In today’s blog post, Miller Friel attorney Miles Karson addresses how policyholders can secure insurance coverage for false advertising claims under Director and Officer insurance policies. Using a real-life example, Miles addresses a situation where a series of D&O insurers wrongfully denied coverage for numerous false advertising claims. There, the policyholder faced potential liability for the underlying false advertising claims, and looked to their existing private company D&O insurance policies for coverage. In turn, the insurance carriers asserted that a professional services exclusion in the policy precluded coverage. In the end, the insurance carriers paid the claim, but they would not have done so unless appropriate insurance recovery strategies were employed.
Please watch the video to learn more.
We have included a transcript of the video below:
Insurance Coverage for False Advertising Claims
A lot of times we talk about insurance coverage issues in the abstract, but I think it’s important that we bring some of those concepts to real life examples. One example would be a client we have, that a number a years ago, faced approximately 15 class action lawsuits throughout the country, alleging false advertising of its services. At the time the company was still in its early phases, but had its eye on going public down the road, and so this really in their mind, bet the company type of litigation.
As litigation spread throughout the country, for discovery purposes, these cases eventually got consolidated into an MDL, but they were facing large defense costs in defending these claims, and uncertain liabilities at the end, depending on how the cases would go. As a result, and not surprisingly, they turned their attention to their insurers. Among them their D&O insurers, their private company D&O insurers, and maybe not surprisingly, the D&O insurers in looking at the defense costs and a potential liability, denied coverage. And in denying coverage decided seemingly every exclusion in the policy, but eventually narrowed the scope of their denial down to the professional service’s exclusion.
Mind you, that the insurers were relying on a professional liability exclusion for false advertising claims brought against a technology liability company. This goes to show you the extent to which insurers will try to stretch and broaden exclusions. The insurers primary argument was that, because you provide this professional service, and you advertise those services, any lawsuit alleging false advertising, well that’s definitely connected to your professional services, even if the advertising itself is not a professional service.
We argued, and successfully with case law support, that allegations of false advertising, even when that advertising had to do with professional services, could stand on their own without any need to consider the actual performance of the services. In other words, we successfully argued that the professional service’s exclusion could not apply to false advertising claims, because the plaintiff’s injuries, alleged injuries, resulting from the false advertising, were in no way connected to any acts, errors or omissions in the actual performance of the professional services. And moreover, that the act of advertising wasn’t a professional service performed by our client, but was incidental to our client’s performance of its professional services.
I think there are at least two important take-aways from this example. One, it goes to show the extent to which insurers will try to broaden the scope of exclusions in their policies in an attempt to escape liability of large claims. But along with that, it behooves a policy holder to dig in, to push back on insurers when they do that, but it requires a detailed analysis of underlying facts, of facts alleged in the underlying complaints, and a detailed analysis of case law. And going outside, perhaps, of the jurisdiction that you’re in to find case law to support your argument.
Two, I think it goes to show that it’s important to analyze all avenues of potential coverage. It might not dawn on a company that their D&O policy could provide coverage for false advertising claims. Typically, you might look to your CGL policy for such coverage, or maybe even an E&O policy, depending on what type company you are. But there is potential coverage for such claims under your D&O policy, particularly if you’re a private company, if the facts and the law are on your side.