Liability Insurance Coverage: Basic Principles - Part Two
Liability Insurance Coverage: Basic Principles - Part Two

There are certain core principles that must be applied in analyzing coverage under a liability insurance policy.

This two-part article sets out those principles. It also explores some counter-intuitive situations in which such coverage may come into play.

Examples of Coverage in Counter-Intuitive Situations

  • Patent infringement
  • Business and IP disputes
  • Cyber-related risks
  • Trade dress claims
  • Unfair competition claims

Patent Infringement

  • See, e.g., com International, Inc. vs. American Dynasty Surplus Lines Ins. Co., 120 Wash. App. 610 (2004) (patent infringement covered under “misappropriation of advertising ideas” offense where infringed software itself constituted or embodied advertising technique); Hyundai vs. National Union Fire Ins. Co., 600 F. 3d 1092 (9th Cir. 2010) (coverage for infringement of business method patent arising out of Hyundai’s “build your own vehicle” feature on its website); Dish Network Corporation v. Arch Specialty Ins. Co., 659 F. 3d 1010 (10th Cir. 2011) (coverage for patent infringement where the patent involved a customer service telephone system that allowed customers to perform pay-per-view ordering and customer service over the phone).

Business and IP Disputes

  • Acacia Research Corp. v. National Union Fire Insurance Co. of Pittsburgh, PA, 2008 WL 4179206 (C.D. Cal. Feb. 8, 2008) (D&O carrier obligated to reimburse company and its officer for defense fees and settlement paid in IP theft/trade secrets case).
  • American Century Services Corp. v. American International Specialty Lines Insurance Co., 2002 WL 1879947 (S.D.N.Y. August 14, 2002) (patent infringement claims were potentially within D&O coverage provision applicable to “wrongful acts”).
  • MedAssets, Inc. v. Federal Ins. Co., 705 F. Supp. 2d 1368 (N.D. Ga. 2010) (claim alleging misappropriation of confidential information was covered under D&O policy despite presence of “intellectual property” exclusion).

Cyber-Related Risks

  • Although new insurance products have been developed which are specifically tailored for cyber-risk claims, some such claims may be covered under traditional insurance policies.
  • See, e.g., Retail Ventures, Inc. v. National Union Fire Insurance Company of Pittsburg, PA, 691 F. 3d 821 (6th Cir. 2012) (insurance provided reimbursement to company for remediation expenses where company was victimized by computer hackers who stole private customer and credit card information); Creative Hospitality Ventures, Inc. v. United States Liability Ins. Co., 655 F. Supp. 2d 1316 (SD Fla. 2009) (violation of right of privacy, and hence “personal and advertising injury” coverage, under CGL policy triggered where vendor failed to redact customer credit card information from receipts).
  • Although this is a minority position, some cases also hold that data loss caused by a computer virus may be covered under business interruption or other first-party property policies.
  • See, e.g., Southeast Mental Health Center, Inc. vs. Pacific Insurance Company, Ltd., 439 F. Supp. 831 (WD Tenn. 2006); Lambrecht and Associates vs. State Farm Lloyds, 119 S.W. 3d 16 (Tex. App. 2003).

Defense of Data Breach Class Action

  • Travelers Indem. Co. v. Portal Healthcare Solutions, LLC, 2016 WL 1399517 (4th Cir. 2016)
  • The Fourth Circuit ruled that Travelers Insurance must defend a medical records company in a class action suit stemming from a data breach which resulted in the disclosure of its customers’ personal health information. The Court held that availability on the internet to the general public qualified as a “publication” within the meaning of the general liability policy. Thus, making any document or information available on the internet may constitute a “publication” for insurance purposes, where “publication” is a trigger for coverage. 
  • But note that most courts hold that the “publication” requirement is satisfied only if the “publication” is made by the insured. See Evanston Ins. Co. vs. Gene by Gene, Ltd., 155 F.Supp.3d 706 (S.D. Tex. 2016). Thus, claims against a company whose personal data was disseminated by a third-party hacker would not be covered. See Innovak Inter’l vs. Hanover Ins., 280 F.Supp.3d 1340 (M.D.Fla. 2017).

Cyber-Security Claims and D&O Exposure

  • In December of 2016, a plaintiff shareholder filed a new shareholder derivative lawsuit against the board of Wendy’s arising from a data breach:
    • “…the arrival of the Wendy’s lawsuit is a reminder that it is far too early to conclude that we don’t need to be worried about the possibility of cybersecurity-related D&O litigation. The reality is that the plaintiffs’ lawyers are still trying to find the right approach (or perhaps to find a case with just the right facts).  The plaintiffs’ bar is creative and entrepreneurial and they have significant incentives to try to find a way to capitalize on the chronic cybersecurity risks and exposures that companies face.  The plaintiffs’ lawyers will continue to experiment, and for that reason alone we are going to see further cybersecurity-related D&O lawsuits.”
    • La Croix, D&O Diary blog, January 3, 2017

Trade Dress Claims

  • Recognizing that a product’s design or appearance may inherently also constitute a form of “advertising,” several courts have held that trade dress inherently constitutes “advertising” within the meaning of a CGL policy.
  • See Paul Fire and Marine Ins. Co., v. Advanced Interventional Systems, 824 F. Supp. 583, 585 (E.D. Va. 1993), affirmed 21 F. 3d 424 (4th Cir. 1994) (holding that trade dress infringement “expresses essentially the same concept” as the term “style of doing business”); Poof Toy Products Inc. v. U.S. Fid. & Guar. Co., 891 F. Supp. 1228, 1232 (E.D. Mich. 1995) (trade dress infringement constitutes “advertising injury” under the advertising injury “offense” or “misappropriation of advertising ideas or style of doing business”); Peerless Lighting Corp. v. American Motorists Ins. Co., 82 Cal. App. 4th 995, 1000, fn 4 (2000) (“infringement of trade dress arguably qualifies as ‘[m]isappropriation of advertising ideas or style of doing business.’”)

Unfair Competition and “Disparagement”

  • One of the key “offenses” under a CGL policy’s Coverage B “is an oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.” (emphasis added)
  • As shown below, the concept of “disparagement” as used in this “offense” has been applied by courts to find coverage in connection with a variety of business claims.

False Advertising and Unfair Competition Cases

  • Several recent cases have found that “disparagement”, which is a triggering “offense” in many CGL policies, may be implied for insurance coverage purposes where, for example, a vendor claims that it was the “only producer” of a certain software product (piphany, Inc. v. St. Paul Fire & Marine Ins. Co., 590 F. Supp. 2d 1244 (N.D. Cal 2008)) or where it claims that its products are “more effective” or “superior” to those made by others (Knoll Pharmaceutical Co. v. Automobile Ins. Co. of Hartford, 152 F. Supp. 2d 1026, 1036 (N.D. III. 2001)).
  • More recently, a federal court applying California law determined that there was “disparagement” and hence insurance coverage where a complaint alleged that the insured had “implied to the marketplace” that it had a superior right to use a certain trademark and thus by implication represented that the underlying plaintiff did not have the rights to that trademark. Burgett, Inc. v. American Zurich Insurance Company, 2011 U.S. Dist. LEXIS 135449 (E.D. Cal. 2011).
  • These cases support a finding for coverage in false advertising or unfair competition cases, even where the underlying policy does not specifically identify these claims as covered “offenses”.

The California Supreme Court Decision In Hartford Casualty v. Swift Distribution, 59 Cal. 4th 277 (2014)

But in 2014 the California Supreme Court significantly limited the doctrine of “implied disparagement” in the insurance coverage context:

  • “In evaluating whether a claim of disparagement has been alleged, courts have required that defendant’s false or misleading statement have a degree of specificity that distinguishes direct criticism of a competitor’s product or business from other statements extolling the virtues or superiority of the defendant’s product or business…[This] involves two distinct … requirements. A false and misleading statement (1) must specifically refer to the plaintiff’s product or business, and (2) must clearly derogate that product or business”. Id. at 291.
  • Thus, an insured’s attempt to copy or infringe on the intellectual property of another’s product does not, without more, constitute disparagement. at 296.

Key Take-Aways and Best Practices

  • There are opportunities to find coverage for lawsuits arising out of business, IP and other risks under traditional insurance policies, such as CGL, D&O and E&O.
  • Report claims immediately under all potentially pertinent policies. Be aware that there may be a reportable “claim” even if it has not ripened into an actual lawsuit. In addition, “circumstances” that do not yet constitute a “claim” may also be required to be reported.
  • Do not accept a declination of coverage, but instead hold your carriers to their statutory duties to investigate, respond, defend, settle and indemnify.
  • Consider the newer, non-traditional insurance products for IP infringement and cyber-liability to fill gaps in coverage left by traditional products.

This is Part Two of a two-part series by Peter Selvin, Partner and Chair of ECJ’s Insurance Coverage and Recovery Department. Click here to read part one. 

Disclaimer: The views and opinions expressed in this presentation are not necessarily the views of Ervin Cohen & Jessup LLP or any of its clients. © 2020 Ervin Cohen & Jessup LLP

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