When High Point Design, a footwear seller/distributor, was accused by a rival of infringing on a patent, it responded by asking a court to declare that no infringement occurred. The rival, in turn, counterclaimed for patent and trade dress infringement. This prompted High Point to ask its commercial general liability insurer to defend it against the counterclaims under the policy’s “personal and advertising injury” coverage. When the insurance company refused, High Point sued it, seeking coverage for the patent and trade dress infringement lawsuit.
Trial Court Decision
A federal judge ruled in High Point’s favor, holding that while the counterclaims themselves did not explicitly target High Point’s advertising (something needed in order to trigger coverage), other information that had come to light during the lawsuit revealed the possibility that the counterclaims could be covered under the advertising injury portion of High Point Design’s insurance policy. Therefore, the Court ordered the insurance company to pay a law firm to defend High Point in the lawsuit.
The insurance company appealed and the Federal Appeals Court agreed with the trial judge. The case is entitled High Point Design, LLC v. LM Ins. Corp. (2d Cir., Dec. 19, 2018). The Court relied on four cardinal principles of liability insurance law, all of which are critically important legal principles for anyone evaluating whether a liability insurance disclaimer by an insurance company is correct.
The Four Principles
The first principle is that the duty to defend – for the insurance company to hire a law firm to defend its insured – is “exceedingly broad,” far broader than the duty to indemnify.
The second principle is that the duty to defend arises whenever the allegations contained in a complaint potentially fall within the scope of the risks covered by the insurer in its policy, regardless of how groundless or defensible those allegations may be.
The third principle is that if any of the claims asserted in a complaint are covered, then the insurer must defend the entire action. It cannot, for example, agree to pay only a fraction of the costs of defense on the ground that only a fraction of the claims are or may be covered.
Lastly, the fourth principle is that in deciding whether coverage exists, insurers cannot restrict themselves to only looking at the “four corners” of the complaint to determine whether coverage might be available. Rather, they can – and must – analyze coverage on the basis of all information available to them, because the complaint alone may not tell the whole story.
This case is a reminder to insurance policyholders not to give up on coverage. If an insurance company is refusing to cover your company’s claim, do not hesitate to give us a call.