Law360, New York (February 18, 2015, 12:22 PM ET) -- In insurance coverage litigation, two issues often arise. First, what information should a court look to in determining whether coverage exists? Second, how broadly should a court construe the allegations in an underlying complaint for purposes of determining whether an insurer has a duty to defend? These issues can be especially interesting where the underlying plaintiff is a corporation, and the claims made are for commercial torts alleged to have caused “personal injury” to the corporation.

On Jan. 14, 2015, the Fifth Circuit, applying Mississippi law, held that a general commercial liability insurer had no duty to defend or indemnify its policyholders in a lawsuit seeking damages associated with the policyholders’ alleged solicitation of confidential information and customers from a business competitor. See Nationwide Mutual Insurance Company v. Gum Tree Property Management LLC (5th Cir. Jan. 14, 2015). Among other things, the Fifth Circuit concluded that although the lawsuit involved the alleged misappropriation of the plaintiff’s proprietary information, it did not state a claim for violation of a “right of privacy” that would trigger coverage under the defendants’ policies.

The Gum Tree decision provides a useful precis of how courts approach the scope and breadth of coverage issues and what they will look to in making these determinations. Gum Tree also demonstrates the difficulty that policyholders may have in arguing that commercial torts related to rights of privacy and trade secrets fall within liability coverage.


The Gum Tree litigation arose out of a dispute between Lexington Relocation Services LLC, a corporate housing company, and a group of parties associated with Gum Tree Property Management, a property-management company that administers real estate in the Tupelo, Mississippi, area (collectively, the “Gum Tree defendants”). In a lawsuit filed in Kentucky state court, Lexington alleged that one of its former employees had left her position and went to work for the Gum Tree defendants. Lexington contended that the employee violated her employment agreement with Lexington by disclosing Lexington’s confidential company information, which the Gum Tree defendants then allegedly used to solicit Lexington’s current and prospective customers and to harm its business relationships. Lexington brought claims for, among other things, tortious interference with contractual relations, tortious interference with business relations and misappropriation of trade secrets.

Nationwide Mutual Insurance Company issued nine general commercial liability and umbrella insurance policies to the Gum Tree defendants. Seven of the policies provided coverage for claims of “personal and advertising injury,” defined to include claims for “[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services” or “oral or written publication, in any manner, of material that violates a person’s right of privacy.” The other two policies provided coverage for claims of “personal injury,” defined to include claims of “injury, other than advertising injury, arising out of one or more of the following offenses committed during the policy period in the conduct of your business: ... (2) The publication or utterance of libel or slander or of other defamatory or disparaging material, or [a] publication or utterance in violation of an individual’s right of privacy.”

Nationwide formally denied coverage on July 12, 2012, and July 17, 2012, and then brought suit in the U.S. District Court for the Northern District of Mississippi, seeking a declaration that it had no duty to defend or indemnify Gum Tree. The district court agreed, and granted summary judgment in Nationwide’s favor.

Fifth Circuit’s Analysis

On de novo review, the Fifth Circuit affirmed the district court’s decision. The Fifth Circuit agreed with the district court that Lexington’s lawsuit did not allege claims for “disparagement” or “advertising injury,” as those terms were used in the policies. The court further agreed that Lexington’s lawsuit did not fall under the policies’ coverage for claims alleging a violation of a “right of privacy.”

True Facts Exception

Before engaging in a substantive review of the claims at issue to determine whether they were covered by the policies in question, the Fifth Circuit first addressed the issue of what it should look at to determine whether Nationwide had an obligation to defend and indemnify its policyholders. In making these determinations, many courts, including those in Mississippi, look to what is referred to in some jurisdictions as the “eight-corners rule.” Under this “rule,” courts confine their review to the four corners of the complaint and the four corners of the policy, hence the so-called eight corners.

Courts apply a limited exception to this rule, the so-called true facts exception, where an insurance company learns facts during the course of its investigation that are not plead in the complaint, but which suggest that coverage exists. The Gum Tree court addressed the breadth of Mississippi’s true facts exception based on the Gum Tree defendants’ contention that Nationwide should have provided them with a defense based upon the true facts discovered from the Gum Tree defendants’ answer and other evidence wherein they denied intentional conduct. The Fifth Circuit found that these facts did not compel a determination in favor of coverage.

In narrowly construing the true facts exception, the Fifth Circuit held, “We do not interpret the ‘true facts’ exception to require an insurance company, when the claim is outside coverage, to consider the denials in an answer when deciding whether to defend or to review affidavits from the insured that support the denials.” The court reasoned that construing the exception in this manner would effectively swallow the rule, because a policyholder could create coverage in every circumstance by simply denying the allegations of the complaint.

Coverage for Personal Injury Claims

After determining that its review of coverage would be limited to the complaint and the policy, the Fifth Circuit then turned its attention to the Gum Tree defendants’ substantive coverage claims. In essence, the Gum Tree defendants’ attempted to recast each of Lexington’s claims within the definitions of the policies’ insuring language. While the Gum Tree defendants conceded that the complaint did not contain explicit allegations of disparagement, invasion of privacy or advertising injury, they nonetheless contended that Lexington’s claims in the underlying action should be found to be the functional equivalent of these claims under the definitions in the policies. Analyzing the policy definitions and the facts alleged, the court found that none of the allegations satisfied any of the policies’ definitions.

The Fifth Circuit rejected the Gum Tree defendants’ claim that the underlying complaint stated a claim for breach of Lexington’s right of privacy based on the fact that the Gum Tree defendants had allegedly acquired Lexington’s confidential information without its permission. While it was at least conceivable that “person” could include a business like Lexington, the Fifth Circuit noted that neither the policies’ structure nor governing state law supported such an interpretation. The court thus declined to give “person” the broadest interpretation possible, and instead adopted a narrower interpretation more consonant with both the overall policies and governing law.

In finding that this claim failed to state a covered claim for invasion of privacy, the court explained that Lexington could not allege a privacy claim covered by the policies because Lexington did not qualify as a “person” under the policies. The policies afforded coverage only for claimed violations of a “person’s” or “individual’s” right of privacy. Although the policies did not define the term “person,” other phrases in the policies, such as “persons or organizations,” indicated a distinction between “persons” and businesses such as Lexington. Moreover, the policies did not refer to an “organization’s” right of privacy, thus suggesting that coverage did not exist for the trade secret claims brought against the Gum Tree defendants by Lexington.

The Gum Tree defendants argued that since “person” was not defined in the policies, Mississippi law required the court to interpret the term in the policyholders’ favor, which in this case meant broadly enough to include businesses such as Lexington. The Fifth Circuit rejected this argument. The court noted that the law of Kentucky, where Lexington had brought its action against the Gum Tree defendants, did not afford a cause of action for the invasion of a business’s right of privacy. Similarly, the Gum Tree defendants had failed to cite cases from any other jurisdiction suggesting that an entity like Lexington could bring such a cause of action based on similar facts. The lack of legal support, combined with the policies’ use of the term “organizations,” precluded a broad reading of “person” that would include Lexington.


The Gum Tree decision is worthy of note for several reasons. First, the decision serves as an important reminder of how courts analyze coverage and the facts to which they will look in making their determinations. Second, the court’s construction of the true facts exception provides guidance as to narrow application of the rule. Third, the Fifth Circuit’s rejection of the Gum Tree defendants’ argument that misappropriation of a business’ proprietary information is akin to violation of a “person’s” privacy rights under a general commercial liability policy has immediate significance for policyholders who may face claims for misappropriation of trade secrets from business competitors. Finally, Gum Tree serves as a reminder that courts will not always construe undefined policy language in the manner most favorable to the policyholder.