## Facts

- Killer Music contracted with composer Pfeifer to sell his jingles and performances and to pay him per sale; the contract expired in 1988.
- After expiration, Killer Music compiled and sold a music library including Pfeifer’s songs without attribution or compensation.
- Pfeifer sued Killer Music in state court alleging copyright infringement and related business torts (including false designation of origin, unfair competition, palming off, conversion, and unjust enrichment) and sought damages and equitable relief.
- Killer Music had a Zurich CGL policy that covered “advertising injury,” including copyright infringement in an advertisement, but excluded advertising injury “arising out of” breach of contract.
- Killer Music defended and settled the Pfeifer action, then sought reimbursement from Zurich for defense and settlement costs.
- Zurich denied coverage, relying on the contract exclusion, arguing the infringement was willful, and asserting lack of proper notice and other unmet conditions.
- Zurich filed a federal declaratory judgment action seeking a declaration of no duty to defend or indemnify; Killer Music counterclaimed for breach of contract and bad faith.
- The district court granted summary judgment for Zurich on no duty to defend/indemnify and on Killer Music’s counterclaims.

## Issues

1. Whether Pfeifer’s lawsuit created a potential for “advertising injury” coverage triggering Zurich’s duty to defend, notwithstanding the policy’s breach-of-contract exclusion and Zurich’s intent and notice defenses.
2. Whether Zurich’s refusal to defend and indemnify constituted bad faith under California law, beyond a breach of the contractual duty to defend.

## Decision

- The Ninth Circuit reversed summary judgment for Zurich on the duty-to-defend issue and remanded, holding Zurich wrongfully refused to defend because the complaint and known facts showed a potential for covered advertising injury and exclusions did not eliminate that potential as a matter of law.
- The court affirmed summary judgment for Zurich on Killer Music’s bad-faith counterclaim, finding no evidence of conduct beyond an incorrect coverage position.
- Disposition: affirmed in part; reversed and remanded in part.

## Legal Principles

- Under California law, an insurer must defend if the underlying allegations and known facts show any potential for coverage; doubts are resolved in favor of the insured.
- Where “advertising injury” coverage includes copyright infringement, allegations tied to the insured’s marketing or distribution activities can trigger a duty to defend.
- Policy exclusions, including “arising out of breach of contract,” are construed narrowly; if alleged liability can rest on independent tort theories, the exclusion does not necessarily defeat the duty to defend at summary judgment.
- For duty-to-defend purposes, disputed facts bearing on coverage (including whether conduct was intentional and whether notice was sufficient) can preclude summary judgment for the insurer.
- Tort bad faith requires proof of unreasonable or egregious claim handling beyond a mistaken denial of the contractual duty to defend; a wrongful refusal to defend does not, by itself, establish bad faith.

## Conclusion

The Ninth Circuit held Zurich breached its duty to defend because Pfeifer’s claims potentially fell within advertising-injury coverage and the contract exclusion did not conclusively bar coverage, but it rejected a bad-faith tort claim absent evidence of unreasonable claim handling beyond the coverage denial.


Zurich Ins. Co. (U.S. Branch) v. Killer Music, Inc., 998 F.2d 674 (9th Cir. 1993)