Many business managers trust that the hefty insurance premiums they pay will provide them with coverage when they’re sued, regardless of the cause of action.
However, when it comes to intellectual property cases, this trust is too often misplaced.

Background

First of all, many general liability policies don’t even cover intellectual property claims. Those policies that do cover IP often limit coverage to a narrowly defined set of circumstances.

Additionally, a policy will require that the insured notifies the insurer in a timely manner.

A recent federal district court case illustrates what can go wrong when a company tries to “have its cake and eat it too” when it comes to coverage for IP cases.

Hartford Case

The case of Hartford Cas. Ins. Co. v. ContextMedia arose out of a claim from a competitor that ContextMedia had misappropriated the competitor’s trade secrets and other intellectual property.

ContextMedia had a typical business liability policy with Hartford that ensured it for:

“property damage” caused by an “occurrence” and “personal and advertising injury,” as defined by the policy and subject to exclusions.

The policy required ContextMedia to notify Hartford of an occurrence or an offense which may result in a claim “as soon as practicable.” The policy also required ContextMedia to immediately send to the insurance company any demands, notices, summonses, or legal papers received in connection with a claim or lawsuit.

Upon receiving a “cease-and-desist” letter from its competitor, Context Media conducted an internal investigation and decided that the claims were without merit. The company did not notify Hartford of the claims at that time, because it believed that insurance coverage was not an issue.

Several rounds of letters between the competitors followed. Seventeen months after ContextMedia received the last letter, its competitor sued. ContextMedia notified Hartford of the lawsuit a few weeks later.

Hartford sought a declaration from the federal court that it had no duty to defend or indemnify ContextMedia. One basis for this claim was that ContextMedia had failed to provide notice to Hartford when the first letter was sent.

The court noted that ContextMedia failed to notify Hartford of the letters because it “felt it had the winning legal argument.” However, noted the court “the policy’s notice provision did not require it to notify Hartford only of claims that it believed to be meritorious.”

Having Your Cake

The court ruled in favor of Hartford:

At the end of the day, ContextMedia wants to have its cake and eat it too. It wants to be able to ignore threatened legal action, the defense of which it expects its insurer ultimately to pay, while waiting to see if a suit is brought before telling its insurer about it. That way, if no suit comes to fruition, ContextMedia avoids involving its insurance company and the potential premium increases that could result. If, instead, the threat is realized, ContextMedia can simply beckon its insurer to defend it regardless of how much time has passed since the potential claim arose. But this wait-and-see approach is precisely what the notice provision prohibits.

Questions?

If you have questions about insurance coverage for intellectual property claims, or if you anticipate the need for an intellectual property litigator, please contact our office at 626-796-4000 or toll-free at 855-UR-IDEAS (855-874-3327) for a free initial consultation with one of our intellectual property attorneys. Please also visit our website for more information about us.

Photo Attribution:  [Public domain] via Wikimedia Commons.

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