Northwest Insurance Law Blog : Seattle Insurance Lawyer & Attorney : Williams Kastner Law Firm : Tacoma, Washington, Portland

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In Sony Computer Entertainment America, Inc. v. American Home Assurance Company et al. (9th Cir. July 15, 2008), the Ninth Circuit recently affirmed a district court’s denial of coverage for claims arising from the alleged malfunction of Sony’s Playstation 2, one of the world’s most popular gaming consoles.

Facing breach of warranty, negligent misrepresentation, and related consumer protection claims by disgruntled purchasers, Sony turned to its media liability and general commercial liability insurers for defense and indemnity. Sony filed suit when the insurers denied coverage, but the district court granted summary judgment in favor of both insurers.

As to Sony’s media liability policy, the Ninth Circuit concluded that the policy was not designed to provide coverage for alleged misrepresentations stemming from an alleged product defect. In reaching this result, the court rejected Sony’s attempts to find coverage by focusing upon the plain meaning of isolated phrases rather than evaluating the policy as a whole. The court also rejected Sony’s argument that the insurer at least had a duty to defend based on policy exclusions because exclusions “cannot expand the basic coverage granted in the insuring agreement.”

As for the general liability policy, the Ninth Circuit distinguished the Playstation 2 plaintiffs’ claims of misrepresentation from the covered occurrences of “loss of use of tangible property” or “physical injury to property.” When Sony pointed out that the Playstation 2 plaintiffs could also have filed claims for loss of use and physical injury to property, the Ninth Circuit refused to allow the insured to wander so far beyond the terms of the written complaint to support the claim of the coverage. In so doing, the Ninth Circuit confirmed that an insurer is generally entitled to rely on the face of the underlying complaint when assessing its obligations, particularly its obligation to defend.
 

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In Bordeaux, Inc. et al. v. American Safety Insurance et al. (July 7, 2008), the Washington Court of Appeals addressed and resolved in favor of an insured real estate developer two issues that often arise with liability policies that contain a self-insured retention (“SIR”). The case arose out of construction defect claims against the insureds for condominiums they had developed. The insured and insurers settled the defect claims but were unable to reach agreement on the allocation of ultimate financial responsibility for the settlements. 

The first issue involved determining whether the insured was entitled to be made whole – i.e. recoup all of the defense costs spent to satisfy its SIR – from the proceeds of its indemnity claims against subcontractors before the insurers could recover these funds. The Court of Appeals rejected the insurer’s argument that an SIR is akin to primary insurance and applied the longstanding rule that an insured is entitled to be made whole before an insurer may exercise its subrogation rights. 

The second issue arose out of a disagreement as to whether the insured satisfied its $100,000 SIR in two different policies with two different insurers by paying initial defense costs of $105,000. One of the insurers took the position that the insured still had to pay an additional $95,000 in order to satisfy the second of the two $100,000 SIRs. The Court of Appeals rejected this argument as well, noting that neither policy contained any language about whether the insured’s SIR obligation is satisfied when it fulfills a similar obligation under another policy. 

Click here for a more detailed discussion of the case and the Court of Appeals' decision.