An insurer has a duty to defend even if the causes of action in a lawsuit are not expressly covered by a liability policy if the factual allegations may support a potentially covered claim.  This was expansive interpretation of the duty to defend adopted by the United States District Court Southern District of California in Millennium Laboratories, Inc. v. Darwin Select Insurance Company, __ F. Supp. 2d ___ (S.D. Cal. May 13, 2014).  This highly significant decision further buttresses the now well-established position of courts in California that all of the facts and allegations in a lawsuit, not just the stated causes of action and facts stated in the complaint, must be considered in determining whether there exists a potentially covered claim triggering an insured’s duty to defend. 

In Millennium, the insured, Millennium Labs, was covered under a commercial general liability insurance policy issued by Darwin Select Insurance Company.  The policy provided coverage for “claims alleging Personal or Advertising Injury caused by an offense that takes place during the policy period.”  “Personal  or Advertising Injury” under the policy was defined to include, “injury, other than bodily injury, arising out of … [o]ral or written  publication, in any manner, that slanders or libels a person or organization or disparages a person’s or organization’s goods, product or services.”

The insured sought coverage under the policy for two separate lawsuits involving its competitors.  In the first lawsuit, the plaintiff alleged seven causes of action against the insured including:  false advertising, injunctive relief and damages for violations of unfair trade practices and consumer protection statutes in various states and common law unfair competition violations.  The second lawsuit was initiated by the insured, but the defendant filed counter claims against it for:  interference with contractual relations, unjust enrichment and unfair and deceptive practices in violation of a state statute.  Both of these actions were tendered to the insurer for defense, but the insurer denied coverage for both stating that no coverage was available for either claim under the policy because “those actions did not allege any instances of Personal or Advertising injury within the meaning of the policy.”

The insured filed suit against the insurer for coverage, alleging causes of action for declaratory relief, breach of contract and breach of the covenant of good faith and fair dealing.  Thereafter, the insured moved for partial summary judgment that the insurer had a duty to defend the insured in the two actions against it and the insurer filed a cross-motion for summary judgment that it has no such duty and that it did not act in bad faith.  In granting the insured’s motion for summary judgment, the district court reiterated the well-established rule in California that “the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot.”  Indeed, the court reaffirmed just how broad the duty to defend is in stating that “the precise causes of action pled by the third party complaint may fall outside policy coverage does not excuse the duty to defend where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could be fairly amended to state a covered liability.”  Based on this expansive interpretation of the duty to defend, the court found that the insured burden of showing that the underlying actions may fall within policy coverage because allegations in the two lawsuits that the insured attacked its competitors alleging that they harm patients and engaged in “bad science” fell within the ambit of the policy’s coverage for “disparagement of an organization’s goods, product or services.”  Thus, the court held that the insurer had a duty to defend the insured against both claims and that the bad faith claim against it is a triable issue of fact for the jury to determine.

Not only does the court’s decision in Millennium serve as an affirmation of the breadth of insurer’s duty to defend in California, but it also expands the scope of coverage under those policy to include typically uncovered claims for unfair competition, false advertising and trademark if the claim also contains implied allegations of disparagement.  This decision reminds insureds that an insurer’s duty of defend is very broad and does not turn solely on whether the stated causes of action are covered under the terms of a general liability policy and that even facts that could be reasonably alleged forms a basis for potential coverage under a liability policy.

Finally, in a similar vein, on June 12, 2014, the state Supreme Court clarified the scope of a commercial general liability insurer’s duty to defend an insured under the policy’s personal and advertising injury coverage against a claim of disparagement.  In Hartford Casualty Insurance Co. v. Swift Distribution Inc., 2014 DJDAR 7443, the court held that a claim of disparagement requires a plaintiff to show a false or misleading statement that (1) specifically refers to the plaintiff’s product or business and (2) clearly derogates that product or business. Absent a claim meeting these criteria, an insurer has no duty to defend a company under a commercial general liability insurance policy providing coverage for disparagement.