Since the California Court of Appeal issued its decision in Gunderson v. Fire Insurance Exchange, 37 Cal. App. 4th 1106 (1995), insurers have used it for the proposition that an “insured may not speculate about unpled third party claims to manufacture coverage.”  However, a closer reading of Gunderson‘s holding reveals that the key inquiry is not which claims the third party pled but rather which facts the third party pled.  In the recent case of Hudson Insurance Co. v. Colony Insurance Co., No. 09-55275 (9th Cir. Nov. 5, 2010), the Ninth Circuit Court of Appeals had the opportunity to clarify this distinction, and in doing so found advertising injury coverage for potential slogan infringement. 

In the action underlying the Hudson decision, NFL Properties (“NFL”) sued All Authentic (“Authentic”) alleging causes of action for trademark infringement, trademark counterfeiting, trademark dilution, unfair competition, and deceptive acts and practices stemming from Authentic’s manufacture of counterfeit NFL jerseys.  Among other allegations in its complaint, NFL alleged that Authentic sold jerseys with the phrase “Steel Curtain” on them.  Additionally, NFL pled that the Pittsburg Steelers franchise had “strong common law rights” to the “Steel Curtain” phrase and also owned “a state registration for the” phrase. 

In response to NFL’s complaint, Authentic tendered the matter to its two insurance carriers, Hudson Insurance Company (“Hudson”) and Colony Insurance Company (“Colony”).  Both carriers had policies insuring against advertising injury arising out of slogan infringement in Authentic’s advertisements.  Hudson defended Authentic under a reservation of rights.  Colony denied that it had a duty to defend Authentic and refused to do so. 

After expending $900,000 in defense costs, Hudson settled the matter with NFL.  Hudson then filed suit against Colony for equitable contribution seeking to recover half of its defenses costs from Colony.  The district court granted Hudson’s motion for summary judgment after finding that NFL’s allegations “set forth a claim for slogan infringement that was potentially covered by the Colony Policy.”  Colony appealed to the Ninth Circuit.

Colony’s position was that it had no duty to defend Authentic because NFL’s allegations did not create “a potential for liability” under the policy.  Specifically, Colony argued that NFL’s complaint did not allege a claim for slogan infringement, and under Gunderson a court is precluded “from speculating about unpled claims to manufacture a potential for coverage.” 

In disposing of this argument, the court pointed out that in Gunderson and its progeny, the reason there was no potential for coverage (and thus no duty to defend) was “not because the complaint did not list a particular legal cause of action, but because the complaint did not allege any facts supporting a covered cause of action.”  Due to this distinction, the focus of the court’s analysis was not on the causes of action within NFL’s complaint, but rather on the facts alleged therein, and whether or not the alleged facts showed a potential for coverage. 

The court noted that in its complaint, NFL alleged that Authentic sold jerseys with the “Steel Curtain” phrase on them.  NFL also alleged that through the Pittsburg Steelers, NFL had an ownership interest in the phrase.  As a result, the court found that despite not alleging the legal theory of slogan infringement, “the NFL complaint alleges facts potentially supporting a legal theory of slogan infringement.”  Furthermore, the court noted that “it does not matter that the NFL complaint never referred to ‘steel curtain’ as a slogan and never listed slogan infringement as a cause of action.”  Ultimately, the court held that “[b]ecause the NFL complaint potentially stated a cause of action for slogan infringement, Colony had a duty to defend All Authentic in the NFL Action, and Hudson [was] entitled to equitable contribution.”

While the Hudson opinion’s finding of advertising injury coverage for slogan infringement is useful, it seems the court’s treatment of Gunderson is the most valuable take away from the case.  Far too often insurers assert Gunderson’s “do not speculate” command in an attempt to avoid the duty to defend.  However, as Hudson makes quite clear, when deciding whether there is a potential for coverage and thus a duty to defend, an unpled cause of action is no bar to coverage so long as there are facts in the complaint that potentially support a covered cause of action.