Insurance claims personnel have a natural, probably genetic, aversion to certain topics.  One of them is insurance coverage for “advertising injury.”  So, if your advertising injury claim is in any way unusual, chances are that as a policyholder you’re going to run into trouble with your carrier.

Some brief background:  Commercial general liability policies typically provide coverage for claims of “personal and advertising injury.” This generally includes, for example, coverage for liability claims brought against the policyholder that allege “oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.” 

But what if the policyholder is accused of false advertising bragging about its own product, and not specifically trashing, or even mentioning, the competitor’s product?  Does the “advertising injury” coverage contained in standard commercial general liability policies apply to so-called “implied disparagement”?

Let’s take a look at two recent cases involving the question of coverage for “implied disparagement,” one of which involved the venerable Kim Kardashian, who’s famous for being famous.  Kardashian was once quoted as saying:  “I’m Armenian, so I’m obsessed with laser hair removal.”  Fittingly, then, a company called Tria, Inc. hired her as its celebrity spokesperson in connection with a line of products aimed at, you guessed it, hair removal (as well as acne removal).  Tria later became embroiled in trademark litigation with a competitor, Radiancy, Inc., in which Radiancy claimed that Tria (and Kardashian) had made false and misleading statements in its advertising. 

The interesting aspect of this is that Tria’s advertising said nothing at all about Radiancy.  Instead, Tria’s advertising simply touted its own products as being, for example, “faster,” “superior,” “more powerful,” and more “advanced” when compared to other (unnamed) products on the market.  Radiancy claimed that Tria’s advertising, although not directly addressed to Radiancy, nevertheless caused Radiancy to lose sales, and damaged Radiancy’s goodwill.

Tria’s carriers disclaimed coverage for the claims against Tria, arguing that Radiancy had only contended that Tria had made misleading claims about its own products.  If Tria did not directly disparage Radiancy’s products, the argument went, there could be no “advertising injury” coverage.

Wrong, said the Court, writing: “It is significant that the disjunctive policy language (‘slanders or libels…or disparages’) did not delineate specific causes of action to which ‘disparagement’ applied.  This was done in the exclusions section, which carved out a variety of subject matter from coverage.  Given this structure, reading the policy broadly to cover implied, ‘own-product’ disparagement would be consistent with a reasonable insured’s objective expectations.”  (Emphasis added.)  (Alas, the Court then went on to negate coverage for other reasons, such as an intellectual property exclusion.  Not sure why the Court went through the exercise of explaining how “advertising injury” coverage works, only to eviscerate the coverage on other grounds, but so be it.)

You can read the full Tria decision here.      

In another recent case involving insurance coverage for “implied disparagement,”  a pharmaceutical manufacturer named TPU, which sold a prescription topical analgesic called Lidoderm, claimed that the policyholder (JAR) had made false and misleading statements in the course of advertising its own product, a nonprescription topical analgesic called LidoPatch.  The allegedly false statements included:  “Like the prescription brand, LidoPatch will provide relief for up to 24 hours!”  The LidoPatch advertising did not mention Lidoderm by name. 

The Court held that TPU’s allegations were sufficient to trigger the carrier’s duty to defend, writing:  “That plaintiff’s statements did not identify Lidoderm by name is immaterial…Whatever words plaintiff used, TPU clearly understood (and alleges that ‘a substantial segment of consumers’ would likewise believe) that plaintiff’s implicit ‘message’ was about Lidoderm…[and] a statement equating a competitor’s product with an allegedly inferior one is logically indistinguishable from, and no less disparaging than, a statement describing one’s own product as ‘superior’ to the competitors’.”

These cases turn on the reasonable expectations of the policyholder.  If the policy doesn’t expressly limit “false advertising” claims to cases in which the policyholder explicitly and directly disparages a competitor’s product, why shouldn’t coverage exist?  Otherwise, aren’t claims personnel just engaging in what we euphemistically call “post-loss underwriting”?

You can read the full JAR case here.