NO ADVERTISING INJURY EXCLUSIONS IN COMMERCIAL GENERAL LIABILITY
POLICIES BAR COVERAGE FOR INTELLECTUAL PROPERTY LAWSUITS
David A. Gauntlett
Gauntlett & Associates, Irvine, California
I. INTRODUCTION
Insurers frequently rely upon "advertising injury" exclusions in the 1986 ISO Commercial
General Liability ("CGL") form to deny coverage. The exclusions to 1986 form policy
provide:
This insurance does not apply to:
. . .
(a) advertising injury:
(1) arising out of oral or written publication of material if done by or at the direction of the
insured with knowledge of its falsity;
(2) arising out of oral or written publication of material if the first publication took place
before the beginning of the policy.
The "advertising injury" exclusions should not bar coverage for intellectual property claims
for three distinct reasons:
First, the "advertising injury" exclusions are inherently limited to acts which require a
specific state of mind (knowledge of the falsity of published material) or are self-contained
singular acts where the offense is complete at the moment of its commission (publication
prior to the policy's inception). Intellectual property infringement is a continuous tort that
does not depend on proof of the publication of a specific piece of material.
Second, the contextual analysis of the exclusionary analysis of language supports its
limitation to reputation torts and privacy violations, which establish liability based on a
singular act of publication.
Third, the drafting history of the exclusionary language supports its limitation to the
reputation torts and privacy violations, as that was the clear limitation of the scope of the
prior "advertising injury" exclusion. The drafters expressly stated in their explanation of
changes in coverage introduced by the new policy language in 1986 which evidenced that only
the new policy language was to be simplified with no change in scope. The insurer's
expansive interpretation of the exclusion's scope is contrary to the drafter's express and
articulated intent.
II. MOST INTELLECTUAL PROPERTY CASES DO NOT INVOLVE CONDUCT
WHICH COULD BE FACTUALLY BARRED BY THE ADVERTISING INJURY
EXCLUSIONS
Intellectual property torts are continuous torts. Each new act of alleged infringement
provides an independent basis for liability and therefore triggers an independent duty to
defend.
The "advertising injury" exclusions, such as the "first publication" and/or "knowledge of
falsity" exclusions, have no application to continuing torts such as unfair competition, trade
secret misappropriation or Lanham Act violations. Courts have defined a continuous tort to
"involve wrongful conduct that is repeated until desisted, and [that] each day creates a
separate cause of action."(1) Other courts analyzing this issue have similarly held, as a matter
of law, that each "new advertisement" creates a separate basis for liability.(2) Injuries arising
out of the offense committed during the policy period establish liability that triggers
coverage. The referenced exclusions cannot bar coverage for intellectual property torts as
distinct acts which support the imposition of liability, as well as an award of damages
necessarily occur following the inception of coverage, independently provide a basis for
coverage even if similar but distinct acts precede the policy's inception.
Under the Lanham Act, advertising (itself) is actionable conduct that gives rise to liability for
lost profits, as well as offering for sale and distribution.(3) Even if the policy language requires
that there be a relationship between the advertising activity and the covered offense, the
injury need only arise out of the offense. For example, customer confusion over the similarity
of a product that injures a competitor will establish coverage so long as the offense (i.e.,
unfair competition or trade dress) occurs in the course of the insured's advertising activities.
This will often be the case.(4)
In Two Pesos, Inc. v. Gulf Insurance Company, 901 S.W.2d 495 (Tex.Ct.App. 1995), a Texas
Court of Appeals addressed the issue of whether a claim for trade dress infringement, which
admittedly began prior to the policy period, constitutes an offense occurring during the policy
period. The Court ruled that trade dress infringement was a continuing tort. It noted that
the tort gives rise to a claim for relief as long as the infringement persists, and determined
there to be no coverage due to the fact that the complaint seeking damages was based on
infringement already found by a jury and not on a new cause of action.
A well-reasoned decision by a District Court in Michigan similarly stated why these
exclusions have no application to intellectual property torts. In Irons Home Builders, Inc. v.
Auto-Owners Insurance Company, 839 F.Supp. 1260 (E.D.Mich. 1993), the District Court
held that a liability exclusion for injury arising out of oral or written publication of material
first published before the policy period only applied to libel, slander and invasion of privacy,
and not to ongoing torts such as copyright infringement claims. The insurer, relying on the
exclusion, refused to defend or indemnify plaintiff, claiming coverage was expressly excluded
because the first instance of copyright infringement occurred before the policy covering such
conduct had become effective.
The Court, in analyzing this issue, appropriately recognized that:
There is no exclusionary provision that limits coverage where one of several instances of
copyright infringement occurred before the effective date of the policy. Each instance of
copying of plans and each instance where copies of plans are used to construct a home
constitute an infringement of copyright.(5)
Adopting this rationale, the Court held in favor of the plaintiff, concluding that the first
publication exclusion was inapplicable to subsequent instances of infringement occurring
during the policy period.
Recently, in Dogloo, Inc. v Northern Insurance Company of New York, 907 F.Supp. 1383
(C.D.Cal. 1995), the Central District Court of California held that a "first publication"
exclusion did not operate to negate trade mark or trade name infringement claims. The
Court addressed the issue of whether Dogloo's extensive advertising campaign, expendingover $3,000,000 over the past five years, conclusively established that the exclusion
precluded coverage. The Court, finding the exclusion inapplicable to both the trade mark and
trade name infringement claims, concluded that "based on the record before it, the Court
[could not] say that any advertising published prior to the policy period caused the type of
injury alleged in [the] Counterclaim." Id. Thus, "where the application of an exclusion is
only a possibility, the duty to defend continues."(6)
In Curtis-Universal, Inc. v. Sheboygan Emergency Medical Services, Inc., 43 F.3d 1119, 63
USLW 2416 (7th Cir. 1994), reh'g denied (Jan. 12, 1995), an ambulance service business
known as "Orange Cross" appealed from the District Court's ruling that the insurer owed no
duty to assume the defense of plaintiff against claims of federal antitrust and state tort law
violations. The Appellate Court, engaging in a detailed analysis, focused on whether the
plaintiff's dissemination of false information constituting "unfair competition" was not
covered under the policy due to the application of the "knowledge of falsity"exclusion
incorporated in the Commercial General Liability Policy provided by the Insurer. The
"falsity exclusion" specifically precluded coverage when the advertising injury arises out of
the "publication or utterance of defamatory or disparaging material concerning any person
or organization or goods, products or services . . . made by or at the direction of the insured
with knowledge of the falsity thereof." The Court determined that the falsity exclusion was
inapplicable to the tort of "unfair competition" because plaintiffs did not allege or would not
have to prove that the dissemination of false information was made knowingly, as required by
the exclusion. Whereupon the Court reversed the decision of the lower court, finding
coverage under the policy, and that the insurer was in breach of its duty to defend.
In Monumental Life Ins. Co. v. United States Fidelity and Guaranty Co., et. al., 94 Md.App.
505, 617 A.2d 1163 (Md.Ct.App. 1993), the Maryland Court of Appeals addressed the issue
whether intentional torts such as defamation and unfair competition can be committed
without intending to cause harmful results. The Appellate Court found no coverage due to
the undisputed fact that the defamatory statement by the insureds was made with knowledge
of its falsity. The court suggested that "knowledge of falsity" was akin to acting with an
intent to cause harm. However, while that analogy may well apply when analyzing
intentional acts of defamation, it does not apply to analysis of intellectual property torts
which, unlike defamation, do not assess liability based on whether statements in any
publication are true or false. Id. at 1177.
III. CONTEXTUAL ANALYSIS OF THE "ADVERTISING INJURY" EXCLUSIONS
LIMITS THEIR AMBIT TO THE REPUTATION AND PRIVACY INVASION TORTS
In Irons Home Builders, the District Court in its coverage analysis looked not only at the
exclusion provision referencing "oral or written publication of material," but also to the
context in which the policy provisions pertaining to advertising injury involving libel, slander
and invasion of privacy arose. The Court noted that "[the first publication exclusion] mimics
the provisions of the policy that relate to advertising injury involving libel, slander and
invasion of privacy." Id. at 1264. "The clear implication is that the exclusion provision
relied upon by Auto-Owners merely limits coverage for advertising injury that arises from
those three particular torts." Id. Determining the exclusionary language to be duplicative to
that of the advertising injury provision, the Court held that the only "reasonable construction
of the provision [is] that it only applies to libel, slander, and invasion of privacy, not to
copyright infringement." Id. at 1265.
Courts have recognized that the "knowledge of falsity" exclusion found in many Commercial
General Liability Policies by their own terms and drafting history are limited to claims of
defamation and invasion of privacy torts. Therefore, any attempt by the insurer to expand
the application of the exclusionary provisions to include ongoing intellectual property torts,
such as trade dress and copyright infringement, is generically unavailable to these types of
cases.
The Federal District Court of Ohio, in Winningham v. Sexton, 820 F.Supp. 338 at 343
(S.D.Ohio W.D. 1993), recognized that "in ambiguous insurance contracts, courts have
established two methods of analysis: (1) interpret the contract against the drafting party --
the insurance company -- see Blohm v. Cincinnati Ins. Co., 39 Ohio St. 3d 63, 64 529 N.E.2d
433, 434 (1988); and (2) attempt to ascertain the intent of the parties to the insurance
contract by looking to extrinsic evidence." Furthermore, "if the language is ambiguous,
courts can then resort to extrinsic evidence to arrive at the parties intentions. By resorting
to extrinsic evidence, the courts are still attempting to enforce the agreement the parties
intended to enter." Id. at 345. It is well-established that exclusions are to be narrowly
interpreted against the insurer draftsman.(7) Additionally, "where the terms of an insurance
contract are susceptible to two reasonable constructions, that interpretation which will
sustain coverage for the insured will be adopted." Irons Home Builders v. Auto-Owners Ins.
Co., 839 F.Supp. 1260, 1265 (E.D.Mich. 1993) citing Poole v Travelers Ins. Co., 130 Fla.
806, 179 So. 138 (1937).
IV. THE DRAFTING HISTORY OF THE "ADVERTISING INJURY" EXCLUSION
SUPPORTS LIMITING THEIR AMBIT TO THE REPUTATION TORTS ND INVASION
OF PRIVACY
Many courts have permitted reference to drafting history to aid in interpreting ambiguous
contractual provisions of Commercial General Liability Policies.(8) As the California Supreme
Court recently articulated in Montrose Chemical Corp. of California v. Admiral Ins. Co., 10
Cal.App.4th 645, 42 Cal.Rptr.2d 324, 896 P.2d 807 (1995) (The drafting history of policy
forms adopted by ISO has been accepted as evidence of the proper meaning which may be
ascribed to the policy provisions by a growing number of jurisdictions). No court to date has
considered the drafting history of the advertising injury language an issue under either the
1976 ISO or 1986 ISO policies in analyzing the scope of coverage.
Here, that drafting history is compelling. The 1976 Explanatory Memorandum to the Broad
Form Comprehensive General Liability Endorsement provides in pertinent part:
The Endorsement was developed based on an expression of need from producer organizations as well as various insurance companies for a standardized form. . . . We believe that the coverage afforded under this Endorsement is the broadest package of coverage available to the average insured.
. . .
2. Personal Injury and Advertising Injury Liability Coverage . . . Advertising injury
covers the insured for various types of injuries such as piracy, unfair competition,
infringement of copyright, etc., arising out of the insured's advertising, promotional or
publicity activities."
The scope of coverage under the 1986 ISO Broad Form Endorsement flows forward to that
available in 1986 for the advertising injury offense of "misappropriation of advertising ideas
or style of doing business" which replaced the earlier offenses of "piracy" and "unfair
competition." Pursuant to the "ISO GENERAL LIABILITY POLICY REVISION
HIGHLIGHTS OF CURRENT AND REVISED CONTRACTS" Section 11, Personal and
Advertising Injury:
Current "Occurrence" Policy: Coverage Provided in Broad Form Endorsement.
New "Occurrence" Policy: Coverage in basic policy, simplified but no change in scope.
Coverage triggered, as in current policy, by offense
committed during policy period.
Commercial General Liability Endorsement: Limited Coverage for discrimination or
humiliation has been added. "Contractual,"
"personal injury" liability added.
The pertinent exclusions to advertising injury under the 1976 ISO form were expressly
limited in scope to reputation torts and privacy violations:
(3) Personal Injury or Advertising arising out of a publication or utterance of libel or slander,
or a publication or utterance in violation of an individual's right of privacy, if the first
injurious publication or utterance of the same or similar material by or on behalf of the
named insured was made prior to the effective date of this insurance;
(4) Personal Injury or Advertising Injury arising out of libel or slander or the publication or
utterance of defamatory or disparaging materials concerning any person or organization
or goods, products or services, or in violation of an individual's right of privacy, made by
or at the direction of the insured with knowledge of the falsity thereof.
Compare those 1976 "advertising injury" exclusions with those in effect for 1986. They
provide:
This insurance does not apply to:
(a) Advertising injury:
(1) arising out of oral or written publication of material if done by or at the direction of the
insured with knowledge of its falsity;
(2) arising out of oral or written publication of material if the first publication took place
before the beginning of the policy.
The revision of the policy evidences no intent to change the scope of coverage. Notably, the
exclusions which employs each of the predicate words "oral or written publication of
material" are limited to the invasion of privacy and loss of reputation torts. The "oral or
written publication of material" predicate language does not qualify the policy's express
"advertising injury" coverage for the offenses of "misappropriation of advertising ideas or
style of doing business" and "infringement of copyright, title or slogan." The drafting
history, as well as the contextual analysis of the policy language supports a finding that
onlythose offenses that are preceded by the "oral or written publication of material"
language are subject to the first publication exclusion. This interpretation is bolstered by the
fact that these torts by their motion involve singular discrete acts that are complete at the
time of their commissions rather than continuing torts as is the case with intellectual property
violations. As such, they replicate the predicate element previously required in the
exclusions under the 1976 policy. The reference in the drafting history to the fact that the
new policy language is simply "simplified in scope" and involves "no scope in change of
coverage" is consistent with this reading of these exclusions to limit their ambit to the
reputation and privacy violation torts.
1. 2. 3. 4. 5. 6. 7. 8.
The IAS Court did not abuse its discretion in supervising disclosure by directing the primary
rating, statistical and drafting organization for general liability insurance industry in the U.S.,
whose primary function was to draft standard-form comprehensive general liability insurance
policy language, for the industry, to comply, in part, with a subpoena seeking the
organizations' drafting and policy interpretative documents, where such documents were
material and necessary to issues of insurance policy construction raised in pending action
against 42 insurance companies to enforce standard-form liability policies. Id. at 223).
©1996 American Bar Association. All Rights Reserved.