The insurer of commercial general liability insurance policies brought an action seeking a declaration that the policies did not cover a consumers' class actions against the insured. This case is Westfield Insurance Company v. Robinson Outdoors, Inc., 700 F.3d 1172 (2013).

Robinson Outdoors marketed and sold camouflage products that, according to Robinson, would eliminate human scent so that wild game would not be able to detect a hunter's presence. Consumers who had purchased these products brought a class action lawsuit claiming that the products did not actually eliminate human odor. Robinson sought coverage from its general liability insurer, Westfield. Westfield denied coverage and filed a declaratory judgment action.

Westfield asserted that the general liability policies did not cover the underlying lawsuits because the advertisements were first published before the policy period, and because the claims were excluded under the failure to conform provision. The district court ruled in favor of the insurer and the insured appealed.

The U.S. Court of Appeals held that the exclusion precludes coverage. The court found that the policies do not cover claims arising out of the failure of goods, products, or services to conform with any statement of quality or performance made in the named insured's advertisements. Robinson argued that the exclusion was ambiguous, but the court noted that insurance policy provisions are ambiguous only when they are reasonably subject to more than one interpretation. A plain reading of the exclusion in question is not reasonably subject to more than one interpretation. Robinson marketed goods with a statement of quality and performance; the goods did not conform to the promises made in the advertisement; the exclusion directly applies.

Robinson said that some of its advertisements were either “literally true” or ambiguous and do not represent a specific degree of quality or performance. As a result, Robinson contends that at least some of the misleading advertisements do not fall within the scope of the failure to conform exclusion. The court disagreed. The court stated that the failure to conform exclusion precludes coverage in this case because it captures all of the legal claims asserted by the consumers in the underlying lawsuits. Therefore, the ruling of the district court was affirmed.

Editor's Note: Under coverage B, personal and advertising injury liability, the exclusion pertaining to failure to conform requires the insured to honestly advertise its goods, products, and services if there is to be coverage for a claim. In this instance, the insured claimed its goods would accomplish something that buyers of those goods showed did not happen. The goods demonstrably did not conform with the advertised quality or performance and the Eighth Circuit Court of Appeals had no problem applying the exclusion.

Tree Damage on a Golf Course

The insured appealed a grant of partial summary judgment in favor of the insurer over a claim for tree damage on the insured's golf course. This case is Hickory Properties, Inc. v. American Zurich Insurance Company, 2011 WL 10071964.

Hickory Properties managed a number of properties, one of which is the Hickory Hills Country Club. A strong windstorm occurred and damaged the clubhouse and the banquet hall and damaged or destroyed 64 trees on the golf course. The insured had a standard commercial property coverage form and an endorsement adding coverage for “fairways, greens, tees, rough areas, out of bounds areas, sand traps, driving ranges, land, lawns, standing timbers, trees, shrubs, plants and sand specifically designed and maintained for the game of golf”. However, this endorsement limited coverage to no more than $25,000 for loss or damage caused by wind.

After the windstorm, the insurer retained an independent adjuster who reported that the golf course had suffered extensive damage from wind, and estimated debris removal from the wind damaged trees would cost $31,500. Zurich made an advance payment to Hickory in the amount of $50,360, with $25,000 representing payment for the tree-related claims. Two years later, Hickory sent Zurich a demand letter asserting it was entitled to $1,000,000 of coverage due to its tree loss, citing a section of the endorsement that places a policy limit on “covered property” at $1,000,000.

Hickory filed a lawsuit and alleged that it was entitled to coverage up to the full limit in the building form as well as the $1,000,000 coverage from the endorsement. Hickory's argument centered around the definition of the term “building”, contending that the entire country club, including the golf course, constituted the building and therefore, was covered property. The trial court did not buy this idea and ruled in favor of the insurer. This appeal followed.

The Illinois Appellate Court stated that the first issue to be decided is Hickory's claim that the damaged trees were covered under the policy's building form. Central to the insured's argument is its definition of the term “building”. The court referred to the standard dictionary and noted that a building is defined as “a usually roofed and walled structure built for permanent use”. The policy itself stated that a building means the building or structure described in the declarations; the declarations for the building form describes the business as a public golf course, but it does not describe any structures on the course.

It was abundantly clear to the court from a plain reading of the contract that the golf course itself was not covered under the building form, and so, the course is not considered part of the building as the insured asserted.

The court then looked to the endorsement and noted that the endorsement adds covered property to the coverage that had already been listed in the building form. The endorsement does extend coverage to trees, but this coverage is specifically limited to $25,000 for loss or damage caused by wind. This limitation clearly applied to the facts of this claim. The insured claimed that the $25,000 limit did not apply because the damaged trees were not “designed and maintained for the game of golf”. However, while the insured claimed that the trees simply added positive aesthetics and strategic play for the course, the court said the function and purpose of the trees, as well as the fairways, greens, sand traps, etc., etc., clearly met the “designed and maintained for the game of golf” notion.

The court said that the plain language of the insurance contract here compelled it to agree with the circuit court's ruling. Hickory's several attempts to legally convert golf course trees into buildings that would not be subject to the $25,000 limit was summarily denied as being specious and devoid of merit.

Editor's Note: This has to be considered one of those “nice tries” by an insured eager to find compensation for damaged property. Even though the commercial property form does not use the standard dictionary definition of “building”, the claim by the insured that trees are buildings was not a leap from reality that the Appellate Court of Illinois was willing to make.

Internet Advertising Injury Liability

This is a dispute regarding an insurance company's duty to defend under a commercial general liability policy against allegations of advertising injury based on the use of another's advertising idea. In the underlying lawsuit, Air Engineering sued Industrial Air Power alleging various causes of action based on Industrial's alleged misappropriation and use of Air Engineering's website source code and site content and an advertising system that was designed to place advertisements on potential customers' computers. This case is Air Engineering, Inc. v. Industrial Air Power, 346 Wis.2d 9 (2013).

The complaint against the insured in the underlying case describes four systems that Air Engineering claims Industrial Air misappropriated and used in its own marketing. Industrial's insurer, Acuity, agreed to defend Industrial under a reservation of rights and then filed a declaratory judgment action, asking the court to declare that it had no duty to defend or indemnify Industrial. The circuit court granted declaratory judgment and Industrial appealed.

In order to determine whether the allegations in the complaint give rise to a possibility of coverage under the advertising injury section of the general liability policy, the court of appeals asked three questions: does the complaint allege a covered offense under the advertising injury section of the policy; does the complaint allege that Industrial engaged in advertising activity; and, does the complaint allege a causal connection between Air Engineering's alleged injury and Industrial's advertising activity?

The court noted that the policy defines an advertising injury as the use of another's advertising idea in the insured's advertisement. The facts alleged are that Air Engineering developed the Proprietary Systems to enable it to provide information about its products to potential purchasers. Further, the facts allege Industrial's use of the Proprietary Systems without Air Engineering's consent to market Industrial's products and services and to solicit business.

Air Engineering alleges that it developed the systems to advertise its products to the public in order to facilitate sales. Air Engineering's system is “an idea for calling public attention to a product or business, especially by proclaiming desirable qualities and suitability to the customer's needs so as to increase sales or patronage”. Industrial used that information to do the same thing. Accordingly, the court found that Industrial's use of the system as described in the complaint is the use of another's advertising idea.

As for the second question about whether the insured engaged in advertising activity, the court found that the system used by Industrial designed and placed ads when certain search terms are entered into the system, which ads contain domain names leading to information about available products and how to purchase such products. Liberally construing the allegations in the complaint, these ads give notice to potential customers about Industrial's goods, products, or services and are placed with the purpose of attracting customers. Therefore, using the Internet Advertising System to place these ads is advertising activity. The links are about Industrial's goods and products and therefore are potentially an advertisement under the website subsection of the policy definition of advertisement.

Finally, the court addressed the issue of whether the complaint alleges a causal connection between Industrial's advertising activity and Air Engineering's advertising injury. Air Engineering contended that Industrial used its advertising ideas to draw past and potential customers away, thus causing business loss to Air Engineering. Assuming Industrial used Air Engineering's advertising system to target potential customers, it was reasonable the court said to infer that such usurped techniques did draw customers away from Air Engineering. The court decided that the causal connection requirement was met.

The order of the circuit court in favor of the insurer was reversed and the cause remanded.

Editor's Note: The Wisconsin Court of Appeals decided that the insured's alleged use of Internet advertising system constituted the use of another's advertising idea, the insured engaged in advertising activity, and there was a reasonable causal connection between the insured's advertising activity and the plaintiff's advertising injury. Based on the wording of the complaint matching up with the wording of the policy, the court found that the insurer did have a duty to defend under the advertising injury liability coverage section of the general liability policy.

Loss of Computer Data Tapes

The insurers filed motions for summary judgment after the insured sought coverage for the loss of computer data tapes. This case is Recall Total Information Management, Inc. v. Federal Insurance Company, 2012 WL 469988.

Recall Total Information entered into a distribution agreement with IBM and as part of this agreement, Recall agreed to store vital records. Recall entered into a secure transport subcontracting agreement with Ex Log to transport the IBM media. Ex Log was required under contract to maintain a general liability policy, an automobile liability policy, a crime policy, and an umbrella liability policy, all naming Recall as an additional insured.

In 2007, an IBM cart containing electronic media fell out of an Ex Log van near a highway. The cart and approximately 130 computer data tapes containing personal information for more than 500,000 IBM employees went missing. IBM took steps to prevent the dissemination of the information and then wrote to Recall claiming a total of over $6M in expenses as a result of the loss of tapes; Recall entered into a settlement agreement with IBM. Recall then wrote to Ex Log claiming reimbursement and indemnification for the amounts it paid to IBM. Both Recall and Ex Log provided notice of the claim to Federal Insurance Company and Scottsdale Insurance Company, the general liability insurer and the umbrella insurer, respectively.

Both insurers denied coverage. Recall and Ex Log filed a lawsuit against the insurers alleging, among other things, breach of contract.

Recall argued that the insurers are precluded from challenging the coverage issues based on Connecticut case law. The insurers countered that the case law is inapplicable because the duty to defend is not implicated since IBM never sued; the Federal policy required it to provide a defense for a lawsuit against the insured. Recall asserted that the settlement between IBM and Recall constituted an “other dispute resolution proceeding” that was within the policy definition of “suit”. The insured claimed that by failing to defend a suit, the insurer was denying coverage. The insurer countered that even if the process fell within the definition of “suit”, the other dispute resolution proceeding was not undertaken with the consent of the insurer, and this was part of the policy's definition.

The Superior Court of Connecticut found that neither party presented any evidence that convinced the court that the settlement process between Recall and IBM could be fairly characterized as an other dispute resolution proceeding. Moreover, the court continued, there is no question that Federal did not give Recall its consent to the process.

The court also noted that the insurers denied coverage based on the point that the claims do not qualify as property damage since the amounts paid to IBM are not for loss of use of tangible property. The insurers maintained that the claims are only for the remedial or consequential damages from a loss of electronic data and electronic data is excluded from the definition of tangible property. Recall argued that the loss of the tapes did constitute property damage and that the release between IBM and Recall implicitly included property damage claims. However, the court pointed out, IBM did not claim damages for the tapes or the cart. Moreover, since the policies defined property damage as damage to tangible property and state that electronic data is not tangible property, the court agreed that there is no damage to tangible property and thus, no coverage for a claim for property damage.

The insured also asserted that coverage is available under the personal injury section of the policies. The definition of personal injury included reference to injury caused by an offense of electronic publication of material that violates a person's right of privacy, and Recall argued that publication should be interpreted very broadly to mean “making generally known”. However, the insurers pointed out that there is no evidence of publication since the term generally refers to the communication of words to a third person. The court, agreeing with the insurers, found that there was no evidence of communication to a third party, and with no publication, there is no injury to a person. IBM is not a person and there was no evidence that any person suffered identity theft or that the privacy of any IBM employee was violated in this instance.

The Superior Court granted Federal's and Scottsdale's motions for summary judgment.

Editor's Note: The Superior Court of Connecticut ratified the point that electronic data is not tangible property and the loss of that data is not property damage as defined in general liability policies. The insureds tried several avenues in order to secure insurance coverage in this instance, but the actual claims (expenses for notifying IBM employees and for credit monitoring services) and the policy language precluded any coverage.