Ninth Circuit Addresses Overlooked Underlying Coverage Theory

In 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), now on appeal before the Ninth Circuit, the District Court determined the initial coverage requirements of offense “f” for “use of another’s advertising idea in your ‘advertisement’” were satisfied. The “Failure to Conform” exclusion, however, was then determined to negate that coverage. The opinion is problematic in that it acknowledged the potential for coverage under offense “g” for “infringing upon another’s . . . trade dress . . . in your ‘advertisement’,” but failed to explain why the “Failure to Conform” exclusion would apply to that coverage theory.  

This is a common failure of courts analyzing exclusions. In their haste to quickly resolve a case by finding an applicable exclusion, they overlook that coverage law requires them to first articulate the coverage theory to which the exclusion would apply. This was most famously stated in Waller v. Truck Ins. Exchange, Inc., 11 Cal. 4th 1, 16 (1995): “Before ‘even considering exclusions, a court must examine the coverage provisions to determine whether a claim falls within [the policy terms].’” Though no Hawai’i court has explicitly addressed whether the same principle applies under Hawai’i law, those courts routinely adopt coverage principles from California law. For example, the NHC court readily accepted the “all possible worlds” standard for exclusions first articulated in Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1039 (2002).  

The NHC court’s failure to address the potential trade dress coverage is problematic as that form of coverage is inherently incompatible with the “Failure to Conform” exclusion. The exclusion is aimed at the failure of goods to possess “quality” in the sense of general excellence, not “a quality” in the sense of a particular feature. Pennfield Oil Co. v. Am. Feed Indus. Ins. Co. Risk Retention Grp., Inc., No. 8:05CV315, 2007 U.S. Dist. LEXIS 21456, at 25 (D. Neb. Mar. 12, 2007) (“[T]he injuries excluded by the clause are limited to those caused by a claim that the company's product did not conform with its advertised quality or performance.”); DecisionOne Corp. v. ITT Hartford Ins. Group, 942 F. Supp. 1038, 1043 (E.D. Pa. 1996) (“[T]he exclusion for the failure of goods, products or services to conform with advertised quality or performance, is not applicable. STK was not claiming that Bell Atlantic's quality did not rise to the level advertised.”) Trade dress, by contrast, is explicitly defined as a non-functional part of the product that could not possibly affect performance in the manner required by the “Failure to Conform” exclusion. Star Mkts., Ltd. v. Texaco, Inc., Civil NO. 95-01018 BMK, 1996 U.S. Dist. LEXIS 22443, at 9–10 (D. Haw. Dec. 11, 1996) (“To prevail on a claim of trade dress infringement, Plaintiff must establish that its trade dress (1) is nonfunctional . . . .”)