Advertising Injury Coverage Boundaries Examined
January, 2005
Two recent decisions have addressed the limits of advertising injury coverage under a general liability policy. In both cases, the courts delved into the specific language of the policy and determined that no coverage existed due to a lack of advertising and the absence of any allegation that the content of a message caused damage.
Advertising injury is covered under a general liability policy only if it is caused by an act of advertising, not an act of stealing a product.
Information Spectrum, Inc. v. The Hartford, 860 A.2d 926 (N.J. 2004).
Facts
In Information Spectrum, the insured entered into a software marketing agreement that provided the insured with the exclusive right to demonstrate, market and license Facstore's software system. The agreement contained confidentiality provisions designed to keep Facstore's proprietary information secret. Facstore had developed a working computer-assisted dispatch and records system beneficial to police departments. The relationship deteriorated due to loss of the insured's sales force. In its claims against the insured, Facstore asserted that the insured hired one of its programmers and sold a “knock-off” of the Facstore system to a police department. Facstore alleged that the insured misappropriated a computerized police reporting system developed by Facstore.
Facstore alleged that the insured infringed on its copyright, violated the Lanham Act (15 U.S.C. § 1125(a)), misappropriated trade secrets, and breached a marketing agreement. It also made claims based upon quantum meruit, fraud, tortious interference with contractual and prospective economic relationships, and intentional spoliation of evidence.
Information Spectrum tendered the matter to Hartford under an “advertising injury” clause within its CGL policy. The policy provided in part as follows:
1. “Advertising injury” means injury arising out of one or more of the following offenses:
a. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;
b. Oral or written publication of material that violates a person's right of privacy;
c. Misappropriation of advertising ideas or style of doing business; or
d. Infringement of copyright, title or slogan.
* * *1. Insuring Agreement.
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “personal injury” or “advertising injury” to which this coverage part applies. We will have the right and duty to defend any “suit” seeking those damages. We may at our discretion investigate any “occurrence” or offense and settlement any claim or “suit” that may result.
b. This insurance applies to:
(1)“Personal injury” caused by an offense arising out of your business, excluding advertising, publishing, broadcasting or telecasting done by or for you;
(2) “Advertising injury” caused by an offense committed in the course of advertising your goods, products or services; but only if the offense was committed in the “coverage territory” during the policy period. [emphasis added.]
* * *
Hartford denied the tender and asserted that the alleged offense did not occur in the course of advertising the insured's goods, products or services and was therefore not covered under the policy.
Analysis
The New Jersey court of appeals held that only the copyright infringement claim fell within the policy's enumerated offenses. It also concluded that because the allegations contained no assertion that any of the pleaded injuries, including the copyright infringement claim, were caused by any advertising by the insured, no obligation to defend was triggered.
The court of appeals also found that Facstore alleged a claim of “reverse passing off,” claiming that the insured “marketed, and continues to market, [Facstore's] computer assisted dispatch and reporting system by misrepresenting it as a product of [the insured's] sole design and development.” A “reverse passing off” claim does not constitute a misappropriation of an advertising idea or style of business. Instead, Facstore claimed that the insured used its own advertising ideas and style of business to profit from its misappropriation of the product created by Facstore. The allegations were that the insured took Facstore's product, not its advertising ideas.
The Supreme Court of New Jersey adopted the appellate court opinion in its entirety, finding that “Facstore never alleged that the insured advertised the offending product, let alone advertising engendered the injury.” Even if Facstore had alleged incidental marketing activities, that would not have brought the claim within the policy language for “advertising injury.” The harm alleged must have been “caused by” the advertising act itself and not by the underlying purloinment. In short, a causal connection must exist between the advertising and the injury and the injury must fall within one of the four categories defined by the policy.
Reverse passing off claims are not the types of offenses included within the advertising injury provisions of a general liability policy.
Learning Point:
In concluding that the alleged activity was not covered under the policy, the court was careful to note that the insured allegedly demonstrated its infringing product at the Police Hardware Exposition. The court of appeals assumed that this would constitute advertising under the policy, but this specific activity took place after the policy terminated. This point crystallizes the issue before the court in this case. That is, the policy provides coverage where there are allegations that the insured committed a specific act of advertising during the policy. The policy would only cover advertising “acts” that cause injury, not the act of stealing an idea or product.
American States Ins. Co. v. Capital Assocs. of Jackson County, Inc., 392 F.3d 939 (7th Cir. 2005).
Facts
In American States, the insured, Capital Associates, sent an unsolicited advertisement to the fax machine of J.C. Hauling Company. J.C. Hauling initiated a class action against Capital Associates under the Telephone Consumer Protection Act (“TCPA”). Capital Associates tendered its defense to American States. American States undertook the defense under a general liability policy and filed a declaratory judgment action.
Within the policy, “advertising injury” was defined as including “[o]ral or written publication of material that violates a person's right of privacy.” The policy excluded coverage for injury that was “expected or intended from the standpoint of the insured.”
Analysis
American States contended that sending an unsolicited advertisement by fax did not cause “advertising injury” and that if it did, the damages were “expected or intended from the standpoint of the insured.” The Seventh Circuit reviewed the meaning of the term “privacy” and whether the policy covered the seclusion interest affected by faxed ads. The court found that “privacy” has two connotations, secrecy and seclusion. Secrecy relates to private facts that a person want to keep to themselves. Seclusion relates to retaining peace and quiet and avoiding unwanted contact.
The court noted that most states hold that business entities lack a privacy interest. A business lacks interest in seclusion and is in fact “open for business” and welcomes profitable opportunities. The structure of the policy strongly implied that coverage was limited to secrecy interests, not seclusion interests. The TCPA condemns a particular means of communicating an advertisement. Advertising injury coverage deals with the information in advertising content. The court noted that this was the first federal appellate decision on this subject and held that “an advertising - injury clause of the kind in American State's policy does not cover the normal consequences of junk advertising faxes.”
The Seventh Circuit also held that the property damage clause within the policy did not provide coverage because senders anticipate the consequences of using up ink and paper in the recipients' fax machines. The intentional tort exception applies to the property damage coverage.
Consequently, American States was not required to provide a defense or indemnification to its insured.
Learning Point:
This case brings to mind Sophocles who, in 442 B.C., urged us not to kill the messenger later--attributed to Shakespeare in "Henry IV, Part II" (1598). Under this policy, it was the content of the message that determined whether coverage existed. The mode of communication was the basis of the claimants' action, not the content of the message. If an insured seeks coverage for using an actionable method of communicating their message, no coverage will be found. The analysis must look to what is said and the damage that flows from those statements, not how the message was delivered.
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