The Wisconsin Court of Appeals recently issued an insurance coverage decision likely to induce heartburn for risk management personnel responsible for deciding whether and when to notify their liability insurers regarding speculative future claims that may arise. See Vistelar, LLC v. Cincinnati Spec. Ins. Co., No. 2019AP633 (Feb. 25, 2020).
At issue in this case was the availability of defense coverage for a lawsuit claiming Vistelar engaged in unauthorized use of intellectual property after its license to do so ended in 2013. Slip. Op., ¶3. Upon the licensing agreement’s expiration in 2013, the licensor sent Vistelar a letter demanding that Vistelar cease using the intellectual property and warning that a failure to do so would result in “immediate legal action.” Id. ¶13. Vistelar promptly responded and acknowledged it would make every effort to comply with the licensor’s requests and that any further use of the intellectual property would be accidental, not intentional. Id. ¶¶3, 13.
Three years later, Vistelar purchased a claims-made liability policy from Cincinnati for the 2016-2017 time period; the policy covered claims asserted during its term based on acts alleged to have occurred in or after August 2011. Id. ¶4. The policy included “known loss” exclusionary language stating that coverage did not apply if the insured had become aware of the claimed injury or damage prior to the policy’s coverage period. Id. ¶7.
In 2017, the previously referenced licensor sued Vistelar, alleging trademark infringement involving the intellectual property that previously was the subject of the parties’ licensing agreement. Id. ¶5. Vistelar promptly tendered the claim to Cincinnati to provide a defense, and Cincinnati disclaimed any coverage obligations on the grounds that the allegations demonstrated that Vistelar had knowingly engaged in the alleged infringement after receiving the aforementioned cease-and-desist letter in 2013. Id.
Vistelar sued Cincinnati for breach of coverage. The circuit court granted summary judgment to the insurer, based on the “known loss” exclusionary language in the policy. Id. ¶7. The “known loss” language provided as follows:
This insurance applies to injury only if:
. . . .
Prior to the policy period, you did not know, per Paragraph 1.c below, that the injury had occurred or had begun to occur, in whole or in part.
Paragraph 1.c: You will be deemed to know that injury has occurred at the earliest time when any authorized representative:
. . . .
Becomes aware, or reasonably should have become aware, of a condition from which injury is substantially certain to occur.
On appeal, the Court of Appeals upheld the circuit court’s decision. The Court of Appeals noted that the allegations fell squarely within the “known loss” exclusion, stating that the October 2013 correspondence from the licensor made Vistelar well aware, years prior to Vistelar’s purchase of the Cincinnati policy, that any further use of the intellectual property would result in a lawsuit. Id. ¶13. The Court held that it was not material whether the licensor’s complaint alleged intentional or negligent conduct, as the cease-and-desist letter placed Vistelar on notice that any infringement, whether knowing or accidental, would trigger a lawsuit. Id.
To say that coverage decisions like Vistelar place insureds in difficult and complicated circumstances is an understatement. Here, the Court disclaimed coverage based on a largely prospective cease-and-desist letter that the insured had received a full three years prior to purchasing the insurance policy at issue. You would be hard-pressed to find a single corporate risk manager who believes that such a letter would trigger an insured’s disclosure obligations to its prospective liability insurer, especially considering that the three-year old letter had threatened “immediate legal action.” Placing such onerous disclosure obligations on insureds is not only unreasonable, but likely makes it more difficult for companies to procure insurance by imposing an obligation for the potential insured to disclose every speculative lawsuit that could conceivably arise from the company’s ordinary business activities. Indeed, the Vistelar decision leaves one to ponder where an insured’s disclosure obligations begin and end, given that the Court imputed to Vistelar advance knowledge of accidental conduct.
In light of Vistelar, Wisconsin insureds must seriously consider notifying their then-existing liability insurer anytime they receive correspondence referencing possible future litigation (no matter how prospective the language). Most claims-made liability policies have “notice of circumstances” language that allows insureds to “park their coverage” for any future claim under the liability policy then in place, even if the lawsuit ends up being filed after the end of that policy’s coverage period. While this approach could have some other drawbacks (e.g., potential exhaustion of aggregate limits if other claims arise, as well as potential future premium increases based on regularly noticing potential liability exposure), insureds may be wise to take a “better safe than sorry” approach to their notification practices going forward.