Insurance Policyholder Advocate & Attorney David Gauntlett : Gauntlett Law Firm : Insurance Recovery, Policy Interpretation : Irvine, Orange County, California

New Insurance Policies Covering Cyberspace Torts

Insurers now issue so-called cyberspace policies and also provide for net security coverage that addresses a host of exposures emanating from a company’s greater dependence on information services. Coverage for cyberspace intellectual property defense risks and prosecution opportunities, especially of patent and trade secret claims, is available only through policies specifically covering IP risks. You should carefully evaluate the wide array of available policies to maximize coverage for your company’s needs. The larger your client’s revenues and, hence, its premium payments, the greater your ability to negotiate favorable coverage terms.

Traditional offense-based advertising injury/personal injury CGL policies have a better track record than non-CGL policies in covering internet- and cyberspace-related torts. But the definitions of claims specified by the various ISO forms sometimes are murky and could require a case to proceed to trial to clarify whether coverage will arise. Common exclusions and questions about causal nexus also may apply to bar coverage. Errors and Omissions and Directors and Officers policies typically cover wrongful acts and require particularized conduct, either by a professional or a director/officer, to trigger coverage.

Cyberspace, Net Secure, and Intellectual Property Defense as well as pursuit policies offer a rich variety of solutions for addressing common e-commerce problems. As an adjunct to traditional policies, they give policyholders an improved coverage position that should minimize transaction costs. As the hypotheticals reviewed herein reveal, many common problems confronted by policyholders are best addressed under new forms of coverage where price point is a key consideration.

Nevertheless, a combination of broadly written traditional CGL Coverage with new form Cyberspace and Net coverage may present a winning package. Articulating hypothetical problems which your company could encounter and asking a prospective insurer to address whether its policy would cover given claims in writing is an effective way to “test drive” these new policies and find insurers who are willing to work for your business. However, because some of the narrower forms of cyberspace policies arguably do nothing more than duplicate the coverage that should be available under CGL and E&O/D&O policies, however, you must carefully review the policy language before selecting your company’s coverage.

Savvy corporate counsel will assure that the potential litigation exposure of their company governs the choice of its insurance policies. Many risks may not trigger net secure and cyberspace policies. But the significant exposure posed by cyberspace perils calls for having proactive, offense-based coverage in place before it is needed.

Cyberspace Policies

Unlike ISO policy forms, cyberspace policies offered by the current marketplace have not congealed into any standardized form. Indeed, insurers use product differentiations, protected by copyright, as a significant competitive strategy. It is therefore essential that you discuss with the vendor its specific policy language.

Cyberspace policies typically provide coverage for damages and defense costs arising out of enumerated offenses, such as defamation, invasion of privacy, misappropriation of name or likeness, or alleged violations of intellectual property rights stemming from information disseminated by the insured in covered media or advertising activities. They may also be endorsed to provide E&O coverage for the content of the covered information.

Media/Professional Insurance Agency, Inc., for example, issues a policy for Cyberspace Liability Plus™ Insurance that covers claims arising out of defamation and various intellectual property offenses, as well as “Piracy and plagiarism” (which according to at least one court makes that definition redundant) and the misuse of an intellectual property right, in the context of cyberspace activities. Iolab Corp. v. Seaboard Surety Co., 15 F.3d 1500, 1506 (9th Cir. 1994) (Placed in context, the intended meaning of the language is clear. “In the context of policies written protect against claims of advertising injury, ‘piracy’ means misappropriation or plagiarism found in the elements of the advertisement itself – in its text form, logo, or pictures – rather than in the product being advertised.”).

Although you can expect pertinent exclusions and other endorsements to exclude coverage available in a given factual scenario – typically for patent, trade secret, and antitrust claims – you will find the scope of the insuring grant in these policies a good place to start negotiating desired coverage (see sidebar for a list of cyberspace coverage vendors).

Net Secure Policies

Marsh’s Net Secure policy contains the elements common to most such policies. It addresses both first- and third-party losses and is underwritten by a consortium of insurers. It focuses on the more traditional kind of operational issues that companies encounter and addresses cyberspace property damage coverage.

Coverage A in the Marsh Net Secure policy includes a variety of perils, such as inadvertent mistake, error, or omission in the creation, distribution, installation, maintenance, modification, processing, repair, testing, or use of your computer system, and the introduction or spread of a computer virus, as well as other related forms of interruption to electronic information processing systems. The policy kicks in when there is “direct loss resulting from damage to forms of electronic data, information assets, computer programs or data processing media.”

Coverage B of the Marsh policy extends business income and extra expense coverage to include disruption, interruption, delay, or suspension of your internet and network activities during the period of recovery. The same litany of perils as enumerated in Coverage A triggers rights under this coverage.

Intellectual Property Policies

Policies that expressly provide for defense and/or prosecution of patent, trademark/trade dress, trade secret, and copyright claims obviously represent the most direct form of coverage for intellectual property claims. Intellectual property policies have the advantage of removing any ambiguity regarding the scope and extent of coverage. See DAVID A. GAUNTLETT, INSURANCE COVERAGE FOR INTELLECTUAL PROPERTY ASSETS, § 17.04 n.7 (Aspen Law and Business Division of Aspen Publishers, Inc., Gaithersburg, NY, 1999) (2007 Supplement).

One example of such coverage was historically available from the American International Specialty Lines Insurance Co. Called patent infringement indemnity insurance, it provided coverage of patent infringement claims caused by the “manufacture, use, distribution, advertising or sale” of any “covered product,” as long as the insured’s infringement was not intentional. You could endorse this policy to include other forms of intellectual property, such as trade secret, trademark, trade dress, or copyright.

Although a cyberspace policy may more economically protect your company from the latter three offenses, the patent defense policy expressly excludes them, absent an endorsement. At present for U.S.-based insurers, the sole resource for this insurance is the Intellectual Property Insurance Services Corporation based in Louisville, Kentucky. For significant corporations with a significant presence in Europe willing to procure patent defense insurance over a significant SIR (Self-Insured Retention), a number of opportunities through European-based insurers are becoming available. Similar risk-specific policies are available for the other intellectual property claims.

Intellectual property prosecution policies provide the necessary funding for you to pursue lawsuits in order to stop the infringement of your IP assets. Coverage of this type can be particularly important to companies that have a lot of their value tied up in these assets. Given the high cost of litigating intellectual property claims, smaller companies may lack the resources to pursue infringers and thus face the unfortunate prospect of standing idly by while infringement dilutes their valuable IP assets. Investing in coverage of this type can effectively eliminate this risk. Pursuit insurance has funded two cases that reached the U.S. Supreme Court. See Markman v. Westview Instruments, Inc., 52 F.3d 967 (Fed. Cir. 1995), aff’d, 517 U.S. 370 (1996); In re Lockwood, 50 F.3d 966 (Fed. Cir. 1995), vacated, 515 U.S. 1182 (1995) (after withdrawal of jury demand); see also Summit: Conn. Indem. Co. v. Markman, 1993 WL 304056 (E.D. Pa. 1993) (insured able to pay for the suit because his carrier had paid for two other suits involving the same patent).

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Two recent trademark cases analyzing trademark infringement coverage properly found a duty to defend.

Capitol Indem. Corp. v. Elston Self Service Wholesale Groceries, Inc., No. 04 C 6536, 2008 WL 696919 (N.D. Ill. March 13, 2008)

Analyzing the meaning of “infringement of title” under Illinios law, the court found that “infringement of title” can include improper use of a business name, citing Charter Oak Fire Ins. Co. v. Hedeen & Cos., 280 F.3d 730, 736 (7th Cir. 2002). At issue were allegations of advertising falsely labeled counterfeit cigarettes under the Newport brand. The court found that affirmative self-promotion of the actor’s goods or services was implicated by labeling of the cigarettes with the Newport mark characterizing earlier Michigan precedent from the 6th Circuit in the Advanced Watch case as anomalous. See Peterson Tractor Co. v. Travelers Indem. Co., 156 Fed. Appx. 21, 23 (9th Cir.2005). Id. at *9. It also rejected application of two exclusions, the first for “knowledge of falsity” which it mixed characterized as an intentional conduct exclusion noting that Trademark Infringement claims did not depend on either intentional or knowingly false conduct. Indeed a defendant could be liable for trademark infringement without proof that it engaged in an intentional or willful conduct to prevail. See Utica Mut. Ins. Co. v. David Agency Ins., Inc., 327 F.Supp.2d 922, 927 (N.D.Ill.2004). The court’s “knowledge of falsity” analysis properly applying Illinois law which an earlier Seventh Circuit decision misapplied.

In Del Monte Fresh Produce N.A., Inc. v. Transportation Ins. Co., 500 F.3d 640, 646 (7th Cir. (Ill.) 2007) the panel held that the “knowledge of falsity” exclusion was implicated because the allegations against Del Monte are not grounded in any theory of relief except fraud, transforming the exclusion into a more “intentional acts” exclusion.

The court also found the “first publication” inapplicable. The absence of any fact allegations asserting when the alleged counterfeit cigarette bearing the Newport® trademark were used, or when fliers of the insured allegedly advertises cigarettes and circulated them led the court to find the exclusion is inapplicable because it was unclear whether the claimant asserts that the infringing and fraudulent activity began. It reasoned:
While advertising may be cumulative, the court doubts that advertisements circulated before Capitol Indemnity began insuring Elston in 1993 had a discernable impact in 2003. Thus, the court will not invoke the first-publication exclusion simply because Elston’s advertising remained the same between 1983 and 2003.

Id. at *14.

Manzarek v. St. Paul Fire & Marine Ins. Co., ___ F.3d ___, 2008 WL 763385 (9th Cir. (Cal.) March 25, 2008)

Analyzing a “field of entertainment limitation endorsement” (“FELE”) the court found it did not exclude otherwise available coverage for “advertising injury” for alleged wrongful use of The Doors name, trademark and logo in connection with the planned national and international tour.

The court noted that coverage could well exist even outside the scope of the field entertainment limitation endorsement if The Doors own line of salad dressing, T-shirts or electric cars were promoted. There was no evidence that the specific content of The Doors memorabilia was identified in the complaint and absent same, the court did not discern that there was coverage necessary falling within the pertinent exclusion.

Also intriguing, the court found that bodily injury coverage was implicated because an alleged loss to a Doors’ band member “reputation and stature by causing people to believe that he was not, and is not, an integral and respected part of The Doors band, or is one member who easily can be replaced by another drummer.” Id. at *7.

“Bodily injury” coverage included emotional distress as part of its definitional perimeter. Mere economic loss arising from reputational harm is certainly been easily flowed within “personal injury” coverage for liable/slander/defamation and related offenses. The courts have often been more restrictive in looking at bodily injury coverage. This case suggests that a different approach is appropriate here.

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Two distinct decisions, one applying North Carolina the other Illinois law, both found false advertising claims fell within standard advertising injury coverage where initiated by competitors.

Granutec, Inc. v. St. Paul Fire & Marine Ins. Co., No. 5:96-CV-489-BO(2), 2008 WL 312146 (E.D.N.C. Jan. 16, 2008)

Granutec, Inc. (“Granutec”) is a North Carolina corporation that manufactures and sells generic, over-the-counter (“OTC”), pharmaceutical products. Following an initial agreement with Johnson & Johnson in 1989 to employ a color scheme for generic caplets different from that of the Tylenol Gelcaps, in February 1994 Granutec changed the color scheme to mimic the Tylenol Gelcaps. This conduct precipitated a suit against it for Lanham Act claims under 15 U.S.C. § 1125(a) and 43(a)(2) for false and deceptive advertising, as well as trademark trade/trade dress infringement.

Following issuance of a preliminary injunction against Granutec on December 21, 1995, Granutec agreed to market its OTC product in a color scheme that was conspicuously different from that used by McNeil, a Johnson & Johnson subsidiary, after incurring $500,000.00 in defense fees. Two policy forms were in effect from June 30, 1994 to July 31, 1994, a 1986 ISO form covering as “advertising injury” “misappropriation of advertising ideas or style of doing business”, and from August 1, 1994 to August 1, 1995, a St. Paul variant of an ISO 2001 policy form covering as “advertising injury” “unauthorized taking or use of any advertising material, slogan or title of others” the later policy included intellectual property exclusion.

Focusing on the express unfair competition claim pursuant to NCGS § 75-1.1 et seq., which prohibits “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce,” the court found a defense owed. It noted under the earlier 1986 ISO policy issued by Aetna:

McNeil alleged in its amended complaint that its advertising idea – portraying two “Gelcaps” on the front of the Tylenol box in a red and yellow color scheme – was wrongfully taken by Granutec for its own use on its generic packaging. . . . Granutec’s adoption of this color scheme will likely cause consumer confusion as to origin and generic equivalence. . . . Changing its generic product’s color scheme from red/orange to red/yellow represented an attempt by Granutec to simulate the likeness of the Tylenol Gelcap product. . . . Such allegations establish not only a prima facie case of unfair trade practices in violation of § 75-1.1 but also arguably fall within the meaning of “misappropriation of advertising ideas.”

Id. at *4-8.

The court found the causal nexus to advertising readily satisfied because the advertising content of the color scheme change was the basis for asserted liability. St. Paul was also held to have a duty to defend since there were distinct unfair competition allegations outside the scope of the intellectual property exclusion and the term “unauthorized taking or use of any advertising material” was deemed to be synonymous with misappropriation and advertising material to encompass ideas as well as tangible marketing tools.


Greenwich Ins. Co. v. RPS Products, Inc., 882 N.E.2d 1202 (Ill. App. Ct. (1st Dist.) 2008)

The underlying suit asserted claims for patent and trademark infringement as well as unfair competition. At issue was alleged infringement of the Holmes patent for its “HAPG 600 Harmony Air Filter.” An amended complaint tendered after denial by the carrier under a patent infringement exclusion asserted false advertising claims, to wit, the pertinent allegations assert in paragraph 9 that

The label on the H600 Replacement Filter box prominently displays the claim that it ‘Fits Holmes®,’ and lists the following Holmes® Harmony® Air Purifier Models: HAP 615, 625, 650, 675, 675RC. This designation is literally false because the RPS Replacement Filters do not meet Holmes performance standards, a high proportion of the RPS Replacement Filters are defectively manufactured and, when the RPS Replacement Filters are placed in one of the Holmes machines that they purportedly ‘fit’, the RPS filter will not allow the door to close.

Id. at 1204. It is further alleged in paragraph 13 that the replacement filter “substantially and materially underperforms.” Id.

The court quickly rejected the argument that a patent is property and the infringement of the patent is “damaging.” The court pointed out that property damage is defined in the Greenwich policy as “physical injury to tangible property, including all resulting loss of use of that property . . . .” A patent right encompasses intangible, incorporeal rights, not tangible property. Newark Morning Ledger Co. v. United States, 507 U.S. 546, 556, 123 L.Ed.2d 288, 300, 113 S.Ct. 1670, 1676 (1993).

Looking to the causal nexus sufficient to meet the requirement that the advertising of infringing products falls within the definition of advertising injury as contained in the Greenwich policy, the court noted:

The advertisement must instruct or explain to the purchaser exactly how to recreate or reassemble the product into one that infringes a patent. Count I of Holmes’ amended complaint (that RPS manufactured and sold allegedly infringing products) does not allege that RPS provided any detailed instructions to its customer on how to infringe the patent. RPS’ argument is, therefore, unpersuasive.

Id. at 1209 (citation omitted).

The court also found the patent infringement exclusion applicable to bar a defense in any event.

The court found the absence of the term “unfair competition” within the 1998 ISO policy language problematic. Neither disparagement nor trade dress infringement were specifically asserted in the court’s view. The court noted that trademark infringement is expressly excluded from the policy and therefore that count cannot trigger a defense as well. The court found that it was not problematic that the policy excluded trademark advertising injuries, yet covered trade dress advertising injuries. The court reasoned

The answer to RPS’ inquiry lies in the fact that trade dress infringement and trademark infringement are two different causes of action. See Schwinn Bicycle Co. v. Ross Bicycles, Inc., 870 F.2d 1176, 1182 (7th Cir.1989) (“[a] product’s trade dress is the overall image used to present it to its purchasers * * *. [Citation.] A trademark is thought of as something more specific, such as a logo” (emphasis in original )). We therefore find RPS’ argument unpersuasive.

Id. at 1212.

Notably, the court did not explain what coverage the trademark infringement might fall within, though it seems conceivable that the “use of another’s advertising idea in your ‘advertisement’ ” offense might have been contemplated. However, the court does not make its analysis on this point clear. Indeed, for a court of appeal decision it is remarkably inarticulate about the basis for its analysis. The court also fails to look at fact allegations that might underlay both the trade dress and trademark claims, as well as other case authority finding trademark claims readily covered, applying Illinois law under the very policy language at issue herein, to wit: Central Mut. Ins. Co. v. StunFence, Inc., 292 F. Supp. 2d 1072 (N.D. Ill. 2003).

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Two cases looked at the 1986 ISO policy provision offering “advertising injury” coverage for misappropriation of “advertising ideas or style of doing business”, the later, the 1998 ISO CGL “advertising injury” provision for “use of another’s advertising idea in your advertisement.” Each found a defense in a series of distinct scenarios.

General Cas Co. of Wisconsin v. Wozniak Travel, Inc. No. 07-3515 RHK/AJB, 2008 WL 440747 (D. Minn. Feb. 14, 2008)

The court determined there was a split of authority between an unpublished court of appeal decision – Williamson v. N. Star Cos., No. C3-96-1139, 1997 WL 53029 (Minn. Ct. App. Feb. 11, 1997), review denied (Apr. 15, 1997), and the Eighth Circuit Court of Appeal applying Minnesota law in Callas Enters., Inc. v. Travelers Indem. Co. of Am., 193 F.3d 952 (8th Cir. (Minn.) 1999). The court certified to the Minnesota Supreme Court the issues of: 1) Does trademark infringement fall within the scope of “misappropriation of advertising ideas or style of doing business” or constitute “infringement of copyright, title or slogan” as set forth in the CGL policy?

2) Is a trademark an “advertising idea” or does trademark infringement constitute “infringing upon another’s copyright, trade dress or slogan” as set forth in the CUL Policy?

Id. at *6.

The court noted that the Supreme Court might re-formulate questions of law as stated. See Minn. Stat. § 480.065, subd. 6(a)(3).

The court noted that a number of decisions had failed to follow the approach of the Sixth Circuit, including state court opinions in Michigan, and was not disposed to reach an opinion inconsistent with Sixth Circuit authority absent published Minnesota state case law to support such an approach.

Capitol Indem. Corp. v. Elston Self Service Wholesale Groceries, Inc.
No. 04 C 6536, 2008 WL 696919 (N.D. Ill. March 13, 2008)

At issue were allegations of trademark infringement and fraud asserted against Elston Self Service Wholesale Groceries, Inc. by Lorillard Tobacco Company. It is alleged that Elston advertised cigarettes purporting to be genuine Newport brand cigarettes when they were in fact knock-offs.

The court found that under out-of-state precedent consistent with Illinois law, title infringement could include trademark infringement, also noting an unpublished Illinois case, First State Ins. Co. v. Alpha Delta Phi Fraternity, No. 1-94-1050, 1995 WL 901452, at *12 (Ill. Ct. App. (1st Dist.) Nov. 3, 1995) (“infringement of title or slogan can include trademark ... infringement, and as such, is well suited for advertising liability coverage”) (unpublished opinion). Id. at *5.

It also found persuasive Charter Oak Fire Ins. Co. v. Hedeen & Cos., 280 F.3d 730, 736 (7th Cir. 2002), applying Wisconsin law. The court suggested that the use of the term “infringement of title” in this context was at minimum ambiguous. The court reached an equivalent result in analyzing the “misappropriation of advertising ideas” coverage. It concluded:

Lorillard’s Amended Complaint alleges that advertising and sale of falsely-labeled counterfeit cigarettes deprived Lorillard of sales, tarnished the Lorillard marks, and otherwise harmed Lorillard. In other words, the advertising itself was the wrongful and harmful conduct at issue in the underlying litigation.

Id. at *7.

It joined the chorus of authority characterizing the Advance Watch case as an anomaly, noting “Peterson Tractor Co. v. Travelers Indem. Co., 156 Fed. Appx. 21, 23 (9th Cir.2005) (district court correctly found that insurer had a duty to defend trademark infringement claim because ‘[t]his claim stated an advertising injury, either as a misappropriation of Peterson’s advertising ideas ... or as an infringement of title’) . . . .” Id. at *9.

The mere labeling of the cigarettes with the Newport mark was advertising, which need only involve actual, affirmative self-promotion of the actor’s goods or services. Erie Ins. Group v. Sear Corp., 102 F.3d 889, 894 (7th Cir. 1996). Id. at *9. The court reasoned:

Lorillard’s contention that Elston and the Dukums traded on Lorillard’s reputation, history, sales advantage, and goodwill, corresponds to the allegations found to describe an advertising injury in Native American Arts.

Id. at *11.

The court readily disposed of the first publication of knowledge of falsity exclusions because neither was implicated by liability to establish trademark infringement.

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