Verdant Home Goods: Copied Photos, a Comparison Chart, and Coverage B
Verdant Home Goods sells planters online. In March, its marketing coordinator downloaded six product photos from a competitor's website and used them on Verdant's product pages, adding the line "Unlike Brand X, ours won't crack." She also posted a comparison chart stating that Brand X planters are "defective, unsafe, and prone to mold." Brand X sued Verdant in June for copyright infringement, trade libel, and false advertising under the Lanham Act, seeking $450,000 and an injunction. Verdant's CGL is the standard ISO occurrence form with Coverage B, the intellectual property exclusion, and the knowing-violation exclusion. In an internal email, the coordinator admitted she "knew the photos were Brand X's but figured it was fine."
1. Sort the three claims: which fit Coverage A, which fit Coverage B, and which fit neither?
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Start with the definitions, not with the label on the complaint.
- Copyright infringement (the six photos). Not Coverage A - a copyright is intangible, so there is no "physical injury to tangible property" and no "occurrence." Under Coverage B, offense (g) reaches "infringing upon another's copyright, trade dress or slogan in your advertisement." The photos were published to attract customers, so the offense is pleaded. Coverage B is offense-based and needs no occurrence.
- Trade libel / disparagement (the chart). A listed offense: written publication of material that disparages a person's or organization's goods, products, or services. It is also "in the course of advertising" if the chart was published to attract customers. This is the strongest covered claim.
- Lanham Act false advertising. Standing alone, false advertising about your own product is not an enumerated offense. Courts often fold a competitor-directed false-advertising count into the disparagement offense when the statements denigrate the competitor's goods, and just as often refuse when the count is purely about the insured's own claims. Read the count, not the caption.
The $450,000 and injunction are remedies, not coverage; injunctive relief is not damages and the insurer owes defense, not performance.
2. How do the intellectual property exclusion and the knowing-violation exclusion apply, and do they defeat the duty to defend?
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Two exclusions, two different jobs, and the duty to defend survives one of them.
- IP exclusion. It bars "personal and advertising injury" arising out of infringement or violation of an intellectual property right. Check the edition you hold: the ISO form has carried a carve-back preserving infringement of copyright, trade dress, or slogan in your advertisement, which is precisely the offense (g) grant. If your edition has the carve-back, the photo claim is back in; if it does not, offense (g) is largely illusory for this loss. Read the form before you opine - this is where editions diverge.
- Knowing violation. This bars coverage for injury caused by an offense committed by an insured with knowledge that it would violate another's rights. The coordinator's email is close to an admission. Her knowledge is imputed to the corporate insured under respondeat superior. That defeats indemnity for the photo claim, and possibly the chart claim if she knew the mold statements were unsupported.
- Duty to defend. Broader than the duty to indemnify. If the chart-based disparagement count is potentially covered and not barred, the carrier defends the entire suit - in most jurisdictions - under a reservation of rights, with a right to recoup defense costs allocated to uncovered counts where the forum allows.
Likely outcome: defense with a reservation, indemnity limited to the disparagement count if the knowledge exclusion can be confined.
3. The carrier offers to pay defense under a reservation of rights. What should Verdant's response be, and what should you verify about the limits?
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Accept the defense, protect the privilege, and price the limits.
- Accept and cooperate. A reservation-of-rights letter preserves the carrier's coverage defenses but triggers the insured's right to independent counsel in conflict jurisdictions - here, because the coordinator's admission creates a conflict between the insured's interest in defeating the knowledge allegation and the carrier's interest in proving it. Demand Cumis-type independent counsel where the state provides it.
- Do not let the defense be silently allocated. Some carriers bill a portion of fees to uncovered counts. Track hours by claim; the disparagement count should carry the bulk of the work.
- Limits. Coverage B is subject to a Personal and Advertising Injury limit per offense and is included in the General Aggregate on the standard form; defense is inside those limits. The injunction is not damages and does not erode the limit - only defense costs and any settlement or judgment do.
- Collateral exposure. Punitive damages and Lanham Act disgorgement raise insurability questions that vary by state; treat them as a separate analysis from the compensatory claim.
Get the declarations, the Coverage B limit endorsement, and the edition of the IP exclusion on file before the reservation letter expires.