Intellectual property (IP) takes many different forms including trademarks, copyrights and patents, and includes other rights, such as unfair competition and trade dress. Regardless of its form, IP is economically valuable and strategically important to businesses of all shapes and sizes. A substantial portion of a company's value may stem from its IP, so businesses often find themselves in lawsuits involving allegations of infringement. Yet, business owners often fail to consider that insurance coverage can be an equally valuable asset to protect against the expense of defending those lawsuits and funding a settlement or judgment. As the number of IP-related lawsuits increase (which it has done and continues to do since the turn of the century), so too does litigation between insurers and insureds over the extent to which general liability policies cover the defense and cost of settlement or judgment in those suits.
Comprehensive General Liability or Commercial General Liability (CGL) coverage provides broad insurance for claims against an insured alleging, among other things, “advertising injury.” A CGL policy's insuring agreement typically obligates the insurer to “pay those sums that the insured becomes legally obligated to pay as damages” such as for what the policy defines as “advertising injury” (the duty to indemnify). It also typically obligates the insurer to provide and/or pay the litigation costs related to that claim, including attorney fees incurred in defending a lawsuit (the duty to defend). As early as 1998, one federal district court was already referring to the “litigation explosion” involving insurers' duty to defend IP claims alleging “advertising injury” as that term was then defined. That definition has since gone through numerous iterations and the “litigation explosion” is showing no signs of slowing.
Most CGL policies are a product of the Insurance Services Office (ISO), an organization that drafts and publishes policy “forms” used in the insurance industry. A standard form CGL policy provides coverage for: (1) bodily injury and property damage; and (2) personal and advertising injury. Business owners that are potential defendants in IP litigation must understand the scope and breadth of their advertising injury coverage. The ISO's definition of “advertising injury” has changed multiple times over the years and each modification had its own unique impact on the resulting coverage disputes for IP claims.
The 1981 “broad form” endorsement defined “advertising injury” as an injury “occurring in the course of the named insured's advertising activities, if the injury arises out of … piracy, unfair competition or infringement of copyright, title or slogan.” This same endorsement also typically excluded claims of “advertising injury arising out of … infringement of trademark, service mark or trade name, other than titles or slogans” in connection with the sale or advertising for sale of goods, products or services. Its inclusion of coverage for “unfair competition” has resulted in divergent authority about how that term should be interpreted. Some, but not all courts, broadly construe it to include many forms of unfair business practice.
Beginning in 1986, the CGL policy included “advertising injury” coverage as part of the standard form, rather than through endorsement. It also revised the definition of that phrase by replacing the term “piracy [or] unfair competition” with “misappropriation of advertising ideas or style of doing business” and removed the trademark infringement exclusion. A 1998 form revision replaced “infringement of title,” and the “misappropriation” language with “infringement upon another's trade dress.” This same revision included within the definition of advertising injury, among other things, slander and libel; violation of privacy rights; use of another's idea in advertising; and infringement in advertising. Further revisions were enacted in 2001 and again in 2004.
What remains is the well-documented difficulty by the insurance industry to clarify the scope of coverage for specific types of IP-related claims, resulting in a wide array of and oftentimes inconsistent judicial interpretations. As one legal commentator has noted:
Whether insurance coverage exists for IP claims depends, at the moment, on the specific kinds of claims asserted in the underlying suit, and the court which is considering the issue. For some types of IP matters, the situation is more than simply unsettled. Coverage for trademark infringement claims under the most commonly encountered “advertising injury” policy, for example, is the subject of a dramatic split among the circuits. Coverage for claims of trade dress, copyright and patent infringement, unfair competition, and trade secret misappropriation, under similar policy provisions, is anything but clear. Whether an intellectual property claim is insured or not can have an enormous impact on whether and how it is adjudicated. For reasons having as much to do with history as with anything else, standard commercial general liability policies insuring against “advertising injuries” do not expressly state that claims for infringement of trademarks, trade dress and patents, or for misappropriation of trade secrets, are covered. In consequence, particularly because litigating these claims can be very expensive, suits to ascertain the reasonable expectations of the insurer and insured on this point have burgeoned.1
This drafting difficulty can ultimately benefit insureds in many settings because general rules of insurance contract interpretation mandate that ambiguities in insurer-drafted policy language be construed against the insurer and in favor of coverage. In other words, it is not caveat emptor that applies, but rather “let the seller beware.”
CGL coverage is not the only source of policy assets for defending an IP suit. For example, media liability errors and omissions policies (E&O) provide coverage for media and entertainment companies involved in creating or utilizing IP and which find themselves defending against allegations of copyright and trademark infringement, misappropriation, defamation/libel and privacy rights violations. Notably, E&O policies typically do not cover claims alleging patent infringement or false advertising. Like E&O policies, cyber risk policies provide coverage for activities relating to the use or transmission of Internet content. Also like E&O policies, this coverage is available to defend against allegations of copyright and trademark infringement, misappropriation, defamation/libel and privacy rights but typically do not cover claims alleging patent infringement or false advertising.
There are generally three types of policies available for coverage of claims arising from the alleged protection and enforcement of patent rights: defense and indemnity; infringement abatement; and defense cost reimbursement. A critical issue is whether the policy permits the insured to select defense counsel of its choosing in the event a lawsuit is filed, as insureds often want the right to do so (or, at the very least, do not want to be foreclosed from having the option of selecting its own counsel). “Defense and indemnity” policies provide coverage for the defense of patent infringement claims brought against the insured stemming from the insured's use, distribution, advertising, and/or sale of its products. They typically exclude allegations of willful infringement and acts that rise to the level of criminal conduct. In contrast, insurance abatement coverage pays the insured's cost associated with prosecuting alleged infringers but do not cover liability for judgments or damages awards against the insured. Finally, as the name implies, “Patent Defense-Cost Only Insurance” covers the insured's costs to defend itself in a patent litigation brought in the United States. Also as the name implies, it does not provide coverage for damages or judgments and, therefore, typically has a smaller premium as compared to defense and indemnity policies. Whether this option and lower costs is more attractive to the insured is dependent on the particular insured's potential liabilities, exposures and other IP-related risks.
As with any coverage, insureds should be aware of timing-related limitations concerning the right to initiate litigation against an insurer, should such an action be necessary. In some instances, the time within which insureds can file suit is dictated by the express terms of the policy, while in others a statute or regulation will provide the relevant limitations period. And insureds may have arguments in favor of coverage even if they do not fully comply with a deadline. But, to best ensure coverage, insureds should pay attention to, and endeavor to honor, the timeframe in which they can sue their insurer. Finally, when making a claim for coverage following the filing of a suit or notice of a claim, insureds should not make any assumptions about what is covered under their policies, let alone assume that an insurer is right in disputing coverage.
The scope of coverage provided by IP policies can vary and the interpretation of those policies vary by jurisdiction, so insureds should carefully review their policies prior to making a claim to ensure that they frame their claim in a way that maximizes recovery and takes full advantage of the coverage provided.
Endnote:
1. D. Peter Harvey, “Insurance for Intellectual Property Claims: The Growing Coverage Debate,” 6 No. 2 Intell. Prop. L. Bull. 1 (Fall 2001).
Jeffrey Schulman is a partner in Liner's insurance recovery group in New York.
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