It is extremely rare to find a complaint for any type of advertising injury claim that does not allege that the defendant acted willfully, intentionally and/or with malice. In fact, such complaints are often replete with these types of allegations for a couple of reasons. In some cases, the type of claim may require that the plaintiff prove an intentional or malicious act to recover. More often than not, though, the plaintiff is looking for enhanced damages in the form of punitive damages or, in cases involving intellectual property infringement, treble damages and attorneys’ fees.
Policyholders subjected to these types of suits may look to their commercial general liability (“CGL”) insurance policy to provide coverage for their defense costs. Upon opening their CGL policy and finding the section governing Coverage B: Personal and Advertising Injury, the policyholder might notice a coverage exclusion under the caption “Knowing Violation of Rights of Another” which excludes personal and advertising injury “caused by or at the direction of the policyholder with knowledge that the act would violate the rights of another and would inflict” injury.
Comparing this definition of the exclusion with a complaint alleging an advertising injury claim based on an intentional act may cause some policyholders to panic that they will lack the coverage needed to defend themselves. Does this “knowing violation” exclusion relieve insurers of their duty to cover defense costs when the complaint alleges that the advertising injury was intentional? Three recent insurance coverage cases came to very different conclusions on this very question.
In Singer v. Colony Ins. Co., Case No. 14-22310, 2015 U.S. Dist. LEXIS 160207 (S.D. Fla. Nov. 30, 2015), the district court was faced with deciding whether the insurer should cover defense costs for a lawsuit brought by an employee of the policyholder allegedly asserting claims of false imprisonment, malicious prosecution, libel, slander and invasion of privacy, among other claims. Although the court had held that the insurance policy did not provide coverage for the claims asserted in the underlying case, it still considered whether any of the exclusions would apply to further prevent coverage for the claims and concluded that the knowing violation exclusion would apply to relieve the insurer of its duty to defend. According to the court, in a cursory opinion, the “allegations in the Underlying Complaint clearly support a finding that [the policyholder] acted with knowledge.” Therefore, this court looked only at the allegations in the complaint and, because those allegations claimed that the policyholder acted with knowledge, the court held that the knowing violation exclusion applied to bar coverage in this case.
Nevertheless, in KM Strategic Mgmt., LLC v. Am. Cas. Co. of Reading, PA, Case No. CV15-1869, 2015 U.S. Dist. LEXIS 171435 (C.D. Cal. Dec. 21, 2015), the district court came to the opposite conclusion and placed the higher burden on the insurer to show that the claim was not covered or was excluded. The policyholder was named in two separate suits alleging that the policyholder sent false and defamatory statements to the plaintiffs’ customers to interfere with potential business relationships. The policyholder maintained that the asserted claims alleged the advertising injury of defamation and were covered by its CGL insurer. The insurer argued that the claims did not set forth all of the essential elements of a defamation claim so that coverage did not apply and if there was coverage, various exclusions, including the knowing violation exclusion, barred coverage for the underlying case. With respect to the knowing violation exclusion, the district court held that, although the underlying complaint alleged that the act was intentional, the burden was on the insurer to provide conclusive evidence demonstrating that the exclusion applies. Therefore, to prove that the knowing violation exclusion barred coverage for defense costs, the insurer could not simply rely on the allegations of intentional acts in the complaint, but had to provide evidence outside of the complaint that conclusively showed that the policyholder committed the act intentionally. Otherwise, the potential for coverage remained and the defense costs were covered. See also Foliar Nutrients, Inc. v. Nationwide Agribusiness Ins. Co., Case No. 1:14-cv-75, 2015 U.S. Dist. LEXIS 125528 (M.D. Ga. Sept. 21, 2015) (holding that an insurer has to provide evidence outside the complaint to prove that the policyholder acted with knowledge for the knowing violation exclusion to bar coverage for defense costs in an advertising injury case).
Finally, in Krispy Krunchy Foods, LLC v. AMA Disc., Inc., Case Nos. 15-590 and 15-2845, 2016 U.S. Dist. LEXIS 3499 (E.D. La. Jan. 12, 2016), the district court decided whether the knowing violation exclusion in the defendant’s CGL policy prevented coverage of defense costs for the plaintiff’s claims for trademark and trade dress infringement. In the underlying case, the plaintiff alleged that it had a license agreement with the policyholder to allow the policyholder to use its trademarks and trade dress, that the plaintiff terminated the license agreement and that the policyholder continued to use the trademarks and trade dress to sell a competing product. The complaint specifically alleged that the policyholder deliberately infringed the plaintiff’s trademarks and trade dress after termination of the license agreement. The district court held that the defendant was entitled to coverage for its defense costs because, while the plaintiff alleged deliberate action to support a claim for enhanced damages, the plaintiff’s causes of action did not require proof of an intentional act for the policyholder to be found liable. Under this court’s reasoning, as long as the plaintiff in the underlying case can recover without proving that the policyholder acted intentionally, the knowing violation exclusion does not bar coverage for defense costs.
Despite the holding of the Southern District of Florida, policyholders are entitled to coverage of defense costs even when the allegations of the complaint allege intentional acts on behalf of the policyholder. Most courts, including Ohio courts, have followed the analysis set forth in Krispy Krunchy Foods and held that the knowing violation does not bar coverage of defense costs if the plaintiff in the underlying case could recover without proving the act was intentional. If a policyholder receives a denial for coverage of defense costs in an advertising injury case based on the knowing violation exclusion in its CGL policy, it should reach out to coverage counsel as such coverage is available for this type of claim.