Expert Commentary

No Fortuity for Wrong That Started before Policy

Insurance, as I have often repeated, only works if the facts that caused the insured to be sued were contingent or unknown to the insured at the time the policy was acquired. An insured cannot act tortiously and knowingly cause damage to another, decide to continue the tortious conduct, and buy an insurance policy to protect itself against a future claim of damage without disclosing the wrongful conduct to the insurer.


Claims Practices
June 2014

In Street Surfing LLC v. Great Am. E&S Ins. Co., 2014 U.S. App. LEXIS 10737 (9th Cir. June 10, 2014), the defendant, Great American E&S Insurance Company, issued general liability insurance, including advertising injury coverage, to the plaintiff, Street Surfing LLC. The parties disagreed over whether Great American had a duty to defend Street Surfing in an action alleging trademark infringement, unfair competition, and unfair business practices under federal and California law. The district court granted summary judgment in favor of Great American, finding that the prior publication exclusion in the policies relieved Great American of any duty to defend.

Background

Street Surfing sold the "Wave," a two-wheeled, inline skateboard, to retail stores starting around December 2004. Less than a year after Street Surfing started doing business, it had earned approximately $600,000 in sales. By 2007, Street Surfing was also selling and advertising accessories for the Wave, like "Lime Green Street Surfing Wheels for the Wave" and the "New Ultimate Street Surfer Wheel Set."

Street Surfing applied for general liability insurance coverage from Great American in August 2005, 8 months after advertising the Wave. In the application, Street Surfing stated that its website address was www.streetsurfing.com and that the Wave showed its logo. It did not provide a picture or description of the logo. Great American approved the application and issued general liability insurance to Street Surfing from August 2005 until September 2007. There were two policies: the 2005 policy (spanning August 2005 until September 2006) and the 2006 policy (from September 2006 until September 2007).

The policies covered personal and advertising injury liability, among other things. Several exclusions limited that coverage, including a prior publication exclusion, which excluded coverage for "'[p]ersonal and advertising injury' arising out of oral or written publication of material whose first publication took place before the beginning of the policy period" and other exclusions that became moot.

Rhyn Noll, the owner of the registered trademark "Streetsurfer," filed suit against Street Surfing in June of 2008. Noll claimed trademark infringement, unfair competition, and unfair trade practices under federal and California law. Since early 2005, Street Surfing had known that Noll owned the "Streetsurfer" trademark, and it had unsuccessfully attempted to purchase the trademark that year. Street Surfing submitted a claim to Great American for coverage in September 2008 and tendered Noll's complaint. Great American cited the exclusions and amendments in denying Street Surfing's claim. The letter reserved to Great American "the right to assert any and all other terms, provisions, conditions and/or exclusions set forth in its policy which may be applicable to the Noll action" but did not mention the prior publication exclusion.

In December 2009, Street Surfing and Noll settled. Street Surfing's only response to Great American's second denial was to file suit in July 2011 seeking a declaration that Great American was obligated to defend and settle the Noll action. When Street Surfing and Great American filed cross-motions for summary judgment, the court concluded that Great American did not have any duty to defend Street Surfing in the Noll action because of the prior publication exclusion. The district court therefore granted Great American's motion for summary judgment, denying Street Surfing's motion for partial summary judgment and entering judgment in favor of Great American.

Discussion

According to California law, "a general liability insurer has a duty to defend an insured if it becomes aware of, or if the third-party lawsuit pleads, facts giving rise to the potential for coverage under the insuring agreement." The duty to defend is broader than the duty to indemnify, and an insurer can owe its insured a defense in an action in which no damages are ever awarded.

The insured only needs to demonstrate that the underlying claim could be covered by policy, and the insurer must prove it can't. However, this only applies to facts that might give rise to a duty to defend—not to questions about the legal interpretation of policy terms.

The Noll Action Potentially Falls within the Policies' Coverage

When resolving an insurance coverage dispute, before considering exclusions, a court has to analyze the coverage provisions to determine whether a claim is covered by the policy.

Although "Streetsurfer" could be used as a slogan, Street Surfing hadn't shown any instance of that kind of use that Great American could have easily discovered when the claim was filed, and nothing in the complaint or extrinsic evidence indicated that Noll ever used "Streetsurfer" as a slogan. The policies only covered Street Surfing's infringement of another's slogan. The Noll action was potentially covered, which triggered Great American's duty to defend under the advertising injury provision but not under the slogan infringement provision.

The Prior Publication Exclusion Applies to the Noll Action

The prior publication exclusion in the policies excepted coverage for "'[p]ersonal and advertising injury' arising out of oral or written publication of material whose first publication took place before the beginning of the policy period." The exclusion's clear-cut purpose was to prohibit coverage when the "wrongful behavior … beg[a]n prior to the effective date of the insurance policy." (Taco Bell Corp. v. Continental Cas. Co., 388 F.3d 1069 (7th Cir. 2004).) "The purpose of the prior publication exclusion is to preclude coverage for risks that have already materialized...."

In the context of advertising injury coverage, an allegedly wrongful advertisement published before the coverage period triggers application of the prior publication exclusion. If this threshold showing is made, the exclusion bars coverage of injuries arising out of republication of that advertisement, or any substantially similar advertisement, during the policy period, because such later publications are part of a single, continuing wrong that began before the insurance policy went into effect.

Street Surfing Published at Least One Advertisement Using Noll's Advertising Idea before Coverage Began

The prior publication exclusion of the policies was triggered only if the insured published allegedly injurious material before the policy period started. Here, the possible coverage was for injuries stemming from "[t]he use of another's advertising idea in [Street Surfing's] 'advertisement.'" Attaching the Street Surfing logo to the Wave was an advertisement using Street Surfing's brand name and logo. Because Street Surfing published the logo on the Wave before coverage started, the prior publication exclusion precluded coverage of injuries caused by the attachment of the logo during the coverage periods of the policies.

The Noll complaint did not mention any specific advertisements. If Street Surfing's post-coverage publications were wrongful, that would be so for the same reason its pre-coverage advertisement was wrongful: it used Noll's advertising idea in an advertisement. Street Surfing's post-coverage advertisements were not fresh wrongs that escaped application of the prior publication exclusion.

Conclusion

This case involves a company that began a wrongful course of conduct, obtained insurance coverage, continued its course of conduct, and then sought a defense from its insurer when the injured party sued. Although "a liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity," the prior publication exclusion, strictly construed, serves to place reasonable limits on that broad duty.

© 2014 Barry Zalma, Esq., CFE


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

Like This Article?

IRMI Update

Dive into thought-provoking industry commentary every other week, including links to free articles from industry experts. Discover practical risk management tips, insight on important case law and be the first to receive important news regarding IRMI products and events.

Learn More