On June 12, 2014, the California Supreme Court, in Hartford Casualty Ins. Co. v. Swift Distribution Inc. 59 Cal. 4th 277 (2014), issued its long awaited opinion affirming an appeal of a ruling that at first blush appeared to have reversed years of precedent, excusing Hartford from defending an infringement suit even though the suit may have included facts supporting a potentially covered implied disparagement or trade libel claim. Hoping to use this case as a vehicle for change, the insurance industry had mounted considerable efforts, lining up amicus in a battle on the issue of whether an insurer need only rely on the causes of action pled to determine whether there is a duty to defend. While the Court did not go that far, the Court spent considerable time considering what constitutes an Implied Disparagement. The Court spent much of the Opinion on defining what the substantive claim of disparagement is:
“What distinguishes a claim of disparagement is that an injurious falsehood has been directed specifically at the plaintiff’s business or product, derogating that business or product and thereby causing that plaintiff special damages.”
How then to find Implied Disparagement? The Court provided examples referring to circumstances where the advertising insured does not mention competitors by name, but claiming to be the only producer of a given product or the only owner of a given trademark.
Unfortunately for Policyholders, the Court did note that the Charlotte Russe decision appeared to depart from the other cases which limited disparagement claims “to those who are the direct object of criticism and denying it to those who merely complain of nonspecific statement that they believe cause them some hurt.” In Travelers v. Charlotte Russe 207 Cal App 4th 969 (2012) an appellate court found it was implied disparagement for the insured to sell the claimant’s “premium apparel” for deeply discounted prices. This Court felt a “mere reduction in price may suggest any number of business motivations; it does not clearly indicate that the seller believes the product is poor quality.” Thus they disapproved the Charlotte Russe holding “to the extent it is inconsistent with [their] opinion.” We think perhaps the Court missed the point that much of what may make “premium apparel” premium is the price. The disapproval language left an opening to revisit that point in another case.
Turning to the Swift claims, the Court found no implied disparagement because Swift merely touted or puffed about the qualities of their own product and thus could not be found to have disparaged even by implication, the competitors almost identical product. The holding does not limit the obligation of insurers to consider extrinsic facts when investigating whether to defend.
For more than 40 years California has rejected the so-called “four corners rule” – that coverage determinations are made only on the basis of comparing the complaint to the policy. Since Gray v. Zurich, 65 Cal. 2d 263 (1966), the law in California has been that, when determining whether to defend under a liability policy, insurers must look into available or known extrinsic evidence as well as the facts pled in the complaint. Under Gray, where facts exist supporting the potential for coverage, insurers must defend, even if all the elements of a covered claim are not explicitly pled. As noted in the opinion in Pension Trust Fund v. Federal Ins., 307 F. 3d 944, 951 (9th Cir. 2002), “California courts have repeatedly found that remote facts buried within causes of action may potentially give rise to coverage and are sufficient to invoke the defense duty.”