In an important decision for policyholders, a New York state appellate court rejected AIG’s effort to avoid defending McGraw-Hill in a series of copyright suits. In doing so, it reversed the trial court and rejected the insurer’s attempted use of the contract exclusion and fortuity doctrine as a bar to coverage under various multimedia liability insurance policies.
From March 2009 through March 2012, publisher McGraw-Hill purchased three consecutive $20 million multimedia liability policies from AIG subsidiary Illinois National Insurance Company. Over the past ten years, the publisher faced 35 copyright infringement suits filed by photographers and stock photo owners. While McGraw-Hill paid for the right to use certain photos in textbooks and other publications, the underlying suits allege that the images were ultimately used in ways the parties had not agreed upon. Illinois National initially covered approximately $5.5 million of McGraw-Hill’s defense. The insurer then changed its position, contended that coverage was unavailable, and sought to recoup the previously-paid defense costs.
McGraw-Hill sued Illinois National in October 2016, and the parties moved for summary judgment in fall 2018. The New York trial court denied both sides’ motions finding factual disputes regarding the applicability of the policy exclusions and the fortuity doctrine. On cross appeals, the state Appellate Division’s First Department held that the trial judge erred concerning the insurer’s duty to defend.
The appellate court rejected Illinois National’s reliance on the policies’ contract exclusions to bar coverage. The court explained that license agreements between the photo owners and McGraw-Hill was insufficient to support application of the policies’ contract exclusions. The court reasoned that the licensors could have asserted copyright claims regardless of the licensing agreement, meaning that the agreement was not the “but for” cause of the loss. The exclusion was accordingly irrelevant.
The appellate court then addressed the conduct exclusion, as the insurer asserted that the claims involved an “intentional violation of law” or the gaining of profit or advantage to which the insured was not legally entitled. The court noted that, as is typically the case, the conduct exclusion at issue required a judicial determination that the violation was intentional. No such determination had been made, however, and Illinois National did not have the right to litigate the issue in the coverage action. Accordingly, the conduct exclusion could not apply.
Finally, the court rejected Illinois National’s attempt to avoid coverage based on the fortuity doctrine. This doctrine embodies the concept that a policyholder can only collect insurance proceeds due to a fortuitous accident or occurrence rather than a known or expected loss. The media liability policies at issue, however, were expressly issued to cover claims arising out of “infringement of common law or statutory copyright.” The Court held that applying the fortuity doctrine here would render this portion of the policy illusory – it would never provide coverage under any set of circumstances.
The McGraw-Hill decision is yet another illustration of the breadth of defense coverage under commercial liability policies. The decision is also an example of the extreme strategies insurers will employ to extract themselves from costly claims. Policyholders should be wary of such strategies, particularly where there have been no material changes in the facts. Policyholders also should pay close attention to the facts underlying any coverage denial predicated on exclusions such as those asserted against McGraw-Hill and always insist on a full explanation of the grounds supporting the insurer’s coverage position.