Chapter 23: Advertisement-Specific Exclusions I. Chapter Introduction and Overview
This chapter focuses on two subgroups of exclusions to personal and advertising injury liability coverage: (1) exclusions related to the insured’s contractual liability – both liability for breach of contract and liability to a third party that the insured has assumed in a contract or agreement; and (2) exclusions that focus on specific kinds of false or misleading advertising statements. First are the exclusions for liability assumed in a contract (exclusion e. of the CGL form) and liability for breach of contract (exclusion f.). The scope and application of the breach of contract exclusion is frequently litigated when conduct that constitutes a personal and advertising injury offense has a nexus to a contract between the claimant and the insured that the claimant alleges has been breached. Second are the exclusions that preclude coverage for claims based on allegations that the insured’s goods, products or services do not conform to their advertised quality or performance (exclusion g.) or that the insured’s advertisements misstated the price of the insured’s goods or services (exclusion h.). Thorny questions of interpretation can arise regarding these exclusions. II. Burden of Proof and General Rules of Policy Interpretation Related to Exclusions As discussed in prior chapters addressing exclusions to coverage for personal and advertising injury liability, general rules of insurance policy interpretation influence the construction of the exclusions discussed in this chapter. In particular, courts generally adhere to the maxim that exclusions should be interpreted narrowly so that coverage is not unduly restricted. See, e.g., Harleysville Mut. Ins. Co. v. Buzz Off Insect Shield, L.L.C., 692 S.E.2d 605, 612, 364 N.C. 1 (N.C. 2010) (“[W]e strictly construe against an insurance company those provisions excluding coverage under an insurance policy.”); JAR Labs. LLC v. Great Am. E&S Ins. Co., No. 12 C 7134, 2013 WL 1966386, at *7 (N.D. Ill. May 10, 2013) (“[P]rovisions limiting or excluding coverage ‘are . . . construed liberally in favor of the insured and against the insurer.’”); Westfield Ins. Co. v. Robinson Outdoors, Inc., 700 F.3d 1172, 1175 (8th Cir. 2012) (“Insurance contract exclusions are construed strictly . . . and narrowly against the insurer.”); Bridge Metal Indus., L.L.C. v. Travelers Indem. Co., 812 F. Supp. 2d 527, 542-43 (S.D.N.Y. 2011) (“An insurer must establish that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case.”); Westfield Ins. Co. v. Factfinder Mktg. Research, Inc., 168 Ohio App. 3d 391, 860 N.E.2d 145, 154 (1st Dist. 2006) (“[U]nder Ohio law, ‘an exclusion in an insurance policy will be interpreted as applying only to that which is clearly intended to be excluded.’” (emphasis in original)). In addition, the insurer bears the burden of proving that an exclusion applies. See, e.g., Looney Ricks Kiss Architects, Inc. v. State Farm Fire & Cas. Co., 677 F.3d 250, 256 (5th Cir. 2012) (“The insurer has the burden of proving that a policy claimed loss falls within an exclusion.”); Hartford Fire Ins. Co. v. Vita Craft Corp., 911 F. Supp. 2d 1164, 1176 (D. Kan. 2012) (“The insurance company has the duty to show that a specific provision of the policy excludes coverage.”); Liberty Ins. Corp. v. Tinplate Purchasing Corp., 743 F. Supp. 2d 406, 411 (D.N.J. 2010) (“[T]he burden is on the insurer to bring the case within the exclusion.”); see also CGS Indus., Inc. v. Charter Oak Fire Ins. Co., 777 F. Supp. 2d 454, 460 (E.D.N.Y. 2011) (noting, under New York law, the insured bears the burden of establishing that an exception to an exclusion applies). These two rules of interpretation tip the scales slightly in the insured’s favor whenever there are questions concerning whether an exclusion applies to bar coverage.304 ■ Coverage B: Personal and Advertising Injury Compendium ■ 2014 III. Contractual Liability Exclusion (Exclusion e.) Both Coverage A and Coverage B of the CGL policy contain exclusions for liability an insured has assumed in a contract or agreement and that the insured would not have borne but for its agreement to assume this liability. The exclusion that appears in Coverage B for personal and advertising injury liability states: This coverage does not apply to “personal and advertising injury” for which the insured has assumed liability in a contract or agreement. This exclusion does not apply to liability for damages that the insured would have in the absence of the contract or agreement. The intent of this exclusion is to eliminate coverage for the insured’s liability under indemnification or hold harmless agreements with third parties in which the insured takes on obligations that would not otherwise be imposed under the law. However, the exclusion does not apply to all claims against the insured for breach of contract. As explained by the Supreme Court of Alaska, “‘liability assumed by the insured under a contract’ refers to liability incurred when one promises to indemnify or hold harmless another, and does not refer to the liability that results from a breach of contract.” See Olympic, Inc. v. Providence Washington Ins. Co., 648 P.2d 1008, 1010 (Alaska 1982). This type of contractual liability is addressed under the policy’s “Breach of Contract” exclusion. Cases evaluating the applicability of the “Liability Assumed by Contract” exclusion typically involve an independent assessment of both parts of the exclusion – first, whether the insured has agreed to indemnify a third party for that party’s liability for personal and advertising injury; and second, whether the exception to the exclusion applies because the insured could be held liable for such personal and advertising injury in the absence of its agreement to indemnify. Whether the exclusion bars coverage typically depends on the nature of the underlying liability and the indemnification agreement at issue. An instructive case is CBL & Associates Management, Inc. v. Lumbermens Mutual Casualty Co., No. 1:05-CV-210, 2006 WL 2087625 (E.D. Tenn. July 25, 2006), in which the court evaluated whether an insured landlord had assumed liability for wrongful eviction in an indemnity provision of a lease with a tenant and whether this liability could have been imposed on the insured in the absence of the indemnity provision of the lease. The court first held that under the lease, the insured landlord had agreed to assume its tenant’s liability for wrongful eviction. The court then evaluated the exception to the exclusion. After a detailed analysis of the landlord’s potential liability for wrongful eviction in the absence of its agreement to indemnify the tenant, the court held that the insured would not have liability in the absence of its agreement to indemnify the tenant. Accordingly, the “Liability Assumed by Contract” exclusion applied. See id., at *11-12. CGS Industries, Inc. v. Charter Oak Fire Insurance Co., 777 F. Supp. 2d 454 (E.D.N.Y. 2011), addressed the “Liability Assumed by Contract” exclusion in the context of a trademark and trade dress infringement claim. There, the insured had supplied merchandise to Wal-Mart under a supplier agreement that obligated the insured to indemnify Wal-Mart for infringement claims related to the merchandise. When a third-party sued both the insured and Wal-Mart for infringement, Wal-Mart sought indemnity from the insured. The insured, in turn, sought coverage for this indemnity obligation from its insurer. The court held that the Liability Assumed by Contract exclusion did not apply because, although the insured had agreed to indemnify Wal-Mart for infringement liability, this was not the sole source of the insured’s indemnification obligation. Independent of the supplier agreement’s indemnity provisions, the insured was also obligated to indemnify Wal-Mart for infringement under Section 2-312(3) of the New York Uniform Commercial Code. The court opined: The critical question is not what the supplier agreement provides with respect to [the insured’s] duty to indemnify Wal-Mart. It is whether section 2-312(3) confers on Wal-Mart an independent Chapter 23: Advertisement-Specific Exclusions ■ Hamilton and Kozloff ■ 305 legal right to indemnification from [the insured]. The contract between [the insured] and WalMart is, for the purpose of this insurance agreement, a mere decorative counterpane over the blanket protection of the law – section 2-312(3). Accordingly, the exception to the exclusion applied and coverage was invoked. Id. at 460-62 (E.D.N.Y. 2011); see also Encore Receivable Mgmt. v. ACE Prop. & Cas. Ins. Co., No. 1:12-cv-297, 2013 WL 3354571 (S.D. Ohio July 3, 2013) (contractual liability exclusion did not apply because the insured “would be liable for the operation of its call centers even absent its agreement with [the claimant]”). IV. Breach of Contract Exclusion (Exclusion f.) Many provisions of the CGL policy support the concept that CGL coverage is not intended to cover the insured’s liability for purely contractual obligations. These include Coverage A’s requirement that covered bodily injury or property damage be the result of an “occurrence” or accident. However, because Coverage B for personal and advertising injury is not occurrence-based coverage, in that it applies to injuries arising from the defined personal and advertising offenses, Coverage B contains a “Breach of Contract” exclusion that is not found in Coverage A. Questions regarding application of the “Breach of Contract” exclusion frequently arise in claims between business competitors involving advertising conduct and the personal and advertising injuries of misappropriation of advertising ideas in advertisement or infringement of copyright, trade dress or slogan. These claims frequently involve license agreements, franchise agreements, confidentiality agreements, or non-compete agreements that are alleged to have been breached. Other kinds of contracts that can give rise to “Breach of Contract” exclusion claims include settlement agreements and, occasionally, leases or rental agreements. A. The Policy Language Coverage B’s “Breach of Contract” exclusion provides as follows: This insurance does not apply to: “Personal and advertising injury” arising out of a breach of contract, except an implied contract to use another’s advertising idea in your “advertisement”. B. Interpretation of the Exclusion 1. “Arising Out of Breach of Contract” Cases interpreting the “Breach of Contract” exclusion predominately involve the question of how to interpret the phrase “arising out of breach of contract.” The exclusion does not bar coverage for claims “for breach of contract,” “alleging breach of contract,” “seeking damages for breach of contract” or other language that would expressly limit the exclusion to breach of contract claims. Rather, the phrase “arising out of breach of contract” indicates that the exclusion could be more broadly applied. How much more broadly it is applied depends on how “arising out of breach of contract” is interpreted. There are competing approaches to the interpretation of this phrase. a. Broad Interpretation of “Arising Out of Breach of Contract” Some courts have applied a broad interpretation of “arising out of” in the “Breach of Contract” exclusion. These courts have explained that “arising out of” means “originating from,” “having its origins in,” “growing out of,” or “flowing from.” See, e.g,. Callas Enters., Inc. v. Travelers Indem. Co., 193 F.3d 952, 955-56 (8th Cir. 1999) (applying Minnesota law); Westfield Ins. Co v. Factfinder Mktg. Research, Inc., 168 Ohio App. 306 ■ Coverage B: Personal and Advertising Injury Compendium ■ 2014 3d 391, 860 N.E.2d 145, 404 (Ohio App. Ct. 2006). Other courts interpret “arising out of” by holding that “‘[a] claim need only bear an “incidental relationship” to the described conduct for the exclusion to apply.” Sport Supply Grp., Inc. v. Columbia Cas. Co., 335 F.3d 453, 459 (5th Cir. 2003) (applying Texas law). A third way courts have articulated the broad interpretation of “arising out of” is New Jersey’s “substantial nexus” test. See Liberty Ins. Corp. v. Tinplate Purchasing Corp., 743 F. Supp. 2d 406, 411-12 (D.N.J. 2010); N. Plainfield Bd. of Educ. v. Zurich Am. Ins. Co., No. 05-4398 (MLC), 2008 WL 2074013, at *9 (D.N.J. May 15, 2008). Although courts have used various terms to explain the broad interpretation of the exclusion, the result of this interpretation is that as long as there is “some causal relationship between the injury and the risk,” the exclusion will apply. Essex Ins. Co. v. Edizone, LC, No. 2:07-cv-00984-BSJ, 2011 WL 1791643, at *5 (D. Utah May 10, 2011). Under the broad interpretation of “arising out of,” claims and causes of action based on legal theories other than breach of contract are equally excluded as long as a breach of contract was part of the conduct giving rise to a claim. b. Narrow Interpretation of “Arising Out of Breach of Contract” In recognition of the principle that policy exclusions should be interpreted narrowly, other courts have adopted a more restrictive view of “arising out of” as it is used in the “Breach of Contract” exclusion. This interpretation is that injury arises out of a breach of contract if no injury would have taken place and no claim could be asserted against the insured “but for” the breach of contract. See, e.g., Hugo Bass Fashions, Inc. v. Fed. Ins. Co., 252 F.3d 608, 623 n.15 (2dCir. 2001) (applying New York law); Looney Ricks Kiss Architects, Inc. v. State Farm Fire & Cas. Co., 677 F.3d 250, 256 (5th Cir. 2012) (applying Louisiana law). In other words, even if the insured breached a contract with the claimant, the exclusion does not apply if the claimant asserts claims that could exist or be sustained independent of the breach of contract. Using the narrow interpretation of “arising out of,” courts focus on the nature of the claims asserted and the role the alleged breach of contract played in those claims. Claims based on tortious conduct or duties that arise under tort law or statute, rather than under a contractual relationship, do not fall within the “Breach of Contract” exclusion. See Hugo Boss, 252 F.3d at 621; see also Houbigant, Inc. v. Fed. Ins. Co., 374 F.3d 192, 203 (3d Cir. 2004) (applying New Jersey law); Zurich Ins. Co. v. Killer Music, Inc., 998 F.2d 674, 678 (9th Cir. 1993) (applying California law); Aearo Corp. v. Am. Int’l Specialty Lines Ins. Co., 676 F. Supp. 2d 738, 750-51 (S.D. Ind. 2009). The exclusion will apply only if the claim could not be asserted in the absence of the alleged breach of contract. See Fantasia Accessories, Ltd. v. N. Assurance Co., No. 01 Civ. 663(AGS), 2001 WL 1478807, at *9 (S.D.N.Y. Nov. 20, 2001) (holding statutory breach of warranty claim that was dependent on breach of sales agreement was excluded under breach of contract exclusion under the “but for” standard for interpreting the phrase “arising out of”). Under this standard, courts generally hold that claims that do not assert breach of contract and claims that are based on rights and obligations existing under the contract that are collateral to the legal claims asserted are not excluded. For example, in Looney Ricks Kiss Architects, the court stated: Louisiana courts will not apply the “breach of contract” exclusion to preclude an insurer’s liability for a tort action, even though the same factual basis could support claim for breach of contract. . . . A claim for relief cannot be considered to have “arisen from” a breach of contract where the legal support for the claim emanates from a source other than contract law. 677 F.3d at 257. Where a claim does not assert breach of contract, but nonetheless is dependent on the rights and obligations under the contract, the exclusion should apply. For example, in Nutrisystem, Inc. v. National Fire Insurance Co of Hartford, No. Civ. A. 03-6932, 2004 WL 2646598 (E.D. Pa. Nov. 19, 2004), the court held that claims for tortious interference with business expectancy, tortious interference with contract, and unjust Chapter 23: Advertisement-Specific Exclusions ■ Hamilton and Kozloff ■ 307 enrichment fell within the breach of contract exclusion because these claims alleged that the insured tortiously interfered with, and was unjustly enriched by violating the territorial marketing terms established in, a franchise agreement; therefore, the tortious interference and unjust enrichment claims could not exist but for the breach of the franchise agreement. Id. at *5-6. Likewise, in situations where only a breach of contract claim is alleged, the exclusion will apply even if the insured’s conduct could have given rise to tort claims that may not have been excluded under the narrow interpretation of the exclusion. See Advance Watch Co. v. Travelers Prop. Cas. Co., No. 10 Civ. 3305(NRB), 2011 WL 446271, at *3-4 (S.D.N.Y. Jan 21, 2011). 2. Does the Insured Have to Be a Party to the Contract Alleged to Have Been Breached? Some courts have also addressed whether the “Breach of Contract” exclusion applies when the insured is not a party to the contract alleged to have been breached. This issue has appeared in claims alleging breach of confidentiality, trade secret, or non-compete provisions of a contract between the plaintiff company and individual employees who subsequently become the insured’s employees. In these circumstances, the named insured was not a party to the contract alleged to have been breached. In the few cases interpreting the “Breach of Contract” exclusion under these circumstances, the results are in conflict. Courts taking a narrow interpretation of the exclusion have held that the breach of contract exclusion does not apply if the named insured entity was not a party to the contract that was breached. See Kinko’s, Inc. v. Shuler, 646 N.W.2d 855, 255 Wis. 2d 834 (Wis. Ct. App. 2002) (finding breach of contract exclusion did not apply when former Kinko’s employees started insured company and Kinko’s sued company based on the employees’ misappropriation of trade secrets and breach of non-compete provisions of employment contracts because employees, not the insured, were parties to the contract alleged to have been breached); see also Interface, Inc. v. Std. Fire Ins. Co., 2000 U.S. Dist. LEXIS 14019, at *14 (N.D. Ga. August 10, 2000). However, employing a broader interpretation of the exclusion whereby claims of injury originating from or flowing out of a breach of contract are excluded, courts have held that the exclusion applies even if the named insured was not a party to the contract that was breached. See Liberty Corporate Capital Ltd. v. Security Safe Outlet, Inc., No. 5:12-cv-178-KSF, 2013 WL 1311231, at *9 (E.D. Ky. March 27, 2013) (the breach of contract exclusion applied even though the insured was not a party to the contract because the insured’s contractual breach was the predicate of all claims asserted) (appeal pending); Petronet LLC v. Hartford Cas. Ins. Co., No. 10-3675 (DWF/JJK), 2011 WL 2960240, at *5 (D. Minn. July 21, 2011). C. Contracts That Commonly Appear in Coverage Disputes Involving the Breach of Contract Exclusion 1. License Agreements, Franchise Agreements, Confidentiality, Trade Secrets, and Non-Disclosure Agreements A common fact pattern in cases addressing the “Breach Of Contract” exclusion is as follows: (a) the insured enters into a contract granting it a right to sell another company’s products and to use related intellectual property, such as trademarks or trade secrets; (b) the insured breaches that contract by selling the other company’s products or using its intellectual property in a manner not permitted under the contract; and (c) the other company files suit against the insured, alleging causes of action for breach of contract, as well as unfair competition, trademark infringement, misappropriation of trade secrets, tortious interference with contract, and other tort-based claims, all of which flow from the same breaching conduct of the insured. Under the broad interpretation of “arising out of a breach of contract,” all claims and causes of action that flow from the breach of contract, including tort claims and other claims that could be sustained indepen-308 ■ Coverage B: Personal and Advertising Injury Compendium ■ 2014 dently of the breach of contract, would be excluded from coverage. See Callas Enters., 193 F.3d at 956; Sport Supply, 335 F.3d at 465; Gemini Ins. Co. v. Andy Boyd Co., 243 F. App’x 814, 816 (5th Cir. 2007) (applying Texas law) (“For the breach of contract exclusion to apply, the breach of contract need not have caused the injuries. Instead, the breach of contract must merely have had an incidental relationship to or connection with the injuries.”). However, when “arising out of breach of contract” is interpreted narrowly using the “but for” standard, claims that are independent of the breach of contract are not excluded from coverage. In these cases, courts have held that the exclusion does not apply to claims based on the federal Lanham Act, copyright laws, state unfair competition and trade secret statutes, and common law tort claims for tortious interference, even though the conduct that gave rise to these claims would also constitute a breach of contract. See Looney Ricks Kiss Architects, 677 F.3d at 257. 2. Employment and Non-Compete Agreements The “Breach Of Contract” exclusion has also been applied in the context of claims involving alleged breaches of employment and non-compete agreements. Under the broad interpretation of “arising out of breach of contract,” courts have held that statutory and tort based claims that originate from the breach of confidentiality or non-compete provisions of an employment agreement are excluded. See Capital Specialty Ins. v. Indus. Elec., LLC, 407 F. App’x 47, 50 (6th Cir. 2011) (applying Kentucky law); Ross v. Briggs and Moran, 540 N.W.2d 843, 848 (Minn. 1995). However, under the narrow interpretation of “arising out of,” such claims would not be excluded if the breach of the employment agreement was not an essential element of the claim. In other words, if the claim would be sustained without establishing a breach of contract, the exclusion would not apply. 3. Settlement Agreements Courts have had occasion to interpret the “Breach Of Contract” exclusion in the context of claims brought to enforce settlement agreements in which the underlying conduct would trigger coverage for personal and advertising injury. In Axiom Insurance Managers, LLC v. Capitol Specialty Insurance Corp., 876 F. Supp. 2d 1005 (N.D. Ill. 2012), the plaintiff alleged that the insured made disparaging statements about the plaintiff in violation of a non-disparagement provision of a settlement agreement. Although the conduct that allegedly violated the settlement agreement would have triggered coverage for personal and advertising injury, the court held that the breach of contract exclusion applied because the plaintiff ’s claim was only based on breach of the settlement agreement, and the plaintiff had sought liquidated damages provided for under the settlement agreement, in contrast to compensatory damages for defamation. See id. at 1015-17; see also TNI Packaging, Inc. v. Hanover Ins. Co., No. 2-12-0145, 2012 IL App. (2d) 120145-U, at *3-5 (Sept. 21, 2012). 4.Leases The definition of “personal and advertising injury” includes injuries resulting from “wrongful eviction from . . . a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor.” A tenant who brings a wrongful eviction claim against a landlord or property owner may also assert a claim that the landlord or owner breached the lease granting the tenant occupancy. This implicates the “Breach of Contract” exclusion. Courts interpreting the “Breach of Contract” exclusion in the context of a landlord/tenant dispute involving alleged wrongful eviction, have construed the exclusion narrowly, holding that it did not bar coverage for the claim. See Cincinnati Ins. Co. v. Contemporary Distrib., Inc., No. 09 C 2250, 2010 WL 338943, at *4 (N.D. Ill. Jan. 26, 2010) (the “Breach of Contract” exclusion did not apply to a wrongful eviction claim prem-Chapter 23: Advertisement-Specific Exclusions ■ Hamilton and Kozloff ■ 309 ised on a breach of the lease because to do so would render coverage for wrongful eviction under Coverage B “virtually meaningless”); see also Supreme Laundry Serv., L.L.C. v. Hartford Cas. Ins. Co., 521 F.3d 743, 749 (7th Cir. 2008) (applying Illinois law) (rejecting breach of contract exclusion in case involving breach of lease agreement). D. Exception for Misappropriation of Advertising Ideas Under an Implied Contract The “Breach of Contract” exclusion contains an exception for claims arising out of “an implied contract to use another’s advertising idea in advertisement.” The purpose of this exception is to ensure that the exclusion is not applied so broadly that it subsumes coverage provided for the use of another’s advertising idea in the insured’s advertisement, which is an expressly covered offense under the definition of personal and advertising injury. Chapter 14 discusses the scope of coverage provided for use of an advertising idea in the insured’s advertisement. Notably, cases discussing the meaning of “advertising idea” and “advertisement” as used in the definition of “personal and advertising injury” are equally applicable to the interpretation of these terms as used in the exception to the “Breach of Contract” exclusion. See Simply Fresh Fruit, Inc. v. Cont’l Ins. Co., 94 F.3d 1219, 1222 (9th Cir. 1996); Microtec Research Inc., v. Nationwide Mut. Ins. Co., 40 F.3d 968, 971 (9th Cir. 1994); Tradesoft Techs., Inc. v. Franklin Mut. Ins. Co., 746 A.2d 1078, 1086 (N.J. Super. Ct. App. Div. 2000); Century Mut. Ins. Co. v. StunFence, Inc., 292 F. Supp. 2d 1072, 1078-79 (N.D. Ill. 2003); Winklevoss Consultants, Inc. v. Fed. Ins. Co., 991 F. Supp. 1024, 1035 (N.D. Ill. 1998). The court in Sport Supply employed such an analysis in holding that a claim for trademark infringement did not fall within the exception to the breach of contract exclusion. The court specifically held that the trademark in question was neither an advertising idea nor advertising because the mark was a label used to identify the owner’s products and distinguish it from other products, rather than an element of the insured’s marketing or promotional materials. See 335 F.3d at 458-65. V. Quality or Performance of Goods – Failure to Conform to Statements (Exclusion g.) Coverage B’s Personal and Advertising Injury Liability coverage for injury arising out of a publication that libels a person or disparages a person’s or organization’s goods, products or services is intended to address the insured’s statements about another person or entity or its goods or services. This intent is reinforced by the “Quality or Performance of Goods – Failure to Conform to Statements” exclusion, commonly referred to as the Failure to Conform exclusion. A. The Policy Language The Failure to Conform exclusion provides as follows: This insurance does not apply to: “Personal and advertising injury” arising out of the failure of goods, products or services to conform to any statement of quality or performance made in your “advertisement.” B. Interpretation of the Exclusion At its most basic level, the “Failure to Conform” exclusion “envisions a scenario in which the plaintiff shows that the insured’s product is, in reality, something different from what the insured has advertised. . . . Thus, the exclusion removes from coverage ‘personal and advertising injury’ proximately caused by a false 310 ■ Coverage B: Personal and Advertising Injury Compendium ■ 2014 statement an insured has made about its own product.” See Harleysville Mut. Ins. Co. v. Buzz Off Insect Shield, L.L.C., 364 N.C. 1, 692 S.E.2d 605, 613 (2010). Cases analyzing whether the “Failure to Conform” exclusion applies to a particular claim generally revolve around questions over whether a statement was made in the insured’s “advertisement”; whether the exclusion applies to a claim asserted by a competitor of the insured rather than a consumer of the insured’s goods or services; whether the claim can be interpreted to include statements made about the claimant’s products or services, and not just the insured’s own products or services; and the meaning of the term “quality” as it is used in the exclusion. 1. Statements Made in “Advertisement” The “Failure to Conform” exclusion applies only to statements made in the insured’s “advertisement.” The term “advertisement” is typically defined in the CGL policy as: 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. Courts interpreting whether certain conduct or statements are “advertisements” as used in the “Failure to Conform” exclusion and elsewhere in the policy generally enforce the terms of the definition. As discussed in detail in Chapter 11 of the Compendium, conduct or statements that are not disseminated broadly to the public or market segments or that serve a purpose other than attracting customer or supports will not be considered “advertisement.” 2. Consumer Claims vs. Competitor Claims A second issue courts have addressed is whether the “Failure to Conform” exclusion applies only to false advertising claims asserted by consumers of the insured’s goods, products or services, or whether the exclusion also applies to claims asserted by the insured’s competitors. The exclusion’s applicability to traditional consumer-initiated false advertising claims is generally not subject to debate. See Robinson Outdoors, 700 F.3d at 1175. However, courts have generally rejected attempts to limit the exclusion to just consumer claims. See Total Call Int’l, Inc. v. Peerless Ins. Co., 181 Cal. App. 4th 161, 104 Cal. Rptr. 3d 319, 328 (2d Dist. 2010). In addition, the exclusion has been applied in instances involving disputes between an insured and its competitor. See, e.g., Buzz Off, 692 S.E.2d at 609; Skylink Techs., Inc. v. Assur. Co. of America, 400 F.3d 982, 983 (7th Cir. 2005); Dollar Phone Corp. v. St. Paul Fire and Marine Ins. Co., 514 F. App’x 21, 22 (2d Cir. 2013); Jarrow Formulas, Inc. v. Steadfast Ins. Co., No. 2:10-CV-810-JST, 2011 WL 1399805, at *5 (C.D. Cal. Apr. 12, 2011); Superformance Int’l Inc. v. Hartford Cas. Ins. Co., 203 F. Supp. 2d 587, 589-90 (E.D. Va. 2002). 3. Direct vs. Indirect Disparagement of the Claimant’s Goods, Products or Services The clear case of when the “Failure to Conform” exclusion applies is a claim alleging that the insured engaged in false advertising by making false statements about the quality of its own goods or services. See Robinson Outdoors, Inc., 700 F.3d at 1175; see also Dollar Phone Corp. v. St. Paul Fire and Marine Ins. Co., No. cv-09-1640, 2012 WL 1077448, at *10 (E.D.N.Y. Mar. 9, 2012) (finding claim for injury caused by alleged misrepresentations about the insured’s products was “precisely the type of harm contemplated by the plain language of the non-conformity exclusion”); PCB Piezotronics, Inc. v. Kistler Instrument Corp., No. 96-CV- 0512E(F), 1997 WL 800874, at *3 (W.D.N.Y. Dec. 31, 1997) (excluding coverage for claims that insured misrepresented the nature, characteristics and qualities of its own products). The exclusion’s application is less clear when the claim alleges that the insured’s statements about its own products or services indirectly disparage by implication the claimant’s goods or services. As discussed in Chapter 23: Advertisement-Specific Exclusions ■ Hamilton and Kozloff ■ 311 detail in Chapter 6 of this Compendium, a typical fact pattern in an implied disparagement claim is that the insured’s statements about the superior qualities or characteristics of its own product implicitly disparage the claimant’s product by making a false comparison. Examples are statements that the insured’s product is the “first” or “only” product on the market with a certain characteristic or that the insured’s product is “superior to” or “more powerful” or “more advanced” than other products. See Tria Beauty, Inc. v. Nat’l Fire Ins. Co. of Hartford, No. C 12-05465 WHA, 2013 WL 2181649, at *3 (N.D. Cal. May 20, 2013); E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co., 590 F. Supp. 2d 1244, 1253 (N.D. Cal. 2008). Some courts have held that the “Failure to Conform” exclusion does not apply to implied disparagement claims due to the fact that the claimant’s injury does not arise from statements about the insured’s own product or that the insured’s product does not live up to the advertised qualities; rather, the injury arises from the negative perception of the claimant’s product or service created by implication, regardless of the truth or falsity of the statement about the insured’s products. See Tria Beauty, 2013 WL 2181649, at *4-6; JAR Labs., 2013 WL 1966386, at *5 (noting insured’s statements that did not refer to claimant by name were clearly directed at the claimant’s product and made false comparison between the insured’s product and plaintiff ’s product); E.piphany, 590 F. Supp. 2d at 1253-54 (implied disparagement claim made negative comparisons about plaintiff ’s products and was therefore not excluded). However, in other cases, courts have held that coverage for claims of implied disparagement are excluded by the “Failure to Conform” exclusion. For example, in Dollar Phone, the plaintiff claimed that the insured falsely advertised its phone card product by making false statements about the number of minutes the insured’s card provided. The court held that the “Failure to Conform” exclusion applied because “the failure of [the insured’s] products to perform as promised [was] the entire basis of . . . the plaintiff ’s alleged injuries [and] the harm to . . . the plaintiff ’s reputation [was] premised entirely on the inaccuracy of [the insured’s] promises as to the number of minutes their [phone] cards provide[d].” 2012 WL 1077448, at *10. Although the insured argued that the alleged false statements about the insured’s product created a false impression that the plaintiff ’s products were inferior, the court held that this implied disparagement did not negate the exclusion. See id.; see also Jarrow Formulas, Inc. v. Steadfast Ins. Co., No. 2:10-cv-801-JST, 2011 WL 1399805, at *6 (C.D. Cal. April 12, 2011) (holding that failure to conform exclusion applied to claim involving statements about insured’s product that did not make indirect reference to the claimant’s product). The court in Buzz Off likewise rejected the insured’s argument that coverage for an implied disparagement claim was not barred by the “Failure to Conform” exclusion. In this case, the insured sold clothing with insect repellant incorporated into the fabric. The insured was sued by S.C. Johnson & Son, Inc. (“SCJ”), which sold topical insect repellants. The North Carolina Supreme Court evaluated each of the allegations in the underlying claim that the insured contended rendered the exclusion inapplicable, rejecting the insured’s attempt to avoid the “Failure to Conform” exclusion by characterizing the allegations as including false statements concerning the plaintiff ’s products. First, the court addressed statements that the insured’s product was “superior in performance to topical insect repellants, such as those containing DEET.” The court stated that “the comparison is alleged to be false not because [the insured] made representations that SCJ’s products were ineffective, but because [the insured] made allegedly false claims that their products worked as well, if not better than SCJ’s products . . . [a]s such, the alleged falsity of the advertisements arises from the failure of the [insureds’] products to actually perform as well as [the insureds] claim they perform.” Next, the court addressed the insured’s advertising statements that topical insect repellents were “messy,” “nasty” and “a hassle.” The court observed that although these statements implied that SCJ’s products were a nuisance—SCJ did not allege that these descriptions of its products were false. The court also stated that these statements were opinions that likely were not actionable as a source of injury in the plaintiff ’s claim. Finally, as to the insured’s statements that its products were 312 ■ Coverage B: Personal and Advertising Injury Compendium ■ 2014 naturally derived, the court concluded that “while SCJ did allege that [the insured’s] advertisements portrayed SCJ’s products in a negative light, the alleged falsity of that portrayal lies solely in the alleged failure of [the insured’s] products to be of the quality and as effective as [the insured] claimed.” 692 S.E.2d at 621-22. For these reasons, the court found that the “Failure to Conform” exclusion precluded coverage. 4.Interpretation of “Quality” of Goods and Services Insurers seeking a broad interpretation of the “Failure to Conform” exclusion have argued that the word “quality” used in the exclusion should be interpreted to refer to any characteristic or attribute of the insured’s product or services. This argument is premised on the dictionary definition of the term “quality” as a “peculiar or essential character” or “an inherent feature.” However, courts have rejected this broad definition of “quality” in favor of a narrow interpretation that refers to the fitness or degree of excellence of the product. For example, in Flodine v. State Farm, No. 99 C 7466, 2001 WL 204786 (N.D. Ill. Mar. 1, 2001), the court observed that the exclusion refers to failure to conform to advertised “quality or performance.” Id. at *12. “When read in the context of the entire sentence, ’quality‘ has a more specific meaning of ’excellence‘; this exclusion bars coverage for claims arising from the failure of the insured’s products to perform as well as advertised.”Id.; see also Jewels Mut. Ins. v. Milne Jewelry Co., No. 2:06-CV-243 TS, 2006 WL 3716112, at *3 (D. Utah Dec. 14, 2006) (finding “quality” ambiguous because it is susceptible to two reasonable meanings); Elcom Techs., Inc. v. Hartford Ins. Co., 991 F. Supp. 1294, 1298 (D. Utah 1997) (holding failure to conform exclusion did not apply because claim did not allege that insured’s product failed to rise to the level advertised); Decisionone Corp. v. ITT Hartford Ins. Group, 942 F. Supp. 1038, 1043 (E.D. Pa. 1996) (exclusion did not apply because claim did not allege that quality of the insured’s product failed to rise to the level advertised). VI. Wrong Description of Prices (Exclusion h.) Similar to the “Failure to Conform” exclusion is the “Wrong Description of Prices” exclusion, which negates coverage for claims for personal and advertising injury “arising out of the wrong description of the price of goods, products or services stated in [the insured’s] ‘advertisement.’” Like the “Failure To Conform” exclusion, this exclusion applies only to the statements made in the insured’s “advertisement.” There is scant case law regarding this exclusion, which suggests that little disagreement exists over what constitutes a “wrong description of price” claim or how the exclusion is applied. By its terms, the exclusion applies when the claim alleges injury caused by false statements about the price of the insured’s goods, products or services. See Dollar Phone, 2012 WL 1077448, at *10 (holding that the exclusion did not apply because the underlying claim lacked allegations that consumers were charged more or less than the price advertised). To the extent questions arise concerning the interpretation of the terms “arising out of” or “advertisement,” cases interpreting these terms as they are used in other exclusions or elsewhere in the policy would likely apply equally to this exclusion. Notably, variations of the “Wrong Description of Prices” exclusion exist. For example, in New Hampshire Insurance Co. v. Power-O-Peat, Inc., 907 F.2d 58 (8th Cir. 1990), the exclusion considered by the court was different from the one that appears in the CGL coverage form. In this case, the exclusion provided that the policy did not apply to advertising injury “arising out of incorrect description or mistake in advertised price of good [sic], products or services sold, offered for sale or advertised.” The court held that this exclusion applied to a claim involving either a mistake in advertised prices or an incorrect description of goods. Therefore, the underlying claim alleging that the insured mislabeled its products was excluded from coverage. See id. at 59. Arguably, the court misinterpreted this exclusion by reading “incorrect description” separately from Chapter 23: Advertisement-Specific Exclusions ■ Hamilton and Kozloff ■ 313 “in advertised price.” One could reasonably interpret the exclusion more narrowly to mean that it applies to an incorrect description in the advertised price or a mistake in the advertised price. Nevertheless, under the typical “Wrong Description of Prices” exclusion used in the CGL coverage form, this claim would not fall within the exclusion because the exclusion applies only to claims involving a wrong description of the price of the insured’s good, products or services.