A Colorado district court held last week that a general liability insurer must defend a product disparagement claim despite a broadly-worded intellectual property exclusion in the policy. The court reached its ruling even though the alleged disparagement involved representations about patent infringement. In so holding, the court rejected the insurer’s attempt to deny coverage where the “crux of the dispute” fell within the policy’s personal injury coverage part and the insurer had failed to show that the underlying allegations “unequivocally” fell within the ambiguously worded exclusion.
In Minute Key, Inc. v. The Charter Oak Fire Insurance Company, No. 1:16-cv-01850-JLK (Aug. 11, 2017), a key-making vendor sought coverage under its commercial general liability policy for a product disparagement lawsuit alleging that the vendor had made false representations of patent infringement against a competitor. The insurer denied coverage on the grounds that the competitor’s lawsuit—which alleged in part that the policyholder disparaged the competitor’s products by making “false and objectively baseless allegations of patent infringement”—was barred by an intellectual property exclusion precluding coverage for injury arising out of an “actual or alleged [patent] infringement.” The parties submitted this threshold issue to the court on summary judgment.
The court ruled for the policyholder, recognizing that, under Colorado law, an insurer must satisfy its duty to defend unless it can establish that the allegations in the complaint are “solely” and “entirely” within an exclusion. Because the injuries alleged in the disparagement lawsuit arose “solidly out of [the policyholder]’s tortious misconduct, not any acts of infringement,” such injuries were “squarely” within the policy’s coverage grant for “personal injury . . . caused by . . . [the] oral or written publication . . . of material that . . . disparages a person’s goods, products or services.” This duty to defend was not negated by the policy’s intellectual property exclusion, the court held, where the alleged tortious misconduct in “the form of false allegations of patent infringement” did not “unequivocally” place the claim within the language of the exclusion. Furthermore, the court found that the exclusion was ambiguous, which precluded a determination in the insurer’s favor. As a result, the insurer had breached its duty under the policy when it declined to defend the product disparagement lawsuit.
The Minute Key decision highlights the breadth of an insurer’s duty to defend (see prior posts on this topic here, here, and here), including the important distinction that an insured need only show that the underlying claim may fall within the policy provision to trigger a defense, while an insurer must prove that it unequivocally cannot. Indeed, the mere possibility of coverage is often enough to rebut an insurer’s interpretation of the facts that allegedly trigger one or more exclusions.
As with any coverage determination, the specific facts alleged and policy provisions at issue will control. But even where underlying allegations reference facts that, at least superficially, may implicate certain exclusions—as with the discussion of patent infringement in the Minute Key complaint—policyholders should carefully review each allegation in light of the specific wording of the exclusions to ensure that there is no reasonable interpretation in favor of coverage, understanding that courts will likely construe the duty to defend liberally in the policyholder’s favor.