Unambiguous Intellectual Property Exclusion Means No Coverage

While there is a prevailing sentiment out there that insurance policies are filled with ambiguities, the truth is quite the opposite. Where a relevant insurance provision is unambiguous, courts will construe it as such. That’s just what happened in a recent case before the Second Circuit Court of Appeals.

In Spandex House, Inc. v. Hartford Fire Insurance Co., No. 19-2784 (2d Cir. Jun. 17, 2020) (Summary Order), the circuit court affirmed the district court’s grant of summary judgment to an insurance company based on an intellectual property exclusion in the insured’s commercial general liability policy. The insured sought coverage for a copyright infringement action brought by a third party that accused the insured of creating, selling and distributing fabrics with designs allegedly copyrighted by the third-party.

The company denied coverage based on the intellectual property exclusion. The exclusion excludes from coverage injury “arising out [of] any actual or alleged infringement or violation of any intellectual property right,” as well as “[a]ny injury or damage alleged in any claim or ‘suit’ that also alleges an infringement or violation of any intellectual property right.” But the exclusion had an exception for advertising, which stated that the exclusion:

does not apply if the only allegation in the claim or “suit” involving any intellectual property right is limited to:
(1) Infringement, in your “advertisement” or on “your web site”, of:
(a) Copyright;
(b) Slogan; or
(c) Title of any literary or artistic work; or
(2) Copying, in your “advertisement” or on “your web site”, a person’s or
organization’s “advertising idea” or style of “advertisement”.

The policyholder made several arguments that coverage existed under the advertising exception to the exclusion. The circuit court, in affirming the district court rejected each of those arguments.

Essentially, the policyholder tried to read out of the exception the phrases “in your ‘advertisement’ or on ‘your website.'” The policyholder claimed that the commas used to offset those phrases allowed for an ambiguity and permitted the exception to be construed by excluding those phrases. The court was unpersuaded by that argument.

The court noted that “the plain language of the Advertising Exception, read in context, unambiguously applies where the sole allegation pertaining to intellectual property rights in the underlying suit is limited to enumerated types of infringement or copying that are causally linked to the insured’s advertising or web site.” Because the allegations in the complaint were not limited to advertising, the exception did not apply and coverage was precluded. The court noted that the commas did not create an ambiguity.

The court also rejected the policyholder’s alternative contract construction arguments, finding that they all violated New York’s contract interpretation rules. The court affirmed the district court’s finding that there was no possibility of coverage because of the allegations in the complaint and the plain and unambiguous language of the exclusion. Finally, the court rejected the policyholder’s claim that coverage was illusory because of the exclusion.