Two phrases combined in a single exclusion—“alleging, arising out of, based upon or attributable to any violation of any law…” and “as respects… unfair trade practices” could inspire carriers to make trouble for policyholders seeking coverage for consumer protection claims. Fortunately, a recent federal decision recognizes that California rules of policy construction limit the scope of this exclusion, in line with a policyholder’s reasonable expectations of coverage.

In James River Ins. Co. v. Rawlings Sporting Goods Co. Inc., Case No. CV 19-6658-GW-MAAx (C.D. Cal., January 25, 2021), the district court was called upon to decide whether this exclusion barred coverage for claims that Rawlings misrepresented the weights of its baseball bats on their labeling. The consumers brought these claims in a class action complaint, seeking relief under the following California statutes: (1) Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 et seq.; (2) False Advertising Law, Cal. Bus. & Prof. Code § 17500 et seq.; and (3) Consumer Legal Remedies Act, Cal. Civ. Code § 1750 et seq. There was no question that the claim fell within the coverage for wrongful acts, but Rawlings’ directors and officers liability insurer, Starr, denied coverage under an “Anti-Trust Exclusion,” which stated: 

This policy shall not cover any Loss in connection with any Claim alleging, arising out of, based upon or attributable to any violation of any law, whether statutory, regulatory or common, as respects any of the following: anti-trust, business competition, unfair trade practices or tortious interference in another’s business or contractual relationships; provided, however, that this exclusion shall apply only to the Company.

The term “unfair trade practices” was not defined in the Starr policies. In support of its denial of coverage, Starr argued that: (1) the statutes under which the claims were brought described the alleged wrongdoing as “unfair trade practices” or “unfair or deceptive acts or practices”; and (2) that the phrase “arising out of…” has been construed broadly by California courts, citing to California State Auto Ass’s Inter-Ins. Bureau v. Warwick (1976) 17 Cal. 3d 190, 195. 

The district court made short work of Starr’s second argument, stating “the fact that an exclusion applies to ‘any claims arising out of XYZ’ does not help with figuring out what XYZ means in the first place.” (quoting Big Bridge Holdings, Inc. v. Twin City Fire Ins. Co. (N.D. Ill. 2015) 132 F. Supp.3d 982, 987). In Big Bridge, the court was interpreting the same phrase “unfair trade practices,” which was likewise undefined.

The court spent more time demolishing Starr’s argument that “unfair trade practices” as used in the Anti-Trust Exclusion encompassed consumer protection claims, not just anti-competitive claims. The court based its conclusion on the following propositions, all of which are consistent with fundamental principles of policy construction:

• As a general rule exclusions are construed narrowly against the insurer.
• Applying Starr’s interpretation would “virtually read the ‘misstatement, misleading statement, omission’ language right out of the policies’ coverage [the D&O coverage grant], vitiating them.” The exception should not swallow the rule.
• Other than the term “unfair trade practices,” which the court found to be ambiguous, all of the excluded conduct referred to competitive injuries rather than consumer injuries (implicitly adopting Rawlings argument that “[A] word takes meaning from the company it keeps.” Credit Suisse First Bos. Mortg. Capital, LLC v. Danning, Gill, Diamond & Kollitz (2009) 178 Cal. App. 4th 1290, 1298 n. 6 (referring to the rule of construction noscitur a sociis).”
• Admissible evidence established that Starr had drafted other policy exclusions which expressly excluded coverage for false advertising—"Starr clearly knew how to draft a false-advertising exclusion and in fact did do so.” (Though not cited by the court, this is consistent with the principle that “failure to use available language expressly excluding [a specific type of] coverage implies a manifested intent not to do so.” Pardee Const. Co. v. Ins. Co. of the West, 77 Cal. App. 4th 1340, 1359 (2000)). The exclusion was labeled “Anti-Trust Exclusion,” not “Anti-trust/Consumer Fraud Exclusion.”

It is worth noting that, while the Rawlings decision did not raise it, the limitation on unfair trade practices to require anticompetitive conduct is likewise consistent with California law. See, e.g., Cel-Tech Commcn’s, Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 186 (1999) (even under the UCL, a claim for an “unfair business practice” requires that the conduct be comparable to or threaten an incipient violation of antitrust law).

Although the Rawlings court stated that it considered the issue a “close one,” it also noted that in “the insured-friendly state of California, ‘any ambiguity or uncertainty in an insurance policy is to be resolved against the insurer.’” (citing to Reserve Ins. Co. v. Pisciotta (1982) 30 Cal. 3d 800, 807). 

Those who represent policyholders might respectfully disagree with the court’s view that the issue was “close.” However, we certainly agree that the court reached the correct result under California law.