Because most people think that insurance law is about as exciting as watching grass grow, I try to be somewhat entertaining in these posts. Probably I usually fail, but at least I keep myself amused.

If there’s one thing that we wannabe comedians hate, though, it’s being upstaged. I was recently reading a decision from a federal appeals court in a case called Sterngold Dental, LLC v. HDI Insurance Company, and the judge who wrote the opinion apparently felt that he, too, needed to entertain.  The case involved a business insurance claim by a dental products manufacturer named Sterngold.  The Court, in denying coverage, wrote things like:

“This appeal gives us an opportunity to sink our teeth into a sophisticated insurance coverage question.”

“Concluding, as we do, that Sterngold’s arguments lack bite…”

“Sterngold fights tooth and nail…”

“Reality has sharp teeth…”

Stop, Your Honor, you’re killing me. No, really, please stop.

Actually, I admit that the tooth references are inventive.  But the policyholder probably didn’t find them entertaining at all.  I pause here to note that the judge who wrote the opinion spent 15 years in private practice with a major law firm that represents insurance companies. There’s nothing wrong with that, of course, but judges are people too, and they may gain their point of reference through their life experience.

The case involved the following facts. A competitor of Sterngold, called Intra-Lock, contended that Sterngold had infringed a trademark called “OSSEAN,” which related to a dental implant coating product. The relevant policy, sold by HDI Global, contained coverage for “personal and advertising injury.” (The judge in the case, like most judges, uses the word “issued” instead of the word “sold.”  “Issued” is such an insurance company word. It suggests that the carrier was doing a favor as opposed to selling you a product.)

Basically, “advertising injury” coverage insures against the following offenses in connection with the insured’s advertising of its goods or services: libel, slander, invasion of privacy, copyright infringement, and misappropriation of advertising ideas.

Sometimes, the policies define “advertising” or “advertising idea.”  Sometimes, they don’t, leading to a reasonable conclusion that, for coverage purposes, “advertising” means any kind of publicity or solicitation. Here, Intra-Lock had alleged that Sterngold “acquired value, name and brand recognition, and goodwill in the OSSEAN mark as a result of continual and substantial advertising,” including the use of confusingly similar marks.  In the coverage litigation, Sterngold reasonably argued that Intra-Lock’s claims were therefore for misappropriation of advertising ideas, within the meaning of the policy.  The Court struggled with that concept, speculating that the OSSEAN mark could be considered an “advertising idea,” but that it could also be deemed to be a reference to the product itself.  I’m not sure that’s a distinction with a difference, but ultimately, the Court punted the issue and, for purposes of the decision, assumed that the “advertising injury” coverage had been triggered.

The far thornier issue, from Sterngold’s perspective, was an intellectual property exclusion contained in the policy, which read:

“This insurance does not apply to: . . . ‘Personal and advertising injury’ arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. Under this exclusion such other intellectual property rights do not include the use of another’s advertising idea in your ‘advertisement.’”

The Court held that the IP exclusion was a valid basis for denial of claim.

The problem here is that second sentence of the exclusion is as clear as mud.  Sterngold argued that, under the second sentence, since the alleged infringement of Insta-Lock’s advertising idea was excepted from the exclusion, coverage should exist.

In response, the Court engaged in some verbal gymnastics, writing as follows: “The first sentence of the IP exclusion lists a series of IP-related claims, including trademark infringement. Each specifically articulated claim is separated from the next by a comma. The list concludes with the catchall phrase ‘or other intellectual property rights.’ This syntax, combined with the use of the disjunctive ‘or,’ clearly differentiates the listed IP-related claims from the catchall phrase ‘other intellectual property rights.’”

You can see how ludicrous this exercise becomes. No policyholder, when placing coverage, is going to go through policy forms with a magnifying glass and a book of grammar to try to figure out what is and isn’t covered.  (Only judges and insurance company claim personnel have that luxury, usually after-the-fact.) By making the policy forms so complicated, insurance companies give Courts the ability to find holes in coverage that the policyholder could never even have imagined.

When clients or potential clients ask whether their coverage is sufficient to protect their business, I always tell them the same thing:  You’re looking at the problem the wrong way. An insurance policy provides you with the right to sue an insurance company. That’s why risk management, in the sense of minimizing the chance that problems will ever occur, is so critically important.

But it’s also important to try to negotiate IP exclusions out of your policy.

You can sink your teeth into the Sterngold Dental decision by clicking here.