Alleged extrinsic evidence outside complaint did not trigger defense duty.

A Washington federal court, applying Washington law, granted Cincinnati Insurance Company’s motion for summary judgment, holding that the insurer need not cover its insured, Zaycon Foods, LLC (“Zaycon”), in a lawsuit brought by an ousted, former CEO.  Zaycon conceded that the only potential for coverage of the underlying lawsuit would be under the “Personal and Advertising Injury Liability.”  The court held that because the underlying lawsuit did not allege liability for defamation, Cincinnati was alleviated from defending its insured.

Cincinnati Insurance Company and Cincinnati Indemnity Company (together “Cincinnati”) issued commercial general liability policies to Zaycon.  Richard Braddock, an ousted, former CEO of Zaycon, filed a lawsuit against Zaycon alleging violation of state and federal securities law, fraud, negligent misrepresentations, breach of fiduciary duty, and breach of contract.  Cincinnati agreed to defend Zaycon in the underlying lawsuit and also sought a declaration that there was no duty to defend or indemnify Zaycon because the injuries in the underlying complaint were not covered under the policies.  Cincinnati moved for summary judgement.

The policies issued by Cincinnati provided coverage for “Personal and Advertising Injury Liability.”  The policies defined “personal and advertising injury” to include a number of specific offenses, one of which being defamation:  “injury arising out of ‘[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.’”  The issue before the court was whether the underlying complaint alleged any potential liability for defamation.

While the underlying complaint does not use the word “defamation,” Zaycon argued that the factual allegations and extrinsic facts nevertheless demonstrated that Mr. Braddock claimed that the Zaycon defendants communicated false facts about him to shareholders, thus causing damage to his reputation.  The court found that the underlying complaint “does not conceivably allege liability for defamation.”  The underlying complaint states the alleged misrepresentation to the shareholders was to induce votes for Braddock’s removal.  The court found that the allegations regarding misrepresentation to the shareholders was related to the attempt to remove Braddock as CEO, but that there was no allegation or implication that the statements disparaged Braddock’s reputation.  Most important to the court’s analysis was that the underlying complaint did not seek damages for reputational harm.  Therefore, the court found that “no claim conceivably seeks damages based upon defamation.”

Zaycon also argued that Cincinnati should be required to defend in the underlying case because Braddock allegedly made complaints to a business acquaintance that “Zaycon disparaged his reputation and that he was going to need to sue to restore his reputation.”  The court found that these complaints to a third party do not create potential liability for defamation.

The court found that the claims of the underlying complaint “clearly fall outside the policies.” Thus, Cincinnati had no duty to defend or indemnify Zaycon in the underlying suit.  The Cincinnati Ins. Co. v. Zaycon Foods LLC, No. 2:17-CV-00140-SMJ (E.D. Wash. Feb. 13, 2018).