Disparagement Coverage: Exactly as Broad as the Policy Says

Disparagement Coverage: Exactly as Broad as the Policy Says

By David A. Gauntlett*

Introduction

In this blog, I respond to many mistakes and omissions commonly weaponized by insurer counsel that were encapsulated in an article published in DRI For the Defense.[1] Although the authors appear to have attempted a neutral evaluation of the “implicit disparagement” doctrine in various jurisdictions, the article neglects several aspects of coverage law that protect policyholders.[2]

Offenses Are Not Torts

A common mistake in interpreting the standard “personal and advertising injury” provisions is assuming that the listed “offenses” neatly correspond to specific torts. This is especially critical in evaluating potential coverage for offense “d,” which provides coverage for suits “arising out of . . . [o]ral or written publication of material that . . . disparages a person’s or organization’s goods, product or services.”  Luckily, some courts have acknowledged that the policy language is not so limited.[3] Despite this judicial acknowledgment, some still seek to spread this misconception:

The disparagement offense is designed to cover both the torts of defamation and commercial disparagement (also known as trade libel) as reflected in the fact that the offense applies to both persons and organizations and extends to goods, products, and services.[4]

Not only does this limited construction conflict with the very nature of the “offense” based coverage, it ignores the preceding “arising out of” language. This necessarily expands the scope of coverage. For example, a suit brought by consumers who were harmed by a company’s disparagement of a competitor[5] does not fit nearly within the confines of defamation or commercial disparagement, but it necessarily “aris[es] out of” disparagement.

Underlying Complaint Need Not Perfectly Articulate Potentially Covered Claims

Insurers will often argue they have no duty to defend by comparing the elements of a tort (which is already a mistake, as noted above) to the allegations of the underlying complaint and noting the absence of a particular element. In analyzing potential coverage of “implicit disparagement” the elements of proof to establish liability for trade libel need not be plead so as to establish liability in order to show potential coverage.[6] Insisting upon perfect articulation also ignores the potential for amendment of underlying pleadings.[7]

Defense Duty Is Triggered by Potential, Not Actual, Coverage

Another key point to consider in evaluating an underlying complaint is that an insurer’s duty to defend is triggered by potential coverage, not actual coverage.

“If any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurer's duty to defend arises and is not extinguished until the insurer negates all facts suggesting potential coverage.” . . . In general, doubt as to whether an insurer owes a duty to defend “must be resolved in favor of the insured.”[8]

Despite explicitly recognizing Swift as “arguably the leading case on disparagement,” the DRI article never once acknowledges this basic tenet of coverage law articulated in that very decision.[9]

Plaintiffs May Seek to Avoid Implicating Defendants’ Policies

Because most insurance policies use standardized language, a plaintiff’s counsel could easily draft a complaint that dodges direct implication of a policy’s coverage provisions. This is done by avoiding a labeled cause of action for “disparagement” and not focusing on facts that would support inferences of disparagement in a way that would identify or be construed as ones “of and concerning” the claimants. This strategy is often employed in an attempt to deny the defendant an insurer-funded defense, thereby pressuring them into capitulation and a quick settlement.

The DRI article criticized Boston Symphony Orchestra, Inc. v. Com. Union Ins. Co., 545 N.E.2d 1156 (Mass. 1989) for concluding that the breach of contract allegations triggered a duty to defend under the policy’s disparagement coverage. It referred to the conclusion as a “leap” and noted that “[t]he court heavily relied on the dictionary definition of disparagement in its analysis, as opposed to the common law elements of disparagement[.]”[10]

Contrary to the DRI article’s implication, plaintiffs should not be able to dictate insurance coverage through their pleadings. Courts are obligated to consider alleged facts and fair inferences, not just the causes of action.[11]

Insurers, Not Courts, Are Responsible for Limiting Coverage

The DRI article discusses at length a fear expressed by many courts:

A number of courts have heeded the First Circuit's warning that approaching disparagement coverage too broadly would lead to the unlimited expansion of the duty to defend in ordinary business disputes.[12]

Broad coverage, however, is precisely what the standard language conveys. It is not a court’s place to intervene on behalf of insurance companies and save them from the natural implications of language they drafted.[13] Furthermore, those fears are misplaced. Not all comparative statements in false advertising cases embody fact allegations that trigger a defense for “implicit disparagement.”[14]

Conclusion

While courts are quick to pay lip service to the principle that policy language should not be twisted in evaluating potential coverage, few of them properly abide by that rule. Policyholders should not be punished for insurers’ failure to restrict “disparagement” coverage. The standard language is not restricted to specific torts and does not limit coverage to “direct” disparagement or even suits brought by the disparaged party. 

*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[1] Melissa Fernandez, Anna Stafford, and Meghan Ruesch, When Competition and Coverage Collide, 61 No. 5 DRI For the Defense 63 (May, 2019) (hereinafter, “When Competition and Coverage Collide”).

[2] For additional discussion of the “implied disparagement” doctrine, see David A. Gauntlett, Implicit Disparagement Insurance Coverage Survey, https://www.gauntlettlaw.com/news/implicit-disparagement-insurance-coverage-survey (Apr. 18, 2024).

[3] Wireless Buybacks, LLC v. Hanover Am. Ins. Co., 223 F. Supp. 3d 443, 448 (D. Md. 2016) (“[T]he underlying complaint needs to be not allege the elements of the tort of disparagement as interpreted in Maryland, in order to trigger coverage.”); Winklevoss Consultants, Inc. v. Federal Ins. Co., 11 F. Supp. 2d 995, 1000 (N.D. Ill. 1998) (“[T]he policy offense of ‘disparagement’ is not synonymous with common law commercial disparagement.”)

[4] See, e.g., When Competition and Coverage Collide.

[5] See, e.g., Miller v. Ghirardelli Chocolate Co., No. C 12-04936 LB, 2013 U.S. Dist. LEXIS 49733, *15–16 (N.D. Cal. Apr. 5, 2013) (consumer claims for disparagement were asserted pursuant to California Civil Code § 1770(a)(8) for marketing of products as “chocolate” leading “customers to falsely believe that the baking chips were (or contained) chocolate, white chocolate and/or . . . cocoa butter.”)

[6] Winklevoss, 11 F. Supp. 2d at 1000 (“[The Microtec] allegations did not amount to displacement as envisioned by the policy where they did not ‘aver that Microtec had said anything negative about Green Hills ‘ but observing that if Microtec had sued insured for falsely advertising that Microtec’s product had ‘bugs’ or was ‘slower,’ such allegations would have satisfied the covered offense of disparagement.”)

[7] Safeguard Scientifics v. Liberty Mut. Ins. Co., 766 F. Supp. 324, 330 (E.D. Pa. 1991) (Noting that liberal amendment rules would easily allow the pleadings to be corrected to have the asserted scienter match the evidence, meaning there was a potential for claims covered by the policy.)

[8] Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 59 Cal. 4th 277, 287 (2014).

[9] When Competition and Coverage Collide.

[10] Id.

[11] Hudson v. Colony Ins. Co. v. Colony Ins. Co., 624 F. 3d 1264, 1269 (9th Cir. (Cal.) 2010) (“The technical label on a cause of action does not dictate the duty to defend whether the claimed cause of action was omitted out of negligence or ‘for strategic adversarial reasons.’”)

[12] When Competition and Coverage Collide (citing BASF AG v. Great Am. Assur. Co., 522 F.3d 813, 822 (7th Cir. (Ill.) 2008)).

[13] Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004) (“‘[C]ourts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing[.]’”) (quoting Reiss v. Fin. Performance Corp., 97 N.Y.2d 195, 199 (2001)).

[14] Wireless Buybacks, LLC v. Hanover Am. Ins. Co., 223 F. Supp. 443, 449–50 (D. Md. 2016) (“Wireless is not making false comparison between the phones it sells and the phones sold by Sprint. Indeed, Wireless is selling phones that contain the Sprint trademark, and its alleged scheme ‘is predicated on the unauthorized exploitation of . . .the Sprint trademark and goodwill.’ . . . JAR Labs , LLC v. Great Am. E&S Ins. Co., 945 F. Supp. 2d 937, 943-945 (N.D. Ill. 2013), for instance, involved false statements that expressly compared the insured’s products to those of a competitor — precisely what is missing here. In Miranda v. California Capital Ins. Co., disparagement existed when an insured falsely represented that its inferior product was, in fact, a superior product from a competitor, and this misrepresentation was intended to tarnish the competitor’s reputation. . . . Here, by contrast, the complaint suggests that Wireless benefited from the good reputation of Sprint . . . and did not act with the express purpose of tarnishing Sprint’s reputation.”)