The PlayStation Coverage Wars: Impaired Coverage?
There's a recent opinion from the Ninth Circuit that doesn't seem to be getting the attention that it deserves. For anyone handling, high tech or IP coverage claims, the court's July 15 opinion in Sony Computer Entertainment v. American Home is a must read.
The case involved efforts by Sony to get coverage under its CGL and media E&O policies for a class action suit brought by disgruntled purchasers of Sony's ubiquitous PlayStation 2 game. The underlying plaintiffs alleged that CD and DVD video games skipped or froze while being played on the PlayStation or made " banging and clicking" noises. Sony argued that allegations that it misrepresented the qualities of its product triggered its E&O coverage for the wrongful act of "negligent publication" or that the claims against it were for a "loss of use" triggering its CGL coverage. The Ninth Circuit disagreed.
As to the media E&O policy issued by AISLIC, the court rejected Sony argument that the AISLIC Multimedia Professional Liability Policy’s coverage for “negligent publication” could be construed to extend to a communication of information to the public lacking or exhibiting proper care or concern so as to encompass the underlying allegations of false advertising or negligent misrepresentations. The court ruled 2-1 that the dictionary definitions pasted together by Sony conflicted with the context in which “negligent publication” was used in the AISLIC policy where the term appears in juxtaposition to incitement and defective advice and that the definition proposed by Sony would be broad enough to subsume virtually all of the other wrongful acts that receive specific definitions in the policy such as defamation, misappropriation, etc.
The court also took note of the fact that a media liability policy is intended to strictly limit coverage to the types of claims normally faced by publishers such as defamation or copyright infringement. The Ninth Circuit reviewed various tort cases in which publishes had been held liable for the negligent publication of material that had prompted third parties to commit harmful acts and found this constructioni of the term was consistent with the context of coverage.
As to the American Home CGL policy, the Ninth Circuit refused to find that problems that Playstation II owners experienced with skipping and freezing CDs and DVDs accompanied by “banging or clicking noises” set forth a claim for “loss of use” within the policy’s definition of “property damage.” The cour t distinguished its opinion in Anthem Electronics, noting that although t that although the plaintiffs alleged that CDs and DVDs had not properly played on the PlayStation 2, there was no suggestion that they did not function properly on other devices.
In any event, the court ruled that any finding of property damage reflecting a loss of use would be subject to Exclusion M as involving impaired property that had not suffered physical injury. The court rejected Sony’s suggestion that because the complaints alleged that the freezing and locking of the disks can happen at any time, there was the possibility that this loss of use had resulted from a “sudden and accidental” physical injury to the Playstation IIs. Rather, the court found that these allegations suggested that the devices deteriorated over time.
Writing in dissent, Judge Bybee argued that the majority had given an unduly narrow construction to AiSLIC’s “negligent publication” coverage and that a broader scope was warranted by looking at separate dictionary definitions of “negligent” and “publication.”
