ADVERTISING INJURY PROVISIONS IN LIABILITY INSURANCE POLICIES

IVAN HOFFMAN, B.A., J.D.


        Many parties such as publishers, web site owners and other parties have liability insurance policies that cover, among other provisions, liability of the insured for “advertising injuries.”  (read “Publisher’s Liability Insurance” and “Online Liability Insurance.”)  However, each policy is different and each business model is different and all parties should consult with their attorneys and insurance brokers about the particulars of each such policy and the applicability to the parties’ business.  Unfortunately, many parties do not discover the gaps in their coverage until too late.

        A case arising in the state courts of California illustrates this point.

        In We Do Graphics, Inc. vs. Mercury Casualty Company, these were the facts in the words of the Court:

On December 1, 2000, Mercury issued a 36-month business liability policy to WDG, a commercial printing business. The policy included coverage for advertising injury, among other provisions.

In June 2001, Stratacom Printed Communication Solutions, Inc., Adgraphics, and Stratacom’s owners, James Majewski and Thomas Majors (collectively Stratacom), filed suit against WDG and Alexander Jakovich. The complaint alleged causes of action against Mercury for misappropriation of trade secrets, violation of the Unfair Practices Act (Bus. & Prof. Code § 17200 et seq.), unfair competition, breach of fiduciary duty, interference with business relationships, conversion, and specific possession of personal property. [Note: it may be that the reference to “Mercury” in this paragraph may have been intended to be a reference to We Do Graphics, Inc.]

The Stratacom complaint alleged that Jakovich was once a shareholder in Adgraphics, who subsequently sold his stock to Majewski and Majors. Jakovich then worked for Stratacom until June 1, 2001. Pursuant to the agreement entered into when Jakovich became a Stratacom salesperson, upon his departure from the company, Jakovich was required to turn over a variety of company materials, including customer files. Both a subsequent amendment to this agreement and the stock purchase agreement included non-competition clauses, which prohibited Jakovich from working for Stratacom competitors for 24 months following the end of his employment and from the date of the stock purchase agreement. [For related issues, read “Inevitable Disclosure of Trade Secrets” and “The Non-Disclosure Agreement.”]

The plaintiffs in the underlying action further alleged that in June 2001, after receiving notice of Jakovich’s resignation, they discovered that various customer files and computer data were missing. They alleged that Jakovich had become an employee of WDG and solicited the business of Stratacom customers for WDG’s benefit.

WDG tendered its claim for defense to Mercury on June 15, 2001. On July 31, the parties in the underlying action stipulated to arbitration of the following claim: “Enforcement of non-competition provisions contained in [the] employment agreement of Al Jakovich as part of purchase of stock and good will of Adgraphics, formerly owned by Al Jakovich; in the alternative, claimants ask for an award of damages based on profits from sales made in violation of covenant not to compete; costs; attorneys fees.”

On October 19, 2001, Mercury denied coverage. On May 24, 2002, WDG and Jakovich prevailed against Stratacom in the arbitration proceeding. WDG subsequently sued Mercury for breach of contract, bad faith, and fraud. Mercury’s demurrer to the fraud cause of action was sustained, and Mercury then moved for summary judgment on the remaining claims. The court granted Mercury’s motion and this appeal followed.

        Thus the issue on appeal was whether the allegations of the complaint filed by Stratacom (see below) fell within the scope of the “advertising injury” provisions of the policy WDC had with Mercury.

The Decision

        The Court stated:

An insurer has a duty to defend a third party claim if there is a potential for coverage or if the insured has a reasonable expectation of coverage in light of the nature and kind of risks covered by the policy. (B & E Convalescent Center v. State Compensation Ins. Fund (1992) 8 Cal.App.4th 78, 92.) The duty to defend is broad, and the insured need only show the underlying lawsuit may fall within the policy’s coverage. (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 300 (hereafter Montrose).) Where the policy language clearly provides no basis for coverage, however, there is no duty to defend because there can be no reasonable expectation of a defense. (B & E Convalescent Center v. State Compensation Ins. Fund, supra, 8 Cal.App.4th. at p. 100.) [emphasis added]

The insurer’s duty to defend turns on the facts alleged by the underlying lawsuit. The facts may either be those alleged in the complaint, or available to the insurer from extrinsic sources. (Montrose, supra, 6 Cal.4th at p. 295; Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 276.) The duty to defend is not measured by hindsight, but turns “upon those facts known by the insurer at the inception of a third party lawsuit.” (Montrose, supra, 6 Cal.4th at p. 295.) If, at the time of tender, the allegations of the complaint together with extrinsic facts available to the insurer demonstrate no potential for coverage, the carrier may properly deny a defense.

 …

The policy states the insurance applies to “‘Advertising injury’ caused by an offense committed in the course of advertising your goods, products or services[.]”

Advertising injury is more fully defined elsewhere in the policy. “‘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.”

        The Court then analyzed the complaint filed in the litigation by Stratacom and concluded that the gist of the allegations was that Jakovich had taken trade secrets and used those trade secrets to the benefit of WDC contrary to the written agreement between Jakovich and Stratacom.  Again, the issue on appeal was whether the said allegations of the complaint fell within the scope of the “advertising injury” provisions of the policy WDC had with Mercury.

        The Court stated:

To trigger coverage under an advertising injury clause, the facts must demonstrate a causal connection between some form of advertising and the alleged injury. (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1275.) “[T]he term ‘advertising’ as used in CGL policies to mean widespread promotional activities usually directed to the public at large.” (Hameid v. National Fire Ins. of Hartford (2003) 31Cal.4th 16, 24, fn. omitted.)

WDG argues that it “routinely advertised its services and products . . . and called upon Jakovich to offer his input and comments on marketing and advertising strategies. The Stratacom complaint alleged that Jakovich removed numerous documents and information which it had compiled at great expense and which related to its advertising and marketing efforts (a potential misappropriation of advertising ideas or style of doing businesses), and that Jakovich then contacted a number of its customers and induced them to cancel their orders with Stratacom and place them with WDG (a potential libel or slander of Stratacom).”

First, we note that Jakovich’s alleged input into WDG’s “marketing and advertising strategies” is not alleged anywhere in the underlying complaint. The only evidence of such input was a declaration filed in opposition to summary judgment. Further, while the Stratacom complaint does allege that Stratacom spent money on advertising, it did not allege the trade secrets directly related to those efforts. The trade secrets allegedly taken were specific customer information, not advertising ideas. WDG’s claims that the underlying complaint states Jakovich had stolen “marketing techniques in advertising” is without foundation.

        The Court also found that there were no allegations in the complaint sufficient to warrant coverage under the “libel or slander” provisions of the policy.
Moreover, the complaint does not allege “libel or slander” in connection with the Jakovich’s customer solicitation, as no false statements of fact are alleged. “An insured may not trigger the duty to defend by speculating about extraneous ‘facts’
regarding potential liability or ways in which the third party claimant might amend its complaint at some future date.” (Gunderson v. Fire Ins. Exchange (1995) 37 Cal.App.4th 1106, 1114.) [emphasis added]
Simply put, the facts alleged in the underlying complaint relate to a defecting employee who allegedly stole trade secrets and attempted to solicit his former employer’s customers.  Nothing is alleged relating to any advertising activity by WDG.
Conclusion

        Parties are often under the very mistaken belief that there is a “one size fits all” type of insurance.  As indicated, that belief is quite erroneous.  Parties should consult with their attorneys and insurance brokers about the specifics of the parties’ business and appropriate insurance should be sought that covers the said business.

Copyright © 2005 Ivan Hoffman.  All Rights Reserved.

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This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation.

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