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Encore Receivable Management, Inc. v. Ace Property and Casualty Insurance Co.

United States District Court, Sixth Circuit

July 3, 2013



TIMOTHY S. BLACK, District Judge.

This civil action is before the Court on Plaintiffs' cross-motion for partial summary judgment (Doc. 66)[1] and the parties' responsive memoranda (Docs. 82, 111, 112, 115, 116, 118, 122, 136, 137).[2] The Court heard extensive oral argument on June 11, 2012.


Plaintiffs commenced this action seeking a declaration of insurance coverage in connection with two lawsuits, one captioned Wheelock v. Hyundai Motor America, et al., No. 30-2011-00522293 (Superior Ct. Cal. Nov. 14, 2011) (the "Wheelock Action") and the other captioned Knell v. Encore Receivable Management, Inc., No. 12cv426 (S.D. Cal. Feb. 16, 2012) (the "Knell Action"). Plaintiffs Convergys Customer Management Group Inc. ("CMG") and Encore Receivable Management, Inc. ("Encore") filed suit seeking coverage for the Wheelock and Knell Actions under four different commercial umbrella liability policies (the "Policies") issued by Defendant ACE. Convergys bought primary, umbrella, and excess insurance coverage from the respective defendants. (Doc. 1 at ¶¶ 16-20).

Primary policies were issued by Discover for October 1, 2005 to October 1, 2011, and by Old Republic Insurance Company ("Old Republic") for October 1, 2011 to October 1, 2012. ( Id. at ¶ 22). The 2009-2012 primary policies contained an endorsement (the "Recording Exclusion") which modified coverage "to exclude liability arising from the recording of information or material in violation of law." ( Id. at ¶ 24). Umbrella policies were issued by American Home for October 1, 2005 to October 1, 2008, and by ACE for October 1, 2008 to October 1, 2012. ( Id. at ¶ 23). The umbrella policies did not have a "Recording Exclusion." ( Id. at ¶ 25). Excess policies were issued by American Guarantee, Continental, Federal, and St. Paul for coverage of Convergys and its subsidiaries, including the plaintiffs Encore and CMG. ( Id. at ¶ 26).

The Knell Action alleges that Encore operated a call center, and that Encore employees allegedly recorded various telephone conversations between Hyundai customers and Encore customer service representatives without obtaining the customers' consent, and that these recordings were then distributed internally within Encore for training and quality control purposes.[3] Similarly, the Wheelock Action alleges that Hyundai operated a call center and allegedly recorded various telephone conversations between Hyundai customers and Hyundai customer service representatives without obtaining the customers' consent.[4]

The "Insurance Coverage At Issue" is "the ACE Umbrella Policies." (Doc. 66 at 15). These policies state that ACE has a "duty to defend the insured' against any suit' seeking damages for... personal and advertising injury', even if groundless, false or fraudulent, to which this insurance applies... 3. When damages sought for... personal and advertising injury' are not covered by underlying insurance' or any other insurance', or any applicable self-insured retention has been exhausted by the payment of loss' covered by this policy." ( Id. at 16).

Plaintiffs contend that the Knell and Wheelock Actions "are not covered by underlying insurance'" - that "[t]he primary policies purchased by Convergys to cover the 2009 to 2012 policy years each contain a Recording and Distribution of Material or Information in Violation of Law Exclusion' endorsement that excludes coverage for the Knell and Wheelock Actions because they constitute claims arising from the recording of information in violation of law", and that the Plaintiffs are "entitled to summary judgment holding that ACE has an immediate duty to defend" because "[t]he failure of ACE's arguments to support a dismissal of this action makes one additional fact crystal clear: the Actions are at least potentially covered under the terms of the ACE Policies." (Doc. 66 at 30). Plaintiffs argue that as long as there is a question of fact regarding whether the claims are covered, ACE must pay for Plaintiffs' defense as a matter of law because any question of fact serves only to confirm that the Underlying Actions at least "potentially" fall within the policy coverage.

Defendants maintain that Plaintiffs have provided no evidence, and have not pointed to any allegations in the Wheelock or Knell Actions, demonstrating that the recordings at issue in either of the lawsuits were distributed or shared with anyone besides Hyundai, Encore, or CMG employees. Defendants claim that in Ohio, "publication, " which is the threshold trigger to coverage at issue here, requires distribution of information to the public at large in the context of insurance policies covering "personal and advertising injuries."

Plaintiffs filed this action for damages against ACE and for declaratory judgment against the remaining Defendants. ACE moved to dismiss the complaint and the other defendants moved for judgment on the pleadings. Plaintiffs cross-moved for partial summary judgment to enforce ACE's duty to defend. The Court denied all of Defendants motions, but permitted the parties to submit additional briefing in connection with Plaintiffs' motion regarding ACE's duty to defend. Plaintiffs' motion for partial summary judgment is now ripe for resolution.[5]


The Knell Action
1. On or about February 16, 2012, Encore was sued in the United States District Court for the Southern District of California (the " Knell Action"). The Knell civil complaint alleges that on or about February 15, 2012, the underlying plaintiff called Encore, and that her conversation was recorded, which she did not know until she asked the Encore representative at the end of the call whether their conversation was being recorded and was told that it was. (Doc. 46, Ex. D at ¶ 9).
2. The complaint also alleges that Encore employed and/or caused to be employed certain equipment on the telephone lines of all of its employees, officers, directors and managers which it "utilized to overhear, record, and listen to each and every incoming and outgoing telephone conversation over said telephone lines." (Doc. 46, Ex. D at ¶¶ 29-30).
3. The plaintiff claims that Encore violated her right of privacy by "eavesdropping" on calls, and asserts claims for: (1) violation of California Penal Code § 637.2, which prohibits, among other things, the recording of calls without notice to and the consent of the caller to the recording; (2) common law invasion of privacy; (3) negligence; and (4) violations of the California Business and Professions Code. ( Id. at ¶ 49; First, Second, Third and Fourth Claims for Relief). In addition to injunctive relief, the complaint seeks as damages in connection with those claims: (1) the $5, 000 per violation in statutory damages provided by California privacy law; (2) "general damages according to proof"; and (3) "special damages according to proof." ( Id. at Prayer for Relief).
The Wheelock Action
4. On or about November 14, 2011, a putative class action was filed in the Superior Court of the State of California (the " Wheelock Action"). The class action allegations of the Wheelock First Amended Complaint state that the action has been brought against Hyundai Motor America ("Hyundai"), along with DOES 1 through 10, on behalf of a putative class consisting of "[a]ll persons located in California who, at any time during the applicable limitations period preceding the filing of this complaint through the date of resolution, participated in a telephone conversation with Hyundai customer service using a cellular or cordless telephone and whose calls with Hyundai customer service were recorded by Defendants without notice." (Doc. 46, Ex. C).
5. CMG operated a call center in Utah for Hyundai, at which it recorded certain calls for quality control purposes, from on or around January 1, 2006 to on or around March 2012. (Doc. 67 at ¶ 2).
6. The agreements between CMG and Hyundai include a qualified obligation for each party to defend, indemnify and hold the other party harmless subject to the terms of the agreements. ( Id. at ¶ 3).
7. CMG employees, who were not participants on the recorded phone calls at issue in the Wheelock Action, subsequently listened to some of the phone calls for quality assurance and training purposes. ( Id. at ¶ 9).
8. Hyundai had access to the recordings and could request that the audio file for any call be forwarded to it at any time. ( Id. at ¶ 8).
9. Hyundai employees also participated in meetings during which they listened to call recordings and evaluated the quality of the calls. ( Id. at ¶ 7).
10. On or about November 23, 2011, after being sued in the Wheelock Action, Hyundai demanded that CMG defend, indemnify and hold Hyundai harmless, and assume Hyundai's defense of the Wheelock Action (the "Hyundai Demand"). ( Id. at ¶ 10).
The Insurance Coverage At Issue
11. Convergys purchased the ACE Umbrella Policies in which ACE specifically promised to:
Pay on behalf of the insured' those sums in excess of the retained limit' that the insured' becomes legally obligated to pay as damages because of bodily injury, ' property damage' or personal and advertising injury' to which this insurance applies.

(Doc. 46, Ex. A at § I.A).

12. "Personal and advertising injury" is expressly defined to include injury "arising out of" several types of offenses, including "oral or written publication, in any manner of material that ...

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