California, applying California law, has held that neither a breach of contract exclusion nor the implied willful acts exclusion provided for by California Insurance Code § 533 precluded an insurer’s duty to defend a lawsuit brought against its insured by one of its competitors for tortious interference and copyright infringement. Educ. Impact v. Travelers Prop. Cas. Co. of Am., 2016 WL 1639548 (N.D. Cal. Apr. 26, 2016). The court further held that the insurer owed a duty to defend three lawsuits brought by the competitor against the insured’s customers for which the customers sought indemnification from the insured because such indemnification demands constituted claims against the insured, triggering coverage under the Policy, and no exclusions applied to bar such coverage.

The insured is in the business of developing, marketing and selling educational products to teachers and schools. One of its competitors had allegedly contracted with an author to develop an educational product. The contract contained a non-compete clause that prohibited the author from developing similar products for competitors. Thereafter, the author began working with the insured to create a series of online programs that allegedly competed with those developed pursuant to her contract with the claimant. The competitor then sued the author for breach of contract and the insured for a host of claims, including violation of the Lanham Act, unfair competition, tortious interference with contract, tortious interference with current and prospective economic advantage, and injunctive relief. Several months after filing this lawsuit, the competitor also sued three of the insured’s customers for copyright infringement. The customers demanded in writing that the insured indemnify them in connection with these lawsuits. The insured tendered both the lawsuit against it and the lawsuits against its customers to its E&O insurer. When its insurer denied coverage for all the lawsuits, the insured brought the current declaratory judgment action alleging breach of contract and bad faith.

The court denied the insurer’s motion for judgment on the pleadings. With respect to the lawsuit brought directly against the insured, the court found that the lawsuit triggered coverage under both the policy’s Technology and Professional Liability and Content Liability Coverage clauses. The court rejected the insurer’s argument that there was no coverage under the Technology and Professional Liability Provision—which provides coverage for claims alleging a wrongful act by the insured “in the performance of Professional Services for others for compensation”—because the insured allegedly wrongfully acquired the author’s work for itself and not for others. Instead, the court found that, although the insured may have acquired the author’s work for its own business benefit, the lawsuit was based on the insured’s providing its customers with a software product and therefore involved Professional Services as defined by the Policy. The court also concluded that, although the complaint did not assert a copyright infringement claim, the lawsuit triggered coverage under the Content Liability coverage clause because the complaint could have been amended to plead copyright infringement because a copyrighted work was at the core of the product at issue.

The court further held that no exclusions applied to bar coverage. The court concluded that the breach of contract exclusion did not apply because the claims in the underlying cases did not arise out of the insured’s breach of any of its contracts but rather the author’s alleged breach of her contract with the competitor. Additionally, the court concluded that the implied exclusion provided for by California Insurance Code § 553 for “willful act[s] of the insured” did not relieve the insured of its duty to defend because the lawsuit contained at least one potentially covered claim—the copyright claim. The insurer therefore had a duty to defend the entire action, including the tortious interference claims for which the Policy did not otherwise provide coverage.

The court also held that the insurer had a duty to defend the lawsuits filed against the insured’s customers because the customers made a written demand for indemnification against the insured in connection with those actions, and those demands constituted a “Claim” under the policy. Such claims deemed by the court to be otherwise covered for the same reasons as the lawsuit filed directly against the insured.

Wiley Executive Summary

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