No Coverage for Known False Statements

Exclusion of Defamatory Or Disparaging Statements Made With Knowledge Of Their Falsity Effective
Post 5007

Liability Insurance is Limited to Unintentional Conduct

The main issue presented to the Tenth Circuit Court of Appeals was whether the insurance policies' exclusions, which deny coverage for defamatory or disparaging statements made with knowledge of their falsity, apply. The District Court held that the exclusions do apply, as the underlying complaint alleged that the insureds knowingly published false statements.

In New Hampshire Insurance Company; National Union Fire Insurance Company Of Pittsburgh v. TSG Ski & Golf, LLC; The Peaks Owners Association, Inc.; Peak Hotel, LLC; H. Curtis Brunjes, No. 23-1248, United States Court of Appeals, Tenth Circuit (February 24, 2025) the Tenth Circuit affirmed.

BACKGROUND

TSG Ski & Golf, LLC (TSG) was insured under commercial general-liability insurance policies issued by New Hampshire Insurance Company and National Union Fire Insurance Company of Pittsburgh. The policies provided coverage for personal and advertising injury but excluded coverage for injury arising from the publication of material known to be false.

In late 2018 the TSG Parties began implementing a three-part scheme to coerce the Underlying Plaintiffs into paying annual assessments that the TSG Parties knew were not owed. First, the TSG Parties commissioned a "sham" audit of the annual assessments paid by Telluride between 2009 and mid-2015. They manipulated the audit to overlook payments made by Telluride through the True-Up Process, guaranteeing that TSG's accountant would erroneously conclude that Telluride had failed to pay any assessments during the relevant time period.

The underlying lawsuit was filed by Telluride Resort & Spa, LLC and its principals against TSG and other parties, alleging that they knowingly published false statements to coerce the plaintiffs into paying assessments that were not owed. The jury returned a verdict for the Underlying Plaintiffs on all claims that proceeded to trial. It awarded the Underlying Plaintiffs $225,000 in compensatory damages but declined to award punitive damages. The court awarded the Underlying Plaintiffs $2,298,225 in statutory attorney fees and $328,510.53 in costs.

THE ISSUES AT THE TENTH CIRCUIT

The insurers sought a declaratory judgment that they had no duty to defend or indemnify the TSG parties in the underlying lawsuit. The District Court granted summary judgment in favor of the insurers, concluding that the knowledge-of-falsity exclusions precluded coverage.

The TSG parties appealed.

DISCUSSION

An insurer need not defend its insured when an exclusion in the insurance policy precludes coverage. To avoid the duty to defend, the insurer must establish that the allegations in the complaint are solely and entirely within the exclusions in the insurance policy; that is, that there is no factual or legal basis on which the insurer might eventually owe coverage.

Because the knowledge-of-falsity exclusions precluded coverage, the Insurers had no duty to defend the TSG Parties in the underlying lawsuit.

The duty to indemnify relates to the insurer's duty to satisfy a judgment entered against the insured. Unlike the duty to defend, the duty to indemnify arises only when the policy actually covers the harm and typically cannot be determined until the resolution of the underlying claims.

At trial the uncontroverted testimony of TSG and POA officers (all of whom sat on the POA board and approved the debt-collection letter) established that the TSG Parties knew the statements in the debt-collection letter were false when the letter was published. The testimony of multiple witnesses established that the liability imposed against the TSG Parties was precluded from indemnification under the knowledge-of-falsity exclusions. The Tenth Circuit concluded, therefore, that the Insurers owed no duty to indemnify the TSG Parties for their losses in the underlying lawsuit.

BAD FAITH

It is settled law in Colorado that a bad faith claim must fail if coverage was properly denied and the plaintiff's only claimed damages flowed from the denial of coverage.

The Tenth Circuit affirmed the district court's decision, holding that the insurers had no duty to defend or indemnify the TSG parties. The district court's grant of summary judgment on all claims was affirmed.

ZALMA OPINION

Liability insurance is designed to protect the persons or entities insured against claims or suits that they cause damage to third parties from an accidental or fortuitous cause. Since intentional acts are not accidental nor fortuitous there can never be coverage for defense or indemnity of intentional acts. The insurers did not rely on lack of fortuity by including in the policy wording a clear and unambiguous exclusion for claims of defamation if the insured had knowledge-of-the-falsity of the statements when made and were deprived of defense or indemnity.

(c) 2025 Barry Zalma & ClaimSchool, Inc.

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