Why Evaluating Coverage for Intellectual Property Is Challenging
Why Evaluating Coverage for Intellectual Property Is Challenging
By David A. Gauntlett
Introduction
Courts analyzing CGL policies have wrestled with how to discern whether coverage under these policies may extend to IP claims. The vast majority of these cases address when coverage may be triggered under the CGL policy’s “personal and advertising injury” coverage. At the inception of that coverage in 1976, it was initially an add-on element to the standard form policy, offering coverage for the offenses of “piracy” and “unfair competition.” In 1986, the “personal and advertising injury” coverage was integrated into the policy as a whole. It included the offense “misappropriation of an advertising ideas or style of doing business.” In 1998, that offense was replaced by “use of another’s advertising ideas in your ‘advertisement’” with the term “advertisement” broadly defined.
All those offenses under the progressive CGL policies are notable for a common failure—they fail to use terms that have any clear or definable limits in contrast to traditional torts that have legally defined parameters established by case law. Thus, courts have had to assess the scope of these no-singular torts labeled offenses when analyzing what intellectual property torts be covered.
Because Policies Lack Clarity, Courts Have Reached Disparate Conclusions
Because facts, not labeled causes of action, control the duty to defend and are adjudged from the layman’s perspective, these features of the CGL policy have led to many inconsistent decisions as well as reversals upon further review of the prior court’s analysis, whether by appellate courts or subsequent decisions. Most insurance coverage disputes are litigated in federal courts because diversity jurisdiction typically arises in disputes between policyholders and out of state insurers. This means that federal courts (who typically do not address states law issues) are called upon to analyze insurance coverage.
The legal uncertainty flowing from these disparate factors led the Third Circuit in Frog, Switch & Manufacturing Co. v. Travelers Insurance Co., 193 F.3d 742, 744 (3rd Cir. 1999), to state that the definition of “advertising injury” in standard business insurance policies “has troubled and in some cases confounded courts for years . . . . With varying degrees of success, insured parties have sought coverage for the underlying actions of patent infringement, trademark or trade dress infringement, misappropriation of trade secrets or other confidential information, and actions alleging harm to consumers rather than competitors.”
Citing Advance Watch Co., Ltd. v Kemper National Insurance Co., 99 F.3d 795 (6th Cir. 1996), the Frog, Switch court observed that Advance Watch “held, specifically, that trademark infringement was not covered by the standard policy because there was no specific reference to trademark infringement.”[1] Advance Watch, therefore, stood for the proposition that “where an insurance policy identifies specific language-based torts, unmentioned product-based violations cannot be thought reasonably to be within the same category.”[2] The court elected not to follow Advance Watch, observing that it “ha[d] been sharply criticized for ignoring the real contours of intellectual property litigation, which often proceeds under a bewildering variety of different labels covering the same material facts.”[3]
The court stated that “[t]here is much controversy in the case law concerning when an ‘advertising injury’ is ‘caused’ by advertising within the meaning of standard business insurance policies” and concluded that the correct approach is to consider whether “the advertising did in fact contribute materially to the injury.”[4] A plethora of court decisions subsequently questioned various assumptions underlying Frog, Switch’s analytic approach to causation. For example, California courts endorsed the view that “[c]overage . . . is triggered by the offense, not the injury or damage which a plaintiff suffers.”[5]
Policyholders’ Rights Are Often Broader Than Insurers Admit
Policyholders are best served by requiring that insurers articulate any rights they reserve regarding their duty to indemnify policyholders in a reservation of rights letter. Policyholders must secure a clear reservation of rights letter before they can challenge an insurer’s claims to control the defense. Otherwise, the policyholder will lose its right to choose its own defense attorney. This right is valuable in IP litigation as few appointed attorneys have the expertise, background, training, and legal experience to take on such cases.
Absent allocation provisions, an insurer is obligated to not only defend the entire suit but also pay a settlement based on exposure for liability under any potentially covered claim even though other duplicative liability assertions fall outside the scope of coverage.
Much of coverage law is yet to be developed in this area so the absence of a settled standard on any particular issue should not preclude policyholders from pursuing claims that have yet to be litigated and could evidence potential insurance benefit recovery.[6]
Problematic IP Exclusions Are Increasingly Common
Some policies include exceptions to their IP exclusions. However, these exceptions are often virtually useless. For example, Hartford policies include an exception for copying “in your advertisement, a person’s or organization’s advertising idea or style of doing business. Unfortunately, the exception only applies if the excepted infringement is the only claim for relief. “It is clear by the Hartford’s policy language that if the lawsuit alleges any other theory of infringement—such as infringement caused by the policyholder’s sales, distribution, manufacturing, or other activities unrelated to its advertisements—then the Advertising Exception of the IP Exclusion does not apply.”[7] Because few asserted claims for relief are premised solely on copyright infringement “in your advertisement,” the exception provides negligible value.
Similarly, insurers often include policy endorsements that over-complicate coverage for “personal and advertising injury.” These endorsements effectively eliminate all coverage for intellectual property claims. Policyholders must pay close attention to what coverage is being eliminated by ambiguous or self-contradictory endorsements as insurers often fail to advise their policyholder of what diminution in coverage that is otherwise available.
Policyholders Must Aggressively Pursue Coverage
Policyholders faced with an insurer denial often presume that the insurer who drafted the policy may know best what it means. However, the meaning insurers attribute to policy language rarely embraces a generous or legally compelling construction of their policy language. So policyholders must assert all possible views of the coverage available as they need only offer one reasonable construction of the policy language to compel its adoption.[8]
Policyholders should not be cowed because the facts supporting coverage are not set forth in the Complaint when this “extrinsic evidence” is known to the policyholder. It is critical, however, that policyholders provide this evidence at the earliest possible opportunity,[9] and in no event should they wait until after the underlying action has concluded as such delay risks losing all policy benefits.[10]
Conclusion
Because the standard insurance policy language related to intellectual property lacks clarity, judicial interpretations have varied considerably. This variation and fluidity leaves room for insurers to write denial letters that often appear convincing to the uninformed policyholders. However, because the duty to defend is premised on the mere potential for coverage, such denials are often mistaken or even potentially in violation of the duty of good faith and fair dealing. Policyholders must aggressively pursue coverage in spite of an initial denial to be sure they reap the full benefits they have paid for under the policy.
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[1] Frog, Switch, 193 F.3d at 747.
[2] Id.
[3] Id.
[4] Id. at 750, n.8.
[5] Atl. Mut. Ins. Co. v. J. Lamb, 100 Cal. App. 4th 1017, 1032 (2002).
[6] See David A. Gauntlett. Do Not Accept No for an Answer If Insurers Deny Coverage for IP Claims. www.gauntlettlaw.com. Apr.14, 2022.
[7] Spandex House, Inc. v. Hartford Fire Ins. Co., 407 F. Supp. 3d 242, 253 (S.D.N.Y 2019) (aff’d on other grounds, Spandex House, Inc. v. Hartford Fire Ins. Co., 816 Fed. App’x 611 (2nd Cir. (N.Y.) 2020)).
[8] MacKinnon v. St. Paul Fire & Marine Ins. Co. 31 Cal. 4th 635, 655 (2003) (“[W]e are not required, in deciding the case at bar, to select one ‘correct’ interpretation from the variety of suggested readings.”)
[9] Basalite Concrete Products, LLC v. Nat’l Union Fire Ins. Co of Pittsburgh, PA, 2013 U.S. Dist. LEXIS 70597, *25 (E.D. Cal. May 16, 2013) (“[P]laintiff’s tender of extrinsic material after the conclusion of the lawsuit did not trigger a duty to defend.”)
[10] High Point Design, LLC v. LM Ins. Corp., 911 F.3d 89, 98 (2nd Cir. (N.Y.) 2018) (“‘[T]he insurer [must] provide a defense when it has actual knowledge of facts establishing a reasonable possibility of coverage.’”) (Applying New York law which applies a “known facts” not “available facts” rule like California regarding the use of extrinsic evidence.)