In a recent federal court decision out of Colorado, Travelers failed to convince the Court that it had no duty to defend its insured based on its IP exclusion (barring coverage for patent infringement claims). Travelers’ subsidiary, Charter Oak, attempted to dodge coverage for its insured, Minute Key, Inc., under a liability policy. Minute Key was sued by a competitor, Hillman Group, who claimed that Minute Key falsely accused Hillman of patent infringement, and in doing so sought to steal business from it. There was no patent infringement claim against the insured!

The Charter Oak/Travelers policy provided “Personal and advertising injury” coverage. Advertising injury was defined as “…injury, other than “personal injury,” caused by one or more of the following offenses: (1) oral or written publication … in your “advertisement” that “disparages a person’s or organization’s goods, products or services… .” Likewise “Personal injury” was defined as “… Oral or written publication … that … disparages a person’s or organization’s goods, products or services… .”

The IP Exclusion states that the “insurance does not apply “Personal injury or advertising injury arising out of …Patent…[infringement]”.

The underlying lawsuit began as a declaratory judgment action where Hillman sought a declaration of non-infringement and invalidity under the Patent Act against Minute Key. Then its suit was amended to add a claim of damages for product disparagement under the Lanham Act and state law.

So the coverage issue raised by Travelers was whether Hillman’s disparagement action’s genesis, in patent infringement allegations made by Minute Key against Hillman, brings the action into the exclusion. Ordinarily, insurers (whose policies exclude coverage for patent infringement claims) deny coverage for patent infringement claims made against their insureds!

Thus, Travelers’ counsel took a creative leap on this one! Even in Colorado, which applies the “four corners rule” determining duty to defend just on the allegations in the Complaint as against the Policy, it is evident Travelers had to defend. This is because the duty to defend arises when the underlying complaint alleges any facts that might fall within coverage. The district court readily decided in favor of the policyholder because while Travelers broad reading of its exclusion was “colorable,” it was not conclusive. The coverage grant expressly included the obligation to defend the underlying claims of product disparagement—and coverage grants are to be applied broadly—Colorado law is to construe the duty to defend “liberally with a view toward affording the greatest possible protection to the insured.” (Thompson v. Maryland Cas. Co., 84 P. 3d 496, 502 (Col. 2004)).

The Court found the IP Exclusion ambiguous in the context of the facts of the case (which seems generous), but that ambiguity finding meant the Court was required to rule against Travelers. Travelers’ effort to argue for a broad interpretation of its exclusion also runs counter to California law, which requires exclusions to be interpreted narrowly as they seek to limit coverage grants which are, in contrast, to be interpreted broadly. This does not stop aggressive insurer counsel from continuing to flaunt the rules of interpretation—arguing the very opposite of what the rules of construction allow.