Hunton Insurance Recovery Blog

The Northern District of California recently rejected an insurer’s attempt at avoiding its duty to defend the insured based on erroneous application of a prior knowledge exclusion. The case highlights the breadth of an insurer’s duty to defend and reiterates that to avoid this duty, “it is the insurer’s burden to demonstrate there is no possible theory that would bring a single issue within coverage.”

Case Background

After purchasing BetterHelp in 2015, BetterHelp’s owner purchased an insurance policy from CNA in 2016 that included coverage for any “Enterprise Liability” claim brought against an insured, including Network Security Liability, Privacy Injury Liability, Privacy Regulation Proceedings, and Privacy Regulation Fines. This coverage was continuously renewed, providing coverage through August 1, 2022.

On June 8, 2022, the FTC sent BetterHelp a draft administrative complaint which alleged that BetterHelp violated the FTC Act by disclosing consumer health information to third-parties without consent. BetterHelp promptly provided notice of the complaint to CNA. BetterHelp and the FTC then entered into a consent agreement in March 2023 in which BetterHelp agreed to pay a fine. Five days after the FTC settlement, BetterHelp was sued in a putative class action lawsuit (“Class Action”) alleging violations under state and federal law, including alleged violations of the Electronic Consumer Privacy Act between January 2017 and September 2021 based on the disclosure of confidential user information to third parties.

BetterHelp tendered the Class Action to CNA for a defense, but CNA denied coverage for both the Class Action and the FTC complaint based on two coverage defenses. First, CNA argued that Section D of the policy precluded coverage because the insured had “executive knowledge of wrongful acts prior to the policy period” based on a civil investigative demand from the FTC in 2020. Section D conditions coverage on “prior to the inception date of [the] Policy or the first such policy issued and continuously renewed by the Insurer, of which this Policy is a renewal, whichever is earlier: no Executive Officer knew or should have known that any such Wrongful Act, or Related Wrongful Acts, might result in such Claim.” Second, CNA argued that the Class Action alleged wrongful acts occurring before the policy period so that the Prior Wrongful Acts exclusion applied.

BetterHelp and its corporate parent, Telacom, brought suit against CNA, seeking coverage for the Class Action. The policyholders moved for judgment on the pleadings.

The Court’s Decision

The court rejected CNA’s arguments and ruled that CNA had a duty to defend. The court first reiterated California law on the duty to defend. Like in all other states, in California, the duty to defend is broader than the duty to indemnify. It is triggered whenever the underlying complaint raises the possibility that there may be coverage. The burden then shifts to the insurer to show that an exclusion applies and that there is “no conceivable theory” that can bring the lawsuit within coverage.

Turning to the exclusions that CNA raised, the court rejected CNA’s contention that Section D applied to bar coverage. The court found that CNA had not conclusively proven that BetterHelp executives had knowledge of the alleged wrongful acts at issue in the Class Action prior to the inception of the policy in August 2021. While CNA pointed to a publicly available report stating that the FTC had served a civil investigative demand (CID) on BetterHelp in July 2020, the court pointed out that the public notice did not state the subject matter of the investigation so CNA could not conclusively show that the CID was, in fact, connected to the Class Action or that executives had knowledge of the wrongful acts alleged in the Class Action at that time.

Second, the court turned to prior knowledge exclusion and rejected CNA’s arguments there as well. This exclusion applies if the claim arises out of wrongful acts that occurred before the named insured purchased BetterHelp on January 23, 2015. The court stated that the exclusion does not apply because the Class Action “does not completely arise out of pre-2015 acts given the ECPA claims, which arise in 2017.” The court explained that the draft FTC complaint and the Class Action distinguished between two ways that BetterHelp improperly disclosed user health information, one of which began before 2015 and the other of which began in 2017. Because there was no link between the pre-2015 events and the entire action did not arise out of the pre-2015 conduct, the court held that the exclusion does not apply.

Takeaways for Insureds

The court’s decision underscores the in-depth factual analysis required for application of a prior knowledge or prior notice exclusion to avoid coverage. Policyholders should push back on insurer attempts to broadly apply prior knowledge or prior notice exclusions to distinct claims and distinct wrongful acts. Further, policyholders and insurers alike should be cognizant of the in-depth factual analysis required for a court to rule on application of these exclusions. Finally, the decision highlights a procedural practice pointer for the insurance coverage bar, noting that “[a]lthough a 12(c) motion mirrors a 12(b)(6) motion and inferences should be drawn in favor of the nonmoving party, the duty to defend still places the burden on the insurers … to establish that policy exclusions apply and that there is no possibility that a claim can fall within policy coverage.”