Sony Computer Entertainment America, Inc. v. American Home Assurance Co.
2008 U.S. App. LEXIS 14985, 2008 WL 2736012, 532 F.3d 1007 (2008)
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Rule of Law:
An undefined term in an insurance policy must be interpreted in the context of the policy as a whole, not by combining dictionary definitions in isolation, and an exclusion clause cannot create coverage that does not exist in the policy's primary insuring agreement.
Facts:
- Sony Computer Entertainment America, Inc. marketed and sold the PlayStation 2 as a home entertainment system capable of playing video games, audio CDs, and video DVDs.
- Sony purchased a 'Multimedia Professional Liability Policy' from American International Specialty Lines Insurance Company (AISLIC) that covered specific 'wrongful acts,' including the undefined term 'negligent publication.'
- The AISLIC policy contained exclusions for claims arising from 'false advertising or misrepresentation in advertising' and 'breach of any express warranties, representations or guarantees.'
- Sony also purchased a 'Commercial General Liability' policy from American Home Assurance Company that covered 'property damage,' including 'loss of use of tangible property.'
- In July 2002, consumers initiated class action lawsuits against Sony (the 'Kim/Kaen' case), alleging an inherent design defect in the PlayStation 2 rendered the consoles unable to play DVDs and certain game discs.
- The consumer lawsuits asserted claims for false advertising and negligent misrepresentation based on Sony’s statements about the PlayStation 2's capabilities as a DVD player.
- Sony tendered the defense of the Kim/Kaen lawsuits to both AISLIC and American Home.
- Both insurance companies denied coverage for the claims.
Procedural Posture:
- Consumers filed two class action lawsuits against Sony in California state court, which were consolidated into the 'Kim/Kaen' case.
- Sony tendered the defense of the Kim/Kaen lawsuit to its insurers, AISLIC and American Home.
- Both insurers denied coverage.
- Sony filed suit against AISLIC and American Home in the U.S. District Court for the Northern District of California, alleging breach of contract and bad faith.
- The district court granted summary judgment in favor of American Home.
- The district court subsequently granted summary judgment in favor of AISLIC.
- Sony, as the appellant, appealed both summary judgment rulings to the U.S. Court of Appeals for the Ninth Circuit.
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Issue:
Does an insurer have a duty to defend an insured against claims of false advertising and negligent misrepresentation under a media liability policy that covers the wrongful act of 'negligent publication' but explicitly excludes false advertising?
Opinions:
Majority - Judge Hall
No. The insurer does not have a duty to defend because the claims do not fall within the policy's coverage grant. The term 'negligent publication,' when interpreted in the context of the entire media liability policy and its surrounding terms ('defective advice, incitement'), refers to a narrow tort where published material instructs or encourages readers to engage in harmful conduct, not general false advertising about a product defect. Sony's attempt to create a broad definition by combining dictionary meanings is rejected because it ignores the policy's context and would render other defined wrongful acts superfluous. Furthermore, the exception to the false advertising exclusion (Exclusion P), which carves back a duty to defend, cannot create coverage where none exists in the affirmative insuring agreement. An exclusion's purpose is to limit coverage, not to grant it.
Concurring-in-part-and-dissenting-in-part - Judge Bybee
Yes, as to AISLIC's duty to defend. The undefined phrase 'negligent publication' should be given its ordinary and popular meaning, which can be derived from combining the dictionary definitions of 'negligent' and 'publication.' This results in a broad meaning—'communication of information to the public lacking due care'—which encompasses the false advertising and misrepresentation claims in the underlying lawsuit. The presence of Exclusion P, which specifically excludes false advertising claims from indemnity but carves back a duty to defend for those very claims, creates a strong inference that such claims were intended to be covered in the first place. This contextual clue, combined with the principle of construing ambiguities in favor of the insured, means AISLIC had a duty to defend Sony, even if it had no duty to indemnify.
Analysis:
This decision reinforces the principle that insurance policies must be interpreted as a whole, giving weight to the context and intended function of each provision. It significantly limits the ability of policyholders to find coverage for product defect or false advertising claims by isolating and broadly defining individual terms in specialized policies, such as a media liability policy. The court's holding that an exclusion cannot create coverage solidifies a crucial barrier against using exceptions or 'carve-backs' in exclusions as an independent basis for a duty to defend, thereby requiring coverage to first be established under the policy's main insuring agreement.
