DEFENDER SECURITY COMPANY v. FIRST MERCURY INSURANCE COMPANY

Filing 22

ORDER GRANTING DEFENDANT'S MOTION TO DISMISS - Ms. Brown's claim is excluded under the insurance policy and that First Mercury has no duty to defend Defender in the California case. Accordingly, we GRANT Defendant's Motion to Dismiss [Dkt. 9 ]. Final judgment shall issue. Signed by Judge Sarah Evans Barker on 3/14/2014. (JD)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION

DEFENDER SECURITY COMPANY,

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Plaintiff,
vs.
FIRST MERCURY INSURANCE
COMPANY,
Defendant.

No. 1:13-cv-00245-SEB-DKL

ORDER GRANTING DEFENDANT’S MOTION TO DISMISS
This cause is now before the Court on Defendant’s Motion to Dismiss, filed on
March 6, 2013, pursuant to Federal Rule of Civil Procedure 12(b)(6). Plaintiff, Defender
Security Company (“Defender”) filed this action against Defendant, First Mercury
Insurance Company (“First Mercury”), asserting claims for breach of contract and breach
of the duty of good faith. Defender’s Complaint alleges that it is entitled to a defense and
indemnity from First Mercury in connection with a class action lawsuit filed against it in
the Central District of California by lead plaintiff Kami Brown (“the Brown Complaint”),
alleging various violations of the California Penal Code.
First Mercury seeks to have Defender’s Complaint dismissed arguing that the
Complaint fails to state a legally cognizable cause of action because the allegations
contained in the Brown Complaint do not fall within the insurance policy issued to

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Defender by First Mercury. For the reasons detailed below, we GRANT Defendant’s
Motion to Dismiss.
Factual Background
The Underlying Lawsuit
On July 25, 2012, Ms. Brown filed a class action complaint in California state
court alleging that in May 2012 she had telephonic communications with certain
employees, agents, and/or representatives of Defender that were recorded without her
consent. That action has been removed from state court and now pends in the United
States District Court for the Central District of California. The Brown Complaint asserts
that Defender’s “acts and practice violated [California] Penal Code § 632, which
prohibits the recording of confidential communications made by telephone without the
consent of all parties to the communication, and Penal Code § 632.7, which prohibits the
recording of any communications made from a cellular or cordless telephone without the
consent of all parties to the communication.” Def.’s Ex. A (Brown Compl. ¶ 2).
The Brown Complaint further alleges as follows: On May 3, 2012, Ms. Brown
called the toll free telephone number for Protect Your Home printed on an advertisement
for a promotional offer for ADT Security Services disseminated by Defender. During the
call with Defender, Ms. Brown “shared personal information,” including her full name
and zip code, but was neither informed that the call would be recorded nor did she give
her consent for such a recording. Id. ¶ 13. The Brown Complaint further alleges that in a

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subsequent call to Defender, Ms. Brown shared her name, address, date of birth, and
social security number, and once again was neither informed that the call was being
recorded nor gave permission for such a recording. Id. ¶ 14. According to the Brown
Complaint, Defender used “Call Recording Technology” that enabled it “to record all of
its telephonic telephone conversations with consumers, and allowed them to store these
recordings for various business purposes.” Id. ¶17. Defender’s “employees, agents, and
representatives were directed, trained, and instructed to, and did record inbound and
outbound conversations with consumers, without the knowledge or consent of
consumers.” Id. ¶ 18. Finally, the Brown Complaint alleges that all class members were
subjected to similar conduct because Defender “systematically recorded all inbound
and/or outbound telephone conversations without warning all parties to these confidential
communications that the conversations were recorded ….” Id. ¶ 27.
Defender’s Insurance Policy
First Mercury issued to Defender a commercial general liability policy, Number
FMMI020041-3, effective July 1, 2011 to July 1, 2012 (“the Policy”). The Policy
provides coverage for, inter alia, “Personal and Advertising Injury.” The Policy provides
in relevant part as follows:
COVERAGE B: PERSONAL AND ADVERTISING INJURY LIABILITY
1.

Insuring Agreement

a.

We will pay those sums that the insured becomes legally
obligated to pay as damages because of “personal injury” or
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“advertising injury” to which this insurance applies. We will
have the right and duty to defend the insured against any
“suit” seeking those damages. However, we will have no
duty to defend the insured against any “suit” seeking damages
for “personal injury” or “advertising injury” to which this
insurance does not apply. …
b.

This insurance applies to:
(1) “Personal injury” caused by an offense arising out of
your business, excluding advertising, publishing,
broadcasting or telecasting done by or for you.
(2) “Advertising injury” caused by an offense committed
in the course of advertising your goods, products or
services;

but only if the offense was committed in the “coverage territory” during the
policy period.

Def.’s Exh. B (Ins. Policy) at 43.
The Policy also contains the following relevant definitions:
1.

“Advertising injury” means injury arising out of one or more of the
following offenses:
b.

Oral or written publication of material that violates a person’s
right of privacy;

…
13.

“Personal injury” means injury, other than “bodily injury,” arising
out of one or more of the following offenses:
…
e.

Oral or written publication of material that violates a person’s
right of privacy.

Id. at 49, 51.
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The Policy includes exclusions applicable to coverage for “Personal and
Advertising Injury,” which provide in relevant part as follows:
2.

Exclusions

This insurance does not apply to:
a.

“Personal injury” or “advertising injury”:

…
(3)

Arising out of the willful violation of a penal statute or
ordinance committed by or with the consent of the insured;

…
Id. at 43-44.
The Instant Lawsuit
Defender provided timely notice to First Mercury of the suit against it in the
Brown Complaint, asserting that the underlying lawsuit falls within the “Advertising
Injury” and “Personal Injury” coverage of the Policy. After receiving notice of the
Brown Complaint, First Mercury denied defense and indemnity coverage under the
Policy.
On December 2, 2013, Defender filed this action in our court alleging that First
Mercury owes it a duty to defend and to indemnify Defender for the underlying Brown
lawsuit and that First Mercury has breached the Policy by refusing to defend Defender.
Defender’s complaint further alleges that First Mercury’s denial of coverage under the
Policy constitutes a breach of its duty to exercise good faith and fair dealing with respect

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to its insured. Defender also seeks a declaratory judgment that First Mercury owes a duty
to defend Defender in the Brown lawsuit.
On March 6, 2013, First Mercury filed this motion to dismiss arguing that the
allegations set forth in the Brown Complaint clearly fall outside the Policy’s coverage,
and that Defender’s complaint should thus be dismissed for failure to state a claim upon
which relief may be granted.
Legal Analysis
I.

Standard of Review
First Mercury’s motion to dismiss was filed pursuant to Federal Rule of Civil

Procedure 12(b)(6). In this procedural context, the Court must accept as true all wellpled factual allegations in the complaint and draw all ensuing inferences in favor of the
non-movant. Lake v. Neal, 585 F.3d 1059, 1060 (7th Cir. 2009). Nevertheless, the
complaint must “give the defendant fair notice of what the . . . claim is and the grounds
upon which it rests,” and its “[f]actual allegations must . . . raise a right to relief above the
speculative level.” Pisciotta v. Old Nat’l Bancorp, 499 F.3d 629, 633 (7th Cir. 2007)
(citations omitted). The complaint must include “enough facts to state a claim to relief
that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see
Fed. R. Civ. P. 8(a)(2). Stated otherwise, a facially plausible complaint is one which
permits “the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

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II.

Discussion
In an action such as this to determine whether insurance coverage and a duty to

defend exist, the insured bears the initial burden of establishing that a claim is covered by
the policy. If such a showing is made, the burden then shifts to the insurer to prove that
an exclusion applies. Aearo Corp. v. Am. Int’l Specialty Lines, Ins. Co., 676 F. Supp. 2d
738, 744 (S.D. Ind. 2009) (citation omitted). Generally, “an insurance company’s duty to
defend is broader than its duty to indemnify.” City of Evansville v. U.S. Fidelity and
Guar. Co., 965 N.E.2d 92, 103 n.9 (Ind. Ct. App. 2012) (citing Newnam Mfg., Inc. v.
Transcontinental Ins. Co., 871 N.E.2d 396, 401 (Ind. Ct. App. 2007)). But “where an
insurer’s independent investigation of the facts underlying a complaint against its insured
reveals a claim patently outside of the risks covered by the policy, the insurer may
properly refuse to defend.” Id. An insurer’s duty to defend is determined by examining
the allegations contained in the underlying complaint “and from those facts known or
ascertainable by the insurer after reasonable investigation.” Newnam, 871 N.E.2d at 401.
“If the pleadings reveal that a claim is clearly excluded under the insurance policy, then
no defense is required.” Jim Barna Log Sys. Midwest, Inc. v. Gen. Cas. Ins. Co. of Wisc.,
791 N.E.2d 816, 823 (Ind. Ct. App. 2003).
Defender alleges that the claims asserted in the Brown Complaint fall within the
“Advertising Injury” or “Personal Injury” coverage provisions in the Policy. Under both
provisions, coverage requires that the injury arise from “publication of material that
violates a person’s right of privacy.” First Mercury maintains that the Brown Complaint
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does not contain any allegations of “publication” of the recorded information because
there is no allegation that the content of the recorded conversations was disseminated to
any person or entity, either in oral or written form. Thus, Defender argues that the
underlying claim clearly falls outside the “Advertising Injury” and “Personal Injury”
coverage provisions.
For the underlying allegations in the Brown Complaint to potentially fall within
the First Mercury policy, Defender must have been alleged to have published material,
either orally or in written form, that violated Ms. Brown’s right of privacy. Here, the
only dispute between the parties is whether Ms. Brown’s allegation that Defender
recorded her telephone conversation in which she revealed personal information and then
stored that recorded information constitutes “publication” under the terms of the policy.1
We are not persuaded that it does.
The term “publication” is not defined in the policy. Under Indiana law, in
interpreting insurance policies, “clear and unambiguous policy language must be given its
plain and ordinary meaning.” Am. Family Life Assur. Co. v. Russell, 700 N.E.2d 1174,
1177 (Ind. Ct. App. 1998) (citation omitted). While ambiguities are construed in favor of
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Ms. Brown clearly alleges in the Brown Complaint that she disclosed personal information
during the telephone call at issue. Thus, any publication of that information would implicate Ms.
Brown’s right of privacy. See Integrated Genomics, Inc. v. Gerngross, 636 F.3d 853, 862 (7th
Cir. 2011) (recognizing that the Seventh Circuit “has held that in order to violate [one’s right to
privacy], the publication must disclose some secret or personal information”) (citing Am. States
Ins. Co. v. Capital Assocs. of Jackson County, Inc., 392 F.3d 939, 942-43 (7th Cir. 2004)); see
also Ace Mort. Funding, Inc. v. Travelers Indemnity Co. of Am., No. 1:05-cv-1631, 2008 WL
686953 (S.D. Ind. Mar. 10, 2008); Erie Ins. Exchange v. Kevin T. Watts Inc., No. 1:05-cv-867,
2006 WL 3776255 (S.D. Ind. Dec. 19, 2006). We offer no opinions on California statutes,
however, that may pertain to this litigation.
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the insured, “failure to define terms in an insurance policy does not necessarily make it
ambiguous.” Id. Ambiguity only exists “where the provision is susceptible to more than
one reasonable interpretation.” Id.
In support of its argument that the allegations in the Brown Complaint allege a
“publication,” Defender cites the Indiana Supreme Court’s decision in Doe v. Methodist
Hospital, 690 N.E.2d 681 (Ind. 1997) in which the court, in contrasting the definitions of
“publication” and “publicity,” recognized that publication “can consist of communication
to just one individual.” Id. at 692 (citing Restatement (Second) of Torts § 577(1)).
Defender also cites this dictionary definition of “publish”: “to produce for publication or
allow to be issued for distribution.” MERRIAM-WEBSTER, INC., WEBSTER’S THIRD NEW
INTERNATIONAL DICTIONARY 1837 (1981). Defender argues that the fact that the Brown
Complaint alleges that Defender stores the recordings “for various business purposes”
implies that a third party will be listening to the recordings and that they are thus being
produced for distribution to at least one person.
This is at best a strained interpretation. Even accepting Defender’s definitions of
“publication,” the allegations contained in the Brown Complaint clearly do not fall within
its terms. As First Mercury argues, the allegation that Ms. Brown shared personal
information with Defender during her call establishes at most only that she published
information about herself, not that Defender published information about her. Assuming
the truth of Ms. Brown’s allegation that Defender utilized “Call Recording Technology”
to store the recording of her telephone call likewise shows merely that Defender
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maintained a record of the call, not that it communicated the content of the recording to
anyone. Similarly, the allegation that Defender’s employees and representatives were
trained and directed to record conversations with consumers establishes only that
recordings of telephone calls occurred, not that the recorded information was distributed,
sold, or shared with any other individual or entity.2
For these reasons, we conclude that Ms. Brown’s claim is excluded under the
insurance policy and that First Mercury has no duty to defend Defender in the California
case. Accordingly, we GRANT Defendant’s Motion to Dismiss. Final judgment shall
issue.
IT IS SO ORDERED.
_______________________________

03/14/2014
Date: ________________________

SARAH EVANS BARKER, JUDGE
United States District Court
Southern District of Indiana

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On September 6, 2013, after the instant motion was fully briefed, Defender filed a notice of
supplemental authority, pointing the Court to the decision of the United States District Court of
the Southern District of Ohio in Encore Receivable Management, Inc. v. ACE Property and
Casualty Insurance Co., No. 1:12-cv-297, 2013 WL 3354571 (S.D. Ohio July 3, 2013). The
facts underlying the dispute in Encore are very similar to those at issue here, to wit, Encore
involves insurance coverage disputes relating to two underlying lawsuits about call centers
allegedly recording telephone conversations without customer consent and whether or not the
underlying lawsuits fell within the Personal and Advertising Injury coverage provisions of the
policies at issue. The Encore Court held that the underlying lawsuits did fall within the coverage
provisions of the insurance policies at issue even though there was no allegation that the
recordings were disseminated to the public because it determined that “publication” occurred “at
the very moment that the conversation is disseminated or transmitted to the recording device.”
2013 WL 3354571, at *9. That decision is currently on appeal to the Sixth Circuit Court of
Appeals. We are not bound by this district court decision, and because we find its analysis to be
contrary to the manner in which we believe Indiana courts would decide this issue, we do not
apply its reasoning here.
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Distribution:
Charles P. Edwards
BARNES & THORNBURG LLP
[e-mail]
Kara Cleary
BARNES & THORNBURG LLP
[e-mail]
James J. Leonard, II
BARNES THORNBURG LLP
[e-mail]
Michael R. Gregg
MERLO KANOFSKY & GREGG LTD
[e-mail]
Rachel H. Krayer
MERLO KANOFSKY & GREGG LTD
[e-mail]

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