A ruling in the cards: an insurer's duty to defend can be stretched only so far.

My wife and sons would like me to show more enthusiasm for my sons' collection of sports cards. My mother still comments--with great disdain--that my brother showed better care in preserving his baseball cards. I collect nothing. So my interest was personal as well as professional when I read the January 2004 decision from the United States Court of Appeals for the Ninth Circuit concerning whether card collecting was a "mental injury" recognized as insurable "bodily injury."

A manufacturer of trading cards was named in a class action suit alleging violations of the Racketeer Influenced and Corrupt Organizations Act, better known as RICO, and various gambling laws. The violation concerned the random insertion of special cards into the card packages.

The manufacturer sought coverage. The insurer denied on the grounds that there was no "accident" or "occurrence." The policyholder argued that the underlying suit could be viewed as claiming injury to children caused by gambling addiction.

To examine this question, the court focused on the policy definition of "bodily injury." The primary policies defined bodily injury as "bodily injury, sickness or disease sustained by a person.... " The umbrella policies defined "bodily injury" to include "sickness or disease, disability or shock, mental anguish or mental injury.... " The question before the court--much like the question in my house--became whether compulsive collection constituted "mental injury."

The policyholder's position was interesting in that the policyholder argued that the underlying suit should be covered because it could be amended to seek damages that might be covered. That is, the suit itself did not allege injury to children. It alleged RICO violations. The policyholder argued, however, that the California law entitled an insured to a defense if the complaint alleged "damages potentially covered tinder the policy, or if the complaint might be amended" to become a covered claim.

Indeed, California law includes a case endorsing this principle. Applying this principle to the trading card complaint presented an interesting question. The complaint, as drafted, did not present a covered claim. But what about the potential and the possibility for amendment? How far did this stretch factor go?

The Ninth Circuit found that the "possibility of an amendment does not require the insurer to speculate about any conceivable claim that a plaintiff might bring against the insured or to spin out wild theories of recovery for every conceivable damage. Liability under the policies only can be characterized as speculative and hypothetical. The duty to defend, albeit a broad one, encompassing liability for damages potentially covered tinder the policies, does not stretch this far."

Historically, California has been viewed as a policyholder friendly jurisdiction. While this case was litigated in federal court, it drew upon California law. The policyholder undoubtedly viewed this forum as the best hope for a tenuous claim. Indeed, it is an extremely policyholder friendly concept for courts to consider the possible effect of underlying pleadings being amended. But evidently, even policyholder friendly courts have limits.

The insured's argument required a stretch of the stretch factor. To take this last step would be to go too far. It would be absurd.

Interestingly, over the past few months we have seen several significant decisions finding that policyholders are not entitled to a defense under their policies. This development is unusual because historically policyholders have enjoyed great success in litigating the duty-to-defend issue. In fact, if the Ninth Circuit had found a duty to defend the trading card case, this decision would have joined a long list of cases seemingly unrelated to cover,age where courts found a duty to defend. Cases have been reported finding the duty to defend acts that seem intentional, if not heinous.

Given my family's personal tie to card collecting, I would have felt a certain sense of vindication by a decision finding card collecting a form of "mental injury." But, I must endorse the Ninth Circuit's reasoning. As noted in a concurring opinion, "If the Court decides the insurer has a duty, to defend in this case, it is hard to imagine a situation where the insurer's duty to defend would not be triggered." The duty to defend is often said to be broad, but it is not limitless.

Alan S. Rutkin, a Best's Review columnist, is a partner in Rivkin Radler LLP, Uniondale, N. Y. He cat, be reached at [e-mail].