Insurance: Personal injury coverage for “negligent defamation.” Where some claims are covered Insurer is liable for full judgment unless it intervenes in tort case to obtain special verdict showing part of verdict was based on uncovered claims. Insurer must fund appeals.

Pharmacists Mutual Insurance Co. v. Myer, 2010 VT 10, 993 A. 2d 413 (Reiber, C. J.)
Glenn A. Myer appeals from a summary judgment declaring that his insurer, Pharmacists Mutual Insurance Company, owed him no duty to indemnify or pay defense costs on appeal from a third-party defamation claim. We reverse the decision on the duty to defend and indemnify, and remand for further proceedings.

Myer tendered the complaint to Pharmacists, which had issued him a homeowner’s policy that included an endorsement providing liability coverage for “personal injury.” The policy defined the latter to include “misrepresentation, libel, slander [and] defamation of character,” but specifically excluded coverage for personal injury “caused by a publication or statement made by . . . an insured, if the insured knew or had reason to believe that the publication or statement was false.

Myer contends the court erred in concluding as a matter of law, based on the special verdict in the defamation case , that the statements which the jury found to have been made negligently were not covered. We agree. The jury was directed to consider separately the two categories of statements, and to return separate verdicts on each. We discern no basis to interpret the special verdict, as finding that all of the defamatory statements were made by Myer with knowledge of their falsity or reckless disregard thereof.

We reject Pharmacists’ claim that negligent statements necessaritly fall within the policy exclusion for defamatory statements which the insured knew or “had reason to believe . . . [were] false.” Courts and commentators routinely employ the phrase “knew or had reason to believe” as a shorthand for a state of mind equivalent to gross or willful misconduct or even actual malice. The exclusion does not apply to defamatory statements made negligently.

For purposes of judicial economy, we also consider the corollary issue, raised and briefed by the parties, as to how—if at all—to allocate the damage award in the event of a finding on remand that some of the defamatory statements were merely negligent and therefore within the policy coverage. As noted, the jury in the Cooper litigation rendered an undifferentiated award of $150,000 for defamation; it did not distinguish between covered and uncovered conduct. It is settled law in Vermont, however, that once an insured has demonstrated coverage under a policy, the burden falls “on the insurer to show that a third party’s claim against the insured is entirely excluded from coverage.” State v. CNA Ins. Cos., 172 Vt. 318, 324, 779 A.2d 662, 667 (2001) (emphasis added).

Thus, it was, and remains, Pharmacists’ burden to demonstrate that the award was based upon conduct entirely excluded from coverage, or to show how the jury allocated damages as between covered and uncovered conduct. To protect its interests and meet its burden it was incumbent upon Pharmacists to notify the trial court and the parties of the potential apportionment issue and of the need for special interrogatories allocating damages, to seek permission if necessary to attend the charge conference to propose such interrogatories, or even to intervene in the litigation if all else failed. Pharmacists failed to seek an allocated verdict on the defamation award and thus cannot meet its burden to demonstrate that the award was for statements entirely excluded from coverage under the policy. Pharmacists, therefore, would remain responsible for the defamation award in its entirety in the event that any of the statements are ultimately found to fall within the policy coverage.

Myer further claims that the trial court erred in concluding that Pharmacists had no duty to pay attorney’s fees and costs incurred in the appeal from the judgment in the Cooper litigation.. The ruling was unsound. The general rule is that an insurer under a general duty to defend is required to bring an appeal on its insured’s behalf “when there are reasonable grounds to believe that the insured’s interests might be served by an appeal.” As discussed, the underlying judgment here exposed Myer to both covered and uncovered damages; a reversal would plainly have served his interests; and the appeal raised at least reasonable—if ultimately unsuccessful—grounds for challenging the judgment. Accordingly, we hold that Myer was entitled to recover attorney’s fees and costs incurred in prosecuting the appeal in the Cooper litigation.

That portion of the summary judgment declaring that Pharmacists owed no duty to indemnify Myer for the $150,000 defamation award or to pay for attorney’s fees and costs incurred in his appeal from the underlying judgment in the Cooper litigation is reversed, and the matter remanded for further proceedings consistent with the views expressed herein.