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