Illinois Casualty Company v. Kladek, Inc.

Background

Kladek, Inc. operates a gentlemen's club in Minnesota doing business as King of Diamonds. A group of models (the "Models") sued Kladek in a separate federal lawsuit (Moreland et al. v. Kladek, Inc., Civ. No. 21-1975) alleging that Kladek posted their photographs on the club's Facebook, Instagram, and Twitter accounts without authorization or compensation. The Models brought five claims: (1) false endorsement, unfair competition, and/or false advertising under the Lanham Act, 15 U.S.C. § 1125(a); (2) violation of Minnesota common law right of publicity through appropriation; (3) negligence; (4) violation of Minnesota's Uniform Deceptive Trade Practices Act (MDTPA), Minn. Stat. § 325D.44; and (5) unjust enrichment.

Kladek is covered by a Businessowners Policy issued by Illinois Casualty Company (ICC). The policy contains two relevant components: (a) the Businessowners Liability Coverage Form, which covers "personal and advertising injury," and (b) a Cyber Protection Endorsement (Cyber Endorsement), which is additional, claims-made coverage. In a prior order, the court had sent coverage questions under the Cyber Endorsement to arbitration. An arbitration panel found that ICC owes Kladek a duty to defend under the Cyber Endorsement but did not resolve whether the Businessowners Liability Coverage independently provides a duty to defend or indemnify. The present cross-motions for summary judgment concern only the Businessowners Liability Coverage.

Legal Standard

Summary judgment is appropriate when there are no genuine disputes of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). On cross-motions, inferences are drawn against each movant in turn.

Under Minnesota law, an insurer has two distinct duties: the duty to defend (broader) and the duty to indemnify (narrower). If any claim is arguably covered under the policy, the insurer must defend. An insurer seeking to avoid the duty to defend must show that every claim in the underlying lawsuit clearly falls outside the policy. Exclusions are construed narrowly; ambiguities are resolved against the insurer and in favor of coverage.

The Three Exclusions at Issue

Law Exclusion

The Law Exclusion bars coverage for personal and advertising injury arising out of violations of "any federal, state, county, municipal or local consumer fraud protection law, regulation, ordinance, order, or directive barring fraud, unfair competition, and/or deceptive business practices."

ICC argued the Lanham Act and MDTPA claims fall within this exclusion because both are federal and state statutes addressing unfair competition and deceptive practices.

The court rejected this argument. It found that the Models' Lanham Act claim is not, at its core, a "consumer fraud" claim. The Models alleged that Kladek misappropriated their images, depriving them of compensation and harming their goodwill—not that any consumer was defrauded. The law exclusion targets consumer protection laws; the Models' Lanham Act allegations are commercial advertising-injury claims. Because the Lanham Act claim arguably falls within coverage and is not excluded, ICC has a duty to defend unless another exclusion bars all claims.

The court declined to analyze whether the Law Exclusion applies to the remaining four claims (the state statutory, common law, and unjust enrichment claims), because finding even one covered claim triggers the duty to defend.

Electronic Chatroom Exclusion

This exclusion bars coverage for personal and advertising injury "[a]rising out of any electronic chat room, bulletin board, or blog the insured hosts, owns, or over which any insured exercises control."

ICC argued that Facebook, Instagram, and Twitter function like bulletin boards that Kladek "controls," so this exclusion applies.

The court disagreed. It applied the plain meaning of "chat room" (a real-time online discussion platform) and "bulletin board" (a system for sharing or discussing information). By contrast, Facebook, Instagram, and Twitter are social media platforms. Kladek does not host, own, or control those platforms—it merely used them to post promotional content. There was no evidence Kladek intended to generate discussion among viewers. The court cited analogous precedent holding that posting articles on a website does not trigger a chatroom exclusion. ICC failed to meet its burden to show this exclusion applies.

Multimedia Exclusion

The Businessowners Liability Coverage states that personal and advertising injury coverage does not apply to "Multimedia Liability" "except to the extent that coverage may be provided under the Cyber Protection Form BL EC 06." The Cyber Endorsement's Multimedia Liability Coverage defines "multimedia peril" as the release or display of electronic media on an "internet" site that results in defamation, invasion of privacy, misappropriation of name or likeness, and similar harms.

ICC argued that because the Models' claims arise from posting images on internet sites—and thus constitute "multimedia perils" under the Cyber Endorsement—all such claims are excluded from the Businessowners Liability Coverage.

The court found this interpretation unpersuasive for two main reasons. First, the arbitration panel only determined that ICC has a duty to defend under the Cyber Endorsement; it did not identify which specific claims triggered that duty. ICC itself had previously taken the position that only Cyber Endorsement claims should go to arbitration, implicitly acknowledging that some claims fall outside the Cyber Endorsement.

Second, and more fundamentally, the court found genuine ambiguities in how the Cyber Endorsement relates to the Businessowners Liability Coverage. The Multimedia Exclusion states that Businessowners Liability Coverage does not apply to multimedia liability claims except to the extent coverage is available under the Cyber Endorsement—language that the court read as potentially allowing coverage under the Businessowners Liability Coverage once Cyber Endorsement coverage is established, not eliminating it. ICC's opposite reading—that Cyber Endorsement coverage excludes Businessowners Liability Coverage—was also plausible but contradicted by the policy's own language. Additional ambiguities included inconsistent captions, conflicting statements about whether the Cyber Endorsement modifies or supplements the main policy, and a structural conflict between the "occurrence"-based main policy and the "claims-made" Cyber Endorsement. Kladek's expert opined the Cyber Endorsement can be read as entirely standalone coverage.

Because these ambiguities must be construed against the insurer (ICC) and in favor of coverage, the court concluded the Multimedia Exclusion does not bar the Models' claims.

Ruling

The court denied ICC's motion for summary judgment and granted Kladek's motion for summary judgment on its counterclaim for declaratory judgment. The court declared that the underlying lawsuit includes claims covered under the Businessowners Liability Coverage and that ICC must defend Kladek in that lawsuit.

The court expressly reserved the duty to indemnify question, finding it premature—ICC retains the right to contest indemnification if Kladek is ultimately found liable in the underlying lawsuit.

The court also noted, without deciding, that it found compelling Kladek's alternative argument under the "illusory coverage" doctrine—the principle that courts will not enforce exclusions so broad that they render the insurer's coverage promise meaningless.