Reversing a District Court ruling, granting the carrier summary judgment, the Second Circuit held that allegations that the insured infringed on the trademark of another by improperly "marketing" these suspect goods, was sufficient to trigger the "advertising injury" coverage provided for in the Commercial General Liability policy issued by the carrier.
In an underlying trademark infringement action, Insurer Diamond State Insurance refused to assume a defense on behalf of its insured, Century 21. Challenging its duty to defend, the insurer argued that the term "marketing" alleged in the underlying pleading did not fall squarely within the definition of an "advertising injury" under the subject policy. After the insured moved for summary judgment and the insurer cross-moved, U.S. District Court Judge Gerard E. Lynch exonerated the insurer, Diamond State Insurance, from its duty to defend and reasoned that the pleadings in the underlying action did not trigger an obligation to assume a defense. Persuaded by the insured’s characterization of the term "marketing", the District Court determined that the omission of the express term "advertising" in the underlying complaint allowed the insurer to disclaim coverage because the "advertising injury" coverage contained in the subject policy was not triggered.
Rejecting the hyper technical analysis engaged in by the District Court, the Second Circuit reversed. In its Opinion, the Second Circuit recounted the basic rule that an insurer is required to provide a defense if the allegations against the insured, when compared with the relevant provisions of an insurance policy, fall within or "potentially" within the policy’s coverage.
The Second Circuit observed that a term as broad as "marketing" may in fact be construed to include activities other than selling and distributing thereby implicating the advertising coverage. Accordingly, notwithstanding the fact that the term "marketing" may be read to include both activities related and unrelated to advertising, the Court stated that the use of the term "marketing" alone in the underlying complaint gave rise to the duty to defend. Significantly, the Second Circuit stated that when presented with ambiguities and uncertainties in interpretation, the Court is to give effect to the meaning that allows for coverage.
The Second Circuit closed by adding that once a duty to defend is established, the obligation to defend expires only when it is determined "with certainty" that the allegations fall outside the scope of coverage. Thus, the Second Circuit held that the insurer would be responsible for legal expenses incurred by the insured up until such a determination is made.
This decision underscores the expansive reach of the duty to defend and the low threshold for invoking the duty. Moreover, this case demonstrates that insurance counsel must read the underlying complaint very carefully before concluding that the carrier’s duty to defend has not been triggered.