A recent case in the Northern District of California offers two cautionary tales to policyholders. First, when buying insurance, companies should understand their risks and ensure that the policies they’re buying match those risks as closely as possible. Second, when a claim arises, policyholders must carefully consider all the allegations, not just the formal causes of action, in the complaint to determine whether they might trigger an insurer’s defense obligation.
In Educational Impact v. Travelers Property Casualty Company, No. 15-CV-0510-EMC, 2016 WL 7386139 (N.D. Cal., December 21, 2016), Educational Impact and Teachscape sought insurance coverage for claims arising out of Teachscape’s alleged false advertising. In the underlying lawsuits, Educational Impact argued that Teachscape violated the Lanham Act, engaged in unfair competition, and tortiously interfered with Educational Impact’s contractual rights when Teachscape publicly claimed that it had exclusive rights to market and sell a product licensed to Educational Impact.
Teachscape tendered the claim to its technology errors and omissions (Tech E&O) insurer and its commercial general liability (CGL) insurer. Educational Impact (now acting as assignee of Teachscape’s claims) argued that if coverage for advertising injuries was available under one policy, it must also be available under the other. The District Court for the Northern District of California disagreed. It concluded that coverage was available only under the Tech E&O policy, which provided coverage for “wrongful acts,” including for copyright infringement related to false advertising. The CGL policy, in contrast, provided coverage only for “infringement of copyright . . . in your advertisement.” Because the complaint did not allege copyright infringement in the advertisement itself, the district court concluded that the CGL policy offered no coverage.
Two Key Takeaways
First, this case highlights a difference between the scope of coverage for advertising and intellectual property claims provided by the “personal and advertising injury” coverage in CGL policies and the coverage in Tech E&O policies for acts, errors or omissions in the performance of technology services or the sale of technology products. Coverage for certain intellectual property claims may be significantly broader under Tech E&O policies than under CGL policies. Policyholders worried about intellectual property liability risks may be well-advised to seek out E&O policies with potentially broader protections in this area.
Second, though the court here determined that coverage was only available under the E&O policy, CGL policyholders in other cases may not be entirely out of luck. CGL policies often offer coverage for claims alleging product disparagement or other character harms. Allegations such as those described above can support a claim for implied disparagement, even if there is not a formal cause of action for disparagement in the complaint. For example, an erroneous assertion of exclusive ownership of a product or intellectual property right can cause reputational harms to competitors marketing the same or similar products, which may be enough to support an implied disparagement claim. See Hartford Cas. Ins. Co. v. Swift Distrib., Inc., 59 Cal. 4th 277, 291 (2014) (disparagement may be express or implied); Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1035 (2d Dist. 2002) (disparagement includes “publication of matter derogatory to the plaintiff’s title to his property”).
The court in Educational Impact did not address this argument, and it is unclear whether the policies at issue contained the applicable language. It is possible that the policyholder and the court overlooked the potential for defense coverage under the CGL policy based on allegations that could have supported an implied disparagement theory of liability. We have succeeded in obtaining defense coverage based on similar allegations. Policyholders and their defense counsel should be aware of this possibility, as it may provide an avenue for coverage that should not be overlooked.