First Department Ruling for McGraw Hill Constitutes Blow to Insurers (NY)
In a short, yet significant decision, the Appellate Division First Department in McGraw-Hill Educ, Inc v Illinois Natl Ins Co. reversed a trial court order and held that several insurers must fund the defense of McGraw-Hill Education, Inc. in connection with numerous underlying actions alleging that McGraw Hill violated the underlying plaintiffs’ rights by publishing copyrighted images. McGraw Hill had entered into licensing agreements with third-party photographers and stock photography agencies, which limited the parameters of the images’ usage. The lawsuits alleged that McGraw Hill’s usage of the images in their textbooks and other publications exceeded the scope of these agreements.
McGraw Hill sought a defense from its insurers, who denied coverage on the basis of policy exclusions for claims arising out of a contract and claims arising out of intentional violation of law. The insurers further argued that the claimed losses were not fortuitous (and were thus not covered) because McGraw Hill’s actions constituted willful behavior. They argued that McGraw Hill’s management were well-aware of the legal risks in publishing the photographs for years prior to the lawsuits being filed. At the trial court level, the case was before Judge Ostrager of the Commercial Division, which is notable insofar as Judge Ostrager authored the leading treatise on insurance coverage. Judge Ostrager first found that there were questions of fact as to whether the exclusions barred coverage, especially regarding the intentional wrongdoing and fortuity issues, and thus denied the parties’ motions for summary judgment.
On appeal, the First Department reversed, granted summary judgment for McGraw Hill, and held that the insurers had a duty to defend in the underlying lawsuits. The court first found that the exclusions for claims arising out of a contract did not apply because, although the phrase “arising out of” only requires “but for” causation, the claims could have been brought absent the licensing agreements. In other words, the violation of the agreements was not the “but for” cause of the lawsuits.
The remaining exclusion barred coverage, in part, for claims arising out of intentional violation of law or gaining profit or advantage to which the insured is not legally entitled. However, the policy’s definition of “damages” barred coverage only where it is “judicially determined” that the violation was intentional. The court held that this specific clause covered over the general provision in exclusion G. Thus, because there was no such judicial determination, and because that issue could not be litigated in the coverage action, that exclusion did not apply as a matter of law.
Finally, the court held that the fortuity doctrine did not apply to bar coverage. The court expressly found that because the policy was intended to provide coverage for claims arising out of “infringement of common law or statutory copyright”, invoking the fortuity doctrine “would render that portion of the policy illusory.” Significantly, the court did not address the insurers’ rebuttal argument that this would not render the policy illusory because the policy would still provide coverage for non-intentional violations of copyright law.
The ruling not only overturned a decision authored by one of the leading minds of insurance jurisprudence, but did so in questionable fashion. In particular, the court’s failure to acknowledge that copyright violations could be committed negligently is a significant win for insureds and a blow to the fortuity doctrine.
Thanks to Doug Giombarrese for his contribution to this post. Please email Georgia Coats with any questions.