Eighth Floor Promotions, L.L.C. v. Cincinnati Ins. Cos.

[Cite as Eighth Floor Promotions, L.L.C. v. Cincinnati Ins. Cos., 2016-Ohio-7259.]

IN THE COURT OF APPEALS OF OHIO
THIRD APPELLATE DISTRICT
MERCER COUNTY

EIGHTH FLOOR PROMOTIONS,

PLAINTIFF-APPELLANT, CASE NO. 10-15-19

v.

THE CINCINNATI INSURANCE
COMPANIES, OPINION

DEFENDANT-APPELLEE.

Appeal from Mercer County Common Pleas Court
Trial Court No. 13-CIV-009

Judgment Affirmed in Part, Reversed in Part and Cause Remanded

Date of Decision: October 11, 2016

APPEARANCES:

Stuart E. Scott and Daniel Frech for Appellant

Nancy K. Tordai and D. Wesley Newhouse for Appellee
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ROGERS, J.

{¶1} Plaintiff-Appellant, Eighth Floor Promotions, L.L.C. (“Eighth Floor”),

appeals the judgment of the Court of Common Pleas of Mercer County granting

summary judgment in favor of Defendant-Appellee, The Cincinnati Insurance

Companies (“Cincinnati Insurance”). On appeal, Eighth Floor argues that the trial

court erred in finding that Cincinnati Insurance did not have a duty to defend it

against allegations of copyright infringement. For the reasons that follow, we affirm

in part, and reverse in part, the judgment of the trial court, and remand for further

consideration.

{¶2} This case arises out of an insurance coverage dispute between Eighth

Floor and Cincinnati Insurance. Eighth Floor is a Nevada limited liability company

with its principle place of business in Celina, Ohio. It manufactures and sells sports

awards and business gifts. It is managed by a few officers, some of whom also sit

on its board of directors.

{¶3} Eighth Floor’s Operating Agreement provides that it will “indemnify

and hold harmless” its officers and directors “[i]n any “threatened * * * claim, action

or proceeding to which any officer or any [director] * * * is [a] party or is threatened

to be made a party by reason of its or his activities on behalf of [Eighth Floor].”

(Docket No. 35, Ex. 2, p. 15).

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{¶4} In 2010, Eighth Floor purchased an insurance policy from Cincinnati

Insurance (“the Policy”). The Policy provided that Cincinnati Insurance would “pay

on behalf of the ‘company’ all ‘loss’ which the ‘company’ [was] required to pay as

indemnification to the ‘individual insureds’ resulting from any ‘claim’ first made

during the ‘policy period’ * * * for a ‘wrongful act’ ”. (Docket No. 33, Ex. 1-A, p.

12). The Policy defined “company” as “the ‘insured entity’ and any ‘subsidiary’ ”

and “individual insureds” as “[a]ll persons who were, now are, or shall become

directors, officers or employees, of the ‘company’ ”. (Id. at p. 14).

{¶5} On May 11, 2011, Eighth Floor’s Chief Executive Officer, Dave Willis,

received the following letter from the Business Software Alliance (“the BSA”):

Dear Mr. Willis:

This firm represents [the BSA] in connection with its investigation of
possible instances of illegal duplication of certain software
companies’ proprietary software products. The BSA represents the
interests of [17 software companies].

We recently have been advised that [Eighth Floor] has installed on its
computers more copies of [22 software programs] than it is licensed
to use.

Unauthorized duplication of computer software products constitutes
copyright infringement. The Copyright Act (17 U.S.C. § 101 et seq.)
provides that copyright owners may recover actual damages or
statutory damages. In cases where the infringement is willful
statutory damages can reach $150,000 for each copyrighted product
that has been infringed. The copyright owner can also seek attorneys
[sic] fees.

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However, [the] BSA member companies have determined that
litigation may not be necessary in this case, especially as senior
management may not have had an opportunity to investigate or
consider the ramifications of using unlicensed software. The BSA
member companies instead wish to resolve this matter amicably by
providing Eighth Floor with an opportunity to conduct its own
company-wide investigation. To take advantage of this opportunity,
Eighth Floor’s investigation must include an audit of all of the
software published by [the] BSA members (see above) on all of its
computers and a review of the software licenses and proofs of
purchase for those licenses.

Please understand that while we are contacting you in an effort to
avoid litigation, the BSA member companies are not waiving their
right to litigate to protect their copyrights if this effort is not
successful. We therefore must insist that you contact us by May 31,
2011. At that time we will provide you with specific guidance on how
to conduct your audit.

In addition, please do not destroy or replace any copies of any of the
computer software products published by the above-mentioned
companies that are currently installed on Eighth Floor’s computers.
The software programs installed on Eighth Floor’s computers are
evidence and therefore must be preserved in case this matter does
proceed to litigation. In the meantime, you should not attempt to enter
into any negotiations with sales representatives of these companies to
purchase computer software products prior to the resolution of this
matter.

We look forward to your cooperation.

Sincerely,

Troutman Sanders LLP

***

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(Emphasis sic.) (Docket No. 35, Ex. 4). The letter (“the audit request”) was

forwarded to Eighth Floor’s insurance agent, who forwarded it to Cincinnati

Insurance.

{¶6} On May 20, 2011, Eighth Floor retained counsel to conduct a software

compliance audit and prepare a summary of the results; assist it in its efforts to

comply with all applicable software licensing requirements; attempt to negotiate a

favorable settlement with the BSA; review its applicable insurance policies; and

review proposed software license purchases.

{¶7} On May 26, 2011, Cincinnati Insurance denied coverage for losses

incurred in connection with the audit request. It explained that the audit request did

not constitute a “claim” under the Policy because it was neither a “written demand

for monetary damages or non-monetary relief” nor a “civil proceeding commenced

by filing a complaint or similar pleading.” (Docket No. 33, Ex. 1-C, p. 2). It agreed,

however, to treat the audit request as a “notice of circumstances” that may give rise

to a claim covered under the Policy but warned that “based on the information

currently known,” coverage for a future claim may be limited or precluded under

one of the Policy’s exclusions. (Id.)

{¶8} On November 9, 2011, after Eighth Floor’s software compliance audit

revealed numerous unauthorized software installations, Eighth Floor’s counsel

received the following letter from the BSA:

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Dear Mr. Barnett:

Thank you for investigating the installation and licensing of certain
computer software products at [Eighth Floor]. [The] BSA appreciates
Eighth Floor’s cooperation in this matter.

As you may know, unauthorized duplication of computer software
products constitutes copyright infringement for which the Federal
Copyright Act, specifically 17 U.S.C. § 504(c), allows the recovery of
statutory damages ranging up to $150,000 per product for willful
conduct. Even if willful conduct cannot conclusively be established,
Section 504 permits the copyright owner to elect an award of non-
willful statutory damages of as much as $30,000 for each work
infringed without the necessity of demonstrating actual damages.
Additionally, 17 U.S.C. § 505 permits the court to award to the
prevailing party its costs and reasonable attorneys’ fees.

Often when the BSA investigates [sic] company for copyright
infringement and discovers unauthorized activity, [the] BSA will seek
in settlement an amount equal to several times the full retail value of
all unauthorized copies of software products published by the
software companies whose interests are represented by [the] BSA.

In this case, however, [the] BSA member companies believe that it is
the best interest of all parties to resolve this matter short of litigation.
To that end, we have formulated a settlement proposal which takes
into account the manufacturer’s suggested retail price (“MSRP”) of
the unlicensed installations, the cooperation Eighth Floor has
exhibited, and all underlying facts. While the amount to be derived
from the BSA falls well below Eighth Floor’s maximum exposure as
set out above, [the] BSA’s approach does serve a similar purpose – to
deter infringement.

After all, if it were possible simply to become compliant once
infringement was discovered, there would be no reason to obey the
copyright laws in the first place. To the contrary, such a system would
create substantial incentive to copy software. Accordingly, I have
been authorized to extend a settlement offer on the following terms,
which are documented in the attached Settlement Agreement:

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1. Eighth Floor will certify through one of its corporate officers,
that (a) the software inventory report(s) provided during the
negotiation of this settlement is true and accurate and contains a
complete and accurate list of all copies of all Computer Software
Products installed on its computers as of May 11, 2011; (b) all
Computer Software Products installed on Eighth Floor’s computers
for which it does not have a license have been destroyed; (c) a
sufficient number of licenses for the remaining Computer Software
Programs have been purchased to ensure legal use; and (d) only
licensed copies of the Computer Software Products are now and will
in the future be installed on Eighth Floor’s computers.
Documentation of compliance with these provisions will be provided
along with the certificate described above.

2. Eighth Floor will agree to execute a Software Code of Ethics and
to circulate it to all employees, personnel and affiliated companies.

3. Eighth Floor will agree to permit the BSA to conduct two
inspections per year for three years of Eighth Floor’s computers to
confirm the absence of copyright infringement. The inspections will
be at the BSA’s option and expense absent any discovery of
infringement, and at Eighth Floor’s expense if infringement is found
to any Computer Software Product.

4. Eighth Floor will make a payment to the BSA in the amount of
$179,393.48, a three-time multiplier of the MSRP owed plus
attorney’s fees. This payment is to resolve Eighth Floor’s potential
liability for copyright infringement and is in addition to any costs
incurred by Eight Floor in complying with item 1 above.

5. [sic] The BSA member companies will forego the filing any
lawsuit against Eighth Floor and will release Eighth Floor from any
liability related to past infringement of the copyrights in the software
products listed below due to Eighth Floor’s use and/or installation of
those products on Eighth Floor’s computers.

***

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This offer is made with the assumption that this case will settle
quickly. If it does not, costs will only increase and the potential for a
non-litigation resolution will decrease.

The remaining terms of [the] BSA’s settlement offer are set out in the
enclosed settlement agreement. * * *

Sincerely,

[Troutman Sanders]

(Docket No. 33, Ex. 1-D, p. 3-7. Attached to the letter was a “Settlement

Agreement,” offering to release “Eighth Floor, its officers, directors, employees,

shareholders, attorneys and assigns” from any and all claims relating to the alleged

copyright infringement in exchange for Eighth Floor’s compliance with the above-

mentioned terms. (Id. at p. 9).

{¶9} The letter and settlement agreement (collectively “the settlement offer”)

was forwarded to Eighth Floor’s insurance agent, who forwarded it to Cincinnati

Insurance.

{¶10} On December 8, 2011, Cincinnati Insurance denied coverage for

losses incurred in connection with the settlement offer. It acknowledged that the

settlement offer constituted a “claim” under the Policy but stated that it had no

obligation to defend or indemnify Eighth Floor under Exclusion K of the Policy.

(Docket No. 35, p. Ex. 15, p. 4). It explained,

The Policy includes a copyright infringement exclusion[.] Part V.
Section I. – Exclusion K provides that Cincinnati [Insurance] is not
liable to pay, indemnify or defend any ‘claim’;

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* * * Based upon, arising out of, or in consequence of, or in any way
involving actual or alleged infringement of copyright, patent,
trademark, trade secret, service mark, trade name, or misappropriation
of ideas or trade secrets or other intellectual property rights. . .

(Id.)

{¶11} Later that month, Eighth Floor entered into a settlement agreement

with the BSA whereby Eighth Floor and its officers and directors were released

from any and all claims relating to the alleged copyright infringement.

{¶12} On January 22, 2013, Eighth Floor filed a complaint in the Court of

Common Pleas of Mercer County seeking declaratory relief regarding the terms of

the Policy and asserting breach of contract and bad faith claims against Cincinnati

Insurance. Cincinnati Insurance filed a timely answer, and eventually, both parties

moved for summary judgment.

{¶13} In its motion for summary judgment, Cincinnati Insurance argued that

it did not have a duty to defend Eighth Floor under the terms of the Policy.

Specifically, it argued that the audit request was not a “claim” within the meaning

of the Policy, and even if it was, the audit request and the settlement offer were

excluded from coverage under Exclusion K because they were “claims” concerning

copyright infringement against Eighth Floor.

{¶14} Conversely, Eighth Floor argued that Cincinnati Insurance had a duty

to defend it under the terms of the Policy. Specifically, it argued that the audit

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request was a “claim” within the meaning of the Policy because it demanded an

audit and the preservation of software and threatened litigation. It further argued

that the audit request and the settlement offer were not excluded under Exclusion K

because that exclusion did not apply to a “ ‘claim’ against any ‘individual

insureds’.” (Docket No. 35, p. 10). It explained, “the BSA [sic] allegations

constituted a copyright ‘claim’ against the ‘individual insureds’ (the [o]fficers and

[d]irectors) because the [o]fficers and [d]irectors were by law both vicariously liable

for the infringement, and jointly and severally liable with the company for the

damages.” (Id.)

{¶15} Both parties later filed briefs in opposition of summary judgment and

reply briefs in support of summary judgment.

{¶16} On November 23, 2015, the trial court granted Cincinnati Insurance’s

motion for summary judgment, denied Eighth Floor’s motion for summary

judgment, and dismissed Eighth Floor’s complaint. In doing so, it made the

following findings of fact and conclusions of law:

1. Eighth Floor’s claims against [Cincinnati Insurance] are for the
costs and expenses for resolving the claims made by [the] BSA against
Eighth Floor for copyright infringement.

2. [The audit request] from [the] BSA to Eighth Floor does not
satisfy the [Policy’s] definition of a ‘claim’ against any insureds as set
forth in the [P]olicy.

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3. The [settlement offer] from [the] BSA * * * is a claim against
Eighth Floor only, despite the potential liability of its officers and
directors under the federal copyright infringement protection statute.

4. Despite the proposed settlement agreement explicitly releasing
the directors and officers from liability to [the] BSA, [the] BSA never
made any claim against those persons who are the named insureds as
defined in the exception to Exclusion K of the [Policy] that excluded
coverage for the losses Eighth Floor may incur for violating the
copyright infringement statute.

5. Because [the] BSA never made a written demand against an
individual officer or director for whom the exception to Exclusion K
of the [Policy] provides coverage, [the] BSA never made a claim
against those individuals insured by the [P]olicy * * *.

6. Although [the] BSA could have made claims against the officers
and directors of Eighth Floor for violations of the copyright
infringement law, which claims would have been covered under the
[P]olicy, the fact remains that it did not; and because [the] BSA made
its claims only against Eighth Floor, despite the language of the
proposed settlement agreement that released the officers and directors
of Eighth Floor for any claims of [the] BSA, no claim was ever made
by [the] BSA against Eighth Floor that is covered by the terms of the
[P]olicy * * *.

(Docket No. 63, p. 6-7).

{¶17} It is from this judgment that Eighth Floor appeals, presenting the

following assignment of error for our review.

Assignment of Error

THE TRIAL COURT COMMITTED REVERSIBLE ERROR
WHEN IT HELD THAT THE LETTERS SENT TO EIGHTH
FLOOR THROUGH ITS DIRECTORS AND OFFICERS,
WHEN CONSIDERING THE SURROUNDING
CIRCUMSTANCES, DID NOT GIVE RISE TO A DUTY FOR
CINCINNATI INSURANCE COMPANY TO PROVIDE A

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DEFENSE TO THE DIRECTORS AND OFFICERS UNDER
THE BLUE CHIP POLICY.

{¶18} In its sole assignment of error, Eighth Floor argues that the trial court

erred in finding that Cincinnati Insurance did not have a duty to defend it against

the BSA’s allegations of copyright infringement. Specifically, Eighth Floor argues

that the trial court erred in finding that (1) the audit request was not a “claim” under

Part I, Section IV of the Policy and (2) that the settlement offer was excluded from

coverage under Exclusion K of the Policy. We agree, in part.

{¶19} An appellate court reviews a summary judgment order de

novo. Hillyer v. State Farm Mut. Auto. Ins. Co., 131 Ohio App.3d 172, 175 (8th

Dist.1999). However, a reviewing court will not reverse an otherwise correct

judgment merely because the lower court utilized different or erroneous reasons as

the basis for its determination. Diamond Wine & Spirits, Inc. v. Dayton Heidelberg

Distrib. Co., Inc., 148 Ohio App.3d 596, 2002-Ohio-3932, ¶ 25 (3d Dist.), citing

State ex rel. Cassels v. Dayton City School Dist. Bd. of Edn., 69 Ohio St.3d 217, 222

(1994). Summary judgment is appropriate when, looking at the evidence as a whole:

(1) there is no genuine issue as to any material fact, and (2) the moving party is

entitled to judgment as a matter of law. Civ.R. 56(C). In conducting this analysis,

the court must determine “that reasonable minds can come to but one conclusion

and that conclusion is adverse to the party against whom the motion for summary

judgment is made, [the nonmoving] party being entitled to have the evidence or

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stipulation construed most strongly in the [nonmoving] party’s favor.” Id. If any

doubts exist, the issue must be resolved in favor of the nonmoving party. Murphy

v. City of Reynoldsburg, 65 Ohio St.3d 356, 358-359 (1992).

{¶20} The party moving for summary judgment has the initial burden of

producing some evidence which demonstrates the lack of a genuine issue of material

fact. Dresher v. Burt, 75 Ohio St.3d 280, 292 (1996). In doing so, the moving party

is not required to produce any affirmative evidence, but must identify those portions

of the record which affirmatively support his argument. Id. at 292. The nonmoving

party must then rebut with specific facts showing the existence of a genuine triable

issue; he may not rest on the mere allegations or denials of his pleadings. Id.; Civ.R.

56(E).

The Policy

{¶21} Part I of the Policy is titled “DIRECTORS AND OFFICERS

LIABILITY AND COMPANY COVERAGE.” (Docket No. 33, Ex. 1-A, p. 12).

Part I, Section I, titled “INSURING AGREEMENTS”, provides that Cincinnati

Insurance will “pay on behalf of the ‘company’ all ‘loss’ which the ‘company’ is

required to pay as indemnification to the ‘individual insureds’ resulting from any

‘claim’ first made during the ‘policy period’ * * * for a ‘wrongful act’ ”. (Id.)

{¶22} Part I, Section IV, titled “DEFINITIONS”, provides the following

definitions:

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A. ‘Claim’ means:

1. A written demand for monetary damages or non-monetary
relief; or

2. A civil proceeding commenced by filing of a complaint or
similar pleading;

***

B. ‘Company’ means the ‘insured entity’ and any ‘subsidiary’.

C. ‘Individual insureds’ means:

1. All persons who were, now are, or shall become directors,
officers or employees, of the ‘company’;

***

D. ‘Insureds’ means the ‘company’ and the ‘individual insureds’.

E. ‘Loss’ means ‘defense costs’ and the total amount of monetary
damages which the ‘insured’ becomes legally obligated to pay on
account of any ‘claim’ for a ‘wrongful act’ with respect to which
coverage hereunder applies, including damages, judgments,
settlements * * *.

***

H. ‘Wrongful act’ means any actual or alleged error, misstatement,
misleading statement, act, omission, neglect or breach of duty
committed, attempted, or allegedly committed or attempted on or after
the Retroactive Date, if any, * * * and prior to the end of the ‘policy
period’ by:

1. Any of the ‘individual insureds’ in the discharge of their
duties solely in their capacity as a director, officer, or
employee of the ‘company’;

***

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3. The ‘company’.

(Docket No. 33, Ex. A-1, p. 13-14).

{¶23} Part V of the Policy is titled “GENERAL PROVISIONS

APPLICABLE TO ALL COVERAGE PARTS FORMING THIS POLICY.” Part

V, Section I, titled “EXCLUSIONS”, provides that

[Cincinnati Insurance] [is] not liable to pay, indemnify or defend any
‘claim’:

***

K. Based upon, arising out of, or in consequence of, or in any way
involving actual or alleged infringement of copyright, patent,
trademark, trade secret, service mark, trade name, or misappropriation
of ideas or trade secrets or other intellectual property rights; provided,
however, this exclusion shall not apply to any ‘claim’ against any
‘individual insureds’;

(Id. at p. 27).

The Audit Request

{¶24} The Policy’s definition of a “claim” includes a “written demand for *

* * non-monetary relief.” (Docket No. 33, Ex. A-1, p. 13). None of these terms

are defined.

{¶25} When a term in an insurance policy is undefined, it is given its “plain

and ordinary meaning unless manifest absurdity results, or unless some other

meaning is clearly intended from the face or overall contents of the instrument.”

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Alexander v. Buckeye Pipe Line Co., 53 Ohio St.2d 241, 245-46 (1978), citing First

Natl. Bank v. Houtzer, 96 Ohio St. 404, 406-407 (1917). When an undefined term

has a plain and ordinary meaning, it is “unnecessary and impermissible for a court

to resort to construction of that language.” Nationwide Mut. Fire Ins. Co. v. Guman

Bros. Farm, 73 Ohio St.3d 107, 108 (1995), citing Karabin v. State Auto. Mut. Ins.

Co., 10 Ohio St.3d 163, 166-167 (1984). However, “[w]hen interpreting a contract,

we will presume that words are used for a specific purpose and will avoid

interpretations that render portions meaningless or unnecessary.” Wohl v. Swinney,

118 Ohio St.3d 277, 2008-Ohio-2334, ¶ 22, citing State v. Bethel, 110 Ohio St.3d

416, 2006-Ohio-4853, ¶ 50.

{¶26} “Demand” is defined as “[t]he assertion of a legal right or procedural

right.” Black's Law Dictionary 522 (10th Ed.2014).

{¶27} “Non” is defined as “[n]ot; no.” Id. at 1212. “Monetary” is defined

as “[o]f, relating to, or involving money.” Id. at 1158.

{¶28} “Relief” is defined as “[t]he redress or benefit, esp. equitable in nature

(such as injunction or specific performance), that a party asks of a court. Also termed

remedy.” (Emphasis sic.) Id. at 1482. “Remedy” is defined as “[t]he means of

enforcing a right or preventing or redressing a wrong; legal or equitable relief.” Id.

at 1485.

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{¶29} In interpreting “relief” as used herein, we will look to the plain and

ordinary meaning of “remedy.” This is necessary because if we looked to the plain

and ordinary meaning of “relief” then the Policy’s second definition of a “claim”

(“a civil proceeding commenced by filing of a complaint or similar pleading”)

would be rendered meaningless and unnecessary, as a civil complaint or similar

pleading necessarily requires a party to ask something of a court.

{¶30} Here, Cincinnati Insurance argues that the audit request is not a written

demand for non-monetary relief because it only advised Eighth Floor that the BSA

was investigating possible instances of copyright infringement and gave Eighth

Floor an opportunity to conduct its own company-wide investigation to determine

whether any copyright infringement had occurred. It maintains that “Eighth Floor’s

investigation would not provide redress or benefit to the BSA, particularly if no

copyright infringement was found.” Appellee’s Brief, p. 15-16.

{¶31} In support, Cincinnati Insurance relies on the first sentence of the audit

request which provides, “[Troutman Sanders] represents [the BSA] in connection

with its investigation of possible instances of illegal duplication of certain software

companies’ proprietary software products.” (Emphasis added). (Docket No. 35, Ex.

4, p. 1). While this sentence, standing alone, could support Cincinnati Insurance’s

argument, the rest of the audit request does not.

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{¶32} The second paragraph of the audit request states, “We have recently

been advised that [Eighth Floor] has installed on its computers more copies of [19

software programs] than it is licensed to use.” (Emphasis added.) (Id.). The audit

request does not state that the BSA was advised that Eighth Floor may have installed

on its computers more copies of the programs than it was licensed to use.

{¶33} The fourth paragraph of the audit request states, “However, [the] BSA

member companies have determined that litigation may not be necessary in this

case, especially as senior management may not have had an opportunity to

investigate or consider the ramifications of using unlicensed software.” (Emphasis

added.) (Id. at p. 1-2). The audit request does not state that senior management

may not have had an opportunity to investigate or consider whether Eighth Floor

had committed copyright violations.

{¶34} And to the extent that the word “investigate” could be read broadly,

the final paragraph of the audit request states, “The software programs installed on

Eighth Floor’s computers are evidence and therefore must be preserved in case this

matter does proceed to litigation.” (Emphasis added.) (Id. at p. 2). The audit

request does not state that the software programs installed on Eighth Floor’s

computers may be evidence.

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{¶35} Thus, contrary to Cincinnati Insurance’s claim, the audit request

sought to determine the extent of Eighth Floor’s copyright violations—not whether

Eighth Floor had committed copyright violations.

{¶36} That being said, although the audit request gave Eighth Floor the

“opportunity” to conduct a company-wide software audit, it implied that if Eighth

Floor did not take up this “opportunity,” then the matter would proceed to litigation,

where the BSA could have achieved the same result. The audit request also sought

the preservation of evidence and stated that Willis should not attempt to purchase

any software from sales representative of these companies until the matter was

resolved.

{¶37} These measures were the BSA’s “means of enforcing a right” and

“preventing a wrong” within the plain and ordinary meaning of “remedy.” See Gold

Tip, LLC v. Carolina Cas. Ins. Co., D. Utah No. 2:11-CV-00765-BSJ, 2012 WL

3638538, *4 (Aug. 23, 2012) (a written demand for non-monetary relief can

encompass a letter that coerces conduct of the policyholder through the threat of

using the legal process to compel that conduct.).

{¶38} For these reasons, we find that the audit request was a “claim” within

the meaning of the Policy.

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The Settlement Offer

{¶39} Unlike the audit request, the parties do not dispute that the settlement

offer was a “claim” under the Policy. The parties do dispute whether coverage was

excluded under Exclusion K of the Policy.

{¶40} An insurer’s duty to defend is broader than the duty to indemnify.

Ohio Govt. Risk Mgt. Plan v. Harrison, 115 Ohio St.3d 241, 2007-Ohio-4948, ¶ 19,

citing Socony-Vacuum Oil Co. v. Continental Cas. Co., 144 Ohio St. 382 (1945).

The duty of an insurance company to defend an action against an insured is

determined by the scope of the allegations of the claim. Motorists Mut. Ins. Co. v.

Trainor, 33 Ohio St.2d 41 (1973), paragraph two of the syllabus. “[W]here the

complaint brings the action within the coverage of the policy, the insurer is required

to make the defense, regardless of the ultimate outcome of the action or its liability

to the insured.” Id. “[W]here the insurer’s duty to defend is not apparent from the

pleadings in the case against the insured, but the allegations do state a claim which

is potentially or arguably within the policy coverage * * * the insurer must accept

defense of the claim.” Willoughby Hills v. Cincinnati Ins. Co., 9 Ohio St.3d 177,

180 (1984). “Only if there is no possibility of coverage under the policy based on

the allegations in the complaint will the insurer not have a duty to defend the action.”

Erie Ins. Exchange v. Colony Dev. Corp., 136 Ohio App.3d 406, 413 (1999), citing

Wedge Products, Inc. v. Hartford Equity Sales Co., 31 Ohio St.3d 65 (1987).

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{¶41} However, where an insurance contract excludes coverage for the claim

against the insured, no duty to defend will arise. Zanco v. Michigan Mut. Ins. Co.,

11 Ohio St.3d 114, 116 (1984). In such cases, there is no duty to defend because

the allegations in the pleadings fall squarely within an area of activity specifically

excluded from coverage. Id.

{¶42} The duty of the insurance company to defend is separate from the duty

of the insurance company to indemnify. Motorist Mut. Ins. at paragraph one of the

syllabus. Once a duty to defend is recognized, “speculation about the insurer’s

ultimate obligation to indemnify is premature until facts excluding coverage are

revealed during the defense of the litigation and the insurer timely reserves its rights

to deny coverage.” Erie Ins. Exchange at 413, citing Motorists Mut. Ins.

{¶43} “One who seeks to recover on an insurance policy generally has the

burden of demonstrating coverage under the policy and then proving a loss.”

Chicago Title Ins. Co. v. Huntington Natl. Bank, 87 Ohio St.3d 270, 273 (1999),

citing Inland Rivers Service Corp. v. Hartford Fire Ins. Co., 66 Ohio St.2d 32

(1981). However, when an insurer denies coverage under a policy exclusion, the

insurer bears the burden of demonstrating the applicability of the exclusion.

Continental Ins. Co. v. Louis Marx & Co., 64 Ohio St.2d 399, 401 (1980).

{¶44} Furthermore, “an exclusion in an insurance policy will be interpreted

as applying only to that which is clearly intended to be excluded.” (Emphasis sic.)

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Hybud Equip. Corp. v. Sphere Drake Ins. Co., Ltd., 64 Ohio St.3d 657, 665 (1992),

citing Moorman v. Prudential Ins. Co., 4 Ohio St.3d 20, 21 (1983). “The insurer,

being the one who selects the language in the contract, must be specific in its use;

an exclusion from liability must be clear and exact in order to be given effect.” Lane

v. Grange Mut. Cos., 45 Ohio St.3d 63, 65 (1989), citing Am. Fin. Corp. v.

Fireman’s Fund Ins. Co., 15 Ohio St.2d 171 (1968).

{¶45} Here, Eighth Floor does not dispute the fact that the settlement offer

did not make a written demand for monetary relief against its offices or directors or

contain any language that could potentially or arguably be construed as a written

demand for monetary (or non-monetary) relief against its officers and directors. It

argues instead that the settlement offer is potentially or arguably a “claim” against

its officers and directors insofar as its officers and directors could have been liable

for copyright infringement if the BSA had filed suit against it. It explains,

Vicarious ‘liability for copyright infringement may be imposed upon
an officer, directors, or shareholder so long as [1] the individual ‘has
the right and ability to supervise the infringing activity’ and also [2]
has a direct financial interest in such activities. Jobete Music Co., Inc.
v. Media Broad. Corp., 713 F.Supp. 174, 177-78 (M.D.N.C. 1988).
As such, the Eighth Floor [o]fficers and [d]irectors were jointly and
severally liable on [the] BSA’s claim. As [o]fficers and [d]irectors,
they necessarily had the right and ability to supervise the infringing
activity and as shareholders in a closely held corporation, the
[o]fficers and [d]irectors had a direct financial interest in such
infringement.1

1
Eighth Floor’s officers and directors do not actually own stock in the company. “The companies that do
hold that stock, Renoir Visions and Degonda Corporation, are owned in whole or in part by Eighth’s Floor’s
Board of Directors * * *.” Appellant’s Reply Brief, p. 2-3.

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Had the matter not settled, the BSA would have named the [o]fficers
and [d]irectors in its [c]omplaint because Eighth Floor was not solvent
to the full extent of the potential damages. Because copyright
infringement allows for joint and several liability, because the BSA
was aware that Eighth Floor was closely held, and because the
[d]irectors and [o]fficers constituted a viable source of recovery who
necessarily shared equally in the liability, any lawyer drafting the
[c]omplaint would be obligated to include the [d]irectors and
[o]fficers as [d]efendants. Indeed, [the] BSA would be motivated to
name as many parties as possible to ensure that it would collect on its
judgment.

Appellant’s Reply Brief, p. 8-9.

{¶46} In support, Eighth Floor points to the Ohio Supreme Court’s decision

in Willoughby Hills where the court found that “[w]here the insurer’s duty to defend

is not apparent from the pleadings in the case against the insured, but the allegations

do state a claim which is potentially or arguably within the policy coverage * * *

the insurer must accept defense of the claim.” (Emphasis added.) 9 Ohio St.3d at

180. In doing so, the court noted the reasoning of the Seventh Circuit Court of

Appeals, “ ‘[S]ince the advent of notice pleading, in a case where there is doubt as

to whether a theory of recovery within the policy coverage has been pleaded in the

underlying complaint, the insurer must defend, and its defense obligations will

continue until such time as the claim against the insured is confined to a recovery

that the policy does not cover.’ ” Id. at p. 179, quoting Solo Cup Co. v. Federal Ins.

Co., 619 F.2d 1178, 1185 (7th Cir.1980).

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{¶47} We do not believe that Willoughby Hills stands for the proposition that

an insurer has a duty to defend an otherwise excluded “claim” where the allegations

in that “claim” could potentially or arguably lead to another “claim” which may be

within the policy’s coverage. Indeed, Eighth Floor cites no case law indicating that

its officers and directors would have definitely been liable for copyright

infringement if the BSA had filed suit against it.

{¶48} The only real “claim” at issue here is the settlement offer which did

not demand any monetary relief from Eighth Floor’s officers or directors or contain

any language that could potentially or arguably be construed as a written demand

for monetary (or non-monetary) relief against Eighth Floor’s officers and directors.

It included a provision offering to release Eighth Floor’s officers and directors from

liability if Eighth Floor complied with its demands, but this provision cannot

potentially or arguably be construed as a written demand for monetary (or non-

monetary) relief against Eighth Floor’s officers and directors

{¶49} For these reasons, we find that the settlement offer was excluded from

coverage under Exclusion K of the Policy.

{¶50} Accordingly, because the trial court erred in finding that the audit

request was not a “claim” under the Policy, but did not err in finding that the

settlement offer was excluded from coverage under Exclusion K of the Policy,

Eighth Floor’s assignment of error is sustained, in part, and overruled, in part.

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Because the trial court incorrectly determined that the audit request was not a

“claim,” it did not determine whether that claim gave rise to duty to defend or

whether coverage was excluded under Exclusion K of the Policy. Therefore, the

matter must be remanded to the trial court for resolution of these issues.

{¶51} Having found error prejudicial to the appellant, in some of the

particulars assigned and argued, we affirm, in part, and reverse, in part, the judgment

of the trial court, and remand the matter for further proceedings consistent with this

opinion.

Judgment Affirmed in part,
Reversed in Part and
Cause Remanded

SHAW, P.J. and PRESTON, J., concur.
/jlr

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