A false advertising suit filed by a competitor triggered coverage under a liability policy, according to a federal court in Illinois. This case presents the classic insurance principles that the duty to defend is broadly construed and applies as long as there is a “potential for coverage” and exclusions are narrowly construed and limited in application.

Teikoku Pharma USA filed a complaint alleging false advertising by JAR Laboratories LLC. Teikoku distributes a pharmaceutical product called Lidoderm, a prescription-only patch that contains lidocaine used as a topical analgesic. JAR mounted an advertising campaign to launch a competitive product, the LidoPatch, which was to be sold over the counter.

Here, Teikoku claimed that JAR issued a press release and made comments on its website about LidoPatch that were false and misleading, such as “relief that lasts all day, without a prescription!” and “[l]ike the prescription brand, LidoPatch will provide relief for up to 24 hours.” According to Teikoku, the statements relayed the message that the two products were equally as effective and could be used interchangeably.

JAR sought coverage under policies issued by Great American E&S Insurance Co. (one primary, one excess policy). The policies provided coverage for “personal and advertising injury” defined as injury arising out of “[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.”

The primary policy also contained two exclusions: one for claims alleging infringement of intellectual property such as copyright and unfair competition, and a second based upon injury arising out of the failure of goods or products to conform with statements of quality or performance made in an advertisement.

Great American took the position that it had no duty to defend or indemnify JAR. The insurer argued that the statements at issue in the underlying suit could not reasonably be read to allege that JAR disparaged Lidoderm because the statements all referred to its own product, LidoPatch. The court disagreed and held “[t]hat [JAR’s] statements did not identify Lidoderm by name is immaterial,”; “Whatever words [JAR] used, [Teikoku] clearly understood (and alleges that ‘a substantial segment of consumers’ would likewise believe) that plaintiff’s implicit ‘message’ was about Lidoderm.” Significantly, the court did not limit its analysis to the actual words chosen by the defendant in its advertisement campaign but, rather, honed in on the practical import those words would have in the intended market. Clearly, in contrast, the marketing campaign meant to diminish the superiority of plaintiff’s superior product.

To read the decision in JAR Laboratories LLC v. Great American E&S Insurance Co., click here.

Why it matters: The lesson of this Illinois decision is that words alone cannot define the applicability of a policy to a given set of facts. It is critical that the insurance policy is carefully read and its intended scope of coverage fully understood. From that vantage point the policy is superimposed on what is really at issue in the underlying dispute rather than invoking a hyper technical application of words or labels used in a given pleading.

The court refused to apply the two potentially applicable exclusions raised by defendant under a similar practical analysis. Rigid application of exclusions that make no sense in a real-world context runs counter to the rule that exclusions are narrowly applied. A policyholder needs to understand these guiding principles at the outset of any effort to seek coverage for a given claim.