In no particular order, the three areas of liability claim that seem to make carriers the most unhappy (or suspicious) are (1) employment claims; (2) environmental claims; and (3) “Coverage B”-type claims (intellectual property, false advertising, etc.). The Great Pomegranate Wars fall into category (3). (I should note for accuracy that “Coverage B” is a general liability policy term, and the case discussed below deals with an errors and omissions-type policy.)
According to the Pomegranate Council (and yes, there is a Pomegranate Council): “Pomegranates are royalty amongst fruit. They are symbolic of prosperity and abundance in virtually every civilization.” (Me, I don’t like the seeds.)
Seeking such prosperity and abundance, Welch Foods manufactures and sells fruit juice containing what it describes as “White Grape and Pomegranate” juice. The label on the juice prominently pictures pomegranates when – the horror! – the primary ingredients are actually white grape and apple juice. A competitor, POM Wonderful, LLC, which produces its own blended pomegranate juices, sued Welch in 2009 for false and misleading advertising. Then a class of disaffected consumers also brought suit against Welch for false advertising and deceptive labeling.
National Union sold Welch a liability policy covering Welch’s loss “arising from a Claim … for any actual of alleged Wrongful Act of [Welch].” It defined “[w]rongful act” as “any breach of duty, neglect, error, misstatement, misleading statement, omission or act by [or on behalf of the Organization].”
The broad coverage grant in the policy quoted above seems to include claims of false or misleading advertising, and the trial court agreed. The coverage issue, however, was beclouded by a policy exclusion reading as follows:
“ANTITRUST EXCLUSION
The Insurer shall not be made liable to make any payment for Loss in connection with a Claim made against the insured…alleging, arising out of, based upon or attributable to, or in any way involving either directly or indirectly, antitrust violations, price fixing, price discriminations, unfair competition, deceptive trade practices and/or monopolies, including actions, proceedings, claims or investigations related thereto…”
By its title, the “antitrust exclusion” seems to deal with antitrust-type claims rather than false advertising claims. But the trial court felt otherwise, writing:
“While the exclusion at issue is entitled ‘[a]ntitrust exclusion,’ its scope is not so limited. Indeed, the very next exclusion in the contract, Exclusion 19, states that ‘[t]he headings in this policy are there purely for the convenience of the parties and they form no part of the definition of the scope of the coverage provided.’ Moreover, the plain language of the exclusion is broad enough to include a variety of anti-competitive behavior. Nothing in the text of the exclusion limits it solely to antitrust claims. To the contrary, the fact that it includes a range of anti-competitive conduct suggests that its scope is broader than antitrust claims… Since the exclusion applies, National Union has no duty to defend, and no duty to advance defense costs.”
Bad rulings are what appeals courts are for, right? Umm…not in this case. The United States Court of Appeals for the First Circuit has now issued a decision affirming the trial court, writing:
“No definition was provided in the policy for the terms ‘unfair competition’ or ‘deceptive trade practice’…Although Exclusion 4(c) bears the label ’Antitrust Exclusion,’ and several of the descriptions of covered claims refer to ‘antitrust’ or typical antitrust claims such as ‘monopolies,’ the plain language of the other excluded claims – particularly ‘unfair competition’ and ‘deceptive trade practices’ – is far broader and not so limited.”
(Here’s a question for the First Circuit. If ‘false advertising’ and ‘unfair competition’ mean the same thing, then why have they been historically separately referenced in commercial general liability policies?)
Some thoughts on the implications of this decision. First, a wise person once said that the only justice in the halls of justice is usually in the halls. The reversal rate in the federal appeals court is about 14%. So, if you can do a deal, do it. Second, it’s important to have specific coverages for specific exposures. “General” coverages (such as the one involved in the Welch decision) contain so many carveouts and exclusions that they can often be worthless when trouble strikes. So, if your business may have an advertising liability exposure, review it with your broker or risk management consultant and make sure that you’re properly protected. And third, while businesses need a comprehensive coverage program, never count on insurance. Proper operational controls are paramount. “Insurance” often simply means the right to sue a carrier.
The First Circuit citation is Welch Foods, Inc. v. National Union Fire Ins. Co., No. 10-2261 (1st Cir. Oct. 24, 2011).