Eighth Floor Promotions, L.L.C. v. Cincinnati Ins. Cos.
2016 Ohio 7259
| Ohio Ct. App. | 2016Background
- Eighth Floor Promotions (Ohio-based LLC) purchased a directors-and-officers (D&O) policy from Cincinnati Insurance covering indemnification payments the company must make to its officers and directors for claims of ‘‘wrongful acts.’’
- In May 2011 the Business Software Alliance (BSA) sent a letter to Eighth Floor alleging unauthorized copies of software and demanding a company-wide audit, preservation of software, and threatening possible litigation (the “audit request”). Eighth Floor notified its insurer and retained counsel to perform the audit and negotiate.
- After the audit revealed unlicensed software, the BSA sent a settlement offer in November 2011 demanding remediation and payment ($179,393.48) and offering releases for the company and its officers/directors (the “settlement offer”).
- Cincinnati Insurance initially declined coverage for the audit request (treating it as only a notice of circumstances) and later denied coverage for the settlement offer, relying on a policy exclusion for copyright/infringement claims (Exclusion K), which stated it did not apply to claims made against individual insureds (officers/directors).
- Eighth Floor sued for declaratory relief, breach of contract, and bad faith. The trial court granted summary judgment to Cincinnati Insurance, finding (1) the audit request was not a "claim" under the policy and (2) the settlement offer was excluded by Exclusion K.
- The Third District Court of Appeals affirmed in part, reversed in part, and remanded: it held the audit request was a ‘‘claim’’ under the policy but concluded the settlement offer was excluded by Exclusion K; remanded for further proceedings on whether the audit request triggered a duty to defend or was excluded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the BSA’s audit request constituted a "claim" under the policy definition (written demand for monetary or non-monetary relief or a civil proceeding) | The audit request was a written demand for non-monetary relief (preserve evidence, perform audit, refrain from purchasing software) and thus a "claim" triggering a duty to defend | The audit request was merely an investigatory notice, not a demand for relief, so it was not a "claim" | Audit request IS a "claim" under the policy (court reverses trial court on this point) |
| Whether the settlement offer was a covered "claim" or excluded by Exclusion K (infringement/intellectual property exclusion that excepts claims against individual insureds) | The settlement could be construed as potentially covering officers/directors because they could be vicariously/jointly liable; insurer should defend if any possibility of covered claim exists | The settlement sought relief only from the company and did not demand relief from individual officers/directors; Exclusion K therefore bars coverage | Settlement offer is EXCLUDED by Exclusion K (no duty to defend/indemnify for that settlement) |
| Whether insurer’s duty to defend arises when underlying allegations potentially could lead to claims against individual insureds | Eighth Floor: duty to defend extends where underlying allegations could potentially lead to covered claims against individual insureds | Cincinnati: insurer need not defend absent an actual claim against individual insureds or demand for relief from them | Court rejects plaintiff’s extension here: insurer has no duty for the settlement offer because it did not assert claims against individual insureds |
| Proper allocation of burdens when insurer invokes policy exclusions | Eighth Floor: insurer must defend unless exclusion clearly applies | Cincinnati: exclusion applies and insurer need not defend | Court reiterates insurer bears burden to establish exclusion; here it did for the settlement offer but not for the audit request (remanded to decide exclusion applicability to the audit request) |
Key Cases Cited
- Hillyer v. State Farm Mut. Auto. Ins. Co., 131 Ohio App.3d 172 (discusses appellate review of summary judgment)
- Alexander v. Buckeye Pipe Line Co., 53 Ohio St.2d 241 (plain and ordinary meaning of contract terms)
- Nationwide Mut. Fire Ins. Co. v. Guman Bros. Farm, 73 Ohio St.3d 107 (construction of insurance policy language)
- Motorists Mut. Ins. Co. v. Trainor, 33 Ohio St.2d 41 (insurer’s duty to defend determined by scope of allegations)
- Willoughby Hills v. Cincinnati Ins. Co., 9 Ohio St.3d 177 (insurer must defend when allegations are potentially within policy coverage)
- Erie Ins. Exchange v. Colony Dev. Corp., 136 Ohio App.3d 406 (no duty to defend if no possibility of coverage)
- Zanco v. Michigan Mut. Ins. Co., 11 Ohio St.3d 114 (no duty to defend where claim falls squarely within exclusion)
- Continental Ins. Co. v. Louis Marx & Co., 64 Ohio St.2d 399 (insurer bears burden to prove applicability of an exclusion)
- Hybud Equip. Corp. v. Sphere Drake Ins. Co., 64 Ohio St.3d 657 (exclusions construed narrowly and must be clear)
- Lane v. Grange Mut. Cos., 45 Ohio St.3d 63 (insurer must use clear language to exclude coverage)
- Chicago Title Ins. Co. v. Huntington Natl. Bank, 87 Ohio St.3d 270 (insured bears initial burden to establish coverage)