Wisconsin Supreme Court weighs in on personal & advertising injury coverage
In West Bend Mutual Insurance Company v. Ixthus Medical Supply, Inc., the Wisconsin Supreme Court examined several “advertising injury” coverage issues as a matter of first impression. West Bend issued a Commercial General Liability (CGL) policy to Ixthus that contained standard coverage for “personal and advertising injury.” Ixthus had been sued, along with over 100 other defendants, by Abbott Laboratories in federal court in New York.
The Abbott Labs backstory
The New York suit alleged that Ixthus, along with all other defendants, improperly purchased blood glucose test strips manufactured by Abbott that had been sold in Europe, and advertised and re-sold them in the United States for a profit. The New York complaint alleged thirteen causes of action, including claims under the federal Lanham Act, trademark infringement, unfair competition and other claims.
So, what’s covered under policy?
West Bend’s policy contained a fairly-standard personal and advertising injury coverage, providing coverage for claims alleging (among other things) use of another’s advertising idea in the insured’s advertisement and infringement of another’s copyright, trade dress or slogan in an advertisement.
The policy also contained standard exclusions for this coverage, including exclusions barring coverage for claims alleging:
Personal and advertising injury caused by or at the direction of the insured with the knowledge that the act would violated the rights of another and would inflict personal and advertising injury
Personal and advertising injury arising out of a criminal act committed by or at the direction of the insured.
Navigating the courts
West Bend filed a declaratory judgment lawsuit seeking a court determination that it owed no defense or indemnity to Ixthus for the claims plead against it in New York. The circuit court agreed with West Bend but the Wisconsin Court of Appeals reversed.
On appeal, the Wisconsin Supreme Court affirmed. Resolving issues it described as matters of first impression for that court, the court limited its analysis to (1) whether the New York complaint alleged claims falling within the personal and advertising injury coverage grant, and (2) whether either of the two exclusions identified above nonetheless barred coverage.
Applying the 3 part test
The court first recited the fairly-common three-part test for determining whether a claim falls within the coverage grant:
- does the complaint alleged a covered offense,
- does the complaint allege advertising activities, and
- is there a causal connection between the alleged injuries and the advertising activities?
Applying the test, the court noted that West Bend did not dispute the presence of the first two factors, so it proceeded to considering whether a causal connection was alleged. The court noted past Wisconsin Court of Appeals’ precedent held that such a connection was alleged when the allegations sufficiently assert that the insured’s advertising “did in fact contribute materially” to the plaintiff’s injuries.
Turning to the substance of the New York complaint, the court found several instances where the complaint alleged that the defendants’ advertisements contributed to consumer confusion about the origin of the test strips, which was enough to allege a causal connection.
West Bend argued that Ixthus “was not really an advertising defendant” but instead was “a distributing defendant who did not advertise” products. Unfortunately for West Bend, the court held that under the four corners test applicable to duty to defend determinations, evidence of Ixthus’ conduct outside of the pleadings was irrelevant. Accordingly, because Ixthus was lumped in with all the other New York defendants regarding the alleged underlying conduct, the allegations fell within the coverage grant.
Turning to the exclusions, West Bend argued that the New York complaint alleged that the defendants’ conduct was intentional and amounted to a deliberate and willful fraudulent scheme. These allegations, West Bend argued, triggered application of the exclusions, relieving it of a duty to defend.
The court was not convinced, observing that several of the claims alleged by Abbott Labs did not require proof of intent, including its claims for trademark infringement and those plead under the Lanham Act.
The court held that, at the duty to defend stage, the knowing violation exclusion will only preclude potential coverage when the claim cannot be proved without evidence that the insured acted with knowledge that its actions would violate the rights of another and would inflict personal and advertising injury. The court reached a similar result with regard to the criminal acts exclusion, holding that at the duty to defend stage the exclusion does not bar coverage if the claims could be proven without a showing of criminal conduct.
A reasonable argument, but still rejected
The court rejected West Bend’s argument that the New York complaint, taken as a whole, tells a “story” that Ixthus acted solely with such an intent. In this respect, West Bend seemed to argue that it is the facts alleged against the insured that control at the duty to defend stage, rather than the legal labels affixed to the claims.
This is certainly a reasonable argument, but the court implicitly rejected it in this case, finding that the allegations could support liability even without the required intent.