When Insurance Coverage Arises for Implicit As Well As Direct Disparagement

When Insurance Coverage Arises for Implicit As Well As Direct Disparagement

By David A. Gauntlett*

Implicit disparagement is an insurance coverage doctrine often overlooked or misapplied. It first surfaced within the final decade of the last millennium. The reasoning was always there. But, coverage practitioners had not presented the available arguments that demonstrated that “disparagement” offense policy did not require that the allegations addressed all elements to evidence common trade libel law or product disparagement to establish coverage under offense “d”.

Potential Coverage For Implicit Disparagement

Implicit disparagement satisfies the trigger of coverage under the Commercial General Liability (“CGL”) policy’s “Personal Injury and Advertising Injury” coverage. This include “[o]ral or written publication…of material that…disparages a[n]… organization's goods, products or services”. Courts that carefully examine this offense have recognized that earlier cases which required evidence of common law tort claim assertions for disparagement too narrowly construed the policy language.

Courts Broaden Coverage Beyond Common Law Tort Elements

Since that time, implicit disparagement coverage case law has evolved as the cases that follow evidence.

 “Winklevoss made false comparative statements about the speed of its software relative to competitors; and the specific allegation that Winklevoss made misleading statements about the nature not both parties products all satisfy the above laymen’s definition of ‘disparage’ .  . . ([T]he policy offense of ‘disparagement’ is not synonymous with common law commercial disparagement.”[1]

“The bulk of cases involving interference . . . also involved the commission of some independent tort. Thus in many cases interference with contract is not so much a theory of liability in itself as it is an element of damages resulting from the commission of some other tort.’” [2]

“[T]he word ‘offense’ cannot be read to limit coverage only to a particular ‘cause of action’ or ‘claim.’ It simply does not have this meaning in either common usage or legal usage . . .”[3]

“‘Coverage… is triggered by the offense, not the injury or damage that a plaintiff suffers’

. . . Continental alleged that Lamb had falsely stated to Continental’s customers that Continental’s products were burdened with a prior legal right and their purchase of such products would subject them to litigation. Such allegations, in our view, clearly allege a disparagement of both Continental as well as its products… The term ‘disparagement’ has been held to include statements about a competitor’s goods that are untrue or misleading and are made to influence potential purchasers not to buy.”[4]

“Pennfield’s dissemination of allegedly misleading advertisements and materials that allegedly hurt Alpharma’s sales, profits and good will . . . implicitly disparage Alpharma’s product because Alpharma is the only other manufacturer of the product with FDA approval.”[5]

“Hartford’s argument overlooks the fact that it’s policies define ‘personal and advertising injury’ to include injury arising out of”…publication of material that…disparages a[n] organization’s goods products or services.’ In dicta since Bankwest, the Tenth Circuit has stated that the exact policy language at issue here is broad enough to include a tortious interference claim.”[6]

“[R]eading the policy broadly to cover implied, ‘own-product’ disparagement would be consistent with a reasonable insured’s objective expectations.”[7]

[A] statement equating a competitor’s product with an allegedly inferior one is logically indistinguishable from, and no less disparaging than, a statement describing one’s own product as ‘superior’ to the competitor’s.”[8]

“What distinguishes a claim of disparagement is that an injurious falsehood has been directed specifically at the Plaintiff’s business or product, derogating that business or product and thereby causing that plaintiff special damages…To find specific reference circumstances is consistent with limiting disparagement claims ‘to those who are the direct object of criticism and denying it to those who merely complain of nonspecific statements they believe cause them hurt…Disparagement by ‘reasonable implication” … requires more than a statement that may conceivably or plausibly be construed as derogatory to a specific product or business. A ‘reasonable implication’ in this context means a clear or necessary inference.”[9]

“Some courts have found disparagement based on false equivalence where the insured allegedly made false and misleading statements claiming its products were equivalent to those of a competitor…But these cases tend to involve allegations that the insured explicitly compared its product to that of a competitor- precisely what is absent here.”[10]

A Questionable Rejection of Coverage for Implicit Disparagement

In Benecard Services LLC, v. Allied World Specialty Ins. Co.,[11] a Third Circuit panel affirmed the district court’s determination that no evidence of disparagement arose because Benecard’s partner company never claimed that Benecard’s alleged misrepresentation disparaged it. On the contrary, the subject of the alleged misrepresentation was not the partner company’s ‘goods, products[,] or services,’ but Benecard’s own abilities, expertise, and plans.”[12]

This is a far cry from the district court’s narrow construction of the “disparagement” offense, requiring evidence of common law disparagement (a view which the Court of Appeals neither addressed or affirmed):

First, the Benecard district court’s decision relied on the narrower view of the “disparagement” offense articulated by Third Circuit in Albion.[13]

Second, the policy language does not require that a common law tort be an element of the asserted recovery. Inferences from facts that evidence implicit disparagement suffice as proof of act assertions that meet each element of any common law tort claims are not required.[14]

Third, as was true in the Third Circuit’s decision in Albion, the district court failed to look at pertinent extrinsic evidence, although, at least, the Albion decision acknowledges that it could be relevant to coverage analysis under New Jersey law. In Albion, however, the court failed to recognize the role of a Pretrial Conference Order in superseding the pleadings under federal law.[15]

Conclusion

Coverage for implicit disparagement claims is the appropriate focus in looking for a defense duty under a variety of articulate claim of relief that evidence “disparagement” fact allegations. The litany of case law referenced shows a division between the extremely narrow construction urged by the Benecard district court, the broader embrace of implicit disparagement theory in Swift, and the broader application of the implicit disparagement doctrine in Unwired Solutions and Pennfield.

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* David A. Gauntlett is a principal of Gauntlett & Associates. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com. 

[1] Winklevoss Consultants, Inc. Federal Ins. Co., 11 F. Supp. 2d 995, 999-1000(N. D. Ill. 1998)

[2] COMSAT Corp. v. St. Paul Mercury Ins. Co., 1998 U.S. Dist. LEXIS 2916, *5 (D. Minn. Mar. 6, 1998)

[3] McCormack Baron Mgmt, Services, Inc. v. American Tovar & Liability Ins. Co., 989S.W. 2d 168, 171-172 (Mo. 1999)

[4] Atlantic Mutual Ins. Co. v. J. Lamb, Inc. 100 Cal. App., 1017, 1032 , 1034-1035 (2002)

[5] Pennfield Oil Co. v. Am. Feed Indus. Ins. Co., No. 8:05CV315, 2007 U.S. Dist. LEXIS 21456 at *24 (D. Neb. March 12, 2007)

[6] Hartford Fire Ins. Co. v. Vita Craft Corp., 911 F. Supp. 2d 1164, 1178 (D. Kan. 2012) citing Freightquotr.com, Inc. v. Hartford Cas. Ins. Co. 397 F. 3d, 888, 896 (10th Cir. 2005)

[7] Tria Beauty, Inc. v. National Fire Ins. Co., 2014 U.S. Dist. LEXIS 71499 *14 (N.D. Cal. May 20, 2013)

[8] JAR Laboratories LLC v. Great Am. E & S Ins. Co., 945 F. Sump. 2d. 937, 944 (N.D. I’ll. 2013)

[9] Hartford Ins Co. v. Swift Distribution Inc., 59 Cal 4th 277, 294, 297 (2014)

[10] Unwired Solutions, Inc v. Ohio Sec. Ins. Co, 247 F. Supp. 3d 705, 709 (D. Md. 2017)

[11] BeneCard Services LLC, v. Allied World Specialty Ins. Co., 2020 U.S. Dist. LEXIS 94747 (D.N.J. May 31, 2020), affirmed BeneCard Services LLC, v. Allied World Specialty Ins. Co., 2021 U.S. App. LEXIS 26978 (3rd. Cir. N.J. Sept. 8, 2021).

[12] Id. at *16

[13] Id. at *38-39 citing Albion Eng’g Co. v. Hartford Fire Ins. Co., 779 Fed. Appx. 85, 88 (3rd Cir. N.J. July 10, 2019) (""Under New Jersey law, elements of a trade libel or product disparagement claim are (1) publication; (2) with malice; (3) of false allegations concerning another's property, product, or business; and (4) special—i.e., pecuniary—damages.")

[14] Swift Distributions, at 284, (“We hold that a claim of disparagement requires a plaintiff to show a false or misleading statement that (1) specifically refers to the plaintiff's product or business and (2) clearly derogates that product or business. Each requirement must be satisfied by express mention or by clear implication.”)

[15] Albion, Petition for Rehearing, July 24, 2018, No. 18-1756, at 1 (“Not so. Even if New Jersey law requires fact allegations of direct disparagement to establish potential coverage (a contested issue) that element is satisfied as Newborn alleged that Albion allegedly disparaged it and its products, in the Joint Final Pretrial Order (“JFPTO”), which pursuant to F.R.Civ.P. 16(e), “supersedes the pleadings.” Petree v. Victor Fluid Power, Inc., 831 F.2d 1191, 1194 (3rd Cir. (N.J.) 1987). See, Atlanta Pharma AG v. Teva Pharm. USA, Inc., No. 04-2355 (JLL) 2010 U.S. Dist. LEXIS 146151, at *20 (D.N.J. July 15, 2010).”)