This week, the United States Court of Appeals affirmed Big 5 Sporting Goods Corporation, a case in which the trial court had held that “personal and advertising injury” coverage did not exist for violation of California’s Song-Beverly Act, even where common law allegations of invasion of privacy were alleged in connection with the unlawful collection of ZIP Codes. See Big 5 Sporting Goods Corporation v. Zurich American Ins. Co., No. 13-6249 (9th Cir. Dec. 7, 2015), affirming Big 5 Sporting Goods Corporation v. Zurich American Ins. Co., 957 F. Supp. 2d 1135 (C.D. Cal. 2013).
In Big 5, the insured was sued in multiple underlying class action lawsuits alleging invasion of privacy and violation of the Song-Beverly Act from the practice of requesting ZIP Code information during credit card transactions. See Big 5 Sporting Goods, 957 F. Supp. 2d at 1138. Some of the class actions alleged both violation of the Song-Beverly Act as well as common law negligence and invasion of privacy claims. Id. The insured sought coverage under “personal and advertising injury,” defined in part as injury arising out of “[o]ral or written publication, in any manner, of material that violates a person’s right of privacy.” Id. at 1140.
The insurers argued that defense and indemnity coverage for the underlying actions was barred by the statutory violation exclusion, one of which barred coverage for “personal and advertising injury” “arising directly or indirectly out of” any act or omission that violates or is alleged to violate:
c. Any statute, ordinance or regulation, other than the TCPA or CAN–SPAM Act of 2003, that prohibits or limits the sending, transmitting, communicating or distribution of material or information.
Id. at 1149. The trial court agreed, and now, the Ninth Circuit has affirmed.
Perhaps the most significant component of the Ninth Circuit’s decision was that the allegations of common law claims, which were not accounted for in the statutory violation exclusion, nevertheless did not preclude application of the exclusion because the factual allegations did not assert actionable causes of action.
Specifically, the insured argued that because some of the lawsuits alleged common law claims for invasion of privacy, for purposes of the duty to defend, the statutory violation exclusion could not apply. Big 5, slip op., at 4. The Ninth Circuit disagreed. Holding that because “California does not recognize any common law or constitutional privacy causes of action for requesting, sending, transmitting, communicating, distributing, or commercially using ZIP Codes,” the Court concluded that the only possible claim for recovery was for penalties, not damages, under the Song-Beverly Act. Id. at 45, citing Fogelstrom v. Lamps Plus, Inc., 195 Cal. App. 4th 986, 992 (2d Dist. 2011). In Fogelstrom, the California Court of Appeal held that requesting ZIP Codes during credit card transactions does not assert an actionable claim for invasion of privacy, concluding that the action of “obtaining plaintiff’s address without his knowledge or permission, and using it to mail him coupons and other advertisements … is not an egregious breach of social norms, but routine commercial behavior.” Fogelstrom, 195 Cal. App. 4th at 992.
The Ninth Circuit also rejected the insured’s argument that the invasion of privacy and negligence claims were merely frivolous, and thus could not be discounted for purposes of the duty to defend because an insurance carrier has the duty to defend both meritorious and frivolous claims. The Ninth Circuit distinguished frivolous claims form those that are not actionable, explaining that the privacy claims did not merely lack merit, they were not recognized under the law:
Under settled California law, they are not even recognized as cognizable causes of action, a status one step below “unmeritorious.” Allowing Big 5’s fact pattern to rise to the level of a claim would require an insurance company to insure and defend against non-existent risks.
Id. at 6.
Borrowing from Shakespeare, the Court similarly dispensed with the underlying negligence claims as mere “artful” pleading that could not circumvent an unambiguous policy exclusion:
Big 5’s negligence theory fares no better. Just as a rose by another name is still a rose, so a ZIP Code case under any other label remains a ZIP Code case. See Swain v. Cal. Cas. Ins. Co., 99 Cal. App. 4th 1, 8-9 (2002) (“A general boilerplate pleading of ‘negligence’ adds nothing to a complaint otherwise devoid of facts giving rise to a potential for covered liability.”). As the district court recognized, the California Court of Appeal has discouraged the “artful drafting” of alleging superfluous negligence claims, saying to allow such a practice would inappropriately “erase exclusions in any policy.” Fire Ins. Exch. v. Jimenez, 184 Cal. App. 3d 437, 443 n.2 (1986).
What does this case mean? Like the Third Circuit in Urban Outfitters (also discussed in The Coverage Inkwell), a second United States Court of Appeals now has held that “personal and advertising injury” does not exist for underlying allegations of unlawful ZIP Code collection. A unique aspect to this decision, however, is that where an underlying action alleges a cause of action that is not recognized under the law, that cause of action cannot be used to implicate a duty to defend.