Understanding Advertising Injury Insurance: Application to Protect against Business Torts: This Coverage Is Invaluable for Businesses, but Policy Forms Change and Courts Render Varied Rulings, Making It Necessary for Counsel to Be Alert

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MOST businesses in the United States buy commercial general liability (CGL) insurance. From 1985 through at least 1998, the most commonly used forms for this insurance included coverage for "advertising injury" offenses committed in the course of "advertising your goods, products or services." In policies issued in and after 1998, the policies often provide coverage for "personal and advertising injury" liability, with a definition restricting the coverage for some of the offenses to those committed "in your advertisement." Unlike the more familiar coverage for bodily injury and property damage liability, this so-called "advertising injury" coverage is not triggered by the type of damage but instead applies to all damage caused by covered offenses.

This insurance can be of great benefit to a business sued for damages because of libel or slander, trademark, trade name or trade dress infringement, or suits alleging copyright infringement caused by the insured's advertising. There remains disagreement on certain key issues regarding the scope of the coverage, including intellectual property disputes, but recent cases seem to be establishing trends on some issues of broad significance.

WHAT IS "ADVERTISING"?

A fundamental question, which arose from the earliest form of the coverage, is: What is advertising? More particularly, does advertising include one-on-one solicitation of customers for--example, in person, by phone or mail? The strong trend is for courts to follow the common dictionary definition that "advertising" requires wide spread distribution to the public at large.

The California Supreme Court in 2003 held in Hameid v. National Fire Insurance of Hartford that "advertising injury" as used in the CGL policy "requires widespread promotion to the public such that one-on-one solicitation of a few customers does not give rise to the insurer's duty to defend" an underlying suit. (1) In Hameid, the insured opened a beauty salon and hired hairdressers who previously had worked for a competitor. On learning that its former employees were telephoning and sending mailers to its customers and that this was effective to cause them to switch to Hameid's salon, the competitor filed suit alleging, among other things, misappropriation of trade secrets, including use of the competitor's customer list. The insured's policy included coverage for "advertising injury" arising from "misappropriation of advertising ideas or style of doing business."

The insurer refused to defend, and the insured sued. The trial court granted summary judgment to the insurer, concluding that the underlying suit did not involve advertising. The California Court of Appeal reversed. (2) Relying on New Hampshire Insurance Co. v. Foxfire Inc., (3) it concluded that in the context of a "start-up beauty salon," the solicitation of customers through telephone calls and mailers was sufficient to trigger a duty to defend.

Recognizing that this was contrary to the weight of authority from other jurisdictions, the California Supreme Court reversed, rejected Foxfire and joined the growing majority of courts holding that one-on-one solicitation is not "advertising." This decision likely will prove to be very influential in American courts.

The Supreme Court of Vermont reached a similar conclusion in 1996 in Select Designs Ltd. v. Union Mutual Fire Insurance Co. (4) A competitor sued the insured and several of its officers and employees, alleging that one of the competitor's former employees took proprietary information, including a customer list, then joined the insured's business and tried to lure the competitor's customers to the new employer by using the proprietary information. The insured argued that the term "advertising" is broad enough to include soliciting customers and that there was a misappropriation of advertising ideas via use of its customer list.

The court reviewed cases from numerous jurisdictions that had defined "advertising" as "the widespread distribution of promotional material to the public at large," and it adopted this "majority view. …