General liability insurance is frequently overlooked in business litigation. These policies, however, include coverage for “disparagement” and “malicious prosecution.” Both terms are construed broadly and may provide coverage for a variety of lawsuits, including antitrust claims, patent disputes, trade secret claims, as well as other commercial litigation between competitors, or suppliers and their customers.

What should clients and counsel look for? There are two types of allegations in particular which should immediately raise a red flag regarding the potential for insurance: 1) any allegation that the insured made unfavorable comments about the plaintiff or its products, or 2) any allegation that the insured filed improper lawsuits or otherwise misused the litigation process. Today’s post will examine coverage for “disparagement”-type claims; Part 2 will examine claims for the misuse of legal process.

The typical general liability policy includes coverage for “oral, written, or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.” Business litigation often includes express claims for defamation or disparagement. Such allegations trigger a duty to defend both the covered and uncovered claims, although the carrier may subsequently seek reimbursement of any costs solely related to uncovered claims. Buss v. Superior Court, 16 Cal. 4th 35, 50 (1997). On a practical level, however, establishing such an allocation is difficult and reimbursement claims are rarely, if ever, pursued by insurers. Thus, an insured may obtain coverage for the entire lawsuit, even if the disparagement is a relatively minor aspect of the dispute. Bear in mind as well that, even if the insured is the plaintiff, a counter-claim by the defendant may also trigger coverage, potentially funding most or all of the cost of prosecuting the original action.

The disparagement coverage may apply even if there is no express cause of action for disparagement, as long as the facts alleged or known to the party potentially involve disparagement. In the recent case of Travelers Property Casualty Co. of America v. Charlotte Russe, 207 Cal. App. 4th 969 (2012), Charlotte Russe had been sued by one of its suppliers. The supplier alleged that its brand was identified as “premium” and “high-end,” but that Charlotte Russe had published prices for its goods that implied that they were not, resulting in “significant and irreparable damage to and diminution” of the supplier’s brand and trademark. While there was no express claim for trade libel, the court found these factual allegations created a potential of coverage for “disparaging” the supplier’s products, and thus triggered the insurer’s duty to defend.

Coverage has also been found for allegedly false claims of patent infringement. See Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017 (2002). There, it was alleged that the insured had falsely told the underlying plaintiff’s customers that the plaintiff’s products were subject to patents, and purchasing those products would subject them to litigation. The court found that these allegations fell within the “disparagement” coverage because the statements were “derogatory to the plaintiff’s title to property, or its quality, or to his or her business in general.”

Coverage has also been found for antitrust claims. In CNA Casualty of Cal. v. Seaboard Surety Co., 176 Cal. App. 3d 598 (1986), the underlying plaintiff alleged, as part of his antitrust claim, that the defendant misrepresented “the business, property and rights possessed by plaintiffs to persons with whom plaintiffs did business in an effort to disrupt and prevent” these business relationships. This allegation was found sufficient to trigger the “disparagement” coverage of the policy.

Other false statements criticizing a business or its goods also constitute “disparagement” if they explicitly or implicitly call into question the company’s honesty, integrity, or competence. See, e.g., Polygram Records, Inc. v. Superior Court, 170 Cal. App. 3d 543, 550 (1985). For example, if defendant files a counter-claim alleging that the plaintiff falsely accused the defendant of trade secret theft, this statement impugns defendant’s honesty and integrity and would trigger the disparagement coverage.

As these cases indicate, “disparagement” coverage is very broad and should be considered whenever an opposing party alleges (by complaint or counter-claim) that unfavorable statements were made by the insured. Our next post will explain how general liability policies may also cover antitrust and patent claims under the policy’s “malicious prosecution” coverage.