Fifth Circuit: Contract Exclusion Does Not Apply to Copyright Infringement Claim

Looney Ricks Kiss Architects, Inc. v. State Farm Fire & Cas. Co. (5th Cir. (La.) April 4, 2012)

The Fifth Circuit recently predicted that the Louisiana Supreme Court would apply a “but for” test when construing an insurance policy’s breach-of-contract exclusion. As a result, the court held that two insurers were obligated to defend and indemnify their mutual insured against a copyright infringement claim because the insurers failed to show that the injury would not have occurred but for the breach of contract.

Looney Ricks Kiss Architects (“LRK”), an architecture firm, filed a copyright infringement action against a former client, Steve Bryan, and his affiliate building companies (the “Bryan defendants”). The complaint alleged that LRK created a design known as the Island Park Apartments, which was constructed by the Bryan defendants. LRK and the Bryan defendants entered into a contract pursuant to which LRK retained all common law and statutory rights to the building’s architectural drawings, specifications, and technical drawings. LRK also registered the Island Park Apartments with the United States Copyright Office as an Architectural Work and Technical Drawing.

LRK sued the Bryan defendants for copyright infringement after the Bryan defendants obtained permits to construct the Cypress Lake Apartments in Louisiana, which LRK alleged infringe on its copyrighted work. The Bryan defendants’ insurers, Lafayette Insurance Company (“Lafayette”) and State Farm Fire and Casualty Company (“State Farm”) issued policies that covered copyright infringement, but excluded injury arising out of a breach of contract.

The Fifth Circuit noted that the Louisiana Supreme Court has not addressed whether a breach-of-contract exclusion precludes liability for a statutory tort that an insured has a contractual obligation not to commit. Making an Erie guess, the Fifth Circuit observed that courts in other jurisdictions have used two tests when deciding whether a breach-of-contract exclusion applies: the “but for” test and “incidental relationship” test. The Fifth Circuit concluded that the Louisiana Supreme Court would likely apply a “but for” test to a breach-of-contract exclusion, such that the exclusion would apply only where the injury would not have but for the breach of contract. Since LRK’s claim emanated from a source other than contract law, i.e., federal copyright law, the Fifth Circuit held that the breach-of-contract exclusion did not apply. Therefore, Lafayette and State Farm were obligated to defend and indemnify the Bryan defendants against LRK’s claim.

For a copy of the decision, click here

Carrie Appler and Rick Cohen

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