The purpose of a commercial general liability (CGL) policy of insurance is to insure an insured’s business, and provide the insured with the broadest spectrum of protection for unexpected personal or advertising injury and property damage arising out of the conduct of the insured’s business.1 In particular, Coverage B of the CGL policy purports to provide an insured with coverage for personal injury and advertising injury including, among other claims “copyright infringement in the insured’s advertisement” and slander.
Significantly, however, for those insureds whose business is in the field of entertainment, there may be a significant gap in the personal and advertising injury coverage that is otherwise granted by a CGL policy if the policy contains an Entertainment Industry Exclusion (EIE). In fact, an insured with a policy containing this exclusion may find itself with no personal or advertising injury coverage whatsoever under its CGL policy.
This is because, notwithstanding the basic principle that exclusions in insurance policies are to be construed narrowly, one Los Angeles Superior Court judge recently held that an insurance company had no duty to defend a rock band in an underlying action involving allegations of copyright infringement in the band’s advertisement and allegations of slander, because the CGL policy included an EIE, which excluded claims “arising out of” the exploitation, distribution, or exhibition of the band’s “music.” Specifically, the EIE in the policy at issue provided:
This policy does not apply to Personal Injury or Advertising Injury arising out of the development, pre-production, production, post-production, distribution, exploitation or exhibition of motion pictures, television programs, radio programs, documentary films, industrial films, commercial films, educational films, training films, stage plays, video cassettes, audio cassettes, music, musical recordings, sheet music, lyrics, scripts, manuscripts, books or other similar materials, and properties.2
Significantly, the court found that the EIE excluded coverage for the copyright infringement and slander claims that were alleged against the rock band, even though the allegations in the underlying action did not concern copyright infringement in the band’s music—i.e., there were no claims of copyright infringement that concerned the lyrics or composition of the band’s songs, nor were there any allegations concerning the “development, pre-production, production, post-production, distribution, exploitation or exhibition” of the band’s music or of similar materials or properties. Rather, the allegations related solely to the band’s use of a plaintiff’s visual artwork on fliers, posters, t-shirts, and on other merchandise. Nevertheless, the court found that any coverage provided to the band under Coverage B of the policy was removed due to the EIE because it found that the claims “arose out of” the development, distribution, exploitation or exhibition of the band’s music.
The main reason why the court found that coverage was excluded was due to the fact the EIE contained the term “arising out of,” which the court noted has been construed broadly by California courts,3 and stated it requires only that a factual situation have an “incidental relationship” and be “broadly linked to an event creating liability.” Thus, the court reasoned that the EIE could be triggered even if the advertising or personal injury results from “the insured’s efforts or purpose in develop[ing] . . . distribut[ing] . . . exploit[ing] or exhibit[ing] . . . its music.”
Although the insured/rock band presented the court with two analogous federal cases4 in which coverage was found to exist even though the policy contained an EIE,5 the court was not persuaded. Instead, the court maintained that because the band was known as a successful rock band, and because that success was based on the visual imagery that the band used, including the visual imagery on the hats, key chains, and clothes it sells, an incidental relationship existed between the band’s activities as a merchandiser and its success as a rock band, and therefore, the copyright infringement and slander allegations arose out of the band’s distribution and exploitation of music.
An appeal of the superior court’s decision is currently pending before the California Court of Appeal, Second District. If the Court of Appeal affirms the superior court’s decision, the ramifications will be significant. A CGL policy is a business policy and it purports to insure the insured’s business. Yet, if the CGL policy contains an EIE, the insured may not have any protection against claims that involve advertising injury solely because the insured works in the field of entertainment. In fact, given the court’s logic, it is difficult to conceive of any advertising injury that would not “arise out of” a band’s music. Thus, the coverage that is otherwise provided under Coverage B is simply illusory given that the business of the insured is music.
Finally, it should be noted that there is yet another wrinkle to this EIE issue: A business manager or broker who purchases a CGL policy that contains an EIE for a band or other entertainer should inform the insured that the CGL policy contains the exclusion and that it may preclude certain claims. Otherwise, a business manager or broker may be found liable to the insured under a theory of negligence or breach of implied contract. In fact, at least one court has allowed an insured to maintain claims against its broker and business manager for failing to disclose the fact that a CGL policy contained an EIE, even though it had already been found that the policy at issue provided coverage for the claims that were asserted against the insured. 6
Given the above, the best course of action for insureds who work in the entertainment industry, as well as those who represent them, is to ensure that their CGL policy does not contain the Entertainment Industry Exclusion—an option that may not even be possible or affordable. At a minimum, the insured
1. MacKinnon v. Truck Ins. Exchange, 31 Cal. 4th 635, 654 (2003) (citations omitted).
2. Unlike the 14 standard exclusions that appear within the coverage portion section of Coverage B of the basic Insurance Service Office (ISO) CGLform policy, the Entertainment Industry Exclusion, or Field of Entertainment Endorsement, is an endorsement that does not appear in the main coverage portion of the policy, and it is not a standard ISO exclusion.
3. Although the court correctly noted that there are California cases that have given a broad interpretation to the words “arising out of” in various insurance provisions, including exclusions, the cases do not stand for the proposition that when “arising out of” appears in an exclusion, it necessarily follows that the exclusion is to be construed broadly. In fact, to hold as much creates an inherent conflict with the principles concerning the interpretation of insurance policies,including the principle that exclusions in insurance policies are to be strictly construed and liberally interpreted in favor of finding coverage and the general principle that, when reasonably practical, contracts are to be interpreted in a manner that makes them reasonable and capable of being carried into effect—i.e., policies should not be illusory. See White v. Western Title Ins. Co., 40 Cal. 3d870, 881 (1985); Safeco Ins. Co. v. Robert S., 26 Cal. 4th 758, 765 (2001).
4. To date, there are no California opinions that directly analyze the meaning or effect of the entertainment industry exclusion. However, in Third Eye Blind v. Near North Entertainment Ins. Services, LLC, 127 Cal. App. 4th 1311(2005), and American International Speciality Lines Ins. Co. v. Continental Casualty Ins. Co., 142 Cal. App. 4th 1342 (2006), the courts recognized that the entertainment industry exclusions at issue were ambiguous.
5. In particular, the band argued that the decisions in Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1029 (9th Cir. 2008), and Vivid Video, Inc. v.North Am. Specialty Ins. Co., 1999 U.S. Dist. LEXIS 15322 (C.D. Cal. 1999),demonstrated that the claims at issue were covered. In both Manzarek and Vivid,the court found that there was coverage for trademark infringement claims alleged against the insureds, rock bands who allegedly used infringing logos or trademarks on products, notwithstanding the fact that the CGL policies contained an EIE. Infact, the EIE at issue in Vivid contained the same “arising out of” language, and the court still found that the trademark infringement claim was covered because “an insured might reasonably conclude that the endorsement excludes coverage for in-juries which may arise from the substantive content of its entertainment activities rather than from an insured’s application of its own identifying mark on its line of products, even if those products are entertainment in nature.” Vivid, at *12.
6. See Third Eye Blind, 127 Cal. App. 4th at 1322–23.