Umbrella Policy Excludes Coverage for Impersonation Lawsuit

In Safeco Insurance Company of America v. Betenbaugh, the U.S. District Court for the Eastern District of California held that Safeco Insurance Company of America had no duty to defend an insured under a personal umbrella policy in litigation arising from alleged Craigslist impersonation- and defamation-related conduct. The court concluded that three exclusions — the knowing violation, false publication, and business pursuits exclusions — each independently defeated potential defense coverage.

The dispute involved former Edward Jones financial advisers in Glenn County, California. After Dalas Gundersen’s employment ended, his book of business was distributed to other financial advisers, including Paul Betenbaugh. Gundersen later brought an action alleging that Betenbaugh had posted sexually oriented Craigslist advertisements using Gundersen’s business cellphone number. The postings allegedly portrayed Gundersen as seeking sexual encounters and caused him to receive unwanted calls and messages. The complaint alleged that the conduct was intended to harass, intimidate, and defame Gundersen, as well as to obtain a competitive advantage in the local financial services market. The operative underlying complaint asserted causes of action for internet impersonation, interference with prospective economic relations, unfair business practices, false light, defamation, and intentional infliction of emotional distress.

Safeco issued Betenbaugh a personal liability umbrella policy. The policy covered certain “personal injury,” a definition that included injury arising from defamation of character. Safeco initially accepted Betenbaugh’s defense subject to a reservation of rights. Its reservation of rights letter identified several potential coverage issues, including whether there was an occurrence or covered injury and whether exclusions applied to knowingly false publications, business pursuits, criminal acts, sexual harassment, or “personal injury” caused by or at the direction of an insured with knowledge that the act would violate the rights of another.

After a jury in the underlying action reached a unanimous verdict against Betenbaugh, Safeco filed suit seeking a declaratory judgment that it had no duty to defend or indemnify under a homeowners policy or the umbrella policy. The court granted summary judgment in favor of Safeco with respect to coverage under the homeowners policy and on the duty to indemnify under the umbrella policy. The remaining issue was whether Safeco had a duty to defend under the personal liability umbrella policy.

Applying California law, the court explained that the duty to defend is determined by comparing the allegations of the underlying complaint and relevant extrinsic evidence with the terms of the policy. The court noted that although the allegations generally must be liberally construed in favor of the insured, there is no duty to defend where the insurer establishes that the underlying claim cannot come within the policy’s coverage because of the scope of the insuring agreement or an applicable exclusion.

Here, the court found that the underlying complaint alleged injury potentially within the umbrella policy’s definition of “personal injury,” particularly defamation. However, the court found that the exclusions discussed below eliminated any potential for coverage.

The court first addressed the knowing violation exclusion, which excludes personal injury caused by or at the direction of an insured who knew that the act would violate another’s rights and inflict personal injury. The court relied on the underlying allegations and evidence available to Safeco at the time of its coverage determination. That evidence included Betenbaugh’s recorded statement, answer to the complaint, and declaration. The court noted that Betenbaugh had admitted posting material with Gundersen’s phone number in order to cause others to call and harass Gundersen and that he understood the conduct was wrong. The court held that the evidence established that Betenbaugh intentionally engaged in the conduct knowing that it would violate Gundersen’s rights and inflict personal injury, bringing the conduct within the knowing violation exclusion.

The policy separately excluded personal injury arising from written publication made by or at the direction of an insured with knowledge of its falsity under the false publication exclusion. The court concluded that the posts were false in several respects, including that they indicated Gundersen was the author of the advertisements and suggested that he was soliciting sex. The court further found that Betenbaugh knew the statements were false when they were posted. The court therefore held that the factual record independently triggered the false publication exclusion and provided a separate basis for finding no duty to defend.

The court also addressed the business pursuits exclusion and determined that the alleged injury arose out of business pursuits. The underlying pleadings alleged that the conduct was motivated by competition for financial services clients and intended to impair Gundersen’s communications with former customers. Based on those allegations, the court found that the conduct arose out of Betenbaugh’s business pursuits and that the business pursuits exclusion independently supported the conclusion that Safeco had no duty to defend.