Zurich Ins. Co. (U.S. Branch) v. Killer Music, Inc.

• Decision Date: 06 July 1993
• Docket Number: No. 92-55035,92-55035
• Citation: 998 F.2d 674
• Parties: 1993 Copr.L.Dec. P 27,125 ZURICH INSURANCE CO. (U.S. BRANCH), Plaintiff-Counter-defendant-Appellee, v. KILLER MUSIC, INC., dba: HLC Partnership; TTBB, Inc., dba: Killer Tracks; Ron Hicklin, Defendants-Counter-claimants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 674

998 F.2d 674

1993 Copr.L.Dec. P 27,125

ZURICH INSURANCE CO. (U.S. BRANCH) Plaintiff-Counter-defendant-Appellee, v. KILLER MUSIC, INC., dba: HLC Partnership; TTBB, Inc., dba Killer Tracks; Ron Hicklin Defendants-Counter-claimants-Appellants.

No. 92-55035.

United States Court of Appeals, Ninth Circuit Argued and Submitted Nov. 4, 1992.

Decided July 6, 1993.

Hayward J. Kaiser, Mitchell, Silberberg & Knupp, Los Angeles, CA, for defendants-counter-claimants-appellants.

Lane J. Ashley and Kristen E. Meredith, Sedgwick, Detert, Moran & Arnold, Los Angeles, CA, for plaintiff-counter-defendant-appellee.

Appeal from the United States District Court for the Central District of California.

Before: BEEZER, KOZINSKI and KLEINFELD, Circuit Judges.

BEEZER, Circuit Judge:

Killer Music, Inc., doing business as HLC Partnership; TTBB, Inc., doing business as Killer Tracks; and Ron Hicklin (collectively, "Killer Music") appeal the district court's grant of Zurich Insurance Co.'s ("Zurich") motion for summary judgment on Zurich's declaratory judgment action and the dismissal of Killer Music's counterclaims on a motion for summary judgment. The issues are whether Zurich had a duty to defend and indemnify Killer Music in a suit brought by a third party (Pfeifer) and whether Zurich's denial of coverage was in bad faith. We reverse and remand because we hold that Zurich wrongfully refused to defend Killer Music. We affirm the summary judgment on the bad faith issue.

I

Killer Music contracted with Pfeifer to sell jingles which Pfeifer produced to radio and television stations and movie studios. Killer Music agreed to pay Pfeifer for each jingle sold. The contract also provided that Pfeifer would perform on certain songs, and that he would be paid for these performances when the songs were sold. That contract expired in 1988.

After that date, Killer Music compiled and sold a music library which included Pfeifer songs which had not been sold during the contract period. The songs were not attributed to Pfeifer and no compensation was paid. In April 1990, Pfeifer filed a complaint in which he alleged copyright infringement, false designation of origin, unfair competition, palming off, conversion, and unjust enrichment. He sought punitive and compensatory damages, an accounting, the establishment of a constructive trust, and attorneys' fees.

Killer Music was insured under a Comprehensive General Liability Policy written by Zurich. The policy was sold by DeWitt Stern, an insurance broker. The policy covers "advertising injury," which includes "those sums that the insured becomes legally obligated to pay as damages because of 'personal injury' or 'advertising injury' to which this insurance applies." "Advertising injury" is defined to include injury from infringement of copyright. The policy excludes coverage, however, for advertising injury "arising out of breach of contract."

Killer Music first learned of the Pfeifer litigation when they were notified that Pfeifer had obtained a temporary injunction against them. At this point, Killer Music contacted DeWitt Stern, advised a clerk there that the Pfeifer suit was going to be filed against them, and asked her to check into the matter. Killer Music did not ask that the insurer defend them. The clerk may or may not have contacted persons at Zurich to confer about the policy coverage; at any rate, she advised Killer Music that they were not covered. Another telephone call was made to another clerk that same week, who also reported that there was no coverage. Killer Music never followed up with any written notice of claim either to Zurich or DeWitt, nor did Killer Music transmit any of the court documents to either company. ¹

Killer Music settled with Pfeifer soon after the suit was filed. Under the settlement agreement, Pfeifer transferred his rights to the songs which had been used in the music library, and agreed to drop his suit, in exchange for a $175,000 settlement.

At this point, Killer Music, through counsel, began corresponding with Zurich over the issue of coverage, seeking recovery of defense costs in the suit and indemnification. Zurich responded by filing an action for a declaratory judgment that it had no duty to defend or indemnify. Killer Music counterclaimed and asserted that Zurich breached its duty of good faith. The district court granted Zurich's motions for summary judgment on both its claim and the counterclaim.

II

On appeal, a summary judgment motion is reviewed de novo. Kennedy v. Allied Mutual Ins. Co., 952 F.2d 262, 265 (9th Cir.1991). "Viewing the evidence in the light most favorable to the non-moving party, this court must determine whether there are any genuine issues of material fact, and whether the district court correctly applied the relevant substantive law." Id.

III

Under the contract with Killer Music, Zurich had "the right and duty to defend any 'suit' seeking [damages for 'advertising injury']." "Advertising injury" was defined to include infringement of copyright. Pfeifer alleged copyright infringement, among other causes of action, in his complaint against Killer Music. The policy excludes coverage, however, for advertising injury "arising out of breach of contract." Zurich, based on a reasonable reading of case law, including Home Indem. Co. v. Avol, 706 F.Supp. 728 (C.D.Cal.1989) (applying California law), aff'd without opinion, 912 F.2d 469 (9th Cir.1990), and Allstate Ins. Co. v. Hansten, 765 F.Supp. 614 (N.D.Cal.1991) (applying California law), determined that Pfeifer's copyright infringement claim arose out of a breach of contract and was therefore not covered. Other cases suggest, however, that the Pfeifer action should be characterized as sounding in tort. See Fragomeno v. Insurance Co. of the West, 207 Cal.App.3d 822, 255 Cal.Rptr. 111 (1989); Fireman's Fund Ins. Co. v. City of Turlock, 170 Cal.App.3d 988, 216 Cal.Rptr. 796 (1985). Under California law, "the duty to defend is so broad that as long as the complaint contains language creating the potential of liability under an insurance policy, the insurer must defend an action against its insured." CNA Casualty of California v. Seaboard Sur. Co., 176 Cal.App.3d 598, 606, 222 Cal.Rptr. 276 (1986); Republic Indem. Co. v. Superior Court, 224 Cal.App.3d 492, 500, 273 Cal.Rptr. 331 (1990). Based on our reading of the California cases, we conclude that there was at least a "potential of liability" so Zurich had a duty to defend Killer Music in that action.

IV

Zurich contends that the claim was not potentially covered because coverage was excluded by operation of California Insurance Code § 533. Section 533 provides that "[a]n insurer is not liable for a loss caused by the willful act of the insured...." ² According to Zurich, Pfeifer's suit against Killer Music was based on intentional misconduct, a "willful act" by Killer Music. Killer Music argues that the use of Pfeifer's music in the music library was inadvertent and certainly not "willful" as defined in the statute.

A "clear line of authority" in California directs that "even an act which is 'intentional' or 'willful' within the meaning of traditional tort principles will not exonerate the insurer from liability under [s] 533 unless it is done with a 'preconceived design to inflict injury.' " Clemmer v. Hartford Ins. Co., 22 Cal.3d 865, 151 Cal.Rptr. 285, 297, 587 P.2d 1098, 1110 (1978); California Shoppers, Inc. v. Royal Globe Ins. Co., 175 Cal.App.3d 1, 32, 221 Cal.Rptr. 171 (1985); Waters v. Bourhis, 40 Cal.3d 424, 220 Cal.Rptr. 666, 673, 709 P.2d 469, 476 (1985). The term "willful" is used to describe "an act done with malevolence," Capachi v. Glens Falls Ins. Co., 215 Cal.App.2d Supp. 843, 849, 30 Cal.Rptr. 323 (1963), or with "malice in fact." City Products Corp. v. Globe Indem. Co., 88 Cal.App.3d 31, 36 n. 3, 151 Cal.Rptr. 494 (1979). A " 'willful act' within the meaning of section 533 means 'something more than the mere intentional doing of an act constituting [ordinary] negligence', and appears to be something more than the intentional violation of a statute." B & E Convalescent Center v. State Compensation Ins. Fund, 8 Cal.App.4th 78, 94, 9 Cal.Rptr.2d 894 (1992) (citation omitted) (brackets in original).

Killer Music's actions were not proven to be "willful" as a matter of law. While Zurich characterizes Killer Music's infringement as "knowing," Killer Music's president Hicklin, by sworn affidavit, indicated that he did not know that any of Pfeifer's work was being used in the music library and that he "never intended to engage in any unauthorized use of any work owned in whole or in part by Pfeifer." He also disavowed any intent to injure or harm Pfeifer.

Zurich points out that California courts have been willing to find some activities "willful" as a matter of law "if the harm is inherent in the act itself." B & E Convalescent Center, 8 Cal.App. 4th at 97, 9 Cal.Rptr.2d 894 (citation omitted). It is true that a subjective desire to injure or harm need not always be proven and can be assumed by the nature of the act. See Fire Ins. Exchange v. Altieri, 235 Cal.App.3d 1352, 1358, 1 Cal.Rptr.2d 360 (1991); Aetna Casualty & Sur. Co. v. Sheft, 756 F.Supp. 449, 451 (1990); Fire Ins. Exchange v. Abbott, 204 Cal.App.3d 1012, 1020, 251 Cal.Rptr. 620 (1988). However, copyright infringement is not one of those activities that is "willful" per se. Zurich admits in its brief that "[c]opyright infringement can be innocent or intentional.... Innocent infringement may be covered."

The possibility that § 533 might operate to exclude coverage does not excuse Zurich's initial decision to deny coverage. "[I]n order to rely upon Section 533 to justify its refusal to defend, [Zurich] must show that information available to it at that time demonstrated that [Pfeifer] was required to establish that [Killer Music] intended him harm, not merely that it intended to act." Republic Indem., 224 Cal.App.3d at 502, 273...