Hawai’i Court Enforces “Failure to Conform” Exclusion
By David A. Gauntlett*
Introduction
A recent decision in the United States District Court for the District of Hawai’i addressed two major points that previously had not been the subject of cases applying Hawai’i law. First, the court answered a question that remains an issue in many jurisdictions:[1] what exactly is an “advertising idea” in Commercial General Liability (“CGL”) coverage for “use of another’s advertising idea in your ‘advertisement’”? Second, the court addressed the scope of the standard “Failure to Conform” exclusion.
Court Adopts Broad Definition of “Advertising Idea”
In Allied World Nat'l Assurance Co. v. NHC, Inc.,[2] the insured allegedly marketed its products as “Kona” coffee while failing to use actual Kona beans in its products. The insured asserted the claim was covered under offense “f” “use of another’s advertising idea in your ‘advertisement.’” Allied World disagreed for three reasons, none of which persuaded the court.
First, Allied World argued that the term “advertising idea” should be given the narrow definition of a “process or invention used to market one's goods.”[3] The court rejected this definition as a “stingy construction” that was not “in accord with the reasonable expectations of a layperson,” which is the standard for construing contract provisions under Hawai’i law.[4] Instead, it accepted the insured’s preferred definition of “any idea or concept related to the promotion of a product to the public” as reasonable.[5] The court concluded that the use of “Kona” to promote coffee products easily satisfied that broader definition.
Second, Allied World argued that the word “another” in the phrase “another’s advertising idea” meant that the injury must arise from the use of “advertising idea” that someone owns or has a proprietary interest in. Thus, the insurer claimed, the term was not satisfied because the Kona farmers suing the insured had no legal property right in the term “Kona.” The court dismissed this as inconsistent with the policy language. “The possessive term in the phrase ‘another's advertising idea’ is readily understood to refer to the factual question of whether another person uses something, rather than the legal question of whether they own it.”[6]
Third, Allied World claimed the “your” term was not satisfied because the underlying plaintiffs did not challenge any of the insured’s “advertisements.” This argument was predicated on the technicality that the underlying complaint focused on the advertisements of the insured’s supplier—a distinct entity. The court noted, however, that the complaint also asserted that “undisputed evidence supported the finding that [the insured] was an active participant in [the supplier’s] advertising and marketing efforts.”[7] The court concluded that such allegations were sufficient to render satisfy the “your” requirement of the policy language.
“Failure to Conform” Exclusion Precluded Potential Coverage
To assess the applicability of this exclusion, the court determined that operative question was “whether MNS settled claims that alleged MNS and Mulvadi were making statements about the quality of their coffee products when they labeled those products as ‘Kona.’”[8] The court determined that question must be answered in the affirmative.
It highlighted several allegations from the underlying complaint that asserted “Kona” implied a particular level of quality:
The Corker lawsuit plaintiffs alleged that Kona coffee has a “distinctive flavor and aroma” resulting from its cultivation in the “volcanic soil, the elevation, and the humidity” of the Kona District of Hawai’i island. [citation] They alleged that “Kona coffee is one of the rarest and most prized coffees in the world” and that by telling a consumer that “they are buying coffee grown in the Kona District,” a vendor is “tell[ing] consumers that the coffee has a distinctive flavor profile, and that the beans are of the highest quality.” [citation] These allegations make plain that when a vendor labels coffee as “Kona,” they are making a statement about the quality of the coffee product—they are asserting, in effect, that the coffee they are selling will have the characteristic “unique flavor, aroma, and mouth feel” of Kona coffee.[9]
The insured cited two cases that determined statements of source were predominantly about the provenance of the products rather than the quality.[10] The court determined those were distinguishable on their facts because the allegations in those cases, unlike the allegations quoted above, lacked the explicitly asserted connections between the advertising term and the properties consumers would expect.
Potential Narrower Construction Not Acknowledged
While the NHC court distinguished cases in which the alleged distinguishing characteristic was only related to source and had no impact on quality, other cases highlight that an even narrower definition (which courts must accept under principles of coverage law) is available.
In AMCO Ins. Co. v. Inspired Techs., Inc.,[11] the Eighth Circuit reversed the district court’s decision to apply the exclusion on the basis of the following allegations:
In its Answer to Interrogatory 14, 3M alleged:
d. Despite ITI's claims that Frog Tape is “clean release,” it in fact leaves a residue.
e. Despite ITI's claims that Frog Tape is “UV-resistant,” it in fact leaves a residue behind upon removal after exposure to UV rays.
f. The tape widths that ITI claims for Frog Tape are overstated and thus false and misleading.
The phrase “clean release” is hardly an express statement of quality of performance with measurable objective criteria that can be determined to be accurate or not from its statement, nor is the phrase “UV resistant” subject to such a clearly objective standard. Nor is it clear that the “Failure to Conform” exclusion applies in the context of coverage based on false advertising.[12]
A reasonable construction of the “Failure to Conform” exclusion would be to limit its application to such measurable and definable standards, thereby rendering it unenforceable in cases like NHC where the allegedly missing quality was a “distinctive flavor and aroma.” Under this definition, the distinction would be similar to the one commonly used to distinguish actionable disparagement claims from those categorized as mere “puffing.”[13] The failure of the NHC court to adopt this standard is especially egregious in light of its acknowledgement of California’s “all possible worlds” standard that insurers must meet in order to enforce an exclusion.[14]
Conclusion
Despite properly applying a broad definition of “advertising idea” and paying lip service to the applicable standard for exclusions, the NHC court faltered at the finish line by failing to adopting the narrowest reasonable construction of the “Failure to Conform” exclusion.
*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) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] See, e.g., Princeton Excess & Surplus Lines Ins. Co. v. A.H.D. Hous., Inc., 84 F.4th 274, 283 (5th Cir. (Tex.) 2023) (noting that Texas courts have acknowledged various definitions from other jurisdictions yet none have been adopted under Texas law).
[2] Allied World Nat'l Assurance Co. v. NHC, Inc., No. 22-00469 MWJS-WRP, 2025 U.S. Dist. LEXIS 127281 (D. Haw. July 3, 2025).
[3] Id. at *31.
[4] Id. at *32.
[5] Id.
[6] Id. at *33.
[7] Id. at *37.
[8] Id. at *40.
[9] Id. at *40–41.
[10] Id. at *42–43 (citing Jewelers Mut. Ins. v. Milne Jewelry Co., No. 2:06-CV-243 TS, 2006 U.S. Dist. LEXIS 90551 (D. Utah Dec. 14, 2006) (crafts and jewelry advertised to be of “Native American origin”); Flodine v. State Farm Ins. Co., No. 99 C 7466, 2001 U.S. Dist. LEXIS 2204 (N.D. Ill. Feb. 27, 2001) (similar products advertised as “authentic Indianmade”)).
[11] AMCO Ins. Co. v. Inspired Techs., Inc., 648 F.3d 875, 881 (8th Cir. (Minn.) 2011).
[12] Safety Dynamics, Inc. v. Gen. Star Indem. Co., 475 F. App'x 213, 214 (9th Cir. (Az.) 2012) (“The non-conforming goods exception does not apply because ShotSpotter's injury claimed in the underlying action does not arise out of the failure of Safety Dynamics's product to conform to its advertisements. Rather, it is a competitive injury. This exception ‘is directed to the failure of goods, not the failure of advertising.’ 4 Jeffrey E. Thomas, New Appleman on Insurance Law Library Edition § 30.08[2][a] (2009).”)
[13] Julie Rsch. Lab'ys, Inc. v. Gen. Resistance, Inc., 268 N.Y.S.2d 187, 189 (1966), aff'd, 19 N.Y.2d 906 (1967) (“The defendant's advertisements, amounting to no more than a claim in general terms of superiority of its product over the products of competitors, constitute mere ‘puffing’ and are not actionable. ‘Mere general statements of comparison, declaring that the defendant's goods are the best on the market, or are better than the plaintiff's, are privileged so long as they contain no specific assertions of unfavorable facts reflecting upon the rival product. The feeling has been that the practice of sellers to make consciously exaggerated claims for their own goods is so well known that purchasers attach little or no importance to such assertions, and they usually can do no serious harm.[’]”) (quoting Prosser, Torts (3rd ed.), p. 949).
[14] NHC, Inc., 2025 U.S. Dist. LEXIS 127281 at *48. (“And so ‘in all possible worlds,’ J. Lamb, Inc., 100 Cal. App. 4th at 1039, this court must conclude that MNS settled claims that fell within the failure-to-conform exclusion.”)