New Policies, Less Coverage: Insurance Coverage for Intellectual Property Claims

Over the past 20 years or so, courts have developed an extensive and conflicting body of "advertising injury" case law, as judges have struggled to delineate the scope of coverage that commercial general liability (CGL) policies provide for intellectual property claims.1 However, the advertising injury coverage in standard-form CGL policies that policyholders are buying today is not the same coverage that is described in almost any court decision on the books. Current case law is useful for understanding the issues the insurance industry attempted to address in rewriting the coverage in recent years. But the coming generation of CGL coverage issues involving trademark, trade dress, copyright, patent, and trade secret claims in many instances will turn on new policy language.

Some would argue that the success policyholders enjoyed in the past 20 years in securing coverage for IP claims was a windfall and could not last. In any case, it is clear that insurers have shrunk the coverage for IP cases under standard-form CGL policies. At a minimum, the new policies require all parties to evaluate coverage for IP cases under new contractual standards. As a consequence of the new policy language, now, more than ever, companies that face significant IP risks should not rely solely on CGL policies. They should consider purchasing specialty insurance products that are designed to cover those risks.

1. KEY ADVERTISING INJURY COVERAGE PROVISIONS

   If CGL coverage is available for IP claims, the coverage generally is under the policy's advertising injury provisions. Most CGL insurers use standard insurance forms provided by a national organization, Insurance Services Office. Some insurers may promptly adopt newly published ISO forms, and others may lag in doing so or modify ISO's standard provisions. ISO has introduced successive editions of standard advertising injury coverage forms, principally in 1976, 1986, 1998, and 2001. ISO's 1998 and 2001 revisions substantially revise - and shrink - the coverage for IP claims. Let's look first at the policy provisions themselves and then at the case law interpreting them.

   1. ISO's 1976 Broad Form Endorsement

      ISO introduced a "Broad Form Comprehensive General Liability Endorsement"2 in 1976. The endorsement included coverage for advertising injury, which the endorsement defined as injury arising out of enumerated "offense[s]" occurring "in the course of the named insured's advertising activities." The specified offenses included "piracy, unfair competition, or infringement of copyright, title or slogan." However, the endorsement specifically excluded coverage for "infringement of trademark, servicemark, or trade name, other than titles or slogans, in connection with goods, products or services sold, offered for sale or advertised."

   2. ISO's 1986 CGL Policy Form

      ISO's 1986 and later CGL forms incorporated the advertising injury liability coverage within the standard policy form. The 1986 coverage grant stated:

      We will pay those sums that the insured becomes legally obligated to pay as damages because of "personal injury" or "advertising injury" to which this insurance applies.

      . . .

      This insurance applies to:

      . . .

      "Advertising injury" caused by an offense committed in the course of advertising your goods, products, or services;

      but only if the offense was committed in the "coverage territory" during the policy period.3

      The 1986 ISO form defined "Advertising Injury" as "[i]njury arising out of one or more of the following "offenses":

      (a) Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products, or services;

      (b) Oral or written publication of material that violates a person's right of privacy;

      (c) Misappropriation of advertising ideas or style of doing business; or

      (d) Infringement of copyright, title or slogan."

      The 1986 revision made three significant changes to the coverage under the 1976 endorsement: First, ISO deleted the offenses of "piracy" and "unfair competition" that policyholders frequently argued required insurers to defend IP cases.4 Second, ISO added the offense of "misappropriation of advertising ideas or style of doing business." Third, ISO deleted the exclusion for trademark infringement. (Insurers later sometimes argued that the trademark exclusion was deleted because ISO's elimination of coverage for "unfair competition" made the exclusion unnecessary.5)

   3. 1998 and 2001 ISO CGL Policy Forms

      ISO revised the CGL form in 19986 and again in 2001.7 These editions of the form combine "personal injury" and "advertising injury" into a single coverage:

      We will pay those sums that the "insured" becomes legally obligated to pay as "damages" because of "personal and advertising injury" to which this insurance applies. This insurance applies to "personal and advertising injury" caused by an offense arising out of your business but only if the offense was committed in the "coverage territory" during the policy period.

      In defining "personal and advertising injury," the 1998 and 2001 ISO forms replace two of the enumerated offenses with new ones. The offense of "[m]isappropriation of advertising ideas or style of doing business" is replaced by "[t]he use of another's advertising idea in your 'advertisement.'" ("Advertisement" is a term that ISO introduced in 1998; it replaces "advertising.") "Infringement of copyright title or slogan" becomes "[i]nfringing upon another's copyright, trade dress or slogan in your 'advertisement.'"

      In contrast to the 1986 form, which did not define "advertising," the 1998 CGL defined "advertisement" as "a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters." The 2001 CGL form refines the definition to include specified Internet activities:

      material placed on the Internet or on similar electronic

      means of communication; and

      regarding web-sites, only that part of a web site that is about your goods, products or services for the purposes of attracting customers or supporters.

      ISO also introduced four significant exclusions in 2001. The most important, which we will call "the intellectual property exclusion," excludes "personal and advertising injury arising out of copyright, patent, trademark, trade secret or other intellectual property rights." However, the exclusion does not apply to "infringement, in your 'advertisement,' of copyright, trade dress or slogan." Second, ISO excluded advertising injury coverage entirely for web site designers and "Internet search, access, content or service provider[s]." (This change expanded the businesses for which a CGL does not afford advertising injury coverage. Traditionally, the list had included policyholders whose business was advertising, broadcasting, publishing or telecasting.) Third, ISO added an exclusion for "personal and advertising injury" arising out of an electronic chat room or bulletin board that the policyholder hosts, owns, or over which the policyholder exercises control. Fourth, ISO added an exclusion for unauthorized use of another's name or product in the policyholder's "e-mail address, domain name or metatag or any other similar tactics designed to mislead another's potential customers."

      Coverage is available for most of the risks excluded by ISO's 1998 and 2001 revisionsunder specialized insurance products. These products include advertisers' liability, multimedia, cyber-liability, intellectual property, and errors and omissions policies.8 By excluding CGL coverage for these exposures, the insurance industry may spur demand for these specialty products and avoid coverage overlaps.

2. SHRINKING ADVERTISING INJURY COVERAGE

   A near consensus exists on a three-part test for advertising injury coverage under the fast-disappearing, if not already phantom, 1986 CGL. As the California Supreme Court reiterated last year, to be entitled to a defense the policyholder must show: (1) the policyholder was engaged in "advertising" during the policy period when the alleged advertising injury occurred; (2) the claimant's allegations create a potential for liability for a covered advertising injury "offense"; and (3) a causal connection existed between the alleged injury and the "advertising."9 The 1998 and 2001 revisions impose new restrictions with regard to each of the three requirements for coverage.

   We begin with the critical requirement of a covered advertising injury offense. We will look at CGL coverage for trademark and trade dress, copyright, patent, and trade secret claims before and after the recent revisions. Then we will consider the changes in the "advertising" and "casual connection" requirements.

   1. Coverage For Trademark and Trade Dress Infringement Claims, Then and Now

      1. Then: Under the 1986 CGL

      ISO's 1976 Broad Form Endorsement specifically excluded trademark or trade name infringement.10 However, ISO's 1986 CGL form deleted this exclusion and added coverage for "misappropriation of advertising ideas or style of doing business." The 1986 CGL also included among the enumerated advertising injury offenses "infringement of copyright, title or slogan."

      Although trademark infringement was not a specifically enumerated offense under the 1986 CGL, numerous courts concluded that, at least for purposes of the duty to defend, trademark infringement fell within misappropriation of an "advertising idea" or "style of doing business."11 As discussed below in connection with the "advertising" requirement, some courts treated trademark or trade dress itself as "advertising."12 Some courts also found trademark infringement to be within the covered offense of infringement of "title"

      or "slogan."13 On the other hand, a few courts, led by the Sixth Circuit in Advance Watch Co. v. Kemper Nat'l. Ins. Co.,14 reasoned that where an insurance policy identifies specific torts and omits...