Advertising injury: allegedly willful substitutions trigger duty to defend

Orlando Nightclub Enterprises, Inc. v. James River Ins. Co., 2007 WL 4247875 (M.D. Fla.)

This case concerns the duty of an insurer to defend an insured nightclub, which was sued by Red Bull for selling Rockstar to customers who specifically requested Red Bull (an energy beverage often mixed with vodka). Red Bull sued the nightclub for Lanham Act violations and state-law unjust enrichment, unfair competition, and deceptive and unfair trade practices. The claims all incorporated allegations that the nightclub’s conduct was intentional.

The nightclub had an advertising injury policy that excluded injury caused “with the knowledge that the act would violate the rights of another and would inflict personal and advertising injury.” The insurer argued that the factual allegations trumped the requirements of the causes of action alleged, and thus that it therefore had no duty to defend. The nightclub responded that liability could attach on these claims without any showing of knowledge, even though knowing conduct was alleged.

To my surprise, there are a handful of cases accepting the insurer’s argument. But the court here, after reviewing a large number of cases, sided with the majority: the duty to defend is triggered when the duty to indemnify might ultimately attach. If the nightclub were found liable, but only strictly so, there’d be a duty to indemnify; thus there is a duty to defend. Given that it would be an extremely unusual complaint that omitted an allegation of knowledge, a contrary ruling would get insurers off the hook in almost every advertising injury case, which is surely not what insureds anticipate when they buy advertising injury coverage.