Case Briefs

Internet Domain-Name Suit Is Covered Advertising Injury

Finding that the registration and use of Web domain names to direct Internet users to sites advertising goods and services fell within the “course of advertising,” the U.S. Court of Appeals for the Fourth Circuit recently held that an insurer providing advertising-injury coverage was obligated to defend its insured against a suit claiming trademark infringement. State Automobile Property & Casualty Ins. Co. v. Travelers Indem. Co., ___ F.3d ___, No. 02-2069 (4th Cir., September 4, 2003).

The insured, Nissan Computer Corporation (“Nissan-Computer”), registered the Internet domain names “www.nissan.com” and “ www. nissan.net” and created Web sites located at those Internet addresses that contained advertisements for various goods and services, including those of automobile companies and Nissan-Computer's own computer-related products and services. The Web sites also bore a logo allegedly similar in appearance to the trademarked logo of Nissan-Motor Company (“ Nissan-Motor”), an automobile manufacturer. Nissan-Motor initiated a lawsuit against Nissan-Computer claiming damages from the use of the domain names and logo in advertising these products and services.

Nissan-Computer tendered the defense of these claims to its insurers, State Automobile Property & Casualty Ins. Co. (“State Auto”) and Travelers Indemnity Co. State Auto agreed to provide a defense to Nissan-Computer, but Travelers denied coverage. Subsequently, State Auto sued Travelers seeking contribution to its defense of Nissan-Computer. Travelers argued that there was no coverage under its policy (i) because the complaint alleged no misappropriation of advertising ideas or style of doing business in the course of advertising the insured's goods or services and (ii) by virtue of exclusions precluding coverage for publication with knowledge of falsity and for insureds that are in the business of advertising. Travelers also argued that Nissan-Computer had provided untimely notice of the claim.

Travelers argued that trademark claims were not covered under the advertising injury provisions, which provide coverage for misappropriation of advertising ideas or style of doing business, because the common law tort of misappropriation applies only to the wrongful appropriation of property not protected by trademark law. Relying on Henderson v. United States Fidelity & Guar. Co., 488 S.E.2d 234 (N.C. 1997), in which the North Carolina Supreme Court refused to confine the phrase “unfair competition” (used elsewhere in the policy) to its common law tort, and noting as evidence of ambiguity the disagreement among various courts as well as the disagreement between the two insurers before it (with policies containing identical provisions), the Fourth Circuit held that “misappropriation” refers generally to the wrongful acquisition of property, eschewing the hyper-technical meaning advanced by Travelers. The court found that Nissan-Computer's act of using a logo similar to Nissan-Motor's trademarked logo was properly considered misappropriation under the policy. The court also found that the trademark at issue ' “Nissan” and its logo ' constituted an “advertising idea” due to its uses in identifying goods and in the marketing of products (reflecting Nissan-Motor's significant investment in developing the logo as an advertising tool).

The court also rejected Travelers' contention that the suit against Nissan-Computer focused solely on the registration of the domain names, not injury during the “course of advertising.” The court first sidestepped the issue by holding that, on the facts presented, the allegations regarding the use of “Nissan” in advertising the goods and services of Nissan-Computer and others on the associated Web sites satisfied the course-of-advertising requirement. The court went on to hold that, even apart from those allegations, the registration and use of domain names to direct Internet browsers to commercial Web sites by use of the brand name in the address fell within the broad parameters of the “course of advertising.” (The court also rejected Travelers' contention that there was no coverage because the advertisements on the Web site were for goods and services of third parties, noting that the complaint also alleged that Nissan-Computer advertised its computer sales and services on the Web pages.)

The court next found inapplicable the exclusion barring coverage for injury arising out of an oral or written publication made by the insured with knowledge of its falsity. The court found that Nissan-Motor's complaint contained no allegations that any of the advertisements on the Web site or the domain names themselves were “untrue.” Although the court acknowledged that the definition of “falsity” could be construed to include the creation of misleading impressions in addition to factually untrue statements, it held that such a broad definition was not required by the word falsity and that North Carolina law regarding the interpretation of exclusions required adoption of the narrower construction.

The court also found Travelers' reliance upon the business-of- advertising exclusion unwarranted. Travelers argued that the exclusion applied whenever the insured received revenue from advertising activities. The court held that the exclusion was applicable only where the insured's principal or primary business is advertising (so that the insured faced errors-and-omissions exposure); because Nissan-Computer's principal business was computer sales and service, the exclusion was inapplicable.

Finally, the court rejected the carrier's argument that a letter Nissan-Motor sent to Nissan-Computer 4 years before suit inquiring about Nissan-Computer's registration of the domain names and asking for additional information regarding Nissan-Computer's business gave rise to an obligation to provide notice to the carriers. Thus, Nissan-Computer's provision of notice 4 days after the suit was filed was timely.

Excess Policy Covers Wife's Claim for Car Accident Injuries

In Megonnell v. United States Automobile Ass'n, 368 Md. 633, 796 A.2d 758 (Md. 2002), the Maryland Court of Appeals addressed several key issues relevant to the accessibility and scope of excess liability insurance coverage, holding that amounts paid by liability insurers to settle tort claims against their insureds count toward the exhaustion of policy limits for purposes of accessing excess coverage and that excess policies do not “follow form” to underlying policies absent an explicit provision stating that the exclusions contained in the underlying policies are applicable.

The policyholder in Megonnell operated his automobile in a negligent manner resulting in an accident that seriously injured his wife and two grandchildren, who were riding in the car with him. The policyholder was insured with USAA under two insurance policies: a primary policy that provided coverage up to $500,000 per accident, and a personal umbrella policy providing excess coverage up to $3 million. The wife and grandchildren initiated a lawsuit against the policyholder, which USAA defended, seeking damages under a tort theory of negligence. USAA elected to settle the claims of the two grandchildren before trial for $350,000 each, a total of $700,000. USAA offered to settle the claim of the wife for $20,000, which it claimed was the total limit of its exposure for her claim by virtue of the “household exclusion” contained in the automobile policy, which restricted the coverage available for liability owed to family members of the insured. USAA's offer was rejected, and the wife's claims were tried. The jury returned a verdict of $291,000.

The insured's wife initiated suit against USAA as a judgment creditor seeking a declaration that it had a duty to indemnify the insured for the full amount of the jury's verdict. She conceded that the “household exclusion” in the automobile policy would limit the insured's recovery thereunder to $20,000, but argued that the settlement of the grandchildren's claims had exhausted the per-accident limit of that policy and that her claim was, therefore, covered in full under the excess-liability provisions of the insured's personal umbrella policy. USAA argued that its payment to settle the claims of the grandchildren did not exhaust the per-accident limit of the automobile policy because there had been no adjudication that the insured was “legally liable” under the terms of the policy. USAA also argued that the excess provisions of the umbrella policy were “follow form” provisions that incorporated the terms and exclusions of the primary automobile policy, including the “household exclusion.” After the trial court's grant of summary judgment in favor of the insured and the Court of Special Appeals' reversal of that decision, the case came before the Court of Appeals on a writ of certiorari.

As to the issue of exhaustion, the Court of Appeals held that the insurer's payment of $700,000 to settle the claims of the grandchildren had exhausted the per-accident limit of the automobile policy. The court rejected the insurer's fundamental premise ' that the insured was not “legally liable” as required to trigger coverage under the policy since no judgment or verdict had been entered against the insured on those claims. The court held that the existence of legal liability does not turn on the resolution of a lawsuit by a jury or court but is a “creation of circumstances by and/or between parties, whereby the parties, or one or the other of them, can enforce rights through legal process.” The court noted, “[t]he verdict of a jury and the judgment of the court do not, themselves, create the underlying legal obligation. The underlying legal obligation changes into judgment form ' but the legal obligation pre-existed the judgment or the judgment would not have been possible.” Relying on its previous discussion of the definition of the term “damages” in Bausch & Lomb, Inc. v. Utica Mutual Ins. Co., 330 Md. 758, 780-81, 625 A.2d 1021, 1032 (1993) (“the estimated reparation in money for injury sustained”), the court held that the insurer's payment of $700,000 to settle the grandchildren's claim against the insured constituted the payment of “damages” and thus counted toward exhausting the “maximum limit of liability for all damages for bodily injury resulting from any one auto accident,” as the policy defined the $500,00 per-accident limit of liability.

The court then considered the coverage provided under the personal umbrella policy and held that the excess coverage provisions (which did not contain a “household exclusion”) did not “follow form” to the underlying automobile policy. The court stated, “in order for the excess coverage to be 'follow form' from the primary policy … there would, at the least, need to be a conspicuous, clear and express clause that incorporated the exclusions of the primary policy into the umbrella policy.” Because the excess provisions of the personal umbrella policy at issue were bereft of any such language (although Judge Irma S. Raker, in dissent, argued that the policy did contain such language), the court found that the excess coverage did not incorporate the household exclusion of the primary automobile policy; consequently, the court ruled that there was coverage under the umbrella policy for the entire amount of the judgment entered against the insured on the wife's claim. The court furthermore refused to award attorneys' fees to the prevailing plaintiff (as would be permitted under the exception to the American rule recognized in Maryland where an insured successfully sues its insurer for coverage) because the wife, not the insured, brought the declaratory judgment suit.

Robert E. Johnston of Spriggs & Hollingsworth contributed this month's case briefs.

Internet Domain-Name Suit Is Covered Advertising Injury

Finding that the registration and use of Web domain names to direct Internet users to sites advertising goods and services fell within the “course of advertising,” the U.S. Court of Appeals for the Fourth Circuit recently held that an insurer providing advertising-injury coverage was obligated to defend its insured against a suit claiming trademark infringement. State Automobile Property & Casualty Ins. Co. v. Travelers Indem. Co. , ___ F.3d ___, No. 02-2069 (4th Cir., September 4, 2003).

The insured, Nissan Computer Corporation (“Nissan-Computer”), registered the Internet domain names “www.nissan.com” and “ www. nissan.net” and created Web sites located at those Internet addresses that contained advertisements for various goods and services, including those of automobile companies and Nissan-Computer's own computer-related products and services. The Web sites also bore a logo allegedly similar in appearance to the trademarked logo of Nissan-Motor Company (“ Nissan-Motor”), an automobile manufacturer. Nissan-Motor initiated a lawsuit against Nissan-Computer claiming damages from the use of the domain names and logo in advertising these products and services.

Nissan-Computer tendered the defense of these claims to its insurers, State Automobile Property & Casualty Ins. Co. (“State Auto”) and Travelers Indemnity Co. State Auto agreed to provide a defense to Nissan-Computer, but Travelers denied coverage. Subsequently, State Auto sued Travelers seeking contribution to its defense of Nissan-Computer. Travelers argued that there was no coverage under its policy (i) because the complaint alleged no misappropriation of advertising ideas or style of doing business in the course of advertising the insured's goods or services and (ii) by virtue of exclusions precluding coverage for publication with knowledge of falsity and for insureds that are in the business of advertising. Travelers also argued that Nissan-Computer had provided untimely notice of the claim.

Travelers argued that trademark claims were not covered under the advertising injury provisions, which provide coverage for misappropriation of advertising ideas or style of doing business, because the common law tort of misappropriation applies only to the wrongful appropriation of property not protected by trademark law. Relying on Henderson v. United States Fidelity & Guar. Co., 488 S.E.2d 234 (N.C. 1997), in which the North Carolina Supreme Court refused to confine the phrase “unfair competition” (used elsewhere in the policy) to its common law tort, and noting as evidence of ambiguity the disagreement among various courts as well as the disagreement between the two insurers before it (with policies containing identical provisions), the Fourth Circuit held that “misappropriation” refers generally to the wrongful acquisition of property, eschewing the hyper-technical meaning advanced by Travelers. The court found that Nissan-Computer's act of using a logo similar to Nissan-Motor's trademarked logo was properly considered misappropriation under the policy. The court also found that the trademark at issue ' “Nissan” and its logo ' constituted an “advertising idea” due to its uses in identifying goods and in the marketing of products (reflecting Nissan-Motor's significant investment in developing the logo as an advertising tool).

The court also rejected Travelers' contention that the suit against Nissan-Computer focused solely on the registration of the domain names, not injury during the “course of advertising.” The court first sidestepped the issue by holding that, on the facts presented, the allegations regarding the use of “Nissan” in advertising the goods and services of Nissan-Computer and others on the associated Web sites satisfied the course-of-advertising requirement. The court went on to hold that, even apart from those allegations, the registration and use of domain names to direct Internet browsers to commercial Web sites by use of the brand name in the address fell within the broad parameters of the “course of advertising.” (The court also rejected Travelers' contention that there was no coverage because the advertisements on the Web site were for goods and services of third parties, noting that the complaint also alleged that Nissan-Computer advertised its computer sales and services on the Web pages.)

The court next found inapplicable the exclusion barring coverage for injury arising out of an oral or written publication made by the insured with knowledge of its falsity. The court found that Nissan-Motor's complaint contained no allegations that any of the advertisements on the Web site or the domain names themselves were “untrue.” Although the court acknowledged that the definition of “falsity” could be construed to include the creation of misleading impressions in addition to factually untrue statements, it held that such a broad definition was not required by the word falsity and that North Carolina law regarding the interpretation of exclusions required adoption of the narrower construction.

The court also found Travelers' reliance upon the business-of- advertising exclusion unwarranted. Travelers argued that the exclusion applied whenever the insured received revenue from advertising activities. The court held that the exclusion was applicable only where the insured's principal or primary business is advertising (so that the insured faced errors-and-omissions exposure); because Nissan-Computer's principal business was computer sales and service, the exclusion was inapplicable.

Finally, the court rejected the carrier's argument that a letter Nissan-Motor sent to Nissan-Computer 4 years before suit inquiring about Nissan-Computer's registration of the domain names and asking for additional information regarding Nissan-Computer's business gave rise to an obligation to provide notice to the carriers. Thus, Nissan-Computer's provision of notice 4 days after the suit was filed was timely.

Excess Policy Covers Wife's Claim for Car Accident Injuries

In Megonnell v. United States Automobile Ass'n, 368 Md. 633, 796 A.2d 758 (Md. 2002), the Maryland Court of Appeals addressed several key issues relevant to the accessibility and scope of excess liability insurance coverage, holding that amounts paid by liability insurers to settle tort claims against their insureds count toward the exhaustion of policy limits for purposes of accessing excess coverage and that excess policies do not “follow form” to underlying policies absent an explicit provision stating that the exclusions contained in the underlying policies are applicable.

The policyholder in Megonnell operated his automobile in a negligent manner resulting in an accident that seriously injured his wife and two grandchildren, who were riding in the car with him. The policyholder was insured with USAA under two insurance policies: a primary policy that provided coverage up to $500,000 per accident, and a personal umbrella policy providing excess coverage up to $3 million. The wife and grandchildren initiated a lawsuit against the policyholder, which USAA defended, seeking damages under a tort theory of negligence. USAA elected to settle the claims of the two grandchildren before trial for $350,000 each, a total of $700,000. USAA offered to settle the claim of the wife for $20,000, which it claimed was the total limit of its exposure for her claim by virtue of the “household exclusion” contained in the automobile policy, which restricted the coverage available for liability owed to family members of the insured. USAA's offer was rejected, and the wife's claims were tried. The jury returned a verdict of $291,000.

The insured's wife initiated suit against USAA as a judgment creditor seeking a declaration that it had a duty to indemnify the insured for the full amount of the jury's verdict. She conceded that the “household exclusion” in the automobile policy would limit the insured's recovery thereunder to $20,000, but argued that the settlement of the grandchildren's claims had exhausted the per-accident limit of that policy and that her claim was, therefore, covered in full under the excess-liability provisions of the insured's personal umbrella policy. USAA argued that its payment to settle the claims of the grandchildren did not exhaust the per-accident limit of the automobile policy because there had been no adjudication that the insured was “legally liable” under the terms of the policy. USAA also argued that the excess provisions of the umbrella policy were “follow form” provisions that incorporated the terms and exclusions of the primary automobile policy, including the “household exclusion.” After the trial court's grant of summary judgment in favor of the insured and the Court of Special Appeals' reversal of that decision, the case came before the Court of Appeals on a writ of certiorari.

As to the issue of exhaustion, the Court of Appeals held that the insurer's payment of $700,000 to settle the claims of the grandchildren had exhausted the per-accident limit of the automobile policy. The court rejected the insurer's fundamental premise ' that the insured was not “legally liable” as required to trigger coverage under the policy since no judgment or verdict had been entered against the insured on those claims. The court held that the existence of legal liability does not turn on the resolution of a lawsuit by a jury or court but is a “creation of circumstances by and/or between parties, whereby the parties, or one or the other of them, can enforce rights through legal process.” The court noted, “[t]he verdict of a jury and the judgment of the court do not, themselves, create the underlying legal obligation. The underlying legal obligation changes into judgment form ' but the legal obligation pre-existed the judgment or the judgment would not have been possible.” Relying on its previous discussion of the definition of the term “damages” in Bausch & Lomb, Inc. v. Utica Mutual Ins. Co., 330 Md. 758, 780-81, 625 A.2d 1021, 1032 (1993) (“the estimated reparation in money for injury sustained”), the court held that the insurer's payment of $700,000 to settle the grandchildren's claim against the insured constituted the payment of “damages” and thus counted toward exhausting the “maximum limit of liability for all damages for bodily injury resulting from any one auto accident,” as the policy defined the $500,00 per-accident limit of liability.

The court then considered the coverage provided under the personal umbrella policy and held that the excess coverage provisions (which did not contain a “household exclusion”) did not “follow form” to the underlying automobile policy. The court stated, “in order for the excess coverage to be 'follow form' from the primary policy … there would, at the least, need to be a conspicuous, clear and express clause that incorporated the exclusions of the primary policy into the umbrella policy.” Because the excess provisions of the personal umbrella policy at issue were bereft of any such language (although Judge Irma S. Raker, in dissent, argued that the policy did contain such language), the court found that the excess coverage did not incorporate the household exclusion of the primary automobile policy; consequently, the court ruled that there was coverage under the umbrella policy for the entire amount of the judgment entered against the insured on the wife's claim. The court furthermore refused to award attorneys' fees to the prevailing plaintiff (as would be permitted under the exception to the American rule recognized in Maryland where an insured successfully sues its insurer for coverage) because the wife, not the insured, brought the declaratory judgment suit.

Robert E. Johnston of Spriggs & Hollingsworth contributed this month's case briefs.