In this age of electronic communication, the expense of defending litigation involving internet activities, particularly those involving cross-border issues, can be alarming. As a result, although most Canadian CGL policies provide "Advertising Injury" coverage, either as part of the insuring agreement or by way of endorsement, many insurers consciously do not extend such coverage to businesses engaged in publishing, broadcasting or advertising production, including website hosting.
Typically, advertising injury coverage is provided for specified offences arising out of the insured’s advertising conduct. These are enumerated either within the insuring agreement or within the very definition of "advertising injury", and include defamation, violation of right of privacy, piracy, unfair competition or infringement of copyrights, titles or slogans. In order to obtain coverage, however, all of the following must be established in connection with the underlying action:
- The insured was engaged in an enumerated offence;
- The insured was engaged in advertising activity at the time of the offence;
- There is some causal connection between the alleged injury and the insured’s advertising activities; and
- No advertising injury exclusion applies.
Until recently, Canadian jurisprudence on advertising injury coverage was limited. In most cases, courts have focused on whether the conduct referenced in the underlying litigation constitutes "advertising". A recurring difficulty has been the fact that the term "advertising" is undefined in Canadian policy forms. In the absence of definitions, Canadian courts have elected to take a "broad, common sense approach".
One of the early and more surprising decisions is Grayson v. Wellington. In this case, the British Columbia Court of Appeal determined that a direct causal connection between the alleged injury and the insured’s advertising was not required. The court concluded there need only be a nexus of more than an incidental or fortuitous nature between the advertisement and the injury. In other words, it was not necessary for the insured to show that injury was the direct result of advertising activity. This differs from the dominant position in the United States where most courts require a direct causal connection between the injury and the advertising.
One year later, in Reform Party of Canada v. Western Union Insurance Co., the British Columbia Court of Appeal gave further consideration to the concept of "advertising activities"; this time in the context of the duty to defend under a CGL policy. The insured, a political party, allegedly defamed a senator in an article posted on a web site created by the party under the heading "Senate Scandals". The insured was not clearly identified as the sponsor of the site, nor did the article refer to the party’s policy in favour of an elected senate. Rather, the article consisted entirely of negative comments about several senators. There was, however, a link to the article from the party’s senate reform web page. On this basis, the court concluded that the article was arguably a part of the insured’s promotion of its senate reform policy, and, as such, constituted "advertising activities". Still, this conclusion did not mean that the "Senate Scandals" webpage would necessarily come within coverage or that the insurer had a duty to defend, as the claim could still be excluded from coverage as "comparative advertising". The Court of Appeal noted that the comparative advertising exclusion could be viewed as a fair attempt by the insurer to limit its exposure to risk. However, it also recognized that the exclusion could be read to render the advertising injury coverage illusory for the insured and thus, a windfall for the insurer. The court reasoned in this regard that it would be difficult to imagine political advertising without some form of comparison between political adversaries.
Ultimately, the Court of Appeal found in favour of coverage for the insured by liberally construing the term "advertising". It concluded that it was at least arguable that the website was "promotional" as the site was designed to "sell the idea of elected Senators". As such, it could not be characterized as simply "informational".
In keeping with this broad approach to defining "advertising", Canadian courts have also been willing to view narrowly targeted marketing actions as advertising activity. For example, in the very recent case of PrairieFyre Software Inc. v. St. Paul Fire and Marine Insurance, the insured was alleged to have engaged in copyright infringement. It sought coverage from the insurer arguing, among other things, that the copyright infringement took place in the course of advertising. While the insured contended that copyrighted material was set out in advertising sent to customers, the insurer argued that the material was informational in scope and did not constitute "advertising". The lower court sided with the insured on the advertising issue as product was brought to the attention of customers. However, coverage did not follow as it was still held to be precluded by a "breach of contract" exclusion. The Ontario Court of Appeal upheld the outcome, but on different grounds. While it accepted that advertising activity might have occurred, it concluded that the claim failed to allege a direct causal link between the activity, a listed offence or the resulting injuries.
The most recent Canadian decision dealing with these issues was rendered by the Ontario Court of Appeal in the case of Halifax Insurance Co. of Canada v. Innopex Ltd. The appeal and cross-appeal originated from a summary judgment motion in which the lower court determined that the insurer did not owe a duty to defend the insured in a U.S. intellectual property action. The underlying action by Gucci arose from trademark infringement and related claims as a result of the insured’s sale and distribution of watches bearing copies of the Gucci trademark without authorization. At issue was a policy provision providing coverage for "advertising liability", but excluding coverage for "infringement of trademark, service mark or trade name, other than titles or slogans.
In the first instance, the lower court reviewed the pleadings in the underlying action and received evidence from both parties on the issue of whether the sale at issue involved advertising and/or use of a trademark or title. Counsel for the insurer introduced evidence of the activities, including evidence about the insured’s marketing and sales, to argue that the activity was not advertising and, therefore, not covered. On the basis of this evidence, the lower court concluded that the activities of the insured (i) were not advertising, (ii) triggered the exclusion for infringement of a trademark, and (iii) did not fall into the excepted activity of "infringement of title".
On appeal, the Ontario Court of Appeal was critical of the approach taken by the lower court. In short, by making an enquiry into the underlying facts and activities of  I.L.R. 1-3516.
the insured, the lower court failed to address the fundamental question of whether the insurer had a duty to defend on the basis of the pleadings alone, read with the relevant provisions of the insurance policy. A foray into whether the insured had, in fact, engaged in alleged conduct, was outside of the scope of enquiry on an interlocutory "duty to defend" application. By examining the so-called "true facts", rather than looking only at the pleadings and the policy, the lower court erroneously based its decision on extrinsic evidence.
Having reached the above conclusion, the court went on to hold that, on the pleadings and the policy alone, there was a duty to defend the Gucci complaint. It found that the facts as pleaded came within the coverage because portions of the pleadings referred to false descriptions and false representation in the marketing, distribution, and sale of goods that left the "inference" of offences during the course of advertising. Therefore, at least as respects the interim defence duty, the claim fell within the coverage.
The Reform Party, PrairieFyre, and Innopex decisions are consistent with the basic principle that coverage grants are to be interpreted in a broad and inclusive manner. Applying this theory, courts have held that (i) a wide range of activities can fall within the definition of "advertising", (ii) the form is not limited to the marketing of goods or services, and (iii) communication need not be broadly disseminated to constitute "advertising". As a sidebar result, they have confirmed that the general principle that the defence duty under liability policies is to be determined strictly through reference to the pleadings and policy.
In an age when internet communication and advertising are blurring international borders, insurers must recognize that where their policies do not contain express definitions, courts will, at least in Canada, take a broad, liberal and ultimately "pro-insured" approach in construing such insurance concepts as "advertising injury".
1.  I.L.R. 1-3516.
2.  B.C.J. No. 2794 (S.C.); revd (2001) 153 B.C.A.C. 48.
3.  O.J. No. 3116 (QL) S.C.), affd  O.J. No. 2555 (QL) (C.A.).
4.  O.J. No. 4178.
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