In a blow to an advertiser, a California federal court held that its insurers were not obligated to defend or indemnify the company in a false advertising lawsuit.

A plaintiff filed a putative class action against Nutiva, asserting that the company deceived consumers with representations about its coconut oil products. Contrary to Nutiva’s characterization that coconut oil is healthy, consumption of the product causes detrimental health effects, including impaired endothelial function, according to Preston Jones’ California federal court complaint.

Nutiva tendered defense of the lawsuit to three insurers: West American Insurance Company, Peerless Insurance Company and American Fire and Casualty Company. While the insurers accepted tender and paid for the defense costs, they also filed an action seeking a judicial declaration that they had no duty to defend or indemnify the insured.

The parties stipulated that each of the relevant insurance policies insured Nutiva for legal obligations due to “bodily injury” that is caused by an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Ruling on cross-motions for summary judgment, U.S. District Court Judge Haywood S. Gilliam Jr. sided with the insurers.

To determine whether an insurer owes a duty to defend, courts first compare the allegations of the underlying complaint with the policy terms to see whether the claim may possibly be covered by the policy, he explained, and if so, the insurer carries a heavy burden to show it has no duty to defend.

Unfortunately for Nutiva, the insurers managed to meet their burden, the court found. “The Underlying Lawsuit alleges several false advertising claims against Nutiva,” the court wrote. “The false advertising claims in the Underlying Lawsuit do not arise from any ‘accident,’ but rather from Nutiva’s deliberate marketing decisions.”

Whether coconut oil actually causes impaired arterial endothelial functions is “hotly disputed,” Judge Gilliam noted, and irrelevant to the insurance dispute, despite the insured’s argument that any alleged injuries from the product were accidental.

“[T]he disagreement in the Underlying Lawsuit is over whether Nutiva’s advertising and labeling misled consumers about the purported health benefits of coconut oil in light of its saturated fat content,” the court said. “That Nutiva did not intend these alleged health side effects is inapposite.

“Although Nutiva speculates that its products may have been somehow defective, it does not identify any evidence in support of this suggestion,” the court added. “And Nutiva does not contest that it intended to advertise and sell coconut oil that is 100% fat (the alleged cause of the health effects listed in the underlying complaint). No allegations in the Underlying Litigation raise the possibility that Nutiva’s actions in labeling, advertising, and selling its coconut oil, were accidental. Therefore, there is no duty to defend, and no duty to indemnify.”

The court refused to stay the insurance coverage dispute pending resolution of the underlying litigation. “The issue before the Court involves a legal question regarding the meaning of ‘accident’ and whether the injury alleged in the Underlying Litigation fits within that common law definition,” the court wrote. “That issue is separate from the factual question of causation in the Underlying Litigation. Even if Nutiva argues—or even proves—that the saturated fat in its coconut oil did not cause negative health problems, that would not render the action an ‘occurrence’ for purposes of the insurance policies.”

To read the order in West American Insurance Company v. Nutiva, Inc., click here.

Why it matters: The court’s order provides an important lesson that advertisers should be aware of the limits of insurance coverage. As the court pointed out, even if Nutiva is successful in the underlying lawsuit, the victory will have no impact on the insurance dispute, as the policies at issue did not encompass false advertising allegations within the meaning of an “occurrence.”