March 30, 2018 Articles

Don’t Let Insurance Companies’ Intellectual Property Exclusions Stop Notice to an Insurer of an Intellectual Property Lawsuit

Ultimately, policyholders should canvas insurance markets with the assistance of a knowledgeable insurance broker for policies that offer the best coverage available against IP claims

by David A. Gauntlett

While some insurers have aggressively focused on intellectual property exposure for a number of years (such as St. Paul, subsequently Travelers, which launched an intellectual property exclusion in 1990), the Insurance Services Office (ISO) did not adopt any form of intellectual property exclusion until 2001.                                                                                             

As the form of insurance coverage typically offered by insurers under CGL policies is “occurrence” based—i.e., dependent on when the alleged wrongful act occurred, rather than when a claim (including lawsuits) were pursued against an insured— the insurance industry’s delay in crafting an intellectual property exclusion meant that policies in effect prior to the adoption of that exclusion had to respond to a range of intellectual property lawsuits.

In some forums, such as Canada, earlier policy forms without intellectual property exclusions continue to be available to policyholders.

Why the Statute of Limitations for Asserted Tort Claims May Not Limit the Insurer’s Duty to Defend

Whether intellectual property claims potentially fall within coverage where the dates of the wrongful acts are not alleged and the exhibits to the complaint do not reveal that information either, the insurer’s duty to defend arises unless the underlying complaint “can by no conceivable theory raise a single issue which could bring it within the policy coverage.” Hudson Ins. Co. v. Colony Ins. Co., No EDVC 07-01497-SGL (Opx), 2008 U.S. Dist. LEXIS 10668, at *1-2 (C.D. Cal. Dec. 16, 2008), aff’d, 624 F.3d 1264 (9th Cir. 2010). In other words, the insurer is relieved on its duty to defend “[o]nly if it is clear that [the allegations did not fall within the policy period.]” Jaco Envtl., Inc. v. Am. Int’l Specialty Lines Ins. Co., No. 2:09-cv-0145 JLR, 2009 US Dist. LEXIS 51785 at *15 (W.D. Wash. May 19, 2009) (applying California law).

The statute of limitations will not bar potential coverage where a claimant alleges it is not a bar to recovery. An insurer is obligated to show up, appoint, or, where independent counsel rights arise, pay for reimbursement of defense fees incurred by the insurer’s chosen counsel—not simply make an argument about the merits of the claim against its insured, which in turn would allow it to avoid paying anything for the lawsuit. A denial of coverage on this basis is not well taken. The statute of limitations is not an absolute bar because in appropriate cases a defendant (insured) may be estopped from raising the defense. Because of this potential for coverage, the insurer must defend the action. Garriott Crop Dusting Co. v. Sup. Ct. (Southern Ins. Co.) 221 CA3d 783, 796 (1990).

The 2001 IP Exclusion Does Not Eliminate All Coverage for IP Lawsuits

Given the shorter statute of limitations of many intellectual property torts—three years for copyright and trademark infringement, and four years for patent infringement, and most forms of unfair competition (absent proof of a right to delay the inception of the intellectual property exclusion)—insurers could argue that no coverage arises due to its presence.

When a claim falls solely within a policy’s intellectual property exclusion, insurers may escape liability for the claim. That is, except for one key point: The form of intellectual property exclusion adopted in 2001 is not an absolute intellectual property exclusion. It expressly excepts claims for “infringement of copyright, trade dress or slogan in your ‘advertisement.’” With the latter term “advertisement” broadly defined to include “notice to a . . . selected market segment about your products,” significant insurer exposure for such claims still exists.

New Policy Forms That Look to Eliminate IP Coverage Exposure Coverage

Undoubtedly concerned about this exposure, Liberty Mutual issued an endorsement that redefined “personal and advertising injury” coverage in offense (g) to only include coverage for “infringement of copyright or slogan in your ‘advertisement,’” sub silento, eliminating potential coverage for infringement of trade dress. [Form CG 90 41 01 13, ©2012] But is such a redefinition, which does not call express attention to express coverage for “infringement of . . . trade dress in your ‘advertisement,’” enforceable? At least one recent decision questions the enforceability of such an exclusion secured by redefinition without any express notice to the insured of a reduction in coverage.

While Liberty Mutual leaves in place some “advertising injury” coverage—that for “infringement of copyright or slogan”—it does not contemporaneously advise policyholders of what coverage has been eliminated. This failure to notify of a reduction in coverage is itself distinct grounds for challenging the efficacy of the exclusion achieved by surreptitious redefinition. As the redefinition is often included in a replacement policy upon renewal, it runs afoul of the rule in Lexington Ins. Co. v. Devaney, No. 93-16284, 1995 U.S. App. LEXIS 4976, at *2 (9th Cir. Mar. 9, 1995). Therein it noted, “unless the notice of the reduction in coverage is ‘conspicuous, plain and clear,’ the ‘insurance company is bound by a greater coverage in an earlier policy when a renewal policy is issued.’”) (citing Allstate Ins. Co. v. Fibus, 855 F.2d 660, 663 (9th Cir. 1988)). Thus, following Fibus’s logic as applied to the facts of this scenario, a court may conclude that potential coverage for “infringement of copyright, trade dress or slogan in your ‘[advertisement]’, the prior ISO language, still applies. Such an approach is consistent with the view that notice of an exclusion be “conspicuous, plain and clear.” Steven v. Fid. & Cas. Co., 58 Cal. 2d 862, 878 (1962). Here, Liberty does not highlight the diminution in otherwise available coverage purportedly accomplished by its redefinition of offense (g). It thus fails to satisfy the requirement that “any such limitation [on coverage] must be placed and printed [in the policy] so that it will attract the readers’ attention.” Haynes v. Farmers Ins. Exch., 32 Cal. 4th 1198, 1204 (2004).

In a subsequent policy form issued in 2004, ISO acknowledged that coverage for “use of another’s advertising idea in your ‘advertisement’” did not fall within the scope of the intellectual property exclusion and the reference therein to “other ‘intellectual property’ disputes” did not encompass the subject matter of that broad offense. ISO similarly acknowledged—as many courts have determined—that claims for defamation, disparagement, or invasion of privacy, also do not fall within the scope of the intellectual property exclusion.

Even more problematic, CNA issued an endorsement that redefined it coverage for “personal injury and advertising injury” to eliminate coverage for offense (d)-(g). Encompassed with these (d)-(g) offenses are (f) and (g), which expressly cover conduct which must occur “in your ‘advertisement.’” This renders them the sole offenses that extend coverage to “advertising injury” with the policy’s expressly declared coverage for “personal and advertising injury.” Offense (f) covers “use of another’s advertising idea in your ‘advertisement’” and (g) is “infringing another’s copyright, title, or slogan in your advertisement.” [Form SB-300092-A (Ed. 01/06)]

As Princeton Express & Surplus Ins. Co. v. DM Ventures USA LLC, 209 F. Supp. 3d 1252, 1258 (S.D. Fla. 2016) concluded, “Under Florida law, insurance coverage is illusory when policy provisions, limitations, or exclusions completely contradict the insuring provisions.” A redefinition that eliminated offenses (d)-(g), leaving only coverage for (a)-(c) was deemed to be objectionable because “[t]he Exclusion does not carve out a particular type of advertising injury — such as those that violate a statute as in Interline Brands — but, instead, excludes all advertising injury.” Id. at 1260.

While Intellectual Property Exclusions Are Problematic, Policyholders Should, at Minimum, Give Notice to Their Insurers

Federal court actions are public records, readily identifiable, and insurers will learn of them in any event upon renewal. So failing to give notice only benefits the insurer, not the insured. Several insurers, such as Hartford and Travelers, have sought to reverse the settled rule of policy construction that requires an insurer to defend all causes of action where any asserted claim for relief potentially falls within coverage even if one of those claims is expressly excluded from coverage. This is accomplished by policy language that provides that “[T]here is no coverage for ‘any other injury or damage that is alleged in any claim or suit which also alleges any such infringement or violation.’” S.B.C.C., Inc. v. St. Paul Fire & Marine Ins. Co., 186 Cal. App. 4th 383, 391 (2010). This policy language may clearly apprise an insured of a complaint’s inclusion of excluded conduct but it does not alert an insured to the dramatic elimination of what would otherwise be covered claims under the policy. It also does not inform insureds that their reasonable expectation, that one covered claim in an action with both covered and uncovered claims, would no longer compel defense of the entire lawsuit even though that result is contrary to the settled rule of law in every jurisdiction.

Policyholders should be wary of such restrictive forms of intellectual property exclusions offered by insurers such as Travelers, Hartford, Chubb, and Great American, as well as a plethora of others that do not extend coverage consistent with the ISO policy form. The latter form tends to be the broadest coverage to the average policyholder and should be preferred.

Media Liability Coverage Requires Prompt, Timely Notice

While media coverage available since the mid-1990s offers more robust coverage for intellectual property lawsuit than CGL policies, it is typically written on a claims made and reported basis. This requires that a demand for money or lawsuit be reported promptly. But many policyholders do not realize they have such coverage (it may be nested within directors and officers or cyber policies) or what kind of claims it may cover.

Knowing that a claim is potentially covered is the first step. No broker may be notified of a lawsuit if the policyholder is unaware that the asserted claim may trigger coverage. This problem is especially evident where claims for implicit disparagement and defamation are buried within asserted causes of action for interference or unfair competition, which policyholders may not realize are covered claims.

Ultimately, policyholders should canvas insurance markets with the assistance of a knowledgeable insurance broker for policies that offer the best coverage available against IP claims (with ISO CGL policies typically offer a preferred resource for the reasons noted). Policyholder need to keep their brokers apprised of all claims for damages relating to alleged IP violations and to notify all insurers of such claims. Waiting to see if the matter develops into a meaningful lawsuit can be problematic as pre-defense fees and “voluntary payments” to resolve a dispute are typically not recoverable from the insurer.

David A. Gauntlett is with Gaunlett & Associates, Irvine, California.

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