Calling on insurers fails for phone-card defense

Total Call International, Inc. v. Peerless Ins. Co., --- Cal.Rptr.3d ----, 2010 WL 188213 (Cal.App. 2 Dist.)

Plaintiff-appellant TCI argued that Peerless improperly refused to defend TCI in litigation arising out of its advertising activities; the court of appeals affirmed the dismissal of its complaint.

TCI sells prepaid phone cards. As the court described its allegations, “[m]ost providers rely on ‘point of sale’ advertising, that is, billboards and posters at gas stations and other places where cards are sold that state the price of the provider's card and amount of paid minutes. Because cost is the determinative factor for most consumers, they typically buy the least expensive card advertised on the billboards and posters.” I highlight this because a different phone card seller just argued to the contrary in a different false advertising case.

Anyway, Peerless insured TCI for “personal and advertising injury,” including “[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services” but excluded coverage for “‘[p]ersonal and advertising injury’ arising out of the failure of goods, products or services to conform with any statement of quality or performance made in [the insured’s] ‘advertisement.’”

TCI was sued by IDT (plaintiff in the suit referenced above, too) for false advertising. Peerless refused to defend on the ground that IDT alleged only that TCI’s ads misrepresented TCI’s own phone cards.

The duty to defend is broader than the duty to indemnify, and arises when a lawsuit against an insured alleges a claim that potentially or even possibly could result in liability for covered damages. To figure this out, courts generally compare the allegations of the complaint with the terms in the policy, though facts extrinsic to the complaint can also trigger a duty to defend. The insurer can establish the absence of a duty to defend when the allegations in the underlying complaint disclose no basis for policy coverage and allege no extrinsic facts that raise a possibility of coverage.

The court of appeals reasoned that the coverage at issue was for “product disparagement and trade libel as well as defamation,” but all of these require that statements be “of and concerning” the plaintiff in some way. Though IDT alleged harm to its reputation and market share, the alleged falsehoods didn’t meet the requirement of making specific reference to IDT, which would have at least required reference to a small group of which IDT was a part; California cases use the number 25. (How many phone card sellers are there at IDT’s level?) Anyway, TCI’s allegedly offending ads weren’t comparative. Consumers would have had to look at other materials to compare the prices. Thus, the alleged injury wasn’t covered advertising injury.

Moreover, the nonconformity exclusion also meant that there was no policy coverage. The issue was whether TCI’s cards measured up to their claims, and harm caused by that type of misrepresentation was excluded. TCI argued that the exclusion should be read to bar coverage for claims by consumers, but not claims by competitors, but the court of appeals found no ambiguity in the exclusion justifying such a reading.