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Pushing Claims Off Through a CGL Policy

Pushing Claims Off Through a CGL Policy

March 8, 2016
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" Most people don’t think about their insurance policy when they are accused of copyright or trademark infringement, but you should. "

Federal litigation is expensive. Even if you win your case, you can still lose by spending many thousands of dollars defending an unjustified case. The Intellectual Property Insurance Services Corp. conducted a study that shows the average cost of litigating even a low-dollar copyright infringement suit is about $375,000 just for attorney fees. That’s what you pay even if you win.

Still worse, if you lose you face significant exposure for damages that can run as high as $150,000 without even making a penny off the infringement. Plus, you may end up paying the other side’s attorney fees, in addition to your own, if you lose. So one silly little slip up or mistake could end up possibly costing you $900,000 or more. That is real money for nothing except using someone else’s picture or video on your website.

So in the face of that kind of exposure, what are your options? Just ignore the problem until it becomes a much, much bigger problem? Suck it up and pay whatever it costs? File bankruptcy? Those are definitely options. But there might be a better one you haven’t thought about.

If you have business insurance (frequently called a commercial general liability or “CGL” policy), you should consider pushing this claim off on your insurance company. Most people don’t think about their insurance policy when they are accused of copyright or trademark infringement, but you should. Many, if not most, business liability policies have coverage for “advertising injury” or something similar.

What is an advertising injury? Well it depends on the particular policy, but usually it’s an injury caused to another due to your advertising. So anything your company does to try and generate business, such as put up a website, is typically considered advertising. In many cases, claims for copyright infringement are expressly included. If your policy includes coverage for advertising injury, then you must at least consider tendering a claim for copyright infringement to your insurance company.

Let me give you some examples. In the case of St. Luke’s Cataract & Laser Institute, P.A. v. Zurich American Insurance Co., 506 Fed. Appx. 970 (11th Cir. 2013), Dr. James Sanderson was an oculoplastic surgeon who worked for St. Luke’s Cataract and Laser Institute in Florida.

Dr. Sanderson left St. Luke’s to start his own independent practice. When he started his practice, he created a website using materials that had been used on the St. Luke’s website while he was there. He thought it would be OK for him to use those materials because he had helped St. Luke’s create the website while he was working for them. He was wrong.

St. Luke’s sued Dr. Sanderson for, among other things, copyright infringement for his use of the materials from the St. Luke’s website. Dr. Sanderson did the smart thing and took a look at his insurance policy. Sure enough, his insurance policy included coverage for “advertising injuries.”

Dr. Sanderson’s insurance carrier tried to avoid covering the claim and said that the claim fell into some exclusion in the policy. Ultimately, the court held that Dr. Sanderson’s policy did in fact fully cover the copyright infringement claim and his insurance company was ordered to pay. It’s actually worth noting that the insurance company had actually been paying the litigation bills. But it did so under something called a “reservation of rights” basis. In short, that means that they paid all the litigation bills but reserved the right to deny paying the actual claim, which is exactly what they did.

Only after the court decided the coverage issue did the insurance company pay. Dr. Sanderson suffered a bunch of hassle, but ultimately it didn’t end up costing him for the claim. That’s not ideal, but it’s a whole lot better than going through all the hassle, and then paying the claim too.

So that brings up another good point. Sometimes it’s not the potential liability that is the scary part. Unless a copyright owner actually registered the copyright before infringement commenced, the liability is limited to actual damages, which might be very small.

In those cases, it’s just the cost of the attorneys fees which can break you. In other words, if it costs you $375,000 just to win, then what kind of victory is that? Sure, under the copyright law it’s possible that you can recover your attorneys fees from the person who sued you, but what if that person doesn’t have any money?

So what you really want to make sure is that your insurance company will at least pay for an attorney to handle your case. The good news there is the courts tend to be very much on your side. Consider the case of Lexington Insurance Company v. MGA Entertainment, Inc. 961 F.Supp.2d 536 (S.D.N.Y. 2013) in which an artist who had developed some images of dolls with “large heads, large oval eyes, small bodies and large feet” sued MGA Entertainment, the makers of the “Bratz” line of dolls, for copyright infringement.

When MGA Entertainment tendered the claim to its insurance company, the insurer denied coverage and said it didn’t fall within the covered “advertising injury” provision.

Well the court disagreed. In holding for MGA Entertainment, the court said:

“An insurer must defend a suit which potentially seeks damages within the coverage of the policy. While the insured need only show that the underlying claim may fall within policy coverage, the insurer must prove it cannot. Any doubt as to whether the facts give rise to a duty to defend is resolved in the insured’s favor.”

So at least in California, and this is the same most places, if there is any doubt, the insurance company has to at least pay for the defense of the claim. More often than not, that is the real burden and the fear that keeps you up at night. So if the claim is even close, tender it to your insurance company and at least hope to get your attorneys fees paid.

On the other hand, understand that having insurance doesn’t mean you can just willy nilly copy other people’s stuff and use it as your own. You should still try to avoid liability if you can for at least two reasons.

First, if you’re professional enough to buy insurance, you should at least be professional enough to try and avoid violating the law. Second, if professionalism isn’t enough, you should understand that most policies, and some states, will have exclusions for willful misconduct.

For example, California Insurance Code Section 533 specifically states that “an insurer is not liable for a loss caused by the willful act of the insured.” In other words, insurance policies are generally intended to pay for accidents, not intentional acts. So if you are accused of willful (knowing) infringement, you are unlikely to be able to rely on your insurance to foot the bill.

So don’t intentionally use other people’s stuff with the expectation that if you ever get caught, you can just invoke your insurance policy. Under those circumstances, it might backfire.

So to sum up, hopefully you never get one of those letters accusing you of copyright infringement. But if you do, think back to that article you read about how your insurance company might be the difference between how much sleep you lose over it.

John Whitaker, founder of the Whitaker Law Group in Seattle, focuses on the protection of intellectual property rights, frequently through litigation. His firm champions the rights of small to mid-size businesses and individuals for whom legal services might otherwise be out of their reach. He may be reached at (206) 436-8500 or john@whitaker.law.


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