The Ninth Circuit Court of Appeals has held that neither a media liability insurer nor a commercial general liability insurer had any duty to defend an insured in class action lawsuits alleging product defects in the insured’s video game system. ( Sony Computer Entertainment America, Inc. v. American Home Assurance Co. (9th Cir. 2008) 532 F.3d 1007)
Facts
Sony Computer Entertainment America, Inc. (Sony) marketed and distributed the “PlayStation 2,” a home entertainment system that supposedly was capable of playing audio and video CDs and DVDs as well as video games.
PlayStation users filed two class action lawsuits against Sony in California state court. In those lawsuits the plaintiffs alleged that the PlayStation 2 systems suffered from an “inherent” or “fundamental” design defect that rendered them unable to play DVDs and certain game discs. The plaintiffs’ complaints included causes of action for breach of express and implied warranties, negligent misrepresentation, false advertising and unfair business practices. The plaintiffs’ negligent misrepresentation and false advertising claims were based on statements Sony made in press releases, product packaging and advertising that the PlayStation 2 would function as a DVD player as well as a game player.
Sony was the named insured on both a media liability policy issued by American International Specialty Lines Insurance Company (AISLIC) and a commercial general liability policy issued by American Home Assurance Company (American Home). Sony tendered the class action lawsuits to AISLIC and American Home, but both insurers rejected Sony’s tenders.
Sony then filed a breach of contract / bad faith lawsuit against AISLIC and American Home in federal court, alleging that AISLIC and American Home had wrongfully failed to defend Sony in the underlying class action lawsuits. The district court granted summary judgments in favor of both AISLIC and American Home, and Sony appealed.
Holding
The Ninth Circuit Court of Appeal, applying California law, affirmed the judgments in favor of AISLIC and American Home.
With respect to the AISLIC media liability policy, that policy provided that AISLIC would indemnify Sony and provide defense costs for lawsuits seeking damages because of specified “wrongful acts,” including “negligent publication.” The appellate court rejected Sony’s argument that the term “negligent publication” should be broadly interpreted to include any “communication of information to the public … exhibiting a lack of due care,” and that it should thus extend to the claims of negligent misrepresentation and false advertising made in the underlying class action lawsuits. Rather, the appellate court held that when read in the context of the policy as whole, the term “negligent publication” referred to “a very narrow tort in which the publication of material encourages or instructs readers to engage in harmful conduct.” Since the plaintiffs in the underlying class action lawsuits did not allege that Sony had led readers to engage in harmful conduct, the coverage for “negligent publication” was inapplicable. Thus, AISLIC had no duty to defend or indemnify Sony.
With respect to the American Home general liability policy, that policy provided that American Home would indemnify and defend Sony against lawsuits seeking damages because of “property damage,” which was defined so as to include (1) “physical injury to tangible property” and (2) “loss of use of tangible property that is not physically injured.” As to the issue of “physical injury to tangible property,” the underlying class representative plaintiffs did not allege that Sony’s PlayStation 2 systems had scratched or damaged discs which were inserted into the systems, and in fact the class representative plaintiffs specifically denied that any such damage had occurred. Nor was it sufficient that other members of the putative class may have claimed scratches or other damage to discs, since any such claims were never incorporated into the underlying class action lawsuit. As to the issue of “loss of use of tangible property that is not physically injured,” the class representative plaintiffs did not allege that defects in the PlayStation 2 had caused them to suffer a “loss of use” of game discs or DVDs. Moreover, even if class representative plaintiffs had made that claim, any such claim would fall within the scope of the policy’s “impaired property” exclusion, which barred coverage for “loss of use” property damage arising out of a “defect, deficiency, inadequacy or dangerous condition in [Sony’s] product.” The appellate court concluded that under the circumstances, American Home had no duty to defend Sony in the underlying class action lawsuits.
Comment
One judge on the panel dissented from the ruling that AISLIC had no duty to defend Sony in the underlying class action lawsuits. According to the dissenting judge, a layperson could reasonably understand that AISLIC’s coverage for “negligent publication” would extend to “a publication distributed negligently.” Thus, according to the dissenting judge, the term “negligent publication” was broad enough to include the negligent misrepresentation and false advertising claims alleged in the underlying class action lawsuits.