Advertising Injury: What’s An Advertisement?
January, 2011
Introduction
Coverage B of a typical CGL policy extends coverage to "advertising injury" which includes claims based on the use of another's advertising idea in the insured's "advertisement." An "advertisement" in turn may be defined as "a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters." (See ISO CGL Form no. CG 00 01 12 07.) Although not a matter of frequent litigation, the issue occasionally arises whether a notice about a product has been sufficiently disseminated to constitute an advertisement. This was one of the key issues in a recent case before the Illinois First District Appellate Court in Santa's Best Craft, LLC v. Zurich American Ins. Co., 2010 WL 5293369 (Ill. App. 1st Dist. Dec. 21, 2010). As a matter of first impression, the court there held that a liability insurer whose policy covered advertising injuries, had no duty to indemnify the insureds for settlement of a claim that the insureds improperly used the underlying claimant's trade slogan, where the insureds' use of the slogan was not widely published. The court also addressed issues relating to the insurer's reimbursement of the insured's defense costs.
Facts
The plaintiffs manufactured and wholesaled Christmas lights. In the fall of 2001, they produced a brand of lights called "Stay On," which they marketed and licensed in collaboration with Monogram Licensing, Inc., under the authority of General Electric. The license agreement required, among other things, that the plaintiffs defend and indemnify Monogram and General Electric from advertising infringement type claims, and that they acquire advertiser's liability insurance with Monogram and General Electric listed as additional insureds.
The plaintiffs marketed their products only to about 75 to 100 retailers. They did not use mailers or fliers, but rather invited the retailers to view products in the plaintiffs' showrooms. The retailers would make individual appointments to visit the showrooms. The plaintiffs would display products in the showrooms about 18 months before they would actually be placed on the market for sale. From the court's opinion, it is not clear whether any products were actually sold to retailers or the public prior to commencement of the underlying litigation.
In late 2002, JLJ, Inc. filed suit against the plaintiffs claiming that the Christmas lights bearing the "Stay On" label infringed JLJ's "Stay Lit" label and gave rise to various trademark-related violations. The plaintiffs tendered their defense to Zurich.
Zurich had issued two policies to the plaintiffs for the relevant time period. One was a CGL policy, and the other an umbrella policy, both providing coverage for, among other things, advertising injury. Zurich initially denied coverage, but later agreed to provide a defense under a reservation of rights, and due to the reservation, to pay the reasonable defense costs of counsel selected by the plaintiffs.
During the course of the underlying litigation itself, Zurich reimbursed the plaintiffs for half of the amount of their legal defense cost invoices, and agreed to reimburse the remaining amount, less adjustments, after its legal consultants completed their review of the reasonableness of the charges.
In early 2004, the plaintiffs brought the instant action against Zurich claiming that it breached its duty to defend because it failed to promptly and fully reimburse them the entire amount of defense costs. Following an evidentiary hearing the trial court determined that the plaintiffs sought reimbursement of over $4 million in fees and costs. The court found that only about $3.6 million constituted "reasonable" expenses.
Of that amount Zurich had already paid about $790,000, and another carrier about $1.2 million, leaving a balance of about $1.5 million. The court further determined, however, that of the $1.5 million balance, Monogram's defense costs, which the plaintiffs had paid, comprised about $1.2 million. It found that Zurich had no duty to defend Monogram, as indemnitee of the plaintiffs, and thus ordered Zurich to pay only about $271,000 additional fees and costs.
The plaintiffs ended up settling the JLJ lawsuit for $3.5 million, for which they sought additional reimbursement from Zurich. The trial court agreed with Zurich, however, that it had no duty to indemnify the plaintiffs under the terms of the Zurich policies, and thus no duty to pay the settlement. The plaintiffs brought this appeal, attacking the court's ruling both as to defense costs and indemnity.
Analysis
In an opinion by Justice Maureen E. Connors, the First District affirmed. The court first took up the plaintiffs' argument that Zurich, under Employers Insurance of Wausau v. Ehlco Liquidating Trust, 186 Ill. 2d 127 (1999), had a duty to pay all defense expenses immediately and in full, and because it did not, it was estopped from raising coverage defenses.
The First District disagreed, stating that the estoppel doctrine under Ehlco recognizes an estoppel against raising coverage defenses only when an insurer fails either to defend or to seek a declaratory judgment that no coverage exists. Here, because of a potential conflict of interests, Zurich appropriately agreed to pay the plaintiffs' reasonable defense costs. But the defense costs submitted by the plaintiffs were not entitled to be deemed per se reasonable.
By agreeing to pay half of the amount immediately, and reviewing the reasonableness of the remaining charges, Zurich did not withhold payment as a way of undermining the defense strategy. Rather, it objected to charges for which there was insufficient documentation, as the trial court itself ultimately found. It thus properly satisfied its duty to defend.
With respect to payment of the settlement, the plaintiffs initially argued that Zurich had breached its duty to settle. The court found, however, that that duty arises only where the insurer has control of the settlement negotiations and defense, which was not the case here. Rather, the plaintiffs' argument went to the duty to indemnify.
The court observed that where an insured settles the underlying lawsuit prior to verdict, it must demonstrate that it settled an otherwise covered loss in reasonable anticipation of liability. To make that determination, the court turned to the language of the policy itself.
The court noted that Zurich's CGL policy covered "advertising injury," and that it defined an "advertisement" as "a notice that is broadcast or published to the general public or specific market segments." Under dictionary definitions of "broadcast" and "publish" referenced by the court, those terms required a wide or general dissemination of information.
While the plaintiffs acknowledged that they did not advertise to the general public when they invited retailers to their showrooms, they nevertheless contended that their displays were directed to a "specific market segment" of the general public. Even so, said the court, the wide dissemination requirement remained.
Because of the absence of Illinois case law on point, the Appellate Court turned to what it described as "the case law of the few other jurisdictions that have interpreted this specific policy language." Based on that case law, the court concluded that the plaintiffs did not establish that their notice was sufficiently broadcast or published to satisfy the policy's definition of "advertisement."
The court reached the same conclusion with respect to the umbrella policy. Although it did not contain a definition of "advertisement," it did require an advertising injury, and the plaintiffs did not here establish that they engaged in any advertising activity. Zurich therefore had no obligation to reimburse the $3.5 million settlement.
With respect to Monogram's defense costs, the plaintiffs contended that that entity was an indemnitee to whom they owed a defense obligation which was covered by the Zurich policy. Even if that might be, said the court, Monogram's defense costs, once paid by the plaintiffs, were reimbursable by Zurich only as a form of indemnification, i.e., Monogram's defense costs were not payable as part of Zurich's duty to defend but only, if at all, as part of its duty to indemnify. Since Zurich had no duty to indemnify, as earlier found, the court concluded that Zurich had no duty to pay Monogram's defense costs.
The court therefore affirmed in favor of Zurich.
Learning Points
- An insurer's obligation to pay defense costs for independent counsel retained by an insured requires that the insurer pay only reasonable costs; without breaching any good faith obligations to the insured, the insurer may employ reasonable procedures for determining what is reasonable.
- Claims against an insured involving advertisement misuse or infringement may not give rise to advertising injury coverage if the insured has not widely disseminated the offending advertisement.
- Defense costs for an insured's indemnitee are likely to be reimbursable by the insurer, if at all, as part of the insurer's duty to indemnify rather than as part of its duty to defend.
Back to CM Report of Recent Decisions (2010v4) 2010 Volume 4 Table of Contents
