Insurance Law Hawaii

Contrasting Expert Opinions Result in Denial of Cross Motions for Summary Judgment

    Given the opposing experts' contradictory reports, the court denied both the insured and insurer's motions for summary judgment regarding coverage for a pipe leak. Pronti v. Hanover Ins. Co., 2022 U.S. Dist. LEXIS 222306 (W.D. N. Y. Dec. 9, 2022).

    The insured had a swimming poll and spa, which functioned using a subsurface plumbing system, covered with concrete decking. A subsurface pipe began to leak, preventing the pool from properly functioning. The insureds gave notice under their homeowners' policy and contended that significant portions of the pool, spa, concrete decking and other landscaping had to be torn out to do repairs. The insurer retained an expert, Sarah G. Byer, a structural engineer, to investigate. The parties agreed that the pipe had a leak, but disputed if the location of the leak was specifically identified.

    The parties also disputed the cause of the leak. Byer found that the most likely cause was deterioration incurred over the pipe's lifetime based on the age of the plumbing system and Byer's personal observation of the pipe. Byer further stated that the physical qualities of flexible PVC piping made it susceptible to damage from chlorine and water over time. 

    The insureds retained Patrick Williams as their expert. He concluded that wear and tear was not the cause of the pipe leak. Williams based his conclusion on the purported typical lifespan of flexible PVC piping, his observation of the lack of discolouration or brittleness typical of deteriorated piping, and the lack of leaking water from other sections of the pipe system. Williams did not ultimately identify a specific cause of the pipe leak. 

    The insurer denied coverage based upon exclusions for wear and tear and water damage. Suit was filed and cross motions for summary judgment were presented. 

    The court found that both expert reports were admissible. Considering both expert reports in the light most favorable to the respective nonmoving parties, the court found that there was a genius dispute of material fact regarding the cause of the alleged damage. The expert reports came to opposing conclusions on what caused the pipe to leak. Therefore, the reports created a genuine dispute of fact precluding summary judgment. 

    There was also a genie dispute as to whether the policy covered the tear-out costs the insureds incurred when preparing their plumbing system. The policy stated that all "ensuing loss to property . . . not excluded or excepted in this policy is covered." The insures agreed that the resulting tear-out costs directly resulted from non-excluded losses, and therefore constituted an ensuing loss to "other structures" under the policy. The insurer argued that these damages were merely indirectly caused by the pipe leak, and all related to excluded loss under the policy. 

    There was a genuine dispute of material fact as to whether any exclusion applied, since there was conflicting evidence on what caused the pipe lea. Therefore, because the court could not determine whether any exclusions applied on summary judgment motions it could not determine whether the tear-out costs were covered under the ensuing loss provision.

    

No Entitlement to Reimbursement of Pre-Tender Fees

   The Federal District Court for the District of Hawaii determined that the insured was not entitled to pre-tender defense fees. The Hanover Ins. Co. v. Anova Food, LLC, 2016 U.S. Dist. LEXIS 38947 (D. Haw. March 24, 2016).

   Anova sold and marketed fish. It was insured under policies issued by Hanover that covered claims of "personal and advertising injury."  

   A patent infringement and false advertising case was filed against Anova in the District Court for the District of Hawaii.The underlying complaint alleged Anova falsely, misleadingly, and deceptively advertised, promoted, and sold fish. The allegations covered a period of time between 1999 and 2012, a portion of which time Anova was covered by the Hanover policies. 

   On October 12, 2012, nine months after the underlying lawsuit was filed, Anova requested that Hanover provide a defense. Hanover agreed to defend on December 4, 2012, but subject to a reservation of rights. Shortly thereafter, Anova retained the Zobrist law firm, a mainland firm, to represent it in the underlying case. Hanover sent a supplementary reservation of rights letter, again agreeing to defend, but appointing Gary Grimmer as defense counsel. The letter stated that Hanover had no obligation to pay for or reimburse any fees and costs incurred by Anova prior to the date of Anova's tender. 

   The underlying case settled. Hanover eventually paid $284,624 in attorneys fees to the Zobrist law firm. Anova contended that the Zobrist law firm was owed significantly more attorneys' fees. Subsequently, Hanover transferred Anova's defense to attorneys, Wesley H.H. Ching and Leighton K. Chong. Hanover advised Anova that it would no longer pay for fees generated by the Zobrist law firm.

   Hanover filed suit for a declaratory judgment. Anova moved for partial summary judgment. Anova first contended that pre-tender fees were owed for the period of time before it requested a defense from Hanover. Second, Anova sought post-tender fees incurred after informing Hanover of their need to provide a defense on October 12, 2012.

   The court first determined that Florida law applied to the interpretation of the policies. Florida was the state with the most significant interest in having its laws applied.

   Next, the court found that Hanover had a duty to defend. The policies provided coverage for false advertising. The underlying complaint alleged that Anova had engaged in false advertising and unfair competition. Therefore, Anova's motion for partial summary judgment on Hanover's duty to defend was granted. 

   Turning to pre-tender fees, the court found that Hanover's December 12, 2012 reservation of rights letter did not constitute a breach of contract. Hanover agreed to provide a defense and appointed Mr. Grimmer, who Anova agreed would serve as defense counsel. Accordingly, pre-tender fees were not recoverable. Anova was not entitled to fees it incurred before it requested a defense on October 12, 2012. 

   Regarding post-tender fees, Hanover did not pay all of the post-tender fees to the Zobrist law firm. There were disputed questions of material fact concerning the post-tender fees that Anova incurred from the Zobrist law firm that prevented summary judgment. In the December 10, 2013 letter, Hanover stated that Anova would be responsible to pay for any attorneys fees for the Zobrist law firm if it chose to retain the firm. Hanover contended it did not agree to hire the Zobrist law firm, despite the contradictory evidence that it paid for a portion of the Zobrist law firm's attorneys fees. There were no facts to indicate for which period of time the attorneys' fees were paid to the Zobrist firm by Hanover. The record did not include what agreement was reached concerning the billing for the Zobrist law firm. These unresolved facts precluded the court from determining if Anova was entitled to additional attorneys' fees for the Zobrist law firm. 

Sale of Illegal Wheat Not Intentional Act

      Unknowingly making an illegal sale of wheat seed to an undercover investigator was not an intentional act barring coverage. Parker v. Farm Bureau Prop. & Cas. Ins. Co., 2015 U.S. Dist. LEXIS 15273 (D. Kansas Nov. 16, 2015). 

       Parker was the co-owner of D&B Parker Farms, LLC. He held a property and liability policy from Farm Bureau. The policy covered personal injury/advertising injury, which provided coverage for injuries caused by infringement or misappropriation of copyright, trademark, title, or disparagement of an organization's goods or products.

   In September 2013, Parker advertised wheat seed for sale. The advertisement stated that the wheat consisted of a three-variety blend, including the Fuller variety. Parker did not know that the Fuller variety was a federally protected variety under the Plant Variety Protection Act ("PVPA"). Further, Parker did not know of the existence of the PVPA or the protections that it granted to owners of varieties of seed wheat. The Kansas Wheat Alliance ("KWA") held a certificate giving it the exclusive license to make, use and sell the Fuller variety of wheat.

   KWA hired an investigator who purchased 172 bushels of wheat from Parker. KWA subsequently sued Parker and D&B Parker Farms for treble damages pursuant to the PVPA. Parker tendered the defense to Farm Bureau, who denied coverage and refused to defend.

   In the coverage suit that followed, Farm Bureau moved to dismiss the complaint. Farm Bureau's policy contained an "intentional act" exclusion which provided in part: "There is no coverage for any loss [or] damage . . . arising out of any act which is expected or intended by an insured to cause injury to any person or damage to any property belonging to . . . others." Farm Bureau argued the PVPA claims fell within the exclusion because the insureds voluntarily and intentionally advertised and sold Fuller variety wheat seed. The court rejected this interpretation as inconsistent with the plain language of the exclusion.

   There was no doubt that the insureds intentionally advertised and sold Fuller wheat seed. But the focus of the exclusion was on whether the insured expected or intended to cause an injury, not on whether the insured intentionally did something that resulted in injury. Having never heard of the PVPA, the insureds clearly did not expect or intend their sales of Fuller wheat to cause injury to someone else's property. Nor could it be said that injury to another's property was substantially certain to result from the nature of the insureds' actions. Engaging in a sale of wheat without knowledge that another person had a protected property interest in that variety could not reasonably be characterized as causing "an expected or intended injury."

   Therefore, the motion to dismiss was denied.

Illegal Recording is Not Publication Under Liability Policy

   The Seventh Circuit found that the insured's illegal recording of conversations with customers did not constitute a publication under the insured's liability policy. Defender Security Co. v. First Mercury Ins. Co., 2015 U.S. App. LEXIS 17116 (7th Cir. Sept. 29, 2015).

   A class action complaint was filed in California, alleging that Defender Security Company, a provider of home security systems, illegally recorded conversations in which customers provided personal information, including full names, addresses, dates of birth, and social security numbers. The complaint also alleged that Defender used "call recording technology" that allowed it to record conversations with customers and then store the recordings for various business purposes. These actions violated the California Penal Code, which prohibited the recording of confidential telephone communications without the consent of all parties. 

   Defender tendered to its liability carrier, First Mercury. The policy promised to pay amounts that the insured became legally obligated to pay as damages because of "personal injury" or "advertising injury." The policy defined both "advertising injuries" and "personal injuries" as those "arising out of . . . oral or written publication of material that violates a person's right of privacy."

   First Mercury denied coverage because there was no publication. Defender sued and First Mercury filed a motion to dismiss. The district court granted First Mercury's motion to dismiss.

    On appeal, the Seventh Circuit considered the proper interpretation of "publication." Defender argued that publication was achieved when the material was transmitted to Defender's recording device. 

   The Seventh Circuit disagreed. The common dictionary definitions of "publication" described the release of information by the party holding it. There were no allegations that any third party received the information. Therefore, the Seventh Circuit affirmed the dismissal of Defender's complaint.

Hawaii Supreme Court Construes Designated Premises Endorsement In Insured's Favor

   The Hawaii Supreme Court held that a Designated Premises Endorsement provided coverage for injury and damage that occurred away from a listed location if the injury or damage arose out of the ownership, maintenance or use of the designated premises. C. Brewer and Co., Ltd. v. Marine Indemn. Ins. Co., 2015 Haw. LEXIS 62 (Haw. March 27, 2015). [Disclosure: our office represents C. Brewer].

   The case involves coverage for the former owner (C. Brewer) of land under the Kaloko Reservoir. The Reservoir was fronted by an earthen dam. The Dam burst in March 2006, killing seven people and causing extensive property damage downstream.

   In 1977, the State of Hawaii and C. Brewer entered an agreement requiring C. Brewer to, among other things, restore and expand the irrigation system that provided water to sugar cane fields in Kilauea, Kauai. C. Brewer formed the Kilauea Irrigation Company (KIC) to satisfy obligations to the State, revitalize the System, and sell System water to local farmers for irrigation.

   Under a Water Rights Agreement entered in 1987, KIC became solely responsible for operating, inspecting, maintaining, and repairing the System and Dam. In 1987, C. Brewer sold the land under the Reservoir to James Pflueger. 

   After the Dam burst, Pflueger was sued in various wrongful death and property damage cases. Pflueger sued C. Brewer seeking damages and indemnification. Pflueger alleged that C. Brewer sold him property, including the Dam, while aware of the Dam's structural instability. C. Brewer was therefore obligated to pay Pflueger damages based upon C. Brewer's negligent entrustment of the system to KIC and its alleged failure to maintain the system, warn about the System's unsafe conditions, and adequately capitalize its land operations and the companies responsible for maintaining and repairing the Dam. 

   James River Insurance Company was C. Brewer's liability carrier on the date of the Dam's breach. James River refused to defend C. Brewer in the Pfueger lawsuit. C. Brewer filed suit against James River and sixteen other insurance companies that had issued policies to C. Brewer going back to the 1980's.

   James River moved for summary judgment, arguing among other things, that the Designated Premises Endorsement limited coverage to liability arising out of the ownership, maintenance or use of specifically identified premises. The Dam was not listed as a designated premises in the policy. The circuit court granted summary judgment to James River based upon the Designated Premises Endorsement. 

   The Intermediate Court of Appeals held the policy was ambiguous as to whether the Designated Premises Endorsement barred coverage, and determined a genuine issue of material fact existed regarding the parties' intent. [Prior post on the ICA decision is here.] The ICA therefore vacated the circuit court's Final Judgment and remanded to the circuit court.

   The Supreme Court affirmed in part and vacated part of the ICA's decision. The Court started its analysis by construing the Designated Premises Endorsement, which stated, "This insurance applies only to 'bodily injury', 'property damage', or 'personal and advertising injury' arising out of the ownership, maintenance or use of the premises shown in the above Schedule." The listed properties included C. Brewer's corporate headquarters, but not the Dam site.

      James River argued that the Designated Premises Endorsement limited coverage to injury and damage occurring only on premises listed in the Schedule, which did not include the Dam. C. Brewer argued that the endorsement was ambiguous as to whether injury and damage "arising out of" the "use" of listed premises was covered, contending that the "arising out of" language in the endorsement required broad construction in its favor.

   C. Brewer further argued there was coverage for injury and damage arising out of its "use" of its corporate headquarters in making negligent corporate decisions even though the resulting damage happened at the unlisted Dam site. C. Brewer relied upon Am. Guar. and Liab. Ins. Co. v. 1906 Co., 129 F.3d 802 (5th Cir. 1997), where the court construed a designated premises endorsement with language similar to James River's endorsement, to include coverage for injuries and damage occurring on a premises not listed in the endorsement. As in Am. Guar., a causal connection could be found between C. Brewer and its entrustment of the System to KIC, the operation of the designated premises, and the injuries that resulted from C. Brewer's allegedly negligent corporate decisions.

   James River, on the other hand, sought to rewrite the term "arising out of" to limit liability to injury and damage occurring on designated premises. This construction of the Designated Premises Endorsement would convert the policy from a CGL policy to a premises liability policy that limited coverage to identified premises.

   In Am. Empire surplus Lines Ins .Co. v. Chabad House of North Dade, Inc., 771 F. Supp. 2d 1336 (S.D. Fla. 2011), the court held that language in a Designated Premises Endorsement used to convert a CGL to a premises liability policy "must be clear and unequivocal." The Hawaii Supreme Court agreed with this construction. The James River Designated Premises Endorsement did not clearly convert the policy into a premises liability policy. Therefore, the court rejected James River's argument to construe the Designated Premises Endorsement as limiting coverage to injury and damage occurring on designated premises.

   Further, the inclusion of "personal and advertising injury" in the Designated Premises Endorsement suggested a broader reading than James River offered. Decisions made at C. Brewer's corporate headquarters would likely be the cause of any advertising injury; however, the resulting injury would not occur on designated premises. Further, the James River policy's broad coverage territory encompassed the United States, Canada, Puerto Rico and other parts of the world. This further supported C. Brewer's argument that the Designated Premises Endorsement did not limit coverage merely to listed locations.

   Finally, the Supreme Court considered James River's argument on the Classification Limitation Endorsement, which limited coverage only to "those operations specified . . . under the 'description of operations' or 'classification' on the declarations of the policy." The declarations page did not contain a "Description of Operations', but rather a "Description of Business" in which the phrase "Real Estate Owners' was inserted. James River argued that C. Brewer was not the owner of any real estate when the Dam burst. James River further contended the classification limitation endorsement affirmed that the policy, when read as a whole, was intended to provide coverage only for C. Brewer's liability as the owner of real estate specifically listed in the Schedule. C. Brewer argued that the classification limitation endorsement did not limit coverage to "land, owned or otherwise," and that the phrase "Real Estate Owners" created an ambiguity. 

   The court agreed with C. Brewer's interpretation. The classification limitation endorsement supported C. Brewer's argument that the Designated Premises Endorsement did not preclude coverage for bodily injury and property damage on premises not listed in the Schedule. The classification limitation endorsement stated, "The coverage provided by this policy applies only to those operations specified in the applications for insurance on files with the Company . . . ." Therefore, the policy only applied to "operations' specified in the application, and not the specified "premises."

   The court further noted C. Brewer was leasing its corporate headquarters. Under James River's argument, injury and damage that occurred on premises listed in the Schedule would be excluded from coverage because C. Brewer did not "own" the property listed. This construction was illogical and would require the court to rewrite the terms of the policy to ignore the premises specifically listed in the Schedule that C. Brewer did not own, despite being listed in the Schedule. Therefore, the classification limitation endorsement also supported C. Brewer's position that the policy was meant to cover injury and damage occurring on premises not listed in the Schedule.

   Affirming in part and vacating in part the ICA's October 22, 2013 judgment, the circuit court was instructed to proceed consistent with the opinion. 

 

Coverage For Advertising Injury Barred by Prior Publication Exclusion

   The Ninth Circuit held that a claim for advertising injury was properly denied under the prior publication exclusion. Street Surfing, LLC v. Great Am. E&S Ins. Co., 2014 U.S. App. LEXIS 10737 (9th Cir. June 10, 2014).

   Street Surfing began selling a two-wheeled, inline skateboard called the "Wave" in December 2004. By 2007, Street Surfing also sold and advertised accessories for the Wave, such as "Lime Green Street Surfing Wheels for The Wave," and the "New Ultimate Street Surfer Wheel Set." 

   Rhyn Noll, who owned the registered trademark "Streetsurfer," sued Street Surfing in June 2008, claiming trademark infringement, unfair competition and unfair trade practices. Street Surfing had known that Noll owned the "Streetsurfer" trademark since early 2005. In September 2008, Street Surfing submitted a claim for coverage to Great American and tendered Noll's complaint.

   Great American denied the claim. The prior publication exclusion disclaimed coverage for advertising injury arising out of publication of material whose first publication took place before the beginning of the policy period. Great American's policies were in effect from August 2005 to September 2007.

   Street Surfing settled with Noll and then sued Great American. The parties filed cross-motions for summary judgment. The district court held that the prior publication exclusion relieved Great American of any duty to defend. Street Surfing appealed. 

   The Ninth Circuit affirmed. It looked at extrinsic evidence of undisputed facts which conclusively eliminated a potential for liability. Street Surfing affixed its logo to the Wave before the Great American policy period commenced in August 2005. This constituted a notice broadcast to the general public about goods for the purpose of attracting customers, meeting the policies' definition of an advertisement. Because the logo advertisement predated coverage and used the term "Street Surfing," which the underlying complaint alleged was a wrongful use of Noll's advertising idea, "Streetsurfer," the prior publication exclusion applied to any injuries arising from affixing the logo on the Wave during the coverage period.

   Further, Street Surfing's post-coverage advertisements were substantially similar to its pre-coverage advertisement. Therefore, the prior publication exclusion precluded coverage of the underlying action. 

   

City Covered From Lawsuits Filed After Hurricane-Damaged Dwellings Demolished

   The Fifth Circuit affirmed the District Court's finding that a duty to defend was owed St. Bernard Parish after it was sued for condemning and demolishing housing destroyed by Hurricane Katrina. Lexington Ins. Co. v. St. Bernard Parish Gov't, 2013 U.S. App. LEXIS 24292 (5th Cir. Dec. 6, 2013). 

   St. Bernard's policies with Lexington provided coverage for "property damage" and "personal and advertising injury." The policies included a $10,000,000 per occurrence and aggregate limit, subject to a $250,000 retained limit. 

   Lexington denied coverage and filed for a declaratory judgment that the policies' $250,000 retained limit applied separately to each alleged demolition or property damage asserted in the underlying actions. Under this theory, no defense would be owed because no property had a value exceeding $250,000. The District Court found that only one retained limit applied

    The policies defined personal and advertising injury as arising out of "the wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies by or on behalf of its owner, landlord or lessor." The District Court found this language ambiguous.

   On appeal, the Fifth Circuit noted that the policies' retained limit applied "separately to each and every occurrence . . . or series of continuous, repeated, or related occurrences." The Fifth Circuit held that the acts of demolition alleged in the underlying actions were related because they all resulted from St. Bernard's ordinance condemning the properties that remained in disrepair after Hurricane Katrina. Therefore, the $250,000 retained limit applied once to the alleged acts.

    The Fifth Circuit also agreed with the District Court that the phrase "by or on behalf of its owner, landlord or lessor" was ambiguous. Lexington argued this phrase modified wrongful acts, such that the eviction or invasion of right of occupancy must occur "by or on behalf of" the "owner, landlord or lesser" of the property. Conversely, St. Bernard's contended that the phrase modified "that a person occupies," such that the injury party must rightfully occupy the property "by or on behalf of its owner, landlord or lessor." The phrase was therefore ambiguous and was construed in St. Bernard's favor.

   

   

California Supreme Court Allows Claim Under Unfair Competition Statute To Proceed

   The California Supreme Court determined that insurance practices violating the state's Unfair Insurance Practices Act (UIPA) could support a claim under the state's unfair competition law (UCL). Zhang v. Superior Court, 57 Cal. 4th 353 (2013).

   Zhang purchased a CGL policy from California Capital Insurance Company. She sued California Capital in a dispute over coverage for fire damage to her commercial property. The complaint included causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of the UCL. In her UCL claim, Zhang alleged that California Capital had "engaged in unfair, deceptive, untrue, and/or misleading advertising" by promising to provide timely coverage in the event of a compensable loss, when it had no intention of paying the true value of the insureds' covered claims. 

   Zhang specifically alleged unreasonable delays causing deterioration of her property; withholding of policy benefits; refusal to consider cost estimates; misinforming her as to the right to an appraisal; and falsely telling  her mortgage holder that she did not intend to repair the property, resulting in foreclosure proceedings.

   The trial court sustained California Capital's demurrer based upon a perceived bar against private actions for unfair insurance practices. The Court of Appeal reversed, holding Zhang's false advertising claim was a viable basis for her UCL cause of action.

   The Supreme Court affirmed the Court of Appeals. The UCL defined "unfair competition" as "any unlawful, unfair, or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." A private plaintiff could  bring a UCL action by showing economic injury caused by unfair competition. 

   The UIPA allowed only administrative enforcement by the Insurance Commissioner. Private UIPA actions were barred. A litigant could not rely on prohibited activities by insurers as set for in the UIPA as the basis for a UCL claim. However, when insurers violated both the UIPA and obligations imposed by other statutes or the common law, a UCL action could lie. The Legislature did not intend the UIPA to operate as a shield against any civil liability. 

   Hawaii also has an unfair competition law similar to California's. See Haw. Rev. Stat. 480-2. Claims under the Hawaii unfair competition law may only be pursued by "consumers," defined as natural persons. Haw. Rev. Stat. 480-1. The Ninth Circuit has predicted that the Hawaii Supreme Court would not find that the Insurance Code's unfair methods of competition would preempt suits against insurers for unfair trade practices in violation of section 480-2. Jenkins v. Commonwealth Land Title Ins. Co., 95 F.3d 791, 797 (9th Cir. 1996).  

Insurer Must Defend in "Personal Injury" and/or "Advertising Injury" Suit

   The California Court of Appeal reversed the trial court's ruling and held that the insurer had a duty to defend a "personal injury" and/or "advertising injury" suit. See Travelers Prop. Cas. Co. of Am. v. Charlotte Russe Holding, Inc., 2012 Cal. Ct. App. LEXIS 807 (Cal. Ct. App. July 13, 2012).

   A clothing manufacturer, Versatile, sued a distributor of its products, Charlotte Russe, for breach of contract, fraudulent and negligent misrepresentation. The parties had entered a contract under which Charlotte Russe would be the exclusive sales outlet for Versatile's "People's Liberation" brand of apparel,which included jeans and knits. Charlotte Russe promised to promote the sale of Versatile's products, which Versatile deemed to be a premium product.

   The underlying complaint alleged Charlotte Russe sold Versatile's products at a severe discounts, which not only violated the contract, but would also result in significant and irreparable damage to the People's Liberation brand and trademark. An expert opined that a 70 to 85 percent markdown of People's Liberation brand clothing had the potential of creating a disparaging effect on the People's Liberation brand.

   Charlotte Russe was insured by Travelers. The CGL policy included "personal injury" and "advertising injury" coverage. Personal injury "caused by an offense arising out of your business . . ." was covered. Further, advertising injury coverage applied to "'[a]dvertising injury' caused by an offense committed in the course of advertising your goods, products or services. . ."

   Travelers denied the tender. Travelers contended there was no coverage because the reduction of a product's price was not a disparagement of that product. The district court granted Travelers' motion for summary judgment.

   The Court of Appeals reversed. In was not essential that the underlying claims be expressly phrased in terms of "disparagement" or trade libel in order to trigger personal injury coverage. The underlying claims could trigger a duty to defend if the conduct for which the policy provided coverage was charged by implication, as well as by direct accusation. Here, Versatile's pleading alleged that the People's Liberation brand had been identified in the market as premium, high-end goods; and that Charlotte Russe had published prices for goods implying they were not. Versatile therefore pled that the implication carried by Charlotte Russe's pricing was false. This was enough to invoke a duty to defend.

Duty to Defend Arises from Allegations of "Advertising Injury"

   The insured, Dish Network Corporation, was sued for patent infringement by Ronald A Katz Technology Licensing, L.P. (RAKTL). See Dish Network Corp. v. Arch Specialty Ins. Co., 2011 U.S. App. LEXIS 20955 (10th Cir. Oct. 17, 2011). RAKTL alleged Dish infringed on twenty-three patents. The underlying complaint provided little information about how Dish actually used RAKTL's technologies. 

   Dish had several primary and excess policies from five different insurers. All of the policies agreed to defend and indemnify Dish against claims alleging "advertising injury." The policies defined "advertising injury" as, among other things, "[m]isappropriation of advertising ideas . . . ."

   The insurers denied a defense. Dish sued and the insurers moved for summary judgment. The district court agreed that RAKTL's reference to "customer service functions" in its complaint was sufficient to allege that Dish engaged in "advertising." The court rejected, however, Dish's argument that its use of a patented interactive telephone system to advertise could constitute "misappropriation of advertising ideas." The complaint did not allege that the patented technologies were themselves misappropriated as an element of Dish's communications and interactions with its customers. Therefore, the conduct was not "misappropriation of an advertising idea."

   The Tenth Circuit reversed. The court first considered whether patent infringement generally fell within the applicable CGL policies' "advertising injury" coverage. Here, Dish allegedly committed patent infringement by using RAKTL's technology to sell Dish's own non-infringing satellite television products and services. Normally, the scope of "advertising injury" coverage was clear where a patented product was advertised and sold. Where, however, the advertising idea that was misappropriated was also a patented technology, the scope of coverage was less certain.

   Therefore, whether this case presented a "misappropriation of advertising ideas" was ambiguous.  A suit for patent infringement could, under narrow circumstances, allege "misappropriation of advertising ideas." Therefore, the ambiguity had to construed in favor of coverage of a patent infringement case. 

   The court next asked whether the complaint potentially alleged a "misappropriation of advertising ideas." The underlying complaint potentially alleged acts of advertising because it did not fully explain what was meant by "pay-per-view ordering and customer service functions." This case differed from the typical case in which the insured merely advertised a product it had already misappropriated. Instead, the complaint here alleged misappropriation of a product specifically designed, in part, for advertising purposes. These allegations were sufficient to raise the possibility of misappropriation of an advertising idea.

   Finally, the court considered causation, i.e., whether the complained of injury arose in the course of advertising, as the policy language required. RAKTL alleged it "has been damaged and irreparably harmed by Dish's infringement, which will continue unless Dish is enjoined." Accordingly, the allegations sufficiently stated causation.

   Therefore, the district court's grant of summary judgment was reversed and remanded to allow consideration of exclusions in the policies yet to be addressed by the district court.

   Thanks to my Damon Key colleague, Mark Murakami (www.oceanlawhawaii), for forwarding this case to me.