In litigation involving the rock band Third Eye Blind* and its dispute with its former lead guitarist, the 1st District Court of Appeal in San Francisco asks the musical question:
When an insured sues its insurer for coverage and also brings negligence claims against its business manager and insurance broker for failing to advise about a policy exemption and failing to obtain additional coverage, are the negligence claims barred as a matter of law if the court rules in the insured’s favor on the coverage claim?
The Court concludes that the answer is "no." The broker can still be held liable for its claimed negligence, even though the client eventually obtained coverage from the insurance company. Among the recoverable damages: the attorney's fees incurred by the insured to obtain that favorable ruling on the coverage dispute.
The background: Third Eye Blind, through its business manager, retained insurance broker Near North Entertainment Insurance Services to obtain liability insurance for the band. Near North obtained a policy from North American Specialty (NAS). That policy included a "Field of Entertainment Limitation Endorsement" (FELE) that purported to restrict or eliminate coverage for a variety of claims, including invasion of privacy, infringement on copyright or trademark, defamation, and so on. It was later claimed that Near North did not call this limitation to the band's attention, or offer to procure additional coverage to protect against the potentially excluded claims.
Creative differences later arose between guitarist Kevin Cadogan and the rest of the band, resulting in Cadogan being fired. Cadogan fired back with a lawsuit, including claims that the band's continuing use of the name "Third Eye Blind" constituted trademark infringement under the Lanham Act. The defense to was tendered to NAS,but it declined coverage citing the FELE. The band defended the suit at its own expense, eventually reaching a settlement with Cadogan.
The band then filed suit against NAS -- alleging that the FELE was ambiguous and unenforceable to bar coverage -- and against Near North -- alleging that it was negligent not to point out the potential problems associated with the FELE and not to recommend obtaining additional errors and omissions insurance to fill the potential gap in coverage. Ultimately, the trial court agreed that the FELE was ambiguous and ruled that NAS should have defended the band in the Cadogan action. The band and NAS eventually settled.
Near North then sought judgment in its favor, arguing that it could not be held liable for negligence when the policy it obtained (the NAS policy) was ultimately held to provide the necessary coverage. The trial court agreed, but the Court of Appeal reversed the judgment in favor of Near North. The appellate court reasons that the questions of NAS' coverage and of Near North's negligence present independent issues, and that a ruling on one does not resolve the other:
Although the trial court, in ruling on a motion for summary adjudication, concluded NAS had breached its duty because there was a potential for coverage under appellants’ CGL policy, this ruling could not absolve [Near North] of liability for their own alleged negligence in failing to advise [the band] about the need for errors and omissions insurance.
While the ultimate finding of coverage might limit the amount of the damage caused by Near North's oversight, it does not eliminate that oversight or reduce the amount of the resulting damage to zero. Among other things, the band would not have had to incur the cost of suing NAS to obtain coverage if Near North had obtained the additional errors and omissions policy. Near North remains potentially liable to the extent that its errors contributed to the overall detriment sustained by the band. Accordingly, the Court of Appeal reverses the judgment in favor of Near North and returns the case to the trial court for further proceedings.
The decision in Third Eye Blind, Inc. v. Near North Entertainment Insurance Services, LLC (March 29, 2005), Case No. A102803, can be accessed at these links in PDF and Word formats.
[Note: Links expire approximately 120 days following issuance of the opinions; the opinions should still be accessible thereafter by substituting "archive" for "documents" in the URL.]
*For Further Reading: In the thumbnail history of Third Eye Blind at Rock On The Net, interested readers can follow the band's success in the late '90s, including their total of 5 weeks with #1 singles ("My Semi-Charmed Life" and "Jumper") in 1997 and 1998. Intriguing trivia: in 2003, the band appeared on the NBC series American Dreams, portraying . . . The Kinks. The official Third Eye Blind Web site is 3EB.com.