General Star Indem. Co. v. Driven Sports, Inc., --- F.Supp.3d ----, 2015 WL 307017, No. 14–CV–3579 (E.D.N.Y. Jan. 23, 2015)
General Star issued an insurance policy to Driven, which sold a “pre-workout energy supplement” called “Craze.” Driven was sued by plaintiffs alleging that Craze contained an illegal and potentially dangerous methamphetamine analog, and sought coverage. The court found the underlying lawsuits excluded from coverage by a provision excluding personal and advertising injury arising out of the failure of goods to conform with any statement of quality or performance made in an ad. The underlying lawsuits alleged that Craze claimed to contain only natural ingredients, but didn’t conform with those statements because of the methamphetamine analog. All the injuries alleged in the underlying lawsuits arose out of this failure to conform.
Driven argued that there could be both covered and excluded claims in the underlying complaints, which would trigger a duty to defend—here, the argument was, the underlying allegations also concerned whether it disparaged its competitor’s product (one of the underlying cases was a Lanham Act claim). But none of the allegations could be proven without proving a failure to conform, and thus they all arose out of “the allegation that defendant placed an illegal and potentially dangerous synthetic ingredient into Craze while advertising that it contained only natural ingredients.” Though Driven’s statements on the Craze website compared Craze favorably to other products generally and disparaged them, that didn’t create a link to the underlying allegations in the lawsuits, and the complaints didn’t refer to those web posts. The complaints clearly depended on failure to conform, so the website wasn’t extrinsic evidence giving rise to coverage. A non-excluded alleged injury “would have to exist even if Craze had performed as advertised, and contained only natural ingredients. However, under that scenario, the underlying plaintiff would have no claim, because the comparison between Craze and its competitors would be based upon true facts.” Neither competitors nor consumers could prove their claims without proving failure to conform.
The insurer agreed to provide a defense, subject to a reservation of its rights, including the right to recoup any amounts paid in defense if the policy were ultimately determined not to require coverage. I omit a really interesting discussion about whether the insurer should be able to recoup its costs in representing Driven to this point in the underlying litigation because the underlying claims were in fact excluded. However, the court did agree that the policy was self-liquidating, which meant that the insurer’s expenses in defending the underlying actions counted against the policy’s limit of liability.