RISKVUE ARCHIVE | FEATURE STORIES

Exclusion Confusion: Courts Have Inconsistently Applied Insurers’ Latest Efforts to Limit Intentional Business Tort Coverage Under CGL Policies

By Andrew Hansell
Lindquist & Vennum, P.L.L.P.

Beginning in the 1970s, insurers began adding coverage for “advertising injury” to their standard Commercial General Liability (CGL) policies.1 Advertising injury coverage includes a number of so-called business torts commonly claimed by a business competitor against a policyholder. Some of these torts are copyright, trade dress infringement, misappropriation of advertising ideas as well as liable, slander, and defamation.

Unlike CGL coverage for bodily injury or property damage, the coverage for advertising injury does not require that the injury be caused by an accident. This is because the coverage relates to a business’s deliberate acts, mainly the publication of a statement or advertising, and not the occurrence of a fortuitous event. As a result, insurers have struggled to articulate exclusions to exclude liability for intentionally injurious conduct while preserving coverage for the business torts that necessarily result from intentional conduct.

In 1998, the ISO introduced a revised form exclusion for actions resulting in intentional injury to its form for advertising injury coverage in CGL policies. The “Knowing Violation” exclusion provides that:

This insurance does not apply to:

a. Knowing Violation Of Rights Of Another

“Personal and advertising injury” caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict “personal and advertising injury.”2

The plain language of the exclusion establishes a two-part test: (1) that the policyholder knew its actions would violate the rights of another, and (2) that the policyholder intended to cause injury.

The subjective test of whether the policyholder knew its actions would violate the rights of another is particularly difficult to apply and courts have taken vastly different approaches. For example, the Kentucky Court of Appeals effectively eliminated this factor from the test by concluding that each person must be presumed to know that law and therefore that their conduct would violate the rights of another.3 In contrast, the United States District Court for the District of Kansas has strictly applied this factor and refused to apply this exclusion where the underlying complaint had alleged the policyholder had constructive rather than actual knowledge.4

Similarly, courts are inconsistent in their application of the second “intent to injure” factor. For example, most courts have refused to apply this exclusion to allow insurers to escape their duty to defend lawsuits alleging intentional infringement under the Lanham Act. Specifically, these courts have held that even if the complaint only alleges willful infringement, such complaints should be read to inherently include allegations of negligent infringement.5 These courts have rationalized that willfulness under the Lanham Act is only relevant to the awarding of damages and attorneys’ fees and that it would be illogical to assume a plaintiff only intended to allege intentional infringement, which is much more difficult to proved than negligent infringement.6 Other courts refuse to apply the exclusion where other business torts were alleged to have been committed with “reckless indifference.”7 At least one court has applied the exclusion and found no duty to defend where the underlying complaint only alleged intentional violations of the Lanham Act.8

The introduction of the Knowing Violation exclusion has succeeded only in creating more uncertainty over the coverage for business torts under CGL policies. Given the inconsistent application of this exclusion by the courts, future revision to the Knowing Violation exclusion seems all but certain.

In the meantime, most states have not construed the Knowing Violation exclusion. In those states, businesses ought to argue that confusion makes coverage “arguable” and there is at least a duty to defend business torts that would be covered absent the Knowing Violation exclusion. Further, it can be argued that the confusion underlines the insurer’s inability to meet its burden of establishing the applicability of the exclusion.

Notes:

1 See Francis J. Mootz III, Coverage for Unfair Competition Torts Under General Liability Policies: Will the “Intellectual Property” Tail Wag the Coverage Dog?, Conn. Ins. L. J., 37, 43 (2002).

2 See Commercial Liability Insurance, International Risk Management Institute, Vol. 1, V.E.13 (2005).

3 See Educational Training Sys. Inc. v. Monroe Guaranty Ins. Co., 129 S.W.3d 850, 853 (Ken. Ct. App. 2004).

4 See Park Univ. Enter., Inc. v. American Cas. Co. of Reading, PA, 314 F. Supp. 2d 1094, 1110 (D. Kan. 2004) (refusing to apply exclusion where underlying complaint alleged policyholder “should have known” rather than that policyholder actually “knew” that conduct violated the law).

5 See, e.g., Central Mut. Ins. Co v. Stunfence, Inc., 292 F. Supp. 2d 1072, 1081-82 (N.D. Ill. 2003) (collecting cases); TIG Ins. Co. v. Nobel Learning Communities, Inc., No. CIV.A.01-4708, 2002 WL 1340332, at *9-10 (E.D. Pa. June 18, 2002).

6 See Westfield Cos. v. O.K.L. Can Line, 804 N.E. 2d 45, 53 (Ohio Ct. App. 2003) (holding “[p]roof of intent is required only to justify a request for enhanced damages and attorney fees. The exclusion, therefore, did not apply”); Ryland Group, Inc. v. Travelers Indem. Co of Ill., No. Civ. A-00-CA-233 JRB, 2000 WL 335440986, at *10, n.22 (W.D. Tex. Oct. 25, 2000) (refusing to apply exclusion and stating “it would be foolish for a plaintiff in a copyright infringement case to plead only willful infringement since it is much more difficult to prove than negligent or inadvertent infringement”).

7 See Amquip Corp. v. Admiral Ins. Co., No. Civ. A. 03-4411, 2005 WL 742457, at *6 (E.D. Pa. Mar. 31, 2005) (holding insurer had duty to defend allegations of intentional misappropriation of trade secrets, unfair competition, conversion, breach of duty of loyalty and tortious interference with contractual relations).

8 See Dairy Source, Inc. v. Biery Cheese Co., 674 N.W.2d 680 (Wis. Ct. App. 2003), unpublished disposition (holding complaint only alleged violation of Lanham Act with knowledge it would violate plaintiffs rights and denying coverage).

ABOUT THE AUTHOR

Andrew Hansell is a member of Lindquist & Vennum’s Minneapolis Insurance Coverage and Commercial Litigation groups. He can be reached at 612-371-3269 or e-mail ahansell@lindquist.com.

This article is only a general summary for informational purposes and does not constitute legal advice. Consult a qualified and experienced insurance advisor for your specific situation or particular questions.

riskVue | The webzine for risk management professionals
August 2005