The Advertising Injury and the Rival's Lawsuit
Northline Analytics publishes software reviews. In a paid social media campaign, it states that competitor Vantage Systems "has been sued for fraud three times and its CEO was fired for misconduct." Both statements are false. Vantage sues Northline for libel, trade libel, and violation of the Lanham Act, seeking $750,000. Northline's CGL policy has Coverage B limits of $1,000,000 per offense and a $2,000,000 aggregate, with a $10,000 deductible. The policy excludes advertising injury "arising out of oral or written publication of material, if done by or at the direction of the insured with knowledge of its falsity." Northline's marketing director had questioned the claims before publication, and an internal email shows she wrote, "We can't prove this, but let's run it anyway."
1. Determine whether Coverage B applies to Vantage's libel and Lanham Act claims, addressing the knowledge-of-falsity exclusion.
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Coverage B covers personal and advertising injury, including libel, slander, and disparagement, and the Lanham Act claim may qualify as disparagement of goods or services. The threshold question is whether the offense occurred in the course of advertising. A paid social media campaign is advertising, so the offense is within the grant. The knowledge-of-falsity exclusion is the obstacle. The marketing director's email shows the insured knew the statements could not be proven and published anyway. Courts differ on whether the exclusion requires actual knowledge of falsity or recklessness; the phrase "with knowledge of its falsity" generally means actual knowledge, but the email is strong evidence that Northline knew or strongly suspected falsity. If the exclusion applies, Coverage B drops out entirely for those statements. Northline should argue the email shows doubt rather than knowledge, and that the statements were based on mistaken research. It should also check whether the policy has a separate exclusion for Lanham Act claims or for statements made at the insured's direction. The $10,000 deductible applies per offense, and the per-offense limit is separate from the aggregate.
2. Explain how the insurer's duty to defend interacts with the exclusion and what Northline should do if the insurer tenders a defense under a reservation of rights.
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The duty to defend is broader than the duty to indemnify. If the complaint alleges any claim potentially within coverage, the insurer must defend the entire suit, even claims that are excluded or uncovered. Here the complaint includes libel and Lanham Act claims that potentially fall within Coverage B, so the insurer likely owes a defense unless the knowledge-of-falsity exclusion clearly eliminates all potential coverage on the face of the complaint. Because the email is outside the complaint, the insurer may not rely on it to deny the defense at the outset in many jurisdictions, though it can use it later to deny indemnity. If the insurer defends under a reservation of rights, Northline should request independent counsel if a conflict exists, preserve the email and all campaign records, and avoid settling without consent. Northline should also demand a coverage position in writing and track defense costs, since defense costs may erode the limit if the policy is written that way.