A current resolution by the Fifth Circuit illustrates an vital precept in insurance coverage protection disputes: The wording of insurance coverage insurance policies and primary grammar rules are vital to protection determinations, putting the onus on the insurers that draft insurance coverage contracts to make use of clear and unambiguous language, particularly in searching for to disclaim protection based mostly on exclusions. In Paloma Sources, L.L.C. v. Axis Ins. Co., No. 22-20228 (fifth Cir. July 7, 2025), the insurance coverage coverage included an mental property exclusion, which used the phrase “precise or alleged” earlier than itemizing a sequence of clauses. The courtroom held that use of “the” instantly earlier than the “misappropriation of concepts or commerce secrets and techniques” clause within the exclusion meant that it was affordable to interpret the exclusion as making use of solely to precise misappropriation, quite than broader precise and alleged misappropriation. As a result of the policyholder’s narrower studying of the exclusion based mostly on the phrase “the” was affordable, the courtroom was required to undertake it, no matter whether or not the insurer’s most popular, narrower interpretation was equally or much more affordable.
Background
The policyholder’s enterprise competitor alleged that an worker of the policyholder colluded with two of the competitor’s workers to steal and switch confidential info of the competitor. The competitor additionally alleged that the policyholder induced the theft of the confidential info by means of the prospect of employment to the competitor’s workers.
After the competitor sued in Oklahoma state courtroom, the events settled with the policyholder stipulating that the lawsuit concerned the unauthorized disclosure of and entry to the competitor’s confidential info. The competitor additionally agreed to launch the policyholder’s worker from legal responsibility arising out of the allegations within the lawsuit.
When the policyholder requested that the insurer cowl protection prices and fund the settlement, the insurer denied protection based mostly on the coverage’s IP exclusion, which barred protection for any claims “based mostly upon, arising out of, straight or not directly ensuing from, in consequence of, or in any means involving any precise or alleged infringement of copyright, patent, trademark, commerce identify, commerce gown, or service mark or the misappropriation of concepts or commerce secrets and techniques, or the unauthorized disclosure of or entry to confidential info . . . .” The policyholder then sued the insurer and the competitor searching for a declaration that the insurer improperly denied protection.
The insurer moved for abstract judgment, arguing that it owed no protection or indemnity as a result of the IP exclusion barred protection based mostly on any declare stemming from precise or alleged misappropriation. The district courtroom adopted the insurer’s interpretation of the exclusion and granted the movement for abstract judgment based mostly on the IP exclusion.
The Fifth Circuit Resolution
The policyholder appealed to the Fifth Circuit, which vacated the ruling that the insurer had no responsibility to defend or responsibility to indemnify the policyholder due to the IP exclusion.
On attraction, the policyholder argued that use of “the” instantly earlier than the “misappropriation of concepts or commerce secrets and techniques” clause within the IP exclusion meant that the phrase “precise or alleged” doesn’t apply to the misappropriation clause. Which means, the exclusion solely applies to precise misappropriation of concepts or commerce secrets and techniques, quite than alleged misappropriation.
The Fifth Circuit agreed with the policyholder based mostly on interpretive canons and customary grammar rules. The courtroom first relied on the so-called “series-qualifier” canon, which applies modifying phrases to all the nouns within the sequence except the language or construction of the sentence signifies in any other case. Below this interpretive canon, the Fifth Circuit defined that the insurer’s placement of “the” earlier than “misappropriation of concepts or commerce secrets and techniques” suggests there was no carryover modification of “precise or alleged” to the second clause of the exclusion. In different phrases, the insurer’s inclusion of the determiner “the” earlier than “misappropriation” represented a “purposeful break” within the syntax of the sequence in order that “precise or alleged” didn’t apply to misappropriation. Due to this fact, the courtroom concluded that it made no grammatical sense to learn the IP exclusion as making use of to “any precise or alleged . . . the misappropriation of commerce secrets and techniques.”
The courtroom subsequent endorsed the interpretive precept that unclear or ambiguous coverage language have to be strictly construed in opposition to the insurer because the drafter pursuant to the precept of contra proferentem. This basic insurance coverage precept holds that, if a coverage time period is open to a number of affordable interpretations, the courtroom should undertake the interpretation that helps protection and favors the policyholder.
The Fifth Circuit additional defined that, underneath Texas regulation, it was not required to evaluate whether or not the development urged by the policyholder was the “most pure studying” and even whether or not it was extra affordable when in comparison with the development provided by the insurer. Courts should undertake the policyholder’s building of an exclusion so long as the development will not be unreasonable. It concluded that the development provided by the policyholder was itself affordable, and that was sufficient. The Fifth Circuit underscored that the policyholder’s argument that “precise or alleged” expressly modifies “infringement” was an inexpensive one, so it vacated the district courtroom’s ruling and remanded the case for additional proceedings on whether or not the insurer had an obligation to defend or an obligation to indemnify the policyholder.
Key Takeaway
The Paloma Sources resolution serves as a strong reminder that ambiguities in exclusions have to be resolved within the policyholder’s favor, which is the agreed-upon discount with insurance coverage, and that policyholders mustn’t settle for an insurer’s studying of a coverage exclusion at face worth when it’s overbroad or complicated. Interpretive canons and grammar rules are an vital instrument in resolving such ambiguities. Policyholders contesting exclusionary language must be conscious that they needn’t show that they’ve a extra affordable interpretation than an insurer’s most popular interpretation. They merely should supply one affordable interpretation, and the doorways to protection can swing again open.
