Insurance coverage isn’t the most thrilling topic. There’s a reason that everybody got the joke in the movie Groundhog Day when Bill Murray’s character finally punched Ned “Needlenose” Ryerson because Ned brought up insurance once too often.
Underlying all that tedium, however, is the potential for protecting great gobs of money that would otherwise come out of your pocket. As a manufacturer, imagine yourself in these three scenarios:
You make electric toothbrushes and are sued for false advertising under federal trademark law
You make glass containers and are sued for the infringement of patents on bottle-labeling technology.
You manufacture synthetic drugs and are a defendant in numerous class actions that allege deceptive business practices.
Real cases? You bet.
The first cost the defendant several hundred thousand in legal costs to mount a defense. The second resulted in jury-awarded damages of $36.5 million. The third involved $39 million in legal expenses and a settlement of $134 million.
Insurance protects against dangers
Insurance exists to protect against such dangers, but given the potentially high stakes, manufacturers should have some understanding of what is covered, what is not, and what are the basics to making an insurance claim.
Personal and Advertising Injury Coverage
In each case listed above, the sued company sought coverage under Commercial General Liability insurance policies that included what is called Personal and Advertising Injury (PAI) coverage.
PAI coverage often applies to claims that arise in the course of one’s business including defamation, product disparagement, privacy violations, unfair business practices, false advertising, and various forms of intellectual property (IP) infringement such as copyright, trademark, patent and trade secrets.
In general, the following seven elements are required for PAI coverage to exist for a particular claim:
- The claim must fall within one of the offenses enumerated in the policy.
- Certain offenses must take place in the named insured’s “advertisement.”
- The offense must be committed during the policy period.
- It must occur in the “coverage territory.”
- It must occur in the course of the named insured’s business.
- The claim or suit must seek “damages.”
- The claim must fall outside the policy’s exclusions to coverage.
1. Enumerated Offenses
Your insurance policy will list qualifying PAI offenses, and the claim brought against you must fall within that list to be covered. Many of these listed items are basically terms of art that require more legal interpretation, so be sure to have legal counsel review your insurance policy terms. Of particular importance to IP-related claims are the two common enumerated offenses of “the use of another’s advertising idea in your advertisement” and “infringing upon another’s copyright, trade dress or slogan in your advertisement.” Although the term “advertising idea” is usually undefined in the policy, it has often been legally construed to mean something used to call public attention to a product or business, especially for proclaiming its desirable qualities so as to increase sales. This concept often encompasses trademarks and trade dress, and sometimes certain patents.
Note that the two IP-related offenses mentioned above require that the use or infringement must take place “in your advertisement” in order to be covered by the policy. Since 1998, the term “advertisement” has been defined in policies to be “a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.” For a company website, only the portions that are about the company’s goods or services and put there to attract customers are considered to be “advertisement.” For example, copyright violations committed in other non-advertising parts of the site would not be covered.
3. Conduct must be during the policy period
The focus here is on when the insured’s conduct actually happened, not when the plaintiff’s injury took place, which can be at a later time in some cases. Your policy period will be shown in the policy’s Declaration pages.
4. Offense must be committed in the “coverage territory”
CGL policies issued in the U.S. generally cover offenses that take place in U.S. territories and possessions, Puerto Rico and Canada. Other parts of the world may also be included in the “coverage territory” if the plaintiff’s claim arose out of goods made or sold in the covered geographic areas. The policy may also apply to a covered offense committed on the Internet, provided that the plaintiff filed a lawsuit against you in the “coverage territory.”
5. Offense must arise out of your business
The qualifying offense must also be alleged to have arisen out of your business activities, rather than personal conduct.
6. The claim must seek “damages”
The term “damages” is usually not defined in the policy, but is construed to mean some form of monetary award to compensate the plaintiff for his losses. A lawsuit asking the court only to impose an injunction on you, for example, will generally not be covered. Sometimes a claim that seeks payment of legal restitution, such as by disgorging profits alleged to have been derived by you from wrongdoing, can also be considered to be “damages.” Indeed, recovering an infringer’s wrongful profits is a legal remedy specifically allowed in many cases of copyright infringement and trademark infringement.
7. Exclusions to PAI coverage
Finally, the claim must fall outside of all the exclusions listed in the policy, and that list will vary considerably from one policy to the next. Some of the more common exclusions include:
- Knowing violation of another’s rights
- Claims arising out of material that was first published prior to the start of the policy period
- Criminal acts committed by or at the direction of the insured
- Claims arising out of the failure of the your goods or services to conform with any statement of quality or performance made in the “advertisement”
- Claims arising out of breach of contract
- Infringement of copyright, patent, trademark or trade secret
This last exclusion, known as the IP exclusion, can be confusing. It generally bars PAI coverage for claims arising out of the infringement of the four listed types of IP rights, or infringement of other intellectual property rights. However, the IP exclusion is not quite as broad as its name implies. It might not bar coverage for those claims that fall under one of the two enumerated offenses mentioned in the first section above for IP-related claims. You should consult with your coverage attorney to understand the terms of your policy.
When you find out about a claim against you, do not ignore it. Time is of the essence. You must act promptly to preserve your right to any insurance coverage that may exist.
First, consult with your insurance broker or other professional to identify all the policies you have that might have potential coverage for the claim.
Second, notify all those carriers whose policies potentially cover you that a claim has been made, and tender the claim to those insurers for defense. This should be done in writing. To preserve coverage that might otherwise exist, you must comply with all policy conditions, particularly the notification requirements. Policies usually say that the insurer must be notified of a claim or lawsuit “as soon as practicable” or “immediately.” Those terms are most often construed to mean within a reasonable time. But in some circumstances, allowing even a very short period, such as two or three weeks, to elapse before giving notice to your insurer could be considered to be an unreasonable delay. Coverage can be lost completely due to late notice, so always treat the receipt of a third party claim or lawsuit seriously and promptly.
Third, make sure you comply with all other conditions of the policy. For example, most liability policies include a cooperation clause. This requires you to assist the insurer in defending the claim, such as by producing relevant documents and information.
NOTE: This article offers only very general guidance on the IP-related coverage available in a typical commercial general liability insurance policy. However, insurance coverage for a particular claim depends on your individual policy, your state’s law, and several other factors. Given the complexity of the issues, readers are encouraged to review the details of your coverage with your insurance specialist and your legal counsel.
Dale R. Kurth is Counsel at Partridge IP Law, a Chicago-based IP law firm. He has a wide variety of experience in IP, including dealing with claims for infringement of copyrights, patents, and trademarks, as well as experience in ascertaining insurance coverage for those and related claims. Kurth can be reached at [email protected].