The Knowing Violation of Rights of Another exclusion, found in Coverage B of most CGL policies, can be difficult to apply in the context of determining the duty to defend. A recent decision issued by the United States Court of Appeals for the Eleventh Circuit, in Travelers Pro. Cas. Co. of America v. Kansas City Landsmen, — Fed. App’x –, 2015 WL 137816 (11th Cir. Jan. 12, 2015), provides a good example of why.
The case involved whether the insurer owed a duty to defend its insureds, car rental companies, against an underlying lawsuit alleging that the insureds willfully violated 15 U.S.C. §1681c(g)(1), a provision of the Fair and Accurate Credit Transaction Act (“FACTA”) that prohibits the printing of more than the last five digits of a credit card number or the expiration date on a receipt provided to the cardholder. The underlying litigation, a putative class action, alleged that insured car rental companies had printed credit-card receipts that included more than the last five digits of the card number as well as the card’s expiration date, and accordingly, had “failed to protect” plaintiff and class members “against identity theft and credit card and debit card fraud.” Id. at *2. The action sought statutory and punitive damages under 15 U.S.C. §1681n(a), which imposes liability on “[a]ny person who willfully fails to comply with any requirement” of FACTA.
Coverage litigation ensued over the obligations to defend and indemnify the insureds. The policies at issue had slightly different versions of the “Knowing Violation” exclusion. One set had a “Knowing Violation of Rights of Another” exclusion, which prohibited “personal injury”:
caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict “personal injury”
Id. at *3. The second set had a “Known Violation of Rights” exclusion that prohibited coverage for personal injury:
caused by or committed at the direction of the Insured, or by an offense committed at the direction of the Insured, with knowledge that the rights of another would be violated and that Personal Injury or Advertising Injury would result.
Id. The Eleventh Circuit ultimately held that neither applied.
Importantly, the United States Supreme Court has held that “willfulness,” as defined in §1681n of FACTA, encompasses two levels of intent: “knowing” violations and violations committed in “reckless disregard” of the statute’s requirements. Safeco Ins. Co. v. Burr, 551 U.S. 47, 71 (2007). As noted by the Eleventh Circuit, for purposes of defense coverage, the distinction between the two levels of “willful” intent is important: “‘knowing’ violations are excluded from coverage, but violations committed with ‘reckless disregard’ are not.” Kansas City Landsmen, 2015 WL 137816 at *5.
In the decision before it, the district court had concluded that the underlying action only asserted “willful” FACTA violations under the “knowing” level of intent, thereby precluding coverage under the policies’ Knowing Violation exclusions. In reaching its conclusion, the court relied on the following allegations in the complaint:
57. At the time of the FACTA violations identified in this Complaint and before, Defendants knew of their obligations under FACTA ….
60. Despite knowledge of FACTA’s requirements …, Defendants continued to willfully disregard FACTA’s requirements ….
63. Defendants knew of and failed to comply with their legal duty [under FACTA] ….
65. Notwithstanding all of the publicity and the Defendants’ knowledge of the statute’s requirements, they willfully failed to comply with FACTA ….
The Eleventh Circuit disagreed with the trial court and reversed. Examining these same allegations, the Eleventh Circuit held that the alleged “knowledge” only described the insureds’ “alleged knowledge of FACTA’s requirements, not their knowledge of any alleged violations of its requirements.” Id. at *6. The court explained that it believed the complaint had drawn a distinction between the insureds’ mental state for the FACTA requirements and their alleged violations of the statute:
Paragraph 65 . . . reads, “Notwithstanding … the Defendants’ knowledge of the statute’s requirements, they willfully failed to comply with FACTA …,” meaning that they both knew of FACTA’s requirements and that they failed to comply with them either knowingly or with reckless disregard. . . . Conspicuously absent from the complaint is any allegation that the violations were knowing.
Id. at *6. Because statutory violations committed in “reckless disregard” do not implicate the Knowing Violation exclusions, the underlying court’s grant of summary judgment was reversed.
Notably, the Eleventh Circuit held it was irrelevant that the complaint never used the term “reckless disregard”:
It matters not that the Galloway complaint does not use the phrase “reckless disregard” specifically because the [underlying] complaint alleges that the [insureds] acted “willfully” when they violated §1681c(g)(1). Under Safeco, this means that the Galloway plaintiffs can succeed on their claims if they show that the Car Rental Companies acted either “knowingly” or with “reckless disregard.” See 51 U.S. at 71.
Id. Because the alleged “willful“ intent could not be isolated to knowing intent, the exclusions could not apply for purposes of the duty to defend.
What This case Means. Kansas City Landsmen highlights that careful attention should be given before denying defense coverage under a Knowing Violation exclusion. In addition to a careful analysis of the underlying complaint, analysis of the applicable causes of action, including associated statutory provisions and culpable standards of conduct, should be performed to understand all potential bases of liability.