Second Circuit Holds Insurer Has Duty to Defend but Not Indemnify, Due to Legal Uncertainty about Coverage at Time of Tender

by Wilson Elser

The Second Circuit recently held that an insurer owed a duty to defend under the “advertising injury” section of a commercial general liability (CGL) policy because sufficient legal uncertainty about the policy’s definition of “title” existed at the time of the tender to construe the policy in favor of the insurer. Notably, the Second Circuit also held that the legal definition of “title” was clear enough to preclude the insurer’s obligation to indemnify, which is a more narrow duty than to defend. As the result, the Second Circuit ordered the insurer to pay the insured’s defense costs, but not its settlement.     

The Facts
In CGS Industries, Inc. v. Charter Oak Fire Ins. Co.,  No. 11-2647-cv (June 11, 2013), the Second Circuit examined Five Four Clothing, Inc.’s (Five Four’s) trademark infringement claims against Walmart Stores, Inc. (Walmart) and CGS Industries, Inc. (CGS) to determine whether the claims were covered under the “advertising injury” section of CGS’s insurance policy with Charter Oak Fire Ins. Co. (Charter). In that underlying action, CGS supplied jeans to Walmart that had a rear-pocket stitching design similar to Five Four’s jeans. CGS resolved the dispute by making a settlement payment to Five Four on behalf of itself and Walmart.

After settling the underlying action, CGS commenced suit against its insurer for payment of defense costs and indemnification for the settlement payment. The lower court concluded that the insurer breached its duty to defend CGS in the underlying action and further held that the insurer was obligated to indemnify CGS for the settlement amount. The insurer appealed, arguing that it did not have a duty to defend or indemnify CGS under the policy because (1) CGS’s copying of the jeans’ design stitching did not constitute an infringement of “slogan” or “title” within the meaning of the policy; (2) Five Four did not explicitly allege that CGS committed a covered offense in the course of advertising; and (3) the policy’s “knowledge of falsity” and “knowing violation” exclusions precluded coverage. Further, since there is no duty to defend, there is no duty to indemnify.

Second Circuit’s Approach & Decision
To decide whether the policy required Charter to indemnify CGS for its settlement costs, the Second Circuit first examined whether there was a reasonable basis for a difference of opinion as to the meaning of the policy. If the language were deemed to be ambiguous, the Court would interpret the policy in the insured’s favor because New York law applies the following standard: Where the plain language of a policy permits more than one reasonable reading, a court must adopt the reading upholding coverage. With respect to its duty to defend, the Court noted that an insurer has the burden of demonstrating that the allegations in the complaint fell entirely within its policy’s exclusions and that the allegations were subject to no other interpretation such that there was no uncertainty in fact or law.

Applying the foregoing legal standards, the Second Circuit turned to the relevant policy. CGS’s policy provided, in relevant part, that its insurer would “pay those sums that the insured becomes legally obligated to pay as damages because of … ‘advertising injury’ … to which this insurance applies." The policy defined “advertising injury” as injury arising out of one or more specifically listed offenses, including “infringement of copyright, title or slogan.”

The Second Circuit found that since the policy did not define “slogan” or “title,” it needed to examine whether the meanings of these terms were defined under federal or state law when the claim was tendered. With regard to the definition of “slogan,” the Second Circuit found that federal courts frequently define the word as “phrases used to promote or advertise a house mark or product mark, in contradistinction to the house or product mark itself.” In the case before it, the Court found that design stitching was clearly and unambiguously not a “phrase” and, as such, not a “slogan” as that term is understood in law and used in insurance policies. Accordingly, the Court held that, insofar as the complaint in the underlying Five Four action rested on a claim of infringement of a “slogan,” the insurer had no duty to defend or indemnify.

The Court next considered whether the stitching could be considered a “title.” Recognizing that neither state law nor industry usage defined “title,” the Second Circuit again relied on federal law to determine whether coverage existed. Noting that “while the vast majority of federal cases unambiguously define ‘title’ to mean a word or phrase, a handful define title in a way that could arguably include design or symbol similar to the pocket stitching” at issue. As such, the Second Circuit held that because sufficient uncertainty about a policy's definition of “title” existed at the time of tender, the insurer had a duty to defend its insured, but not a duty to indemnify as the definition of “title” was clear enough to preclude any obligation under the insurer’s narrower duty to indemnify. The Court noted in dicta that the insurer’s proper recourse at the time CGS tendered was to begin to defend CGS and immediately seek a declaratory judgment as to the meaning of “title.” Because the insurer did not do so, the Second Circuit found the insurer to be in breach of its insurance policy with CGS.

Apart from infringement of “slogan” or “title,” the policy covered only “‘advertising injury’ caused by an offense committed in the course of advertising.” The insurer argued that the claim was not covered because Five Four did not allege injury based on CGS’s advertising the jeans. The Second Circuit, liberally construing the complaint, determined that an allegation that defendants – both Walmart and CGS – advertised the jeans was sufficient to satisfy the requirement that the “advertising injury” be caused in the “course of advertising.” The Second Circuit, in dicta, indicated that if the insurer did not believe that Five Four intended to allege advertising by CGS or that CGS did not advertise jeans, then the insurer should have provided a defense and immediately demanded a bill of particulars to resolve any ambiguity in the complaint. The insurer further argued that even if it had an initial duty to defend, that duty ceased once discovery responses demonstrated that neither CGS nor Walmart ever advertised the jeans. The Second Circuit agreed with the insurer’s argument, but held that since this argument was not previously asserted, the insurer had failed to preserve its rights and waived such an argument.

The insurer further argued that the claim was excluded under the policy’s “knowing violation exclusion” that excluded coverage for any “advertising injury” committed “with knowledge of falsity.” Although Five Four asserted boilerplate allegations of willful misconduct, Five Four’s Lanham Act section 43(a) claim did not require it to prove that CGS intended to infringe on its trademark. As such, Five Four’s claim did not require proof of intent to deceive. Therefore, the Second Circuit held that because at least one of the claims in the underlying action did not require intent, the insurer was required to defend the entire action.

The Second Circuit also examined whether the insurer owed a duty to indemnify. In holding that the insurer did not owe a duty to indemnify, the Second Circuit explained that although uncertainty concerning the meaning of “title” gave rise to a duty to defend, there was insufficient ambiguity to give rise to the narrower duty to indemnify. As such, the insurer was not liable for CGS’s settlement costs.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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