In the first article in this series, we noted that
several sections of the CGL policy applied to Coverage B in the same manner as
they apply to Coverage A (Bodily Injury and Property Damage), such as the
Duty to Defend, Who Is an Insured, and Supplementary Payments. But we also
noted that Coverage B is not triggered by physical harm. Instead, it requires
that an insured commit a listed "offense" for coverage to apply. In
general, an "offense" involves a violation or infringement of the
rights of others. Further an "offense" is often the result of an
intentional act. The concept of an "occurrence" is irrelevant to
Coverage B, which does not require personal or advertising injury be caused by
an "occurrence."
That is not to suggest that intentional injury will be covered by Coverage
B. However, eliminating coverage for intentional injury is accomplished by
exclusions to coverage, not by limitations found in the Coverage B insuring
agreement.
List of Offenses
By way of review, the covered "offenses" are specifically listed
and are found in the definition of "personal and advertising
injury":
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False arrest, detention, or imprisonment;
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Malicious prosecution;
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The wrongful eviction from, wrongful entry into, or invasion of the
right of private occupancy of a room, dwelling or premises that a person
occupies, committed by or on behalf of its owner, landlord, or lessor;
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Oral or written publication, in any manner, of material that slanders or
libels a person or organization or disparages a person's or
organization's goods, products, or services;
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Oral or written publication, in any manner, of material that violates a
person's right of privacy;
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The use of another's advertising idea in your
"advertisement"; or
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Infringing upon another's copyright, trade dress, or slogan in your
"advertisement."
Exclusions—Coverage B
Not only are the offenses legalistic terms, the exclusions to coverage also
tend to be
legalistic and therefore difficult to understand. In view of this, the
explanations in this article of the 14 exclusions to Coverage B will include an
illustration as to when the exclusion might apply. Of course, the illustration
is not the only situation in which the exclusion might apply, but is intended
to assist in understanding the general meaning of the exclusion when read
together with the Coverage B insuring agreement and the definition of personal
and advertising injury.
a. Knowing Violation of Rights of Another |
This restriction to coverage is one of the prime exclusions intended to
eliminate coverage for claims involving intentional injury. For the exclusion
to apply, the insured must know their actions would violate the rights of
another, and that violation would inflict personal or advertising injury. The
exclusion applies whether the infliction was caused by the insured or caused by
others under the direction of the insured.
After a rancorous public debate at last week's town meeting, I
am seething at one person who dared to question my motivations. When
that person walked into my store, I immediately ordered him detained by
my security personnel, accusing him of shoplifting, even though I knew
that he had done no such thing. He later sues me for wrongful
detention. Once I recover from my anger, and before an answer to the
complaint is due, I admit that the only reason I detained him is
because I was insulted by his comments at the town meeting debate. As I
knew full well that I was violating his rights by detaining him, and
that directing my security personnel to detain him would inflict injury
upon him, my insurer has no obligation to defend or pay damages on my
behalf. In this illustration, I intentionally inflicted injury on the
store patron.
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b. Material Published with Knowledge of Falsity |
As above, this exclusion is intended to eliminate coverage for intentional
injury, but specific types of intentional injury—usually intentional libel or
slander. If the insured knows the information being distributed is false, this
exclusion eliminates coverage. As in the prior exclusion, there is no coverage
here if the insured directly publishes or directs others to publish information
the insured knows to be false.
It is worth pointing out that the exclusion only applies if the insured
actually knows the injurious information is false. That the insured could have
or should have known the injurious information was false probably does not rise
to the level of knowledge by the insured. In short, as demonstrating actual
knowledge is a factual matter, an insurer may well have to defend allegations
of libel or slander until a finding of fact is made as to whether the insured
did have actual knowledge.
In a hotly contested bid situation for the Acme Manufacturing
account, I am so frantic about writing this account that, against my
better judgment, I include in my proposal to Acme that the
competitor's insurer's A.M. Best rating is B-, even though I
admit that I did check the ratings the day I wrote the proposal and
found the competitor's insurer's rating had been upgraded 6
months earlier to A-. If the insurer brings legal action against me for
libel, in this illustration, my insurer would not have to defend or pay
any damages awarded to the plaintiff insurer against me as I knew the
material that I published was false.
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c. Material Published Prior to Policy Period |
As publications, for example an advertising campaign, may span over months
or years, the intent of this exclusion is to limit the coverage to the policy
in which the publication and thus the offense was first committed. If no prior
coverage existed at the time of the first publication, then the intent is to
avoid the policyholder obtaining retroactive insurance by purchasing coverage
after suspecting they might have trampled on someone else's rights.
How courts have interpreted this exclusion is decidedly mixed, however. The
issue is that while the intent appears to be to eliminate coverage for material
published before the policy period, even if a subsequent publication of the
same or similar material is published during the policy period, some courts
find this interpretation less than compelling.
For example, in P.J. Noyes Co. v. American Motorists
Ins., 855 F. Supp. 492, 495-97 (D.N.H. 1994), the court denied an
insurer's demand for summary judgment (applying New Hampshire law):
Other courts have interpreted this exclusion to apply regardless of which
publication, the publication prior to or the publication during the policy, is
alleged to have caused the injury—the determining factor is whether any of the
injurious material was published prior to the policy. In the case of
Sam Z. Scandaliato & Assoc., Inc. v. First Eastern
Bank & Trust, 589 So. 2d 1196 (La. App. 1991), the court found:
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… prior publication exclusion applies and thus no duty to defend
defamation claim where the plaintiff in the underlying suit alleged
defamatory publications by insured were continuous over a number of years
and covered several policies, but where first injurious publication was
made prior to the effective date of each of the policies….2
Exactly how this exclusion will be interpreted depends to a large extent on
the circumstances.
In starting my new restaurant business,
I began with an advertising campaign that included the slogan
"Where's the beef?" As my business started to grow, I
decided I should purchase CGL insurance, including Coverage B. Six months
into the policy, I am served with a complaint that my "Where's
the beef?" slogan has been misappropriated from Wendy's and that
damages have been demanded for infringing on Wendy's slogan. Upon
tender to my CGL insurer, the insurer discovered that the advertising
campaign, including the infringing wording, was first published before I
purchased coverage. Based on the "prior publication" exclusion,
my insurer denies both defense and any payment of damages on my behalf
because of the Wendy's complaint. |
As some offenses can also constitute criminal acts, coverage expressly
eliminates coverage for such criminal acts. As with prior exclusions, this
exclusion applies to criminal acts committed by the insured or committed at the
direction of the insured. This exclusion has been scaled back a bit from past
editions of the CGL, which eliminated coverage for criminal acts of any
insured. The difference is that this exclusion does not reach those
insureds not involved in the criminal acts, but who may still be held liable
(such as by vicarious liability—an employer for an employee) for a criminal
act.
As an owner of an apartment complex, I lease several apartments to
various local professors. I hear a rumor that one of my tenants has
filed for a medical patent on a process that may significantly slow the
aging process. As I see riches in my future, I hire an unsavory
associate to burglarize the professor's apartment to search for her
patent information. The tenant learns about my actions the next day
and, in addition to going to the police to file a criminal complaint,
brings a civil action against me for, among other things, wrongful
entry into her premises. When arrested and questioned by the police, I
confess immediately to my actions, hoping for lenient treatment. My
insurer, who has received the civil complaint for wrongful entry,
refuses to defend or pay any of my damages when they receive my
confession from the police, as I have directed others to commit a
criminal act.
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Simply put, Coverage B does not provide coverage for liability that the
insured assumes in a contract or agreement. In other words, if my liability for
a personal or advertising injury offense is based solely on my
agreement to assume the liability of others via a hold harmless or indemnity
agreement, no coverage exists under the CGL. However, if I would have been
liable if the hold harmless or indemnity agreement did not exist, then the
exclusion does not apply.
The contractual exclusion can be very problematic for several reasons.
First, hold harmless and indemnity agreements often employ the term personal
injury when they mean bodily injury. Second, it is not uncommon in a hold
harmless and indemnity agreement to be so broad as to demand indemnity for
"any and all liability." This might include personal and advertising
injury offenses. Finally, some indemnity agreements expressly require indemnity
for personal injury or advertising injury offenses.
A couple of solutions may be used, albeit with limited success as many
insurers will not change this wording. One such solution is to have this
exclusion eliminated entirely. This may not, however, completely solve the
problem as some insurers attempt to restrict the phrase "legally obligated
to pay" as meaning only an insured's tort liability and not liability
that may arise out of contract.
A second solution, also limited, is to use the ISO endorsement Limited
Contractual Liability for Personal and Advertising Injury (CG 22 74). Although
the endorsement requires designating the contract or agreement to be covered,
it does provide an affirmative grant of contractual liability coverage for
personal and advertising offenses, but only for the offenses of false
arrest, detention, or imprisonment. No other offenses assumed by contract
are covered by this endorsement. Yet, it may be valuable if, as a security
firm, you are required to indemnify the building owner and its tenants for such
offenses. Insurers also have proprietary endorsements that may provide a better
solution to this coverage issue.
In agreeing to speak for an organization at their convention, I
enter a hold harmless and indemnity agreement in which I agree to
indemnify the organization for "all civil and administrative
liability, including the costs and expense of a lawsuit, defense and
settlement…."
A comment is made during the convention, which an attendee finds
offensive and brings suit against the organization, alleging slanderous
comments directed to the attendee. Even though there were several
speakers at the convention, the attendee did not bother to identify the
speaker, instead alleging the organization as liable. The organization
turns the suit over to each speaker, demanding defense of the slander
allegation. My insurer denies both defense and payment of any damages
that may result as they deem this to be liability assumed in a contract
and, since the complaint did not name me, point out there is no
evidence that I would have liability to the attendee absent the
indemnity agreement.
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Aimed at advertising injury, the exclusion eliminates coverage (with one
exception) for an insured that does not honor the terms of a contract, even if
the contract involves advertising activities. The exception is that a breach of
an implied contract is not excluded provided the alleged offense was
the use of another's advertising ideas in your advertisement.
After long negotiations with a competitor, we expressly agree that I
am allowed to use their advertising idea—specifically, crossword puzzle
mailers that, when solved, promote in a novel way my business to
prospective customers. However, the contract spells out a specific
geographical area in which I may send the mailers, and clearly
prohibits using this mailer in other geographical areas. The mailers
are so successful that my sales department begins sending them outside
the agreed upon area—resulting in the competitor bringing suit against
me for breach of contract. My insurer denies coverage for both defense
and any obligation to pay damages for the competitor's suit as the
complaint refers to breach of the written contract, drawing attention
to the agreed upon prohibition to venture into other areas. The insurer
has concluded the complaint is for breach of contract, and therefore
excluded.
Exception: If the competitor simply gave me
permission to use their advertising idea, but with no mention of
restrictions to any territory, the complaint by the competitor may
state that it was understood (implied) that I would not go into other
territories. The complaint by the competitor would likely be that I
have breached an implied contract as respects limits on the
use of their advertising idea, and thus this exclusion would not
apply.
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g. Quality or Performance of Goods—Failure To Conform to
Statements |
Again targeting advertising injury type claims, this exclusion is intended
to eliminate coverage for claims that your goods, products, or services do not
perform or are not of the quality advertised. While it is difficult to identify
a specific offense that would trigger coverage for this type of situation, the
exclusion is more to reinforce that advertising injury will not provide
coverage for such claims, even if they do involve advertisements as defined in
the CGL.
In a television commercial for an auto
dealership, the owner states that all his used cars are previously owned
by only one person. After buying a used car, I find that the car I
purchased was used by a rental car company. I bring a suit against the
dealership for, among other things, the car I purchased to be of lesser
quality than advertised by the auto dealership. The insurer for the auto
dealership denies both defense and any obligation to pay damages as this
claim is derived from the dealership's product’s failure to conform
to statements of quality. |
h. Wrong Description of Prices |
Also related primarily to advertising injury, this exclusion clarifies that
the CGL will not respond to claims made for mistakes made in prices.
In the Sunday newspaper's
advertising circular, I purchased advertising space to promote my sale of
the latest, high definition flat screen plasma televisions, for this week
only, for $290 each. When I am flooded with customers who demand to see
the $290 televisions, I discover that I provided the newspaper with the
wrong price—I gave them $290 instead of the actual sales price of $2,900.
Several claims are made against me by irate customers alleging that I
engaged in bait-and-switch tactics. Based on this exclusion, my insurer
does not defend and refuses to pay any damages, including losses I may
absorb having to sell televisions at the lower incorrect price. |
i. Infringement of Copyright, Patent, or Trade
Secret |
Infringement of the intellectual property rights of others is not covered by
the CGL unless those intellectual property rights are your advertisement and
then only for the infringement of specifically listed intellectual property
rights: copyright, trade dress, or slogan. The extent of coverage for
intellectual property has been the subject of a significant amount of
litigation, much of which revolves around what, exactly, is meant by
advertising in relation to intellectual property rights. In some cases, the
question litigated is what is meant by copyright, trade dress, or slogan. For
example, policyholders have urged courts to consider patent infringement as a
misappropriation of trade dress and thus a covered offense.
Exclusion i. first appears in the October 2001 edition of the CGL and is
intended to make clear that coverage provided by Coverage B applies only if the
advertising material or broadcast itself is a copyright violation,
trade dress infringement, or misappropriation of trade dress (a style of doing
business).
In writing the users' manual for
the company's software, an employee of the software company takes
verbatim significant portions of a competitor's users' manual.
The competitor brings legal action against the software company, alleging
infringement of copyright. As the user manual was not the software
company's advertisement, the insurer for the software company cites
this exclusion and denies both defense and any obligation to pay damages
on behalf of the software company. |
j. Insureds in Media and Internet Type Business |
Because certain businesses or organizations present an elevated exposure to
most offenses, Coverage B excludes all but three offenses for these businesses
or organizations. Excluded from coverage (subject to three exceptions) are
offenses committed by an insured whose business is:
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Advertising, broadcasting, publishing, or telecasting
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Designing or determining the content or website for others
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An Internet search engine, access, or content or service provider
Certain Internet activities are not considered advertising, broadcasting,
publishing, or telecasting businesses. For example, an insured who develops its
own website, including links to the websites of others, would not be considered
an insured whose business is advertising, broadcasting, publishing, or
telecasting for the purposes of applying this exclusion. The three exceptions
to this exclusion and for which Coverage B would apply is for the offenses
of:
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False arrest, detention, or imprisonment
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Malicious prosecution
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The wrongful eviction from, wrongful entry into, or invasion of the
right of private occupancy of a room, dwelling, or premises that a person
occupies, committed by or on behalf of its owner, landlord, or lessor
Coverage for any other offenses is flatly excluded. Coverage is usually
available for these exposures by either separate endorsement or separate
policies. For example, media liability coverage is available for publishers and
usually includes coverage for numerous professional liability type offenses,
including copyright infringement and libel.
The local cable television broadcast
infuriates a political candidate in the next town, who brings a libel
claim against the television station. As the television station is in the
business of broadcasting, its insurer will not provide defense or pay any
damages for which the television station is liable. |
k. Electronic Chatroom or Bulletin Boards |
This exclusion, introduced in the October 2001 edition of the ISO CGL
policy, recognizes (as does exclusion l. below) the potential liability for
certain uses of the Internet. An insured who owns, hosts, or otherwise controls
electronic chatrooms or bulletin boards also presents an elevated exposure to
certain types of Coverage B offenses. This exclusion eliminates coverage for
liability arising out of the electronic chatroom or bulletin board activities.
This exclusion may be contrasted to the media and Internet type exclusion as
the exclusion does not apply to all of the insured's activities, only those
arising out of the activities related to operating or owning an electronic
bulletin board or similar electronic message board.
A recent Associated Press news article recounted the difficulties companies
who operate message boards are experiencing. In some cases, because the
electronic discussions are so fraught with mean-spiritedness and potential
damage to persons' reputations, the message boards have been restricted or
shut down entirely. While the article states that site operators are not
generally liable for offensive postings, insurers wish to avoid the potential
litigation entirely by excluding all liability for such message boards by the
use of this exclusion.
The operator of an electronic message board allows postings of
messages about a local bank with which several customers have had a
poor experience. Several of the postings suggest that the bank is ready
to fail, causing other customers to withdraw their deposits, creating a
"run on the bank" and its failure. The FDIC brings a suit
against the operator of the electronic message board, alleging gross
negligence in not screening such libelous postings. The CGL insurer for
the operator of the electronic denies both defense and the obligation
to pay any damages as the allegation of libel arose out of an
electronic bulletin board over which the insured exercised control.
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l. Unauthorized Use of Another's Name or
Product |
An insured who uses, without permission, the product or name of another in
their email address, domain name, or metatag to mislead potential customers
will not be covered under Coverage B for any liability that may result. The key
here is using the Internet, including email and websites, to mislead potential
customers.
To target potential customers using Internet search engines, I
include in my email address, my website domain name, and throughout the
text of my website, the name of a well-known competitor, which has the
effect of diverting potential customers to my website when they are
actually searching for my competitor's website. The competitor
brings claim against me for use of its name. My insurer, when served
with the complaint, points to this exclusion and refuses to respond in
any way.
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As policyholders were able, with limited success, to characterize pollution
claims as wrongful entry or other type of covered offense, the policy now
excludes coverage for the release of any pollutants.
Similar to the above, Coverage B excludes not only claims for the release of
pollutants but also any claims for cleaning up pollutants or responding to a
government authority's demand to cleanup or treat pollutants.
As a landlord of an apartment building, I have used a 40-year-old
bare steel 9,000-gallon underground heating oil tank to fuel my
oil-fired boilers. One morning it was found that the tank developed a
hole and that almost all of the oil has been released into the ground
on the premises. Public safety officials required evacuation of the
entire apartment for an indefinite period. The tenants sued me as their
landlord for wrongful eviction. No coverage is afforded for this claim
as it arose out of the actual escape of pollutants.
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To the extent that a covered offense arises out of war, Coverage B does not
provide coverage.
In the above example, the landlord's apartment is damaged when
the National Guard is called in to put down an attempt to overthrow the
state's governor. The tenants sue the landlord for wrongful
eviction, as they cannot occupy their apartments due to the extensive
damage. While it is unlikely the landlord would have liability for such
an event, there is no coverage even for defense of the landlord due to
the war exclusion.
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Other Exclusions—Added by Endorsement
While not included in the December 2004 edition of the ISO CGL, it is likely
that at least two other exclusions will be added to the policy that will affect
Coverage B.
Employment Related Practices Exclusion—CG 21 47
Coverage B does include coverage for "oral or written publication, in
any manner, of material that violates a person's right of privacy."
The CGL policy, absent the above exclusion, does not exclude coverage for
claims made by employees against the named insured, for employment-related
invasion of privacy. The Employment Related Practices Exclusion endorsement
unequivocally eliminates coverage for personal and advertising injury claims
arising out of employment related practices, policies, acts, or
omissions.
Exclusion—Violation of Statutes that Govern Emails, Fax,
Phone Calls, or other Methods of Sending Material or Information—CG 00 67
This endorsement, which is a mandatory ISO exclusion, is intended to
eliminate coverage for claims made under the:
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Telephone Consumer Protection Act
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CAN-SPAM Act of 2003
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And any statute, ordinance, or regulation that prohibits or limits the
sending, transmitting, communicating, or distribution of material or
information
In short, in the wake of several federal and state "do not call"
type laws, businesses and organizations have been sued over the violation of
such statutes, which allow for civil damages against businesses. Whether an
unsolicited phone call, fax, or email that violates such laws is to be
considered an invasion of the right of privacy and thus a covered offense under
Coverage B has been litigated, with mixed results, and is far from a settled
issue.
ISO has mandated this exclusionary endorsement to remove coverage entirely
and to avoid future litigation as to whether such acts constitute a covered
offense under Coverage B—all coverage is now excluded.
Conclusion
Personal and advertising injury coverage is undoubtedly complex and often
difficult to understand, in part because such claims are relatively uncommon.
Nonetheless, a basic understanding of the concept of a covered
"offense," recognizing that only specifically listed offenses are
covered, and that coverage for such offenses may be excluded under given
circumstances, is necessary to properly advise clients of the coverage they
have—and do not have—in the commercial general liability policy.