HNRK Coverage Corner

On August 26, 2019, Judge Caproni of the SDNY issued a decision in Spandex House, Inc. v. Hartford Fire Ins. Co., Case No. 18-CV-8367 (VEC), enforcing an IP exclusion in a CGL policy that circumvented the “entire action” rule by precluding both defense and indemnity coverage for an otherwise-covered “advertising injury” claim if that claim was joined with any IP claim unconnected to advertising. As Judge Caproni explains, under a duty to defend policy, “if a lawsuit contains a mix of allegations covered by an insurance policy and other allegations falling outside the scope of the policy,” New York law requires an insurer “to defend the policyholder against the entire lawsuit, including both the covered and the non-covered allegations.” This well-established rule is variously known as the “entire action” rule, the “complete defense” rule, or the “in for one, in for all rule.”

The policy at issue in Spandex House effectively circumvented this rule.  The “advertising injury” coverage was subject to an IP Exclusion that barred coverage for “any injury or damage alleged in any claim or ‘suit’ that also alleges an infringement or violation of any intellectual property right . . . regardless of whether this insurance would otherwise apply.”  That exclusion was limited by an Advertising Exception, which provided that the IP Exclusion does not apply if “the only allegation in the ‘claim’ or suit is limited to” an IP infringement in the insured’s advertisement.

Spandex House argued that the IP Exclusion contravened the “entire action” rule, since it effectively allowed the insurer to avoid its duty to defend an action involving covered and non-covered claims Judge Caproni disagreed and granted summary judgment to the insurer, explaining:

Spandex House argues that Hartford’s policy “aim[s] to circumvent” the entire-action rule. In some sense, Spandex House is correct. The language of the Advertising Exception mirrors the policy’s definition of advertising injury (contained within the definition of “personal and advertising injury”). Pursuant to the General Coverage Provision, advertising injury is, ordinarily, covered by Hartford’s policy. But when the IP Exclusion applies, advertising injury is covered only if it is “the only allegation” in a case. Put differently, when the IP Exclusion applies, Hartford has no duty to defend otherwise-covered allegations of advertising injury if they are joined with allegations of other, unrelated sorts of injury. This arrangement is unusual: ordinarily, insurers agree to defend against suits alleging a mix of covered and non-covered injuries, consistent with the entire-action rule. But, by expressly conditioning coverage on a particular injury being “the only allegation” in a lawsuit, Hartford has essentially contracted around the entire-action rule.

Second, the policy language is clear and unambiguous. While New York applies the entire-action rule, New York law also requires unambiguous insurance contracts to “be enforced as written.” Because “[f]reedom of contract” is a “deeply rooted” tradition under New York law, this Court is not free to substitute Spandex House’s notions of fairness and propriety for the express provisions of the parties’ agreement; rather, “parties to an insurance arrangement may generally contract as they wish and the courts will enforce their agreements without passing on the substance of them.” That Hartford’s policy may “aim to circumvent” traditional insurance arrangements affords no basis for this Court to strike or modify it.

Third, the IP Exclusion and Advertising Exception, although unusual, comport with the broad purposes underlying the entire-action rule. The rationale behind the rule is that an insurer can provide its insured with a meaningful defense only if it provides a complete defense. . . . Put simply, the entire-action rule makes the duty to defend a binary proposition: either the insurer has a duty to defend, in which case it must defend the entire lawsuit, or the insurer has no duty to defend the lawsuit at all. What the insurer cannot do is provide a defense for some claims in a lawsuit but not others. Hartford’s policy does not violate these principles, as nothing in the policy would require Hartford to provide Spandex House with this sort of partial defense. The IP Exclusion and the Advertising Exception determine when Hartford has an obligation to defend an action at all, not which claims within an action Hartford must defend. When the second paragraph of the IP Exclusion applies, Hartford has no duty to cover “[a]ny injury or damage” alleged in the applicable suit. And in order for the Advertising Exception to apply, “the only allegation[s]” in the suit must be covered forms of “personal and advertising injury,” making Hartford indisputably obligated to defend the entire action. Id. In short, Hartford’s policy does not alter the rule that if an insurer has a duty to defend, it must defend the entire action; instead, it simply narrows the range of cases in which the duty to defend exists in the first instance.

Fourth, and finally, the IP Exclusion and Advertising Exception are analogous to other insurance-policy provisions that have been upheld under New York law. Several courts have upheld provisions that exclude from coverage “damage caused by an excluded peril even when covered perils also contribute to the damage” (known as “anti-concurrent” clauses). . . . Similar to the provisions at issue in these cases, Hartford’s policy excludes entire actions from coverage unless a particular injury is the only loss alleged in the case.

This decision illustrates the importance of examining policy exclusions carefully.  The advertising injury coverage under this policy was quite narrow:  there was no coverage unless the only claims involved infringement in an advertisement; any allegations involving distribution, sales etc. of infringing products would preclude both indemnity and defense coverage, even for advertising-related claims.  By contrast, the policy at issue in another “advertising injury” case covered on this blog, High Point Design, LLC v. LM Ins. Corp., (2d Cir. 2019), Docket No. 16-1446-cv—had an exclusion for IP claims that did not bar coverage for otherwise-covered claims if those claims were joined with non-advertising related claims.