A Furniture Ad, a Stock Photo and a Rival's Lawsuit
Perch Marketing LLC is a creative agency insured under a commercial general liability policy with $1,000,000 each occurrence, $2,000,000 general aggregate and $2,000,000 products-completed operations aggregate. Coverage B, personal and advertising injury, is included with a $1,000,000 limit and a $1,000 deductible. In March 2024 Perch produced a digital campaign for a client's furniture store. A Perch designer used a photograph downloaded from a stock site under an editorial-only license, and the ad copy stated that a competitor's sofas 'are built with formaldehyde-laden foam.' In June 2024 the competitor, Loom & Lath, sued Perch and the furniture store client, pleading copyright infringement, commercial disparagement and trade libel, and demanding $400,000 plus an injunction. Perch's internal emails show the copywriter wrote that the formaldehyde claim 'is not really true, but nobody will check.' Perch tenders the suit and asks whether the client is also protected.
1. Which of Loom & Lath's claims potentially fall within Coverage B, and which are excluded?
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Copyright infringement - covered offense, subject to an exclusion and its exception. Coverage B covers infringement of copyright, trade dress or slogan in the insured's advertisement. The intellectual property exclusion bars most IP claims but carves that offense back in. Because the photo ran in Perch's ad, this claim fits the offense.
Commercial disparagement and trade libel - covered offenses. These fall under the libel, slander and disparagement offense. However, Coverage B excludes injury arising out of publication of material done by or at the direction of the insured with knowledge of its falsity. The copywriter's email that the claim 'is not really true' is direct evidence supporting that exclusion for the disparagement theory.
Injunctive relief. Coverage B pays damages, not equitable relief. The injunction is not a covered loss, though the cost of defending the claim for it is.
Bottom line: the copyright claim is the strongest covered theory; the disparagement claim is vulnerable to the knowledge-of-falsity exclusion but only if the knowledge can be attributed to the insured as the policy requires.
2. Does the carrier owe a defense to the entire suit, and how does the knowledge-of-falsity evidence affect that duty?
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The duty to defend is broader than the duty to indemnify. The carrier must defend if any claim in the complaint is potentially covered. The copyright claim in the advertisement is potentially covered, so the carrier owes a defense of the whole suit - it cannot defend half a complaint or withdraw because one theory is excluded.
The exclusion affects indemnity, not the defense trigger. Even strong evidence of knowing falsity does not eliminate the defense obligation while a potentially covered claim remains. The carrier should issue a reservation of rights and, in an appropriate case, consider a declaratory judgment action on the disparagement theory.
Conflicts. The copywriter's email creates a genuine coverage conflict: the carrier's indemnity position is adverse to the insured on falsity. That may entitle Perch to independent counsel at the carrier's expense, depending on jurisdiction.
Watch points: the offense must have been committed during the policy period and in the coverage territory; and defense costs erode the Coverage B limit unless the form states otherwise, so a prolonged IP defense can exhaust the $1,000,000.
3. The furniture store client also tendered. Is the client an insured under Perch's policy?
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Generally no. Coverage B insures the named insured and, by the who-is-an-insured provisions, its employees, volunteers and similar persons acting within scope. A client is a separate legal entity and is not an insured merely because the insured produced work for it.
The client needs its own status. Protection would have to come from an additional insured endorsement on Perch's policy naming the client, and even then the endorsement must be drafted to reach advertising injury. Many additional insured endorsements are written for liability arising out of the named insured's ongoing operations or completed work and say nothing useful about Coverage B offenses.
The contract cuts the other way. Most agency agreements contain the client's own warranties about claims substantiation and an indemnity running from the client to the agency. Here the agency wrote the offending copy, so that indemnity may not help Perch and may give the client a claim against Perch.
Practical result: the client's own general liability policy, which likely includes Coverage B, should be tendered. If both policies respond, the other insurance conditions decide the order, and if Perch promised additional insured status and did not deliver it, the gap becomes an errors and omissions claim against Perch.