Whether an insurer has a duty to defend is a fact-specific inquiry, and California courts review a broader set of facts when engaging in this inquiry than many jurisdictions. But differing facts alone arguably do not explain the divergent analysis of two recent California appellate court decisions from the same appellate district applying identical policy language.

Both decisions applied California law and analyzed the availability of coverage under an advertising injury provision in a commercial general liability policy. The policy language at issue provided coverage for “injury ... arising out of ... oral, written, or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.”

Both cases turned on the question of disparagement, yet the two decisions took decidedly different approaches to determining whether an underlying suit alleged a potentially covered liability.#

Hartford Casualty Insurance Company v. Swift Distribution Inc.

In Hartford Casualty Insurance Company v. Swift Distribution Inc., No. B234234, 2012 Cal. App. (Cal. Ct. App. Oct. 29, 2012), the Second District Court of Appeal of California affirmed a grant of summary judgment, finding that the insurer had no duty to defend or indemnify its policyholder against a suit alleging Lanham Act and unfair competition claims.

In this case, the insured sought a defense against a lawsuit alleging that it had “impermissibly manufactured, marketed and sold” its product, which allegedly “infringed patents and trademarks” belonging to its competitor.[1] The insured argued on appeal that the lawsuit against it alleged “facts that constituted the potentially covered offense of disparagement” under the policy.[2]In reviewing the trial court’s grant of summary judgment, the Swift court considered the underlying complaint against the insured, as well as “all facts known to the insurer from any source,” including the allegations in the competitor’s application for a temporary restraining order and the competitor’s responses to interrogatories.[3]

The appellate court noted that the competitor’s claims were that the insured had engaged in false advertising of its product with the intent to mislead the public “as to the origin and ownership of rights” in the competitor’s mark.[4]The court then compared these facts against the language of the insurance policy, noting that a disparagement claim under the policy required more than false advertising generally.[5] The court explained that disparagement, or injurious falsehood, “must specifically refer to the derogated property, business, goods, product, or services either by express mention or reference by reasonable implication.”[6] Here, there was no such express disparagement of the competitor or its products, as neither was mentioned in the challenged advertisements.

The appellate court also rejected the insured’s argument that the underlying lawsuit involved allegations of “disparagement by implication,” as the advertisements contained no specific reference to the competitor’s product, no false comparisons to that product, and no false claims of ownership over unique technology related to the product, among other reasons.

Because the underlying lawsuit merely alleged that the insured made false statements about its own product, with no disparagement of the competitor’s product, the court affirmed the trial court’s declaration that the underlying lawsuit did not potentially involve a covered advertising injury claim and that, therefore, the insurer had no duty to defend.

Travelers Property Casualty Co. of America v. Charlotte Russe Holding Inc.

The Swift decision stands in contrast with the earlier Court of Appeal decision in Travelers Property Casualty Co. of America v. Charlotte Russe Holding Inc., 207 Cal. App. 4th 969 (Cal. Ct. App. 2012), where the court found a duty to defend under identical policy language.

There, the insured was a clothing store alleged to have published sharply discounted prices for goods that “had been identified in the market as premium, high-end goods,” and those discounted prices allegedly implied that the goods were not in fact high-end.[7] The manufacturer of the discounted goods brought suit.

The court explained that “the question here ... is not whether the underlying claims expressly allege that the Charlotte Russe parties disparaged Versatile’s products, but whether the allegations may be understood to accuse the Charlotte Russe parties of statements and conduct ‘that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.’”[8]

The court found that the manufacturer’s allegations regarding the discounted pricing “pled that the implication carried by the Charlotte Russe parties’ pricing was false,” and that was “enough” to trigger the insurer’s duty to defend.[9]The Swift court first determined that the Charlotte Russe decision was inapplicable on its facts, but then proceeded to reject its underlying analysis all the same. The court expressly rejected the notion that “even a steep reduction in price” could constitute “disparagement” within the meaning of this policy language.[10]

Although the court recognized that a price reduction could be “injurious to the brand or its high-end, high-quality reputation,” it specifically found that “it is not false and is thus not disparagement.”[11] It further noted that the discounted pricing did not qualify as a “publication that specifically refers to the plaintiff,” and thus declined to follow any reasoning or analysis in Charlotte Russe.[12]

Both the Swift and Charlotte Russe courts essentially recognized the same rules at play — actual falsehood and specific reference to the derogated party’s goods or services — but as the Swift court made clear, if faced with the same dispute, it would have ruled differently than Charlotte Russe and found no duty to defend.

How then — when the rules are agreed but the answers are not in accord — is an insurer to proceed with any comfort going forward?Where Charlotte Russe casts a somewhat broader net regarding an insurer’s duty to defend under an advertising injury provision, the Court of Appeal’s more recent decision in Swift reaffirms that such defense provisions limit the duty to defend to suits involving an actual potential for coverage.

The area of dispute here (albeit in dicta) centered on interpreting “disparagement by implication.” And while distilling a general rule from a pair of cases is often a fool’s errand — as evident by the divergent views within these two cases alone — stated simply, where the implication is too far removed, a potential for coverage is likewise too remote to trigger a duty to defend.

Law360, New York (November 30, 2012, 1:20 PM ET)