The United States District Court for the Northern District of California, applying California law, has ruled that claims against a policyholder alleging intentional violation of a licensor's copyrights and breach of contract are covered under an E&O policy. Adobe Systems, Inc. v. St. Paul Fire & Marine Ins. Co., 2007 WL 3256492 (N.D. Cal. Nov. 5, 2007).

At issue was a policy providing E&O coverage for "'damages . . . for covered loss . . . resulting from your products or your work' caused by a 'wrongful act' that 'resulted in a claim or suit first made . . . while the Policy is in effect.'" The policy included an "intentional acts exclusion," barring coverage for "loss that results from any criminal, dishonest, fraudulent, or other intentionally wrongful act or omission." The policy also excluded coverage for "loss that results from 'infringement or violation of any copyright; patent; trade dress; trade name; trade secret; trademark; or other intellectual property right or law." The policy provided that a claim will be deemed made whenever certain individuals "could reasonably foresee" a claim.

The policyholder company in this case sold common PDF image-reading software. Part of this software package required the company to obtain licenses from the claimant to use certain font copyrights. When the company's software was redesigned, prior to the policy period, the claimant alleged that the redesign violated the claimant's copyrights and was beyond the terms of the license agreements. Various meetings were held between the company and the claimant, but the software as distributed contained the potentially offending technology. Then, during the policy period, several actions by and between the parties were filed. The company filed for arbitration and simultaneously sought a declaratory judgment to resolve the dispute. The claimant brought two distinct suits, one asserting violation of its copyright and the other asserting breach of contract. A year after these actions were filed, the company provided notice to its insurer, resulting in this coverage litigation when the insurer denied coverage.

The court first held that the underlying allegations fit within the E&O coverage part's initial coverage grant because the suits pertained to the company's product and the alleged damages were caused by the "wrongful act" of incorporating the offending technology in the product. Considering the intentional acts exclusion, the court noted that the company intentionally incorporated the offending technology but reasoned that the exclusion required a "subjective intent to inflict injury" and not merely allegations that actions were "objectively inherently harmful." The court held that there was no evidence indicating the company incorporated the technology for the purpose of causing harm, so the intentional acts exclusion did not bar coverage. As to the exclusion for infringement of intellectual property, the court held that it would not preclude a duty to defend given that there were potentially covered breach of contract claims in addition to the claims asserting copyright violations.

The court then considered whether prior to the policy period individuals at the company had sufficient knowledge of the potential claim that they "could reasonably foresee that such claim or suit would be made or brought," and thus the claim would be deemed made prior to the policy period. The court refused to decide that issue of summary judgment, however, reasoning that although there was evidence of meetings and discussions between the company and the claimant prior to the policy period, there were contradictory affidavits from the relevant directors and officers of the company indicating that they were unaware of the potential for a claim prior to the policy period.

The court then considered whether the one-year delay in reporting the underlying actions implicated the voluntary payments provision of the insurance policy, pursuant to which there is no coverage for costs incurred without the insurer's consent. The court ruled this provision was inapplicable, reasoning that there was evidence suggesting that the company was unaware that the actions would ripen into an insurable dispute prior to providing notice. The court also ruled that the costs incurred by the company in the declaratory judgment actions it filed were covered as "defense fees" because the company was "resisting a contention for damages." Finally, the court ruled that there was a genuine dispute regarding the legal effect of the policy's provisions, thereby precluding a bad faith claim under California law.