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Court of Appeal, Fourth District, California.

FRI HOLDINGS, INC. et al., Plaintiffs and Appellants, v. HARTFORD CASUALTY INSURANCE COMPANY, Defendant and Respondent.

No. G017783.

Decided: February 16, 1999

Hanley & Patch, Patch & Wolff, William B. Hanley, Joshua M. Wolff, Irvine, Mikal J. Apenes, Santa Barbara, Carol L. Meedon and Ryan M. Patch, Irvine, for Plaintiffs and Appellants. Gabriel, Herman & Peretz, Dean B. Herman and Karen M. Costello, Los Angeles, for Defendant and Respondent.


When Continental and Northwest Airlines each filed suit to shut down frequent flyer mile broker FRI Holdings, FRI sought a defense from its liability insurer, Hartford Insurance, on the theory that the suits implicated the potential advertising injury coverage under Hartford's policy.   Hartford declined the request, in part because it contended that the airlines' suits fell within an exclusion for advertised material whose first publication took place before the beginning of Hartford's policy.   FRI sued Hartford for breach of contract and bad faith, but Hartford convinced the trial judge that the exclusion applied and obtained summary judgment.   This court then reversed the judgment, holding that the exclusion might not apply because some of the “material” which formed the basis of the airlines' suits might have been published during Hartford's policy period.   The trial court then granted summary judgment in favor of FRI on the question of Hartford's duty to defend, and FRI's bad faith case went to the jury-except that the judge excluded evidence of lost profits and granted a nonsuit on FRI's claim for punitive damages.

FRI didn't do well in its bad faith case:  It obtained but a measly $23,500 as attorney fees incurred in the litigation against the insurer (Hartford had by then paid all of FRI's attorney fees in the lawsuits brought against it by the airlines not otherwise paid by another insurer), and was awarded nothing by way of its request for emotional distress.   FRI now appeals, arguing that an alleged failure on Hartford's part to investigate the claim before declining coverage entitled it to lost profits because Hartford's delay forced FRI to settle with the airlines by agreeing to go out of business.   Hartford has filed its own cross appeal, contending that there never was any potential advertising injury coverage to begin with, notwithstanding the possible inapplicability of the prior material exclusion.   Hartford also claims that there was insufficient evidence of bad faith in its denial of FRI's claim.

 Hartford's argument is well taken on the last point, which also disposes of FRI's arguments on the preclusion of evidence concerning lost profits.1  To say that Hartford unreasonably denied FRI's claim is rather like a two-justice majority in a Court of Appeal decision saying that an appeal is frivolous and awarding sanctions against the appellant's attorney, when their dissenting colleague agrees with the merits of the appellant's argument.   With all due respect to ourselves and our prior decision, just because this court in its wisdom determined that the prior material exclusion might not have applied based on the papers supporting the summary judgment motion submitted to the trial court does not mean the trial judge was unreasonable in concluding what he did.

Our decision turned on the fine nuances inherent in the English words “first material,” and on the impossibility of saying that the “material” which Hartford relied on to say the exclusion applied was really published prior to the beginning of the policy.   But to say that Hartford was unreasonable in denying FRI's claim is to say that the trial judge was unreasonable in granting its summary judgment motion.   We have more respect for the learned trial judge than to assume he was taken in by some facile argument of an insurance carrier.   The judge was acting as a neutral decision maker trying to do impartial justice:  That he could conclude that the exclusion applied must certainly establish a very strong presumption that Hartford itself was reasonable in denying the claim.   Surely the starting point in any bad faith analysis is that judges are presumptively reasonable people, and if they, acting in a judicial capacity, conclude that an exclusion applies, it means that an insurer who concludes the same thing also acted reasonably.   FRI has no evidence to rebut this strong, natural presumption.

Moreover, as mentioned above, our opinion reversing the summary judgment turned on a fine point of language, not some obvious “what-were-you-thinking?” kind of mistake which, even on the merits, arguably might call into question the reasonableness of the trial court's decision.   The Supreme Court, for example, might have concluded that we parsed the word “material” too finely in our decision so as to unreasonably favor the insured, and reversed us.   That it didn't does not prove the trial judge was unreasonable in granting summary judgment.

So much, therefore, for FRI's argument that the trial judge erroneously precluded evidence of FRI's lost profits and nonsuited its punitive damage claim.   Obviously a company that reasonably denies a claim does not act despicably for purposes of punitive damages.   We need only note in passing that the essence of FRI's argument is predicated on an unreasonable approach to an insurer's duty to “investigate” a claim.   In FRI's model, the duty to investigate is a strict liability trap for the unwary insurer and an opportunity for a windfall for the policyholder:  If the insurer doesn't put some gumshoe on the case and conduct all sorts of interviews (FRI points to, for example, all the people who Hartford didn't interview before the claim was denied), and if a court later concludes that the denial of coverage was incorrect, the insurer must be assessed tort (and possibly punitive) damages.

 Manifestly, an insurer's duty to “investigate” a claim before denying it must turn on the nature of the claim and the information that necessarily bears on its validity.   The famous case of Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 169 Cal.Rptr. 691, 620 P.2d 141 involved a disability claim where an agency claims adjuster summarily decided, on just workers' compensation and surgical records, that a back injury was really the result of a preexisting condition of degenerative osteoarthritis;  the adjuster did not have the claimant examined by a doctor or even talk to the plaintiff's treating doctors.   Obviously there is a large difference between a fact-intensive disability claim-where the insurer itself must make a determination as to the nature of a disability-and a third party liability claim, where the universe of relevant facts is mostly, if not completely, contained in the complaint against the insured and controlled by a third party,2 and any additional facts are within the insured's own knowledge and can easily be submitted to the insurer.   Here, there is no question that Hartford had enough information to reasonably, even if erroneously, deny the claim on the prior material exclusion from the investigation (evaluation would be a better word) it conducted.  (See Brinderson-Newberg v. Pacific Erectors (9th Cir.1992) 971 F.2d 272, 283 [“Egan is inapposite when an insurer does not conduct a more thorough investigation because the insurer already has good reason to dispute liability.”].)

 That leaves Hartford's cross-complaint, in which it contends it did not even have a potential contract obligation to FRI. On this point, however, we must agree with FRI.

The airlines' first amended complaints mention several different types of advertising injury, including misappropriation of advertising ideas and misappropriation of style of doing business.  “Advertising ideas” and “style of doing business” have been defined as the “wrongful taking of the manner by which another advertises its goods or services.”  (J.A. Brundage Plumbing v. Massachusetts Bay Ins. (W.D.N.Y.1993) 818 F.Supp. 553, 557, emphasis added.)   What, after all, is a frequent flyer mile program but an advertising gimmick?   Thus it is not surprising that in their complaints Continental defined its OnePass program as “a promotion designed to encourage travel on Continental and to develop passenger loyalty,” while Northwest described its Worldperks program as designed “to encourage travel on Northwest and to develop passenger loyalty by encouraging a closer and more continuous relationship between Northwest and its best customers.”  (Emphasis added.)

Hartford does not dispute that FRI's advertising used the very proprietary terms the airlines themselves devised to refer to their frequent flyer programs:  “OnePass” for Continental, and “Worldperks” and “Fly-Write” for Northwest.   That sounds like misappropriation of advertising ideas to us.

The judgment is affirmed to the extent that it impliedly incorporates the ruling on the motion for summary adjudication that Hartford owed FRI a duty of defense.   It is also affirmed to the extent it impliedly denies FRI lost profits and punitive damages on FRI's bad faith claim.   However, because there was no bad faith in the first place, the judgment is reversed to the extent that it declares that Hartford denied FRI's claim in bad faith and to the extent that it awards FRI attorney fees.   The cause is remanded with directions to enter judgment for Hartford on the bad faith cause of action.3  In the interests of justice each party will bear its own costs on appeal.


1.   FRI loses on the merits of its lost profit argument, however, even if it did have a viable bad faith claim.   As a matter of damages, FRI had no expectation of continuing business even if it could have made a successful estoppel argument on the theory that the airlines acquiesced to the frequent flyer mile brokerage business.  (Cf. TransWorld Airlines v. American Coupon Exchange (9th Cir.1990) 913 F.2d 676 (dicta that estoppel might apply in frequent flyer case).)   Even where a frequent flyer broker shows detrimental reliance, the most it can expect is the ability to sell coupons it has already acquired before it receives notice from the airlines that they will no longer allow their sale, trade or barter.   (Continental Airlines, Inc. v. Intra Brokers, Inc. (9th Cir.1994) 24 F.3d 1099, 1103-1106.)

2.   Thus a classic mistake on the part of insurers is to assume that because a third party's claim cannot legally prevail, say because the statute of limitations must obviously preclude it, that there is no coverage.  (E.g., Garriott Crop Dusting Co. v. Superior Court (1990) 221 Cal.App.3d 783, 796-797, 270 Cal.Rptr. 678 (insurer unsuccessfully based argument on idea third party could not recover because of statute of limitations).)

3.   Because Hartford has discharged, albeit belatedly, its duty to defend, the judgment for FRI on this issue means that no money will change hands.   The practical effect of our decision is that FRI loses its $23,500 attorney fee award but need not fear any claim for reimbursement of defense costs by Hartford.


WALLIN, J.,** and CROSBY, J., concur.

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Docket No: No. G017783.

Decided: February 16, 1999

Court: Court of Appeal, Fourth District, California.

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