(Article from Insurance Law Alert, October 2018)
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A California federal district court ruled that an insurer breached its duty to defend class action suits against Yahoo alleging inappropriate scanning of user emails. Yahoo! Inc. v. National Union Fire Ins. Co of Pittsburgh, PA, 2018 WL 4962033 (N.D. Cal. Oct. 12, 2018).
Three class action suits were filed against Yahoo relating to its alleged practice of scanning the content of emails sent to and from its users. The complaints alleged that Yahoo intercepted and reviewed emails without users’ knowledge. Yahoo tendered defense of the suits to National Union, which initially denied coverage then agreed approximately two years later to defend one of the suits under a reservation of rights. By that time, the other two suits had been dismissed. Yahoo, having spent more than $4 million to defend and settle, sued National Union for breach of contract and bad faith. Ruling on the parties’ cross-motions for summary judgment, the court issued the following rulings:
National Union Breached Its Duty to Defend
The court held that the underlying allegations gave rise to a duty to defend under the policy’s “personal injury” provision, which covers “[o]ral or written publication, in any manner, of material that violates a person’s right of privacy.” Although the suits did not specifically allege publication of the emails to a third-party, the court deemed it “reasonably inferable” that the material was revealed to third parties based on an allegation in one underlying complaint that Yahoo profited financially from reading the emails. Although a second underlying complaint did not include similar allegations, the court stated that “National Union offers no reason why the pleading could not have been amended to include them.”
The court further held that National Union’s duty to defend was not negated by a criminal acts exclusion, notwithstanding that two of the underlying complaints alleged only violations of a state penal code relating to privacy violations. The court reasoned that “the form of the claim is not controlling” and that a duty to defend arose in light of the possibility of a claim for civil damages based on allegations of financial profit. With respect to the third underlying suit (which National Union ultimately agreed to defend), the court held that the insurer breached its duty by failing to provide an immediate defense upon tender.
A Breach of the Duty to Defend Does Not Prevent National Union From Enforcing Its Contractual Rights
The court ruled that the breach of the duty to defend did not eviscerate National Union’s right to enforce a Deductible Coverage Endorsement, under which Yahoo agreed to reimburse National Union for certain expenses and payments. The court reasoned that prohibiting National Union from seeking reimbursement would enrich Yahoo beyond what it contracted for in the insurance policy.
National Union’s Duty to Indemnity Is Limited
The court also ruled that National Union had no indemnity obligation with respect to the two dismissed class actions because Yahoo made no payments in connection with the suits. As to the third class action, the court concluded that a portion of Yahoo’s settlement payment constituted covered “damages” under the policy. In particular, the court held that Yahoo’s payment of attorneys’ fees to underlying plaintiffs’ counsel fell within the scope of “damages,” because such statutory fees were “sums that the insured became legally obligated to pay as damages” because of “personal injury.” However, the court held that “service award” payments to class representatives were not insured “damages” because they were “recompense for the inconveniences of litigation.”
Issues of Fact Exist as to Whether National Union Breached the Covenant of Good Faith and Fair Dealing
Yahoo argued that National Union acted in bad faith by denying coverage based on exclusions that had been deleted from operative policies and by relying on incomplete copies of policies. Although those facts were undisputed, the court concluded that a reasonable jury could deem such actions mistaken decisions rather than bad faith failure to investigate.