Defender Sec. Co. v. First Mercury Ins. Co., 14–1805.

• Decision Date: 29 September 2015
• Docket Number: No. 14–1805.,14–1805.
• Citation: 803 F.3d 327
• Parties: DEFENDER SECURITY COMPANY, Plaintiff–Appellant, v. FIRST MERCURY INSURANCE COMPANY, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

803 F.3d 327

DEFENDER SECURITY COMPANY, Plaintiff–Appellant

v.FIRST MERCURY INSURANCE COMPANY, Defendant–Appellee.

No. 14–1805.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 30, 2014.

Decided Sept. 29, 2015.

Kara Cleary, James John Leonard, II, Attorney, Barnes & Thornburg LLP, Atlanta, GA, Mark J. Crandley, Attorney, Barnes & Thornburg LLP, Indianapolis, IN, L. Rachel Lerman, Attorney, Barnes & Thornburg, Los Angeles, CA, for Plaintiff–Appellant.

Michael R. Gregg, Rachel H. Krayer, Attorney, Merlo Kanofsky Gregg & Machalinski Ltd., Chicago, IL, for Defendant–Appellee.

Before KANNE, WILLIAMS, and HAMILTON, Circuit Judges.

Opinion

KANNE, Circuit Judge.

Defender Security Company (“Defender”) purchased a commercial general liability insurance policy from First Mercury Insurance Company (“First Mercury”). Defender timely tendered a claim to First Mercury, based on a lawsuit filed against Defender in California state court. First Mercury denied coverage and refused to defend Defender in that lawsuit. Defender filed the instant suit in the Southern District of Indiana, alleging breach of contract and bad faith, and seeking a declaratory judgment that First Mercury owed it a duty to defend. First Mercury filed a motion to dismiss, which the district court granted. We affirm.

I. Background

On July 25, 2012, Kami Brown filed a class action complaint in California state court (“the Brown suit”). In her complaint, she alleged that she contacted Defender by telephone in response to its advertisement for a home security system. Brown alleged that, over the course of several calls in May 2012, she provided Defender with personal information, including her full name, address, date of birth, and social security number.

She claimed that Defender recorded those calls without her permission and without notifying her of the recording. She further alleged that Defender used “call recording technology” that allowed it to “record all of its telephonic conversations with consumers” and to “store these recordings for various business purposes.” According to Brown, Defender “directed, trained, and instructed” its employees and agents to engage in those recordings. And, Brown alleged, all class members were subjected to similar conduct, because Defender “systematically recorded all inbound and/or outbound telephone conversations,” without warning the parties that their conversations were being recorded.

These actions, Brown claimed, constituted violations of California Penal Code § 632, which prohibits the recording of confidential telephone communications without the consent of all parties, and § 632.7, which does the same for communications made from a cellular or cordless phone.¹

Defender owned a commercial general liability insurance policy (“the Policy”) issued by First Mercury. In a section entitled “Insuring Agreement,” the Policy provided as follows:

a. We [i.e., First Mercury] will pay those sums that the insured [i.e., Defender] becomes legally obligated to pay as damages because of “personal injury” or “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 you.

(2) “Advertising injury” caused by an offense committed in the course of advertising your goods, products or services.

In a separate definitions section, the policy defined both “advertising injuries” and “personal injuries” as those “arising out of ... [o]ral or written publication of material that violates a person's right of privacy.”

Defender provided First Mercury with timely notice of the Brown suit. It asserted that the lawsuit fell within the advertising injury and personal injury coverage provided by the Policy. First Mercury denied coverage and refused to defend.

Defender then filed this action in the Southern District of Indiana, alleging breach of contract and bad faith, and seeking a declaratory judgment that First Mercury owed Defender a duty to defend in the Brown suit. First Mercury filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. First Mercury argued that the Brown suit fell outside the Policy's coverage, and thus that it had no duty to defend. The district court granted the motion to dismiss. Defender appeals.

II. Analysis

We have diversity jurisdiction over this dispute pursuant to 28 U.S.C. § 1332(a). Defender is an Indiana corporation with its principal place of business in Indiana. First Mercury is an Illinois corporation with its principal place of business in Michigan. The amount in controversy exceeds $75,000.

We review de novo a district court's grant of dismissal under Rule 12(b)(6). Citadel Grp. Ltd. v. Wash. Reg'l Med. Ctr., 692 F.3d 580, 591 (7th Cir.2012). Both parties agree that Indiana law governs.

A. Duty to Defend

In order to establish that an insurer has a duty to defend, the insured bears the initial burden of establishing that a claim is covered by his 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) (applying Indiana law).

The outcome of this case turns on the interpretation of one word: “publication”. Defender's Policy requires that, in order to qualify for coverage under the personal injury and advertising provisions, the subject injury must arise from “oral or written publication of material that violates a person's right of privacy” (emphasis added). So in order to establish coverage, Defender must show that publication was alleged or at least argued by Brown. The Policy itself does not define that term, so we must determine the term's meaning, in the context of the Policy.

Defender argues that in order to constitute publication, the subject material need not be communicated to any third party. Neither the Brown complaint nor Defender's complaint alleges that Defender communicated the recordings or their contents to any third party. Neither do they allege that any employee, agent, or representative accessed or listened to the recordings after they were made. According to Defender, publication was achieved when the subject material was transmitted to Defender's recording device. In other words, Defender argues, it “published” the information it received from Brown when it “transmitted” that material into the recording device. First Mercury argues, on the other hand, that the definition of “publication” is not as expansive as Defender suggests.

We first consider the plain meaning of the term “publication”. Black's Law Dictionary provides the following definitions: (1) “[g]enerally, the act of declaring or announcing to the public;” and in the defamation context, (2) “the communication of defamatory words to someone other than the person defamed.” Black's Law Dictionary 1264–65 (10th ed.2014). Webster's Third New International Dictionary defines publication as “communication (as of news or information) to the public; public announcement.” Webster's Third New International Dictionary, 1836 (1993). And the Oxford English dictionary defines it as follows:

1.a. The action of making something publicly known; public notification or announcement; an instance of this.

1.b. Law. Notification or communication to a third party or to a limited number of people regarded as representative of the public; an instance of this.

...

3. The action or fact of making a thing public or common property.

OED Online (Oxford University Press, June 2015).

All of those definitions share a commonality: they describe the release of information by the party holding it. This comports with a common-sense understanding, and the common usage, of the term publication. After all, it derives from the word “public,” or “exposed to general view.” Webster's Third New International Dictionary, 1836 (1993). In this case, none of the information obtained by Defender was communicated to any individual or entity. While it was captured by the recording device, that device was wholly maintained by Defender. And, as we described above, Defender offered no information to suggest that any individual ever accessed the recordings.

Yet, Defender argues that the transmission of the information to the recorder constitutes publication, despite the fact that the information was never accessed or shared. Suppose, hypothetically, that Defender had a different policy regarding its incoming customer calls. Imagine that, instead of recording the calls, a Defender sales associate would speak to the customer and take copious notes. He would then place those notes in a paper file, in a filing cabinet. Would that constitute publication? In both cases, the information has been received by Defender; it has been transmitted to a storage medium; and it has been stored in a manner that enables future access.

We see no meaningful distinction between the hypothetical paper notes and the actual audio recording. (The only obvious distinction is that the recording is stored in an oral form, whereas the notes would be stored in written form.) If under Defender's definition, the recording constitutes publication, so must the notes. In our view, this hypothetical illustrates that Defender's suggested definition of publication would encompass a wide variety of acts that would strain (at best) any common understanding or usage of the term publication.

And Indiana courts have, in the defamation context, applied the common usage definition of “publication”. In Bals v. Verduzco, the Indiana Supreme Court stated that “[i]n an action for defamation, the plaintiff must show that the defamatory...