HNRK Coverage Corner

On December 17, 2019, the First Department issued a decision in McGraw-Hill Education, Inc. v. Illinois National Insurance Company, 2019 NY Slip Op 08960, ordering an insurer to provide defense coverage in a copyright infringement action, absent a “judicial determination” that the infringements were intentional. This coverage action arose from over two dozen copyright infringement lawsuits filed across the country against textbook publisher McGraw-Hill Education, Inc. by commercial photographers and stock photography agencies, alleging unauthorized publication of copyrighted images in various publications.  McGraw-Hill disclaimed coverage, invoking an exclusion covering “intentional violations of law.”  The First Department found that the facts necessary to trigger the exclusion had not been established in the underlying lawsuits, and could not be established in the coverage action, and therefore granted summary judgment to the insured, explaining:

Exclusion G, which precludes coverage for claims arising, as relevant here, out of intentional violation of law or gaining profit or advantage to which the insured is not legally entitled, does not apply. The relevant policy provision with regard to infringement of copyright is in the definition of damages, which bars coverage only where it is "judicially determined" that the violation was intentional and was carried out by a senior vice president, or someone more senior, of plaintiff. This specific clause controls over the general provision in exclusion G relating to intentional violations of law. Further, there has been no such judicial determination in the underlying actions.  Defendants cannot litigate that issue in the coverage action. Had defendants desired the right to litigate that issue here, they could have provided for it through appropriate language in the exclusion.

Liability policies may expressly exclude coverage for intentional violations of law.  However, as was the case here, such exclusions are often conditioned on a “judicial determination” that the intentional wrongdoing occurred.  Effectively, this means that the policy provides defense coverage for alleged intentional wrongdoing.  The exclusion is triggered, and indemnity coverage is barred, only if the insured loses the underlying case based on a finding of intentional misconduct. Importantly, as the First Department noted in McGraw-Hill, the “judicial determination” needs to happen in the underlying case.  Otherwise, the insured would be thrust into a two-front war—simultaneously defending itself in the underlying case and the parallel coverage action—and the insurer’s duty to provide defense coverage would be all-but meaningless.