A Specialized Risk: IP Coverage No Longer Available Under CGL Policies

New Jersey has several favorable pro-policyholder decisions on insurance coverage for intellectual property. These cases arise from a broad interpretation of the "advertising injury" coverage found in the standard commercial general liability (CGL) policy. As a result, many companies are confident that they are protected against IP risks. That confidence is misplaced. The insurance industry has noticed these pro-policyholder decisions in New Jersey and elsewhere. In response, it has conducted radical surgery on the CGL policy in recent years to remove that exposure, just as the insurance industry has in the past removed coverage for environmental, employment and asbestos risks. The policy language upon which prior New Jersey cases relied is rapidly vanishing, and IP coverage is now to be found primarily in specialty insurance policies.

Filenet Corp. v. Chubb Corp., 324 N.J. Super. 476 (Law Div. 1997), aff'd, 324 N.J. Super. 419 (App. Div. 1999), was New Jersey's first IP insurance coverage case. The court considered whether patent infringement was a covered claim under two consecutive sets of CGL policies. While the court held that the policies did not provide coverage for the claim of patent infringement, the two sets of policies issued to Filenet demonstrate the insurance industry's first effort to narrow advertising injury coverage.

The first set of policies (effective 1985-1987) considered in Filenet contain the original 1976 Insurance Services Office (ISO) advertising injury provision that covered several broad categories of IP offenses committed in the course of advertising, including "infringement of copyright, title, slogan, trademark, service mark or trade name," and "unfair competition or piracy." The insurance policy did not define any of those terms. Indeed, it did not even define the basic term of "advertisement," so that many courts have applied it broadly to cover almost any kind of marketing activity. See, Hameid v. National Fire Ins. of Hartford, 71 P.3d 761 (Ca. 2003); Select Design, Ltd. v. Union Mut. Fire Ins. Co., 674 A.2d 798, 801 (Vt. 1996).

Ten years later, the insurance industry attempted to narrow the scope of advertising injury coverage. The second set of policies (effective 1987-1992) considered in Filenet contained the revised 1986 ISO advertising injury provision.

The 1986 revision eliminated cover-age for unfair competition and piracy. In their stead, ISO provided coverage for "misappropriation of advertising ideas or style of doing business." Once again, the insurance policy did not define any of the key terms. The ISO form also reduced the complement of intellectual property coverage contained in the 1976 form, scaling it back to include only copyright, slogan or title infringement, eliminating coverage for infringement of trademark, service mark or trade name.

The policy revision by the insurance industry did not have the intended impact. In Tradesoft Technologies, Inc. v. The Franklin Mut. Ins. Co., 329 N.J. Super. 137 (App. Div. 2000), the Appellate Division again found that coverage did not exist for patent infringement. The court stated that the advertising injury coverage addressed only "advertising injury activities that caused specifically defined injuries." However, the court also held, in a footnote without any explanation, that "[a]s to the trademark infringement counts, these are obviously covered by the policy, and the [Insurer] does not argue to the contrary." One can assume that the court found it clear that trademark infringement fit within "misappropriation of advertising ideas or style of doing business." The court also found coverage for the claim of misappropriation of trade secrets. The court reasoned that coverage existed because the trade secrets in issue related to marketing, and therefore constituted "misappropriation of advertising ideas." When faced with an undefined term like misappropriation of advertising ideas, the New Jersey Appellate Division interpreted it broadly and found coverage for torts arguably not within the intendment of the insurance industry.

The insurance industry tried once again. In Villa Enterprises Management, Ltd. v. Fed. Ins. Co., 360 N.J. Super. 166, 175 (Law Div. 2002), the policy limited IP coverage to "infringement of copyrighted advertising materials or infringement of trade-marked or service-marked titles or slogans." The policy specifically excluded coverage for "trademark, or service mark or certification mark or collective mark or trade name, other than trademarked or service-marked titles or slogans." The problem for the insurance industry here was again lack of definition: apparently, no one knew what a trademarked or service- marked title or slogan was. At summary judgment, the insurer's attorney opined that it referred to trademarked titles of books.

The suggestion did not sit well with the court in Villa Enterprises, which concerned infringement of the "Villa Pizza" trademark and service mark.

Federal urges that the word "title" means, exclusively, the name of a literary work and that its duty to defend and indemnify extends only to trademarked and service-marked names of literary works. Thus, Federal argues that the underlying dispute over the trademarked and service-marked name VILLA PIZZA is excluded from coverage. Presumably, it would concede that an infringement of "DANTE'S INFERNO PIZZA " would be covered. Federal's tortured definition of "title" in the context of this comprehensive general liability policy and New Jersey law governing construction of insurance policies cannot be sustained.

The insurance industry has now introduced a new Personal and Advertising Injury Liability form. This time, the form defines advertising as follows

"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. For the purpose of this definition:

a. Notices that are published include material placed on the Internet or on similar electronic means of communication; and

b. Regarding web-sites, only that part of a web-site that is about your goods, products or services for the purposes of attracting customers or supporters is considered an advertisement.

The form also includes a much curtailed definition of "personal and advertising injury" which, as to IP, solely includes

The use of another's advertising idea in your "advertisement," or infringing upon another's copy-right, trademark, trade dress or slogan in your "advertisement."

The policy also includes a specific exclusion:

"Personal and advertising injury" arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights.

However, this exclusion does not apply to infringement, in your "advertisement," of copyright, trade dress or slogan.

Even in New Jersey, this does not leave much IP coverage available.

All of the above changes often occurred without notice to the insured. Moreover, insurance carriers are now inserting their own ad hoc, individual exclusions into policies. These have the effect of barring coverage for certain categories of claims or intellectual property risk altogether, such as absolute IP exclusions and absolute Web site/Internet exclusions. Indeed, some general liability policies do not contain advertising injury coverage at all. Most policyholders, and many of their brokers, do not know which form of advertising injury coverage their policy contains. In some cases, policyholders will be able to argue that a policy change on a renewal without notice to the insured is a nullity. See Bauman v. Royal Indem. Co., 36 N.J. 12, 25 (1961) ("[I]nsurer must call attention to any change in the terms and, if it does not, the change cannot be a part of the contract, and the renewal is subject to reformation."); Skeete v. Dorvius , 184 N.J. 5, 9 (2005) ("[P]olicy changes must be conveyed fairly to the policyholder."); McClellan v. Feit, 376 N.J. Super. 305 (App. Div. 2005) ("[W]hen the insured is not specifically and clearly informed of the change, the renewal will be ineffective.") Insurance brokers who fail to advise their clients of these changes are also at risk. Wasserman v. Wharton, Lyon & Lyon, 223 N.J. Super. 394, 407 (App. Div. 1998) (Broker has duty to advise "client that critical coverage which he already has is not only being unilaterally withdrawn but is replaceable at nominal charge.") However, the bottom line is that like environmental coverage before it, intellectual property coverage under the general liability policy is fast disappearing.

Moreover, even some of the related coverages in the general liability policy and elsewhere are sorely challenged by new risks. The personal injury coverage of the general liability policy offers broad privacy coverage, providing coverage for "publications" or "utterances" that violate "an individual's right of privacy." Insurers argue, with some success nationally, that such new torts as blast-faxing and data mining do not involve publication to a third party. See Melrose Hotel Co. v. St. Paul Fire & Marine Ins. Co., 432 F. Supp. 2d 488 (E.D.Pa. 2006). Some courts, including one in New Jersey, have found coverage for such electronic torts. In Myron Corp. v. Atl. Mut. Ins. Co., 2007 WL 432624 (Law Div. 2007), the court relied upon the doctrine of reasonable expectations and found that the insurer had to defend against a blast fax claim. The court did not reach the issue of whether a "publication" had occurred. It would come as no surprise if the insurance industry prepares new exclusions targeting these activities.

The same issue has arisen in the property insurance context. Here, the parties debate whether "data" constitutes property under a first or third-party property policy. See, e.g., Am. Online, Inc. v. St. Paul Mercury Ins. Co., 347 F.3d 89(4th Cir. 2003). As with blast-faxes, courts have reached diametrically opposed conclusions. The insurance industry has dealt with the problem in the usual way - most property policies now explicitly exclude data.

The insurance world is witnessing the demise of the general liability policy. Historically, a CGL policy was the sole liability policy a company needed. As that policy failed to provide coverage for newly evolving risks, a company needed to buy specialized insurance policies: D&O policies, EPLI policies and pollution policies. The collision of new risks with the insurance marketplace has now reached the point where every company must consider purchasing a cyber or media policy.

It is illuminating that the back cover of a recent Sports Illustrated contained a full-page ad for IP insurance coverage by Travelers Insurance Company. Equally symptomatic, Chubb now distributes to brokers and customers the "Chubb CyberRisk Handbook." As IP coverage under the general liability policy is disappearing, insurance companies are offering a wide variety of products to fill the gap.

Unlike general liability policies, these products are not standardized. They range from the very narrow to the very broad. Moreover, a single media or cyber policy can provide coverage for both liability and property risks. For example, one policy can contain coverage for intellectual property infringement; privacy risks; liability arising from the disruption of computer systems, whether by hacking, virus, or denial of service; business income loss from IT security failures; the cost to replace programming or data; and cyber-extortion threats. Once again unlike general liability policies, insurance companies will customize these new cyber policies to fit an individual company's needs. The insurance industry's new employment and pollution policies have by and large been effective, and have not produced a new flood of coverage litigation. Hopefully, policyholders' experience with new cyber policies will also be favorable.

Every company has insurance coverage for fire loss and auto collision, and for slip and fall accidents. Yet those same companies usually do not have coverage for loss of data or intellectual property infringement. Each year, intangible assets such as IP account for a correspondingly greater percentage of Corporate America's wealth than tangible property, yet those intangible assets are often uninsured. Indeed, many companies do not even know that those assets are uninsured, or that insurance for them might be available. Every company should conduct an audit of its intellectual property, and examine the insurance marketplace to see if appropriate products are available.

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