Outside Entity Exclusion Precludes Duty to Defend Claim for Misappropriation of Confidential Information

The United States District Court for the Northern District of California, applying California law, has held that an outside entity exclusion precluded a professional liability insurer’s duty to defend a claim against its insured, an insurance brokerage, arising out of an employee’s alleged misappropriation of an insurance agency’s confidential information because the misappropriation occurred when the employee was still employed at the agency.  H&H Ins. Servs., Inc. v. Endurance Am. Specialty Ins. Co., 2022 WL 888658 (N.D. Cal. Mar. 25, 2022).  The court also held that an exclusion barring coverage for misappropriation of trade secrets applied.

An insurance agency filed a lawsuit against the brokerage and its employee, who had previously been employed by the agency.  The complaint alleged that, while she was still employed at the agency, the employee had access to the agency’s confidential information, including databases of customer lists, purchasing preferences, and negotiated rates, and that the employee used this confidential information to divert the agency’s business to the brokerage.  The complaint asserted causes of action for breach of contract, breach of fiduciary duty, and misappropriation of trade secrets, among others.  The brokerage provided notice of the suit to its insurer, which declined coverage.

In the ensuing coverage litigation, the court held that two policy exclusions precluded the insurer’s duty to defend.  First, the court held that the outside entity exclusion applied.  The exclusion precluded coverage for “any Claim based upon, arising from, or in consequence of the performance of or failure to perform Professional Services for or by any entity other than the Named Insured” if “on or after the date or time of the Wrongful Act giving rise to such Claim . . . any Insured was a[n] . . . employee of such entity.”  Because the allegations of the complaint against the brokerage involved the provision of services to another entity—the agency—by an officer or employee of that other entity at the time that a wrongful act giving rise to the claim occurred, the outside entity exclusion barred coverage.  Second, observing that it “must read each exclusion’s ‘arising out of’ language broadly,” the court determined that an exclusion barring coverage for “any Claim based upon or arising out of any actual or alleged . . . misappropriation of trade secrets” applied because “all claims flow from [the former employee]’s employment with [the agency] and involve the misappropriation of trade secrets.”