A standard provision in Commercial General Liability (“CGL”) policies provides coverage for “[o]ral or written publication, in any manner, of material that . . . disparages a person’s or organization’s goods, products or services.” A growing number of states have embraced the doctrine of “implicit” (or “implied”) disparagement where inferences from statements about the quality of one’s own products imply negative comparative statements about a rival’s products. This blog examines the most prominent cases addressing the issue in the five most populous states.

A Second Circuit panel including Judges Pierre Leval, Sarah Merriam, and Maria Kahn affirmed the district court’s denial of potential coverage in Tzumi Innovations, LLC v. Twin City Fire Ins. Co. Their Summary Order adopted District Judge Abrams’ conclusion that “‘there is no possible factual or legal basis on which’ Twin City would be obligated to defend Tzumi under the ‘personal and advertising injury’ provision of the policy.” Neither court analyzed whether claims under California Civil Code § 1770(a)(8) evidenced implicit disparagement by Tzumi of its competitors’ products so as to require a defense under offense “d” of the policy’s “personal and advertising injury” coverage.

In Tzumi Elecs. LLC v. Burlington Ins. Co., the Southern District of New York court concluded that all potentially covered claims arose out of the explicitly pled patent infringement causes of action in the underlying complaint. Not so. That conclusion was unsupported by analysis explaining how the injury flowing from allegations of disparagement (the asserted basis for coverage) necessarily arose from the patent infringement. This decision inappropriately elevates the labels the plaintiff attached to the cause of action over the actual facts alleged. Further, it fails to account for the “potential for amendment” doctrine that has been accepted under New York law as well as inferences arising from the asserted fact allegations in light of the claimants’ potential intent to avoid triggering potential coverage.

A recent Southern District of California decision ignored several critical pieces of California coverage law, including the impact of extrinsic evidence on an insurer’s duty to defend. In Aram Logistics v. United States Liability Insurance Co., the court refused to acknowledge allegations falling within potential coverage of an insurance policy because they were part of deposition testimony from the underlying action. Judge Huff’s assertions in her decision are like those advanced by adherents of the “Earth is flat” theory.

The Federal Trade Commission (“FTC”) recently made headlines by filing an antitrust lawsuit against Amazon in the U.S. District Court for the Western District of Washington. The complaint describes a number of allegedly illegal practices, including Amazon’s practice of prioritizing “Sponsored Brand” and “Sponsored Product” search results. Injury to consumers and competitors is alleged to flow from Amazon’s selective alteration of search results to make room for these “Sponsored” spots at the top. These allegations in particular could easily spawn civil actions filed by consumers and competitors who claim injuries from these practices. These potential plaintiffs can expedite settlement by careful pleading that facilitates coverage under a Commercial General Liability (“CGL”) insurance policy that insures Amazon for its “use of another’s advertising idea in [its] ‘advertisement’.”

This year, effected entities must make their first filings under the Corporate Transparency Act (“CTA”). Enacted in 2021, the CTA’s purpose is curtail illicit activity such as tax fraud, money laundering, and financing for terrorism by forcing disclosure of additional ownership information for certain U.S. businesses operating in or accessing the country's market. Under the new legislation, qualifying businesses must submit a Beneficial Ownership Information (BOI) Report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network. The BOI reports must provide details identifying individuals who are associated with the reporting company. Several articles have already been written discussing compliance requirements. In this blog, we wanted to discuss a different angle—how will the CTA impact diversity jurisdiction?

A recent Southern District of New York decision deviates from New York coverage law principles. Therein, the court decided that recitals in a Settlement Agreement which the insurer evaluated and concluded did not trigger a defense before the settlement was consummated did not clarify whether the underlying action implicated potential coverage. This continues a problematic trend in New York federal court decisions that have interpreted an insurer’s duty to defend more narrowly than their state counterparts, which the federal courts are bound to follow. 

Currently, eleven states (and the District of Columbia) still adhere to the draconian “eight corners” analysis for the duty to defend. Under this policy, a court can only consider the policy language and the pleadings of the underlying case to determine whether the insurer’s duty is triggered. The modern trend, embraced by the remaining jurisdictions, is to consider additional “extrinsic evidence” in making the determination. Those states are split, however, in whether the duty is determined by facts known to the insurer or facts available to the insurer. The distinction being that the former requires the policyholder to proactively notify the insurer of any facts that implicate the duty to defend before the insurer’s obligations are activated. The burden is on the policyholder to supply the insurer with the information, even if the relevant facts are publicly available.

The New Year starts off with a long awaited decision by a New York Federal Magistrate Judge which implicitly concluded that New York’s construction of the “conducted against liability” doctrine was limited to the “mirror image” cross-complaints in the same pending action. In so concluding, the court necessarily rejected the strategically defensive legal action such as the pending ITC action while the Federal Court Action asserting trade dress claims was stayed. The court failed to conduct the requisite choice of law analysis which would have recognized that under New York choice of law rules, California coverage law applied and a defense of the ITC action was compelled.

For our final blog of 2023, we wanted to look back at some of the prominent coverage cases and discuss emerging trends in insurance litigation.

“Slander of Title” is a commonly added cause of action in lawsuits addressing disputes over real property. Historically, such claims have had a limited intersection with insurance coverage. The principle exception is where the targeted defendant procured a Title Insurance policy providing directly applicable coverage. A recent decision by the Ninth Circuit analyzing potential coverage under an Errors & Omissions (“E&O”) Management Liability policy, however, has finally acknowledged the potential for coverage under more general policies. The decision’s rationale allows policyholders to reap policy benefits from both a Commercial General Liability (CGL”) policy as well as a Title Insurance policy if both are implicated by the fact dispute.

Whether government investigations by the Securities Exchange Commission (“SEC”), Department of Justice (“DOJ”), another federal or state entity, or unanticipated drops in Company stock value precipitate shareholder litigation, securing the best possible insurance coverage to address the asserted claims is critical. The entity then evaluates whether actionable conduct has arisen that allows a government agency to pursue a claim. Such investigations create significant potential exposure for policyholders in investigation costs. Additionally, in responding to government subpoenas or demands for information, even before the start of an investigation, policyholders often expend significant amounts of time and money securing the information required. Luckily, reimbursement may be attained through a policyholder’s “Directors and Officers (“D&O”), Errors & Omissions (“E&O”), or Commercial General Liability (“CGL”) policy.

Patent infringement litigation fees constantly escalate. According to a 2023 American Intellectual Property Law Association (“AIPLA”) survey, the median cost of litigating a patent lawsuit through trial ranges from $600k when the amount in controversy is less than $1M to $3.625M when the amount is over $25M. Patent holders have secured significant settlements and judgments premised on reasonable royalty awards. These recoveries have led patent litigation entities such as Burford to finance this litigation. Cross-licensing of patents also factors into resolutions of these lawsuits. Companies that do not have a significant patent portfolio cannot exchange licensing rights with competitors to resolve infringement disputes. Therefore, the inability to afford costly patent litigation may cause the abandonment of key market advantages that are central to the company’s strategy.

A growing trend in insurance denials (and subsequent litigation) is arguing that policies should be interpreted in a manner belied by the actual language. This runs contrary to governing law, which actually allows policyholders to attack restrictive interpretations by demonstrating that alternative language would have readily achieved the insurer’s preferred reading. A policyholder’s burden is not to promote the most reasonable interpretation. A court must accept any reasonable construction promoted by the policyholder.

A typical trademark suit will assert various causes of action with names familiar to the average person, including the well-known trademark “infringement.” Unfortunately for policyholders, these claims are typically excluded by a policy’s IP exclusion. Though less known, trademark “dilution” is also common and can often be leveraged to attain coverage for the entire suit. This path to coverage is rarely recognized by insurance claims handlers, leading to a quick denial. Luckily, experienced coverage counsel can explain that mistake and secure coverage despite an initial denial.

Policyholders and even general counsel often overlook the potential for coverage by only considering the causes of action in a Complaint. In truth, it is the factual allegations that govern, not the labeled causes of action. And in many jurisdictions, the original form of a Complaint is only the starting point, as insurers must consider the potential for clarifying amendments that would nudge the allegations of a poorly drafted Complaint to within the scope of potential coverage.

Standard Commercial General Liability (“CGL”) policies contain a “Voluntary Payments” clause, which states the insurer must not “voluntarily make a payment, assume any obligation, or incur any expense for damages [or] loss[.]” Courts have recognized that this language cannot be enforced literally as it is written. Litigation over these provisions typically focuses on the actions of the policyholder, but, interpreted broadly, these provisions could allow insurers to bypass state laws requiring prejudice for late notice. Furthermore, they may incentivize insurers to delay their decisions of whether to defend in the hope that the underlying lawsuit will resolve itself. Neither of these practices should be tolerated by the courts.

Despite their legal obligations to defend any claims with even a potential for coverage under a policy, insurers often fail to abide by that standard, looking for any excuse to deny a defense. Litigating to obtain policy benefits can take years in some cases, so the underlying action is often resolved before the battle for coverage comes to a close. When that underlying action is resolved via settlement, the denying insurer is obligated to reimburse the policyholder, even if the claim would not have met the standard for indemnity coverage. A number of cases in jurisdictions across the country have addressed this issue and reached the same conclusion.

Policyholders must be diligent in providing notice of potential claims to their insurers. Many policyholders, and even insurance brokers, make the mistake of assuming there will be no coverage for a particular matter and fail to do so. This is a mistake. Another mistake can be made by failing to provide notice according to the procedure required by the policy. Though ultimately resolved in favor of the policyholder, one Illinois case had to be litigated up to the state’s Supreme Court to secure coverage, all of which could have been avoided by providing notice according to the terms of the policy.

Many policyholders operate under a mistaken belief that a lawsuit filed prior to acquiring insurance can never be covered by that policy. Insurers would be quick to assure them they are correct in that assumption. The truth, however, is more nuanced. Insurance Services Office (“ISO”) Commercial General Liability (“CGL”) policies provide coverage for claims asserting continuous tortious conduct, and general principles of insurance law allow that coverage to extend even to claims where the conduct began before inception of an “occurrence” based policy.