Winter, 2001

CLAIMS LAW UPDATE

WHAT IS AN ADVERTISEMENT

[Ref. Law of Insurance: General Liability, Para. 1108]

Two policyholders claim they are entitled to insurance coverage under the “advertising injury” provisions of their Commercial General Liability Policies (CGL). Both policies define advertising injury as an injury “arising out of” the named insured’s “advertising activities” if such injury “arises out of libel, slander, defamation, violation of a right of privacy, piracy, unfair competition or infringement of copyright, title or slogan.” However, the term “advertising” is not defined. You, the claims professional, must determine if they are correct.

In the first case, the insured manufacturer issued just three letters to a single, potential buyer soliciting the sale of a new machine. This ultimately resulted in a demonstration and executed purchase order for ten of the machines. The plaintiff, another manufacturer, claims that the insured misappropriated the machine after one of its former employees was hired by the insured. By soliciting the customer and providing a demonstration, was the insured engaged in the type of advertising activities which entitle it to coverage under the policy’s advertising injury provision?

In the second case, the insured life insurance company is accused of hiring away nearly 300 employees of a rival company through misrepresenta- tions made during one-on-one solicitations by the insured’s agents. It is also alleged that the insured replaced nearly 10,000 of plaintiff’s policies by contacting its customers and misrepresenting plaintiff’s financial status and ability to pay claims. Although this situation raises a number of questions, your job is limited to determining whether the insured’s solicitations constitute the type of advertising activities which trigger coverage.

The District Court in John Deere Insurance Company v. Shamrock Industries, Inc., 696 F. Supp. 434 (D. Minn. 1988), addressing a scenario similar to the first case, concluded that the three letters “arguably” constituted advertising activities and ruled that there was a duty to defend. The court relied, in part, on a definition of advertising from Black’s Law Dictionary which it interpreted as encompassing “any form of solicitation.” The court was also persuaded by the fact that the policy failed to limit the scope of the meaning of the term advertising activity. In contrast, in Monumental Life Insurance Company v. United States Fidelity and Guaranty, 617 A2d 1163 (1993), the court of Special Appeals of Maryland analyzed facts similar to those of the second case and concluded that the improper individual solicitations did not constitute advertising in part, because they were not of a “public nature.” Does this make sense?

What if the policy language was changed? Rather than requiring an injury “arising out of” the named insured’s advertising activities the policy requires the advertising injury to occur “in the course of advertising” the named insured’s “goods, products and services.” Would this make your decision easier?

This article will focus on the competing definitions and inconsistent applications of the term “advertising” which have emerged as a result of courts wrestling with coverage disputes arising from CGL policies which include advertising injury coverage. After providing an overview of the conflicting interpretations of what constitutes advertising, this article will discuss the Insurance Services Office’s (ISO) 1998 CGL form which, for the first time, defines advertisement, and requires that certain enumerated offenses be committed in the named insured’s advertisement for coverage to be triggered. One issue raised by these changes is whether a uniform definition of advertisement will eliminate confusion and make lengthy, inconsistent legal opinions struggling to define advertising a thing of the past.

A STATE OF CONFUSION

Generally, policyholders were entitled to advertis- ing injury coverage before the 1998 changes if they satisfied the following requirements: (1) the injury arose from an enumerated “offense” (for example, policies issued between 1986 and 1998 often include “infringe- ment of copyright, title, or slogan” as an enumerated offense); (2) the offense was committed during the policy period; (3) the offense was committed “in the course of the named insured’s advertising activities”or “in the course of advertising” the named insured’s “goods, products or services;” (4) the suit sought damages against the insured as a result of the advertising injury; and, (5) the claim fell outside the policy’s advertising injury exclusions. Although each of these criteria has been the subject of fairly extensive litigation, the most frequent disputes have arisen from the third requirement, and the difficult determination of exactly what constitutes advertising in the context of advertising injury insurance coverage.

The third requirement, as set forth above, is a combination of two ISO Commercial General Liability Coverage forms. First, the 1973 broad form endorsement provides that the “offense,” in order to be a covered offense, must be committed “in the course of the named insured’s advertising activities.” In 1986, however, ISO introduced new language requiring that the offense be “committed in the course of advertising your goods, products or services.” Since the introduction of these policy forms, which fail to define either advertising or advertisement, policyholders have attempted to stretch the plain meaning of these words to extremes, requiring courts to resolve some unique and unusual disputes.

For instance, in Zinman v. Fireman’s Fund Insurance Company, 87 Cal.Rptr.2d 397 (Cal. Ct. App. 1999), the court held that a policyholder’s display of an unauthorized copy of a painting did not constitute advertising. In Zinman, the insured owner of a commercial office building held an open house in one of its lobbies with the goal of obtaining additional tenants. The insured procured a painting to hang in the lobby during the open house with the understanding that it might purchase the painting in the future. However, several months later, the insured determined that the painting was too expensive and returned it. The insured replaced the painting with an alleged copy, which resulted in the artist of the original painting filing a copyright infringement lawsuit. When the insured argued that it was entitled to insurance coverage under the advertising injury provisions of its policy (the policy covered advertising injury caused by an offense committed in the course of advertising the insured’s goods, products, or services) the court concluded that the insured was not engaged in advertising. The court said that the painting, like the lobby plants and furnishings, may have constituted an improvement to the lobby, but the painting did not advance the insured’s efforts to lease space since it did not, in and of itself, inform anyone that there was available space in the building.

Zinman involved a fairly simple issue which did not require a complicated analysis. However, courts attempting to define advertising while faced with more complex factual scenarios have yielded conflicting definitions and inconsistent decisions. This may be attributed to the fact that courts have sought assistance everywhere from Black’s Law Dictionary and Webster’s Dictionary to convoluted decisions from other jurisdic- tions. Perhaps this state of confusion was summarized best by the District Court in Farmington Casualty Co., v. Cyberlogic Technologies, Inc., 996 F. Supp. 695 (E.D. Mich. 1998) which made the following observation when attempting to define advertising in a computer software infringement case:

Courts adopting the narrow definition hold that “advertising” refers strictly to widespread announcements or distribution of promotional materials directed at the “public at large”...On the other hand, courts adopting the broad definition have held that promotional activities directed at particular individuals or groups rather than to the public at large may also be considered advertising... Furthermore, it is not certain whether the narrow or the broad definition, or either, may properly be viewed as the majority rule... One factor contributing to this uncertainty is the fact that still other courts have adopted definitions of “advertising” that cannot conveniently be labeled broad or narrow. See, e.g., Atlantic Mut. Ins. Co. v. Badger Med. Supply Co., 528 NW2d 486, 490 (1995) (holding that advertise means to “call public attention to a product or business, especially by proclaiming desirable qualities so as to increase sales or patronage”).

In Farmington Casualty Co. the issue was whether the distribution of print catalogues and compact discs (containing presentations promoting a computer program known as the FIX Driver) to purchasers of FIX software constituted advertising under the terms of a CGL policy. The discs contained a four hour “free sample”of the FIX Driver and were distributed with the goal of encouraging customers to purchase the full FIX Driver on disc upon the exhaustion of their four hour samples. The language of the policy issued by Farmington did not define advertising and provided coverage for advertising injury caused by an offense committed in the course of advertising the insured’s goods, products or services. After examining the conflicting definitions ofadvertising and citing the John Deere and Monumental decisions, and after noting that undefined, unambiguous terms in insurance policies are given their ordinary meaning, the court adopted a broad definition. Itruled that advertising is “any oral, written, or graphic statement made by the seller in any manner in connection with the solicitation of business.” Apply-

ing this definition to the case before it, the court concluded that the distribution of the discs and accompanying print catalogues constituted advertising because the promotional materials distributed directly with the software reached nearly every potential FIX customer. The court reasoned that the narrow definition of advertising requiring distribution of materials to the public at large is not consistent with basic notions of fairness because it ignores that companies servicing small but well-defined markets also act within the “common understanding” of advertising. The court, however, ultimately ruled against the insured on a different issue, finding no causal connection between the insured’s advertising activities and the plaintiff’s infringement claims. Interestingly, the court rejected the insured’s argument that the FIX Driver had a dual identity of product and advertisement because the court believed that the insured’s position, if accepted, would invoke advertising insurance coverage and the duty to defend whenever a product is merely exhibited, displayed, distributed as a free sample, or demonstrated.

The court’s logic in Farmington Casualty Co., when compared and applied to the two factual scenarios presented at the beginning of this article, could raise more questions than answers. For example, applying a broad definition of advertising and holding that three letters to a single buyer constitutes advertising activities certainly addresses the need to take into account smaller business markets when determining the scope of coverage. Applying Farmington to the second scenario, it appears that one-on-one solicitations of a competitor’s employees and customers resulting in the hiring of nearly 300 additional employees and replacement of nearly 10,000 policies would clearly constitute an “oral, written, or graphic statement made by the seller in any manner in connection with the solicitation of business.” However, are we comfortable relying upon a definition which could conceivably result in any solicitations, even those that are not of a public nature, being deemed advertising activities for the purpose of advertising injury insurance coverage? Will providing a uniform definition of advertisement in CGL policies clarify the law or create additional issues to litigate?

CAN WE FINALLY DISCARD OUR DICTIONARIES?

In 1998, ISO released a new CGL form and introduced several changes, such as combining “personal injury” and advertising injury into one term in the definitions section of the policy and adding more exclusions to advertising injury insurance coverage. These modifications also included, for the first time, a definition of the word advertisement and the requirement that certain enumerated offenses be committed in the named insured’s advertisement to trigger coverage. According to the ’98 CGL form, the term advertisement is defined as follows:

1. “Advertisement” means a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.

Now that we finally have a concise, one-sentence definition of the word advertisement, can we finally stop running to our dictionaries when attempting to determine whether certain activities are covered under the advertising injury provisions of the insured’s CGL policy? Has uniformity and clarity finally been infused into the world of advertising injury claims? Unfor- tunately, we would not recommend discarding your dictionaries or betting on uniformity just yet, because the application of the term advertisement could depend upon the definitions of a new set of words. More specifically, what exactly do the terms “a notice,” “broadcast,” “published,” “specific market segment” and “about” mean in the context of ISO’s definition?

INTERPRETING THE NEW DEFINITION

At the present time, there do not appear to be any reported cases addressing disputes arising under the ’98 policies with the new ISO definition of advertisement. This could certainly be the result of a well-crafted definition which will yield very little litigation. For instance, the fact that alleged copyright, trade dress and slogan infringements must now occur in the insured’s advertisement should discourage policyholders from even filing suits like Zinman, since it is doubtful that, even with the most creative arguments, a painting would ever constitute an advertisement under the Zinman scenario. On the other hand, if history has taught us anything, it is that policyholders will continue to attempt to stretch ISO’s definition to its broadest extreme. Therefore, we will attempt to address some issues which may result from ISO’s definition of advertisement.

The first problem that could arise from the ’98 form is determining exactly what constitutes “a notice” “about” goods, products or services. For example, does a notice require a formal, specific advertising pitch for a particular product or can it be an informal, one-on-one solicitation in person or on the phone where the product is briefly discussed in a general manner? An argument could probably be made for either interpretation, although ISO’s definition does seem to encompass something more than the broad view that advertising includes “any form of solicitation” or a “statement made by the seller in any manner in connection with the solicitation of business” as espoused by the JohnDeere and Farmington Casualty courts. However, it remains to be seen whether the requirement of a notice would actually change either of these decisions or include the one-on-one solicitations that were the subject of the Monumental case.

Insureds seeking to invoke advertising injury coverage often face significant exposure in defamation or infringement claims and make any possible argument for coverage. With this in mind, perhaps the meaning of a notice can be clarified by determining the meaning of the words broadcast and publish. Unfortunately, Black’s Law Dictionary does not define the word broadcast. However, the Oxford American Dictionary provides more than one definition ofbroadcast, most of which contemplate the dissemination of information on a wide scale, and transmitting information over the radio or television. Does this mean that there cannot be an advertisement for the purpose of advertising injury coverage unless the insured transmits a notice over the radio or through the television? Probably not, because one of the three definitions attributed to publish by Black’s Law Dictionary is “to communicate (defamatory words) to someone other than the person defamed.” Communicate, of course, includes both written and spoken words. However, it is still unclear whether three letters to a single, potential buyer or numerous one-on-one solicitations with a competitor’s employees and clients constitute a notice or, more importantly, an advertisement as defined in the ’98 form.

Perhaps the answer lies with the meaning of the terms “specific market segments” and “about.” However, attempting to define these words just seems to raise additional questions. For instance, assuming three letters can constitute a notice about a product and the specific market segment consists of two buyers, is an insured entitled to coverage if it sends three letters to just one of the potential buyers? Does the analysis change if there are ten potential buyers? Taking it one step further, how much of a notice must be about a policyholder’s goods, product or services to constitute an advertise- ment? Could just one or two lines explaining the benefits of a new product in a ten page letter to a customer addressing an entirely different issue be construed as a notice about a product for the purpose of “attracting” a customer? Does it depend upon how many customers actually purchase the product as a result of those two lines or does the analysis hinge solely on the intent of the policyholder? Returning to a Monumental type fact pattern, could it be argued that hundreds of one-on-one solicitations consisting primarily of disparaging remarks about a competitor’s product and little dialogue about the policyholder’s product constitute a notice about the policyholder’s product if the solicitations result in an increase in sales? Although the answers to these questions may be obvious to some, and although we may be stretching ISO’s definition well beyond reasonable bounds, it also seems that the resolution of many issues which may arise in future advertising injury coverage disputes will continue to depend upon the court hearing the case and the dictionary it chooses to rely upon.

CONCLUSION

It is possible that ISO’s definition of the term advertisement along with its modifications to the advertising injury portion of the CGL form will help decrease litigation and create clarity in an area of the law that may very well be without a majority rule. At the very least, ISO’s efforts should have a chilling effect on potential claims relating to certain activities which resulted in coverage under the language of the pre-1998 form but, in reality, have very little to do with any advertising activity whatsoever. On the other hand, ISO’s ’98 form could raise additional questions and could once again result in policyholders, insurers, attorneys and courts searching for answers by thumbing through dictionary after dictionary in the midst of heated legal disputes involving hundreds of thousands of dollars. Regardless of the outcome, ISO should be commended for attempting to provide an answer to a question that seems to be asked with growing frequency in courtrooms throughout the country: What is an advertisement?

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