United States: "Fuzzy" Fact Allegations In Business Tort Lawsuits Make For Challenging Coverage

In a corporate insured’s perfect world, plaintiffs suing the corporation would file well pled complaints with clear and articulate fact allegations and express causes of action would be accurately and succinctly laid out. Commercial General Liability ("CGL") policies would clearly articulate the specific types of torts or offenses covered by the "advertising injury" and "personal injury" portions of the policy, determining coverage for suits against the corporation would be a simple matter of comparing the factual allegations and causes of action asserted by the plaintiff against the provisions of the CGL policy. Unfortunately, most plaintiffs refuse (wittingly or not) to do the corporate defendant the favor of pleading with an eye on facilitating the corporation’s efforts to obtain coverage for their suit. In fact, often times a suit with an underlying factual basis that would clearly be within standard CGL coverage appears to be uncovered because the plaintiff has failed to state causes of action which match CGL offenses and/or has incompletely, inaccurately or incoherently plead the factual basis for their claims (the "fuzzy facts" scenario)

Because "advertising injury" and "personal injury" coverage is triggered by the factual allegations of a suit and not by the actual causes of action asserted, a plaintiff’s failure to plead a particular cause of action does not always create a significant barrier to obtaining coverage. Where the fact allegations of a complaint are clear, and the character of tort claims are evident, policy language covering "advertising injury" / "personal injury" offenses, even though vague and ambiguous, can be analyzed with relative ease.

However, this task is greatly complicated when the character of the tort claims are unclear, especially where a variety of potential theories of liability are hidden or nested within a given set of allegations. Indeed, absent well-labeled causes of action, the coverage potential of these claims can be mysterious. Of course this is one mystery that many insurers would prefer remained unsolved and cases of this type often allow insurers to readily deny coverage by claiming there are no allegations that fall within the scope of their coverage.

Coverage counsel who also litigate the same underlying tort claims asserted against an insured can explain the essential distinctions necessary to evaluate and explain to insurers the coverage potential hidden in such claims. This article will focus on when facts may create coverage within enumerated "advertising injury"/"personal injury" offenses even though the identified causes of action do not appear to trigger a defense.

The "advertising injury" offense of "oral or written publication of material that disparage the goods, products, or services", ("disparagement") is one of a series of enumerated offenses which protect an insured against liability for certain acts which "occur in the course of" its advertising activities. Significantly, courts interpreting this offense have defined the word "disparaging" as "to lower in rank in estimation by actions or words" and "[A] statement about a competitor’s goods which is untrue or misleading and is made to influence the public not to buy." ¹

At first blush, a claim for interference with prospective economic advantage seems to bear little relation to the "disparagement" offense. However, the type of factual allegations inherent in these claims are often sufficient to trigger coverage under a variety of standard advertising injury/personal injury offenses including "disparagement", "libel", "slander", or various forms of "unfair competition". Yet without focus on how these assertions create liability and the relationship between that liability and the quest for coverage, the insurer’s defense duty will remain unfilled.

As noted above, interference with contract claims are particularly susceptible hiding allegations which may trigger coverage. As a Minnesota District Court stated²:

A clear example of this was provided by another case decided by the District Court of Minnesota³. In that case Waycrosse had been sued by the Life Point Corporation for, inter alia, interference with business relations and interference with contract. In support of these claims, Life Point alleged that Waycrosse entered into a confidentiality agreement with Life Point regarding proprietary and trade secret information concerning a radio device. Life Point anticipated entering into a license agreement with Waycrosse. But when the license agreement fell through, Waycrosse allegedly wrongfully made and marketed radio devices developed from the proprietary and confidential information. Life Point further alleged that Waycrosse made fraudulent misrepresentations about "the Device and the technology related to the Device."

Life Point did not bring a claim for "disparagement" nor did it specifically allege that Waycrosse even mentioned Life Point or its Device to Life Point’s customers and potential customers. However, because the court found that this was at "least one possible" reading of the allegations it declared that coverage was proper under the policy’s "disparagement" offense.

Similarly, the Western District of New York, applying Illinois law,⁴ found that the underlying complaint alleged disparagement under both "personal injury" and "advertising injury" of the applicable policies. The underlying complaint alleged that the defendant, Laserage, misrepresented the mutual or potential customers of the plaintiff, Zsanbosky, that certain patents (which were, in fact, owned by Zsanbosky) were infringed and that customers act at their own risk in purchasing products form Zsanbosky. The court held: "It seems obvious to this Court that wrongfully asserting that a competitor's product infringes patents clearly defames the competitor and disparages his product." Id.

The commonly used "advertising injury" offense of "misappropriation of advertising ideas or style of doing business" has also been problematic for insurers. Because neither the insurers nor The Insurance Services Office ("ISO"), the drafter of the "misappropriation of advertising ideas or style of doing business" policy language, used policy terms limited to known categories of risks (i.e., expressly understood and defined intellectual property or business torts), ⁵ the offense is subject to more than one interpretation. Despite insurer protests, this language cannot reasonably be limited to the taking of an idea for an advertisement; rather, the taking may be of the subject matter of that which is advertised (i.e., ideas causing advertising, or ideas for advertising). Both formulations are semantically permissible.⁶

In a recent Federal Court Decision from the Northern District of Illinois,⁷ the court stated, "This court agrees that the language is susceptible of more than one reasonable interpretation." Thus, the same tortious conduct nested within a claim for interference with prospective economic advantage may also trigger liability under the above referenced "misappropriation offense."

Indeed, at least four distinct and equally plausible definitions arise:

1. "The insured wrongfully took an idea of about the solicitation of business."⁸
2. If misappropriation means "a taking," "advertising idea" includes "an idea for calling public attention to a product or business, especially by proclaiming desirable qualities so as to increase sales." ⁹
3. "An idea about advertising, including the idea of proclaiming a revolutionary new design as an enticement to customers."¹⁰

Courts applying a "common sense interpretation" have found that a duty to defend begins at the outset of litigation rather than when the evidence is actually tendered to the insurers.¹¹ In jurisdictions where the "complaint allegations rule" apply (i.e. Connecticut, Florida, Nevada and Texas) only the allegations of the complaint and the insurance policy may be considered, "as an amended pleading supersedes and supplants all previous pleadings." ¹² Because the most recent complaint relates back and supersedes the original complaint, when it clearly articulates a covered cause of action, the insurer’s duty to defend is triggered by the original pleading as amended. A similar analysis is available in states that do not apply the "complaint allegations" rule based on a similar logic.¹³

There is, of course, a danger that in some cases especially where a "complaint allegations" rule is applied, excessive information may divest a case of insurance coverage which would have otherwise been available. ¹⁴

These cases evidence the importance of: (1) prompt tender; (2) tender of sufficient facts either those set forth in the complaint or included with the initial tender which trigger a defense duty; and (3) following up and providing additional information which clarifies the scope of the pleadings in a way that supports coverage by providing appropriate declarations, motions, deposition testimony as well as amended pleadings, and pre-trial conference orders which support a defense determination.

1 Bank West v. Fidelity & Deposit Co. of M.D., 63 F.3d 974, 979 (10^th Cir. 1995) (quoting Webster New Int’l Dictionary of the English Language 750 (2^nd ed. 1959).

2 Comsat Corp. v. St. Paul, 1998 U.S. Dist. LEXIS 2916, *9 & *15 (D. Minn. March 16, 1998)

3 Home Ins. Co. v. Waycrosse, Inc., 990 F. Supp. 720 (D. Minn. 1996), aff’d, 131 F.3d 143 (8^th Cir. 1997)

4 Amerisure Ins. Co. v. Laserage Tech Corp., 2 F. Supp. 2d 296, 304 (W.D.N.Y. 1998)

5 Sentex, 93 F.3d at 580 ("This policy’s language, given its ordinary meaning, does not limit itself to the misappropriation of an actual advertising test. It is concerned with ‘ideas,’ a broader term.").

6 See Ross v. Briggs & Morgan, 540 N.W.2d 843, 848 (Minn. 1995) ("From the plain language of the provision, a duty to defend may be established if there is a semantic connection between the policy’s enumerated offenses and the claims made in the underlying case and if the offense arose in the course of advertising activity.").

7 Winklevoss Consultants, Inc. v. Federal Ins. Co., 991 F. Supp.2d 1030,1037 (N.D. Ill. 1998)

8 Winklevoss II, 991 F. Supp. at 1038 (Thus, . . . some causes of action for unfair competition, trade secrets, or misappropriation may be covered by the standard policy.)

9 The Frog Switch, supra at 748-50

10 The Frog Switch, supra at 749

11 See United States Fid. & Guar. Co. v. Wilkin Insulation Co., 193 Ill. App. 3d 1087, 1094, 550 N.E. 2d 1032, 1036 (1^st Dist. 1989), aff’d, 144 Ill.2d 64, 578 N.E.2d 926 (Ill. 1991)

12 Johnson v. Coca Cola Co., 727 S.W.2d 756, 758 (Tex. Ct. App.-Dallas 1987)

14 Associated Aviation Underwriters, Inc. v. Vegas Jet L.L.C., 106 F. Supp. 2d 1051 (D. Nev. 2000)