Whenever a company is sued for any reason, defense counsel must consider insurance coverage. IP defense is no exception. In infringement and related actions, there may be coverage for defense costs and any liability payments. Moreover, speedy notice to the insurer is sometimes a requirement, so missing the issue early may result in loss of all insurance rights. See, e.g., Country Mut. Ins. Co. v. Livorsi Marine, Inc., 2006 WL 1348722 (Ill. May 18, 2006) (claim barred because counsel provided untimely notice of trademark infringement action). The answer to coverage may not always be “yes” for an IP claim. But considering the issue must be high on the initial checklist of any IP defense counsel.
The standard commercial general liability (“CGL”) policy pays for the policyholder’s defense costs and any liability payments arising out of various types of underlying injuries to others— most commonly “bodily injury” or “property damage.” There is also CGL coverage for losses arising out of “advertising injury,” which expressly includes various types of IP claims or claims that are commonly mixed together with IP claims. For example, if there is an allegation of “copyright infringement” made in the course of advertising activities, then there may be coverage under a CGL policy. Courts in various states are split on IP coverage issues involving various underlying offenses beyond copyright infringement, but many courts have found coverage for alleged infringement actions of all types.
The precise policy language is, of course, pivotal to the coverage issue. The standard CGL policy has redefined “advertising injury” over the years. While the 2004 standard Insurance Services Office (“ISO”) policy form is commonly used today, older forms (2001, 1998, 1991) remain in use and may offer broader coverage for IP claims. Moreover, a CGL policy is an “occurrence” based policy, meaning that if an allegation arises today based on an act of infringement that took place in a given prior year, the policy in place for such prior year is the one that responds.
Under almost any of these ISO or other CGL policies, a common first step in confirming coverage for an IP-related complaint is to ask whether the alleged misconduct—infringement or otherwise— took place during the course of advertising the policyholder’s goods, products, or services. “Advertising activities” is usually broadly construed, including advertising on the Internet. If the policyholder-defendant’s alleged conduct took place in the course of advertising, there may be coverage if the alleged offense is “infringement of copyright, trade dress, or slogan,” among other “enumerated” offenses. A CGL policy typically has a list of the offenses, and many courts have interpreted enumerated offenses to imply others, such as infringement of “slogan” implying coverage for trademark infringement.
The following is a list of most of the offenses that may trigger coverage if committed in the course of advertising activities (broadly construed): copyright infringement; slogan infringement; trademark infringement; trade dress infringement; misappropriation of trade secrets; misappropriation of trade dress; misappropriation of advertising ideas; misappropriation of “style of doing business”; defamation; libel; slander; trade libel; disparagement of goods, products or services; violation of the right to privacy; and malicious prosecution. In some circumstances, the alleged covered offense also might be patent infringement, unfair competition, or deceptive trade practices (in recent years, some coverage forms have expressly excluded patent infringement).
In addition to the advertising injury coverage, there is also coverage for loss arising from “personal injury,” which is commonly defined to include “malicious prosecution, defamation, libel, slander, or publication of material that violates a person’s right to privacy.” Thus, for defamation and the other offenses listed in the “personal injury” part, a policyholder need not tie them to “advertising activity.”
Between the “advertising injury” and “personal injury” coverage parts, there is a long litany of offenses that might trigger coverage. It is a bedrock principle of liability insurance coverage in all states, that where there is any potential for coverage under any allegation or cause of action within the “four corners” of the complaint, then the insurer must, at a minimum, provide a complete defense to the action. Such defense cost coverage issues are liberally construed in favor of coverage. Thus, if there are multiple causes of action, it only takes one to trigger coverage for the entire defense. At times, it may be that 17th cause of action for “defamation” that triggers coverage for 100 percent of defense costs.
Moreover, courts generally apply the rule that how a plaintiff chooses to label a cause of action is not determinative of coverage. One must look beyond how claims are actually named. For example, if a given claim is not labeled as one for “defamation,” but a review of the allegations reveals that defamation is, in effect, the essence of the claim, then that may be enough to trigger coverage. It is not uncommon for IP complaints to be packed with a laundry list of alleged wrongs packaged into dozens of separate causes of action. Careful review is warranted, as full defense coverage may be buried within.
As a sample application of the above, these CGL coverages apply to liabilities arising out of cyberspace activity. Cyberspace is an increasingly common location for acts of copyright infringement, ranging from unauthorized downloads to selling someone else’s copyrighted material. Companies or persons with Internet sites, as well as the Internet Service Providers (“ISPs”) that provide access to the sites, can be sued for copyright infringement that allegedly takes place on and through the sites. If an Internet site owner or ISP becomes a defendant in a copyright infringement suit arising from cyberspace activities, it may have insurance coverage for its defense costs and any liability payments arising out of such suit.
Advertising activity in cyberspace is relatively broad. Recent standard policy forms added to the definition of “advertisement” to expressly provide that: “(a) notices that are published include material placed on the Internet or on similar electronic means of communication; and (b) regarding web sites, that part of the web site that is about your goods, products or services for the purpose of attracting customers or supporters is considered an advertisement.” This describes the majority of content of a great many websites.
Many ISPs and some companies carry specialized insurance coverage for any allegations of copyright infringement that are made against them. “Manuscripted” policies have been developed for companies specializing in Internet commerce. For example, such a policy might cover all acts of infringement, among other alleged wrongs, committed by the policyholder in performing “cyberspace activities.” Or a policy might cover all losses arising out of “web injury,” defined to include acts of infringement taking place on Internet sites. But the majority of companies and persons who own Internet sites (as opposed to being ISPs or directly in the business of supporting the Internet) still rely largely on their CGL policies to provide coverage for claims arising from their Internet sites.
Insurers, of course, resist claims. When faced with any particular claim, insurers frequently deny that the infringement took place in an “advertisement” or in the course of the policyholder’s “advertising activities.” As copyright infringement is, almost by definition, an act that takes place through “publication” of some kind—through marketing efforts or otherwise—such insurer contentions have been commonly rejected by courts. See, e.g., Copart, Inc. v. Travelers Ins. Co., 2001 U.S. App. LEXIS 6140 (9th Cir. Apr. 3, 2001) (coverage for allegations of copyright infringement arising from a computer program interface that the policyholder left with potential customers as a demonstration of its services); Interface, Inc. v. Standard Fire Ins. Co., 2000 U.S.Dist. LEXIS 14019 (N.D.Ga., Aug. 15, 2000) (coverage for alleged use of copyrighted pictures of floor covering in advertising).
As in any insurance claim, the insurers may attempt to invoke exclusions. Coverage for patent infringement is decreasing under some forms but still exists in various contexts. See, e.g., Amazon.com International, Inc. v. American Dynasty Surplus Lines Ins. Co., 13-6 Mealey’s Litig. Rep. Patents 14 (Wash. App.2005) (covered “advertising injury” found where Amazon allegedly infringed patents by misappropriating software for use on its website); J. Marcus Wholesalers, Inc. v. Assurance Company of America, 2006 U.S. Dist. LEXIS 5474 (W.D.Pa. 2006) (coverage where defendant accused of counterfeiting 9/11 commemorative flags that infringed both patent and copyright). In order to deal with coverage for patent infringement and other IP claims, the 2004 ISO form first excludes advertising injury “arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights,” but then restores limited coverage as follows: “However, this exclusion does not apply to infringement, in your ‘advertisement,’ of copyright, trade dress or slogan.” While this particular policy form attempts to exclude patent infringement, it still includes coverage for trademark infringement. And wherever a complaint includes one covered claim among a mix of uncovered ones, such as defamation, the entire defense must be paid by the insurer.
The most commonly invoked general exclusion is one for “any act, error or omission intentionally committed while knowing it was wrongful.” For certain statutory claims, if the violation is, by the terms of the statute, “intentional,” this may be imported by the insurer in arguing for application of the intentional conduct exclusion. Policyholders should be wary of insurers who are quick to invoke the intentional conduct exclusion in the infringement context. As any given alleged act of infringement is at bottom an act that was intended by someone, an insurer might use this exclusion to swallow up all coverage for infringement. The proper view of this exclusion is that it precludes coverage for policyholders who intentionally commit an act of infringement with full knowledge at the time that it was wrongful and against the law. Indeed, this is the level of mens rea that typically rises to criminal conduct, which of course is beyond insurance coverage.
This article cannot address all of the other potential insurance coverages that might apply in an IP case. For example, if a Director or Officer is named as a defendant, that may trigger coverage under a separate D&O policy.
In sum, careful consideration must be given to whether a complaint might be read to trigger insurance coverage. Policy language differs, and coverage law in each state is different; indeed, the applicable state law is often unclear, requiring a choice of law analysis and identification of the most favorable forum. Yet the coverage question must be raised quickly after notification of an intent to file a complaint or the filing of a complaint itself. It just may turn out that the defendant is covered, and its insurer must pay defense costs and any settlement or judgment amounts. Where there is defense cost coverage, if the insurer reserves its right to deny coverage for any liability payments (as is often the case), the policyholder and not the insurer controls the defense.