Intellectual Property Insurance – New Appleman on Insurance Law Library Edition, Chapter 30

David A. Gauntlett   By David A. Gauntlett, Principal, Gauntlett & Associates

A limited number of insurers have historically offered insurance coverage for intellectual property claims, initially focused on reimbursement of litigation expenses in the pursuit of patent infringement lawsuits and then expanded to their defense.  The common resource used by most policyholders to obtain such insurance coverage for intellectual property lawsuits, however, is “personal and advertising injury” coverage within Commercial General Liability/Umbrella/Excess policies (“CGL” policies).  Since 1976 CGL policies have included this coverage by endorsement.  In 1986 as part of the standard form’s revision to the Commercial General Liability policy, coverage was expressly extended to advertising-based claims of copyright, title, and slogan infringement, as well as more generically worded coverages for “misappropriation of advertising ideas or style of doing business,” and changed in 1998 to encompass “use of another’s advertising idea in your ‘advertisement.’”  “Advertising injury” and “personal injury” coverage were combined by the Insurance Services Office (“ISO”) in its 1998 policy form.

These provisions have generated the lion’s share of case law addressing coverage for intellectual property claims.  Although some claims have arisen under intellectual property defense policies issued on a claims-made basis, there has been little litigation under their provisions, leaving the state of these policies undetermined and their market penetration minimal.

Multi-media policies (the subject of Chapter 31 in this publication), also encompass intellectual property risks.  Written on a claims-made basis, they have been available since at least 1995.  They represent a growing segment of policy forms available to address such risks, and they should be more commonly considered by policyholders seeking broad intellectual property coverage. While the ISO announced its first intellectual property (“IP”) exclusion in 2001, a number of insurers, such as St. Paul, Chubb, Hartford, and Travelers, adopted earlier intellectual property exclusions to their Commercial General Liability policies’ express personal and advertising injury coverage.  These insurers continue to offer coverage that is typically narrower than the “offense” based coverage available through ISO.

While insurers that specialize in particular markets may appear at first blush to be a more attractive option for policyholders, the fact is that the ISO coverage tends typically to be broader and more likely to cover a variety of IP risks than that issued by insurers that specifically have developed their own IP exclusions (see Section 30.03).  This should be kept in mind by insurance brokers and policyholders during their renewals of coverage. A lack of attention to distinctions in “personal and advertising injury” coverage can lead to narrower coverage in a number of Commercial General Liability (“CGL”) policies sold throughout the U.S. than might have otherwise been available or contemplated by the policyholder.

Commencing in 2001 and in 2004 and 2007, ISO has narrowed coverage response to intellectual property risks (see Sections 30.01[4] and 30.02).  The core ISO coverage for infringement of copyright, trade dress, or slogan remains unchanged in that the operative offense, “infringement of copyright, trade dress or slogan in your ‘advertisement,’ ” was included as an operative offense in each policy year.  As these policies are issued on an “occurrence” basis and many lawsuits allege facts creating liability years before the inception of suit, it is essential to look to earlier policy forms to assure that the broadest coverage available has been accessed.  Similarly, umbrella policy provisions may provide broader coverage than primary forms, and these should always be reviewed.

It is an anomaly that the underlying litigation typically takes place in federal court, but the law to govern it is state court based.  Because of diversity jurisdiction, which often exists between policyholders and insurers, most cases are litigated in federal courts.  Recognizing the absence of controlling precedent due to this fact, a number of policyholders have, with great success, started seeking certification from both district and federal appellate courts to their state supreme courts to address unresolved issues.

While coverage for patent infringement lawsuits (discussed in Section 30.05) — even before the inception of an express IP exclusion — historically has been problematic, this is more a consequence of the character of limited fact allegations, which are often statutorily prescribed, than any inherent disconnection between “advertising injury” coverage and the potential coverage evident in such lawsuits.  A Ninth Circuit decision in favor of Hyundai, where an advertising technique for building a car on a website was at issue, emphasized that there was always a logical connection between certain business method patents and advertising that could make such coverage applicable (see Section 30.03[2][b][i]).  It is therefore necessary to look beyond labels of causes of action to the underlying facts.

Inquiries that ask first whether a particular tort is covered, or what the theory of liability causing injury is, miss the point.  The question is whether the facts asserted could fall within one of the “categories of wrongdoing” that are articulated in the “personal injury”/“advertising injury” offenses at issue (see Section 30.03).  Trade secret misappropriation coverage cases (discussed in Section 30.07) have also encountered a difficult reception, especially where the policyholder seeks coverage for use of a customer list where a departing employee uses it to attract customers for a new employer.  Nevertheless, where that list is the subject matter of express advertising and its content is used to advertise to existing as well as prospective customers, potential coverage may arise.

By contrast, there is broad agreement that trademark infringement lawsuits (discussed in Section 30.06) readily fall within the scope of coverage for “misappropriation of advertising ideas” and, to the extent available, “use of another’s advertising idea in your ‘advertisement’ ” coverage which replaced it in the 1998 ISO form.  This, despite the fact that the ISO version of this policy included express coverage for infringement of copyright, trade dress, or slogan, led to initial arguments that the trade dress coverage implied the absence of trademark.  The breadth of the “use of another’s advertising idea in your ‘advertisement’ ” offense belies the notion that both coverages cannot be simultaneously available.  Thus, a claim for unfair competition might factually implicate allegations for infringement of slogan where the wrongful conduct includes promotion of a shorthand version or moniker, such as the phrase “Steel Curtain” to describe the front four of the Pittsburgh Steelers.  Such conduct might also be deemed an advertising idea, whose use by another in promotional activity could create a distinct basis for liability.

Trademark and Copyright

Copyright infringement coverage (discussed in Section 30.04), explicitly referenced on the face of the policy, has on occasion been challenging to procure because of the absence of express advertising allegations in the typical complaint.  This is often more an issue of the way the claimant articulates its claim than the nature of the underlying case.  In many circumstances, it is therefore helpful to clarify through discovery the factual basis for the asserted claims in a way that helps answer questions raised by the policy that are not definitive one way or the other from the pleadings.

With the advent of intellectual property exclusions (see Section 30.08[6]), exceptions to these exclusions for claims like infringement of slogan (see Section 30.06[2][a]) or, in earlier policy forms, infringement of title (see Section 30.06[2][b]), generate potential coverage in a number of fact scenarios.  These opportunities need to be continually assessed.  Nor should policyholders overlook counterclaims, which can independently create a defense obligation.  In an appropriate case, the defense fees incurred in responding to the counterclaim may dovetail with the very same lawyering duties necessary to prosecute affirmative relief.  Where fees incurred by the policyholder are “conducted against liability,” they may be recoverable despite the fact that they arise out of the affirmative prosecution of lawsuits.

Other exclusions — for “knowledge of falsity” (see Section 30.08[5]), “failure to conform to advertising” (see Section 30.08[2]), and the “first publication” exclusion (see Section 30.08[3]) — have also generated significant litigation.  These exclusions on occasion require analysis of fact issues which cannot readily be resolved.  Some insurers have argued, albeit unsuccessfully, that these suits cannot be adjudicated as a matter of law on summary judgment.

The coverage cases also evidence that it is important for policyholders to focus on facts that are either available to the insurer or not yet known to it in addition to those in the complaint where, as in the majority of forums, facts beyond the pleadings may form a basis for compelling a defense.  To assure that these facts are properly conveyed to insurers at the first opportunity and avoid the argument that the carrier did not know of the asserted basis for coverage, policyholders must continue to track fact development in the underlying action even after notice of the suit to the insurer.  This is especially the case where settlement may be sought, to facilitate insurer reimbursement.  In such cases, policyholders must maintain active communication with insurers to evidence fact allegations which could support potential coverage.

Expert Insight:  This means, as a practical matter, that insurance-savvy coverage counsel may be an important addition to the intellectual property litigation team in a larger number of cases than is typically considered necessary today.  While there are few cases addressing the new multi-media coverages, those that have evidence a more particularized understanding of the nature of that coverage, which is often more fact-specific.  The same attention is required to clarify when intellectual property exclusions will and will not apply.

Cross References: Advertising and personal injury insurance coverage is discussed in Chapter 19 above. Media Liability Insurance is discussed in Chapter 31 below. For practice guidance with respect to intellectual property insurance coverage issues, see New Appleman Insurance Law Practice Guide Chapter 44.

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David Gauntlett is one of the nation’s preeminent authorities in policyholder representation in the area of IP, Antitrust, EPLI Claims, securities and other business torts. He has practiced and made new law in federal and appellate courts throughout the United States. Mr. Gauntlett is also the author of numerous articles such as Plaintiff’s Rights to Use Coverage to Enhance Recovery in Intellectual Property and Antitrust Lawsuits, Journal of Insurance Coverage(2002), “Offer for Sale” Patent Infringement Lawsuits: New Opportunities For Insurance Coverage, New Controversies, Vol. 54, No. 4, SMU Law Review(2002), Tort Claims and Insurance in Cyberspace: Is Your Company Covered?, ACCA Docket, The Journal of the American Corporate Counsel Association, Vol. 19, No. 5 (May 2001) and his book entitled Insurance Coverage of Intellectual Property Assets, ©1999. Mr. Gauntlett also has a soon to be published book entitled Intellectual Property Practitioner’s Handbook on Insurance Coverage.

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