MGA Entertainment Inc. is entitled to defense coverage from its umbrella insurers National Union Fire Insurance Co. and Chartis Specialty Insurance Co. in a lawsuit over the oft litigated Bratz dolls, a New York federal court judge has ruled.

The underlying suit was brought by photographer Bernard Belair, who created an ad campaign for Steve Madden in the late 1990s with a series of female images featuring “large heads, large oval eyes, small bodies and large feet.” Belair alleged that his copyrighted images formed the basis for MGA’s line of Bratz toys and dolls, and MGA apparently admitted that his work served as an inspiration in its design.

MGA sought coverage from its primary and umbrella carriers, but some policies plainly did not apply due to coverage exclusions. The opinion, by District Court Judge Shira A. Scheindlin, thus focused on umbrella coverage provided by National Union and Chartis in the years 2001 and 2002. These policies provided advertising injury coverage specifically excluded by the underlying primary policies.

National Union and Chartis argued that Belair’s complaint did not assert a claim for damages arising out of an advertising injury and alternatively, if it did, coverage was precluded by the prior publication exclusion. Taking a broad reading of Belair’s complaint – which was dismissed at the summary judgment stage – and applying California law, Judge Scheindlin disagreed.

Although the complaint did not expressly base its copyright infringement claim on the theory that MGA’s advertising infringed Belair’s rights, the “plain language alleges facts sufficient to raise the possibility of a potentially covered claim.” “The underlying complaint, as written, imposed potential liability on MGA for an advertising injury since, had Belair’s suit been successful, MGA would have infringed the Belair copyrights every time it published or broadcast a Bratz advertisement.”

The court explained that “the potential liability for damages based on an advertising injury is not based on speculative potential facts or on claims that were conspicuously and intentionally never pled; rather, it stems from the underlying complaint’s sweeping allegations that the entire Bratz line infringed Belair’s copyrights; the reasonable inference that such alleged infringement would have been committed in MGA’s advertising; and the possibility that Belair could have amended his complaint by adding one word to bring it indisputably within the coverage of the policies.”

The court further found the prior publication exclusion inapplicable because there was a factual dispute as to whether the first date of publication occurred during the policy period. The court held that the fact that the date was in dispute alone established that National Union and Chartis must defend. The court found, however, that later insurers were excused from coverage under prior publication exclusions.

To read the decision in Lexington Insurance Co. v. MGA Entertainment, click here.

Why it matters: Judge Scheindlin’s decision reinforces an insurer’s broad duty to defend where the insured can show even “remote facts, … any reasonable inferences drawn from those facts, and potential (but not farfetched) amendments” that could be made to the underlying complaint warranting coverage. The court’s broad reading of the underlying complaint and consideration of a potential amendment reinforces the breadth of the duty to defend where there is a reasonable potential for coverage.