Competitor's positive ads aren't disparaging for insurance purposes

Dollar Phone Corp. v. St. Paul Fire and Marine Ins. Co., 2012 WL 1077448 (E.D.N.Y.)

This magistrate’s report and recommendation dealt with Dollar’s claim that St. Paul wrongly refused to defend and indemnify it in an underlying New Jersey case.  Dollar provides prepaid telephone card services, and was one of more than 100 defendants in a (very interesting, I thought) false advertising case brought by competitor IDT Telecom.  IDT’s complaint alleged that Dollar etc. defrauded customers by promising more minutes per dollar than they actually provided, thus allegedly implying that IDT’s cards were overpriced and harming its market share.  Dollar settled with IDT, but IDT accused it of violating the agreement, and Dollar was reinstated as a defendant.  They settled again in 2008.  Dollar kept St. Paul apprised at all times of this, but St. Paul refused to defend.

NY law controls; the St. Paul policy covered advertising injury, relevantly defined as “Making known to any person or organization covered material that disparages the business, premises, products, services, work, or completed work of others.”  The magistrate judge agreed with St. Paul that IDT’s underlying complaint didn’t assert a disparagement advertising injury offense because the underlying defendants’ ads were not alleged to make specific reference to IDT nor even to make a more general disparaging reference to competitors.  Any negative effect on competitors’ reputations was by implication.  Even using the dictionary meaning of “disparge,” some reference or comparison to competitors’ products would be required, even if not by name.  The unambiguous meaning of “disparage” in the policy “requires either an allegation that the advertisement specifically referred to the competitor's products or touted one's own products as superior to those of its competitors.”  This was lacking from the underlying complaint.  “It is only by referring to both the New Jersey plaintiff's advertisements and those of Dollar Phone that a consumer would draw the conclusion that Dollar Phone's products were superior.”

In addition, the magistrate judge concluded that an exclusion applied, though the law requires exclusions to be strictly construed and narrowly read.  The relevant exclusion was that St. Paul wouldn’t cover advertising injury due to the failure of Dollar’s products to perform as advertised: “We won't cover advertising injury that results from the failure of your products, your work, or your completed work to conform with advertised quality or performance.”  Here, failure of Dollar’s products to perform as advertised was the entire basis of the underlying complaint—“precisely  the type of harm contemplated in the plain language of the non-conformity exclusion.” 

However, St. Paul’s other arguments failed—coverage was not eliminated due to an exclusion for

advertising injury “that results from the wrong description of the price of your products, your work or your completed work,” since the underlying complaint didn’t allege that consumers were charged more than the advertised price for Dollar calling cards.  Nor was coverage eliminated due to an exclusion for knowing falsity.  This exclusion applies when a complaint’s allegations are based solely on intentional conduct.  But where liability might be premised on unintentional or unknowing conduct, the exclusion won’t apply, and the underlying complaint included both allegations of intentional conduct and allegations that would allow IDT to recover based on showing negligence (or, I would add, no fault whatsoever, under the Lanham Act).  The magistrate judge suggested that it mattered that some of the specific allegations in the underlying complaint didn’t specify Dollar’s alleged state of mind, though as I read the earlier cases the better question is whether the insured could still be liable under the cause of action alleged without a guilty mind because that cause of action doesn’t actually require intent.

The magistrate judge also accepted St. Paul’s argument that it was not required to cover Dollar under the Errors & Omissions provisions of the policy, because of an exclusion from the E&O coverage for “loss that results from any actual or alleged violation of any securities, antitrust, restraint of trade, unfair or deceptive trade practices, unfair competition, or other consumer protection law.”  This exclusion goes beyond the exclusion for intentional conduct.

Dollar argued that the Lanham Act fell outside the trade exclusion because consumers don’t have a private cause of action thereunder, making it not a consumer protection law.  The magistrate judge concluded that (1) a statute can protect consumers without providing them a private cause of action, and (2) the allegations still clearly stated claims for “unfair or deceptive trade practices” or “unfair competition.”

Dollar also brought clams under NY GBL § 349, which St. Paul contested on the ground that private contract disputes aren’t within the scope of the law, which governs deceptive trade practices.  Dollar argued that it had presented evidence that St. Paul's claims handling practices are deceptive as defined in the statute because St. Paul has failed to train its claims adjusters in accordance with accepted insurance industry standards, thus showing a consumer-oriented harm.  Courts almost uniformly hold that disputes between policyholders and insurers lack the necessary consumer impact, unless plaintiffs allege that they purchased insurance policies based on defendants' false representations regarding the terms of the insurance policies.

Dollar argued that St. Paul had a system in place designed to deny legitimate insurance claims because it trained and supervised adjusters badly.  But its factual claims didn’t identify any materially deceptive acts or omissions.  Even assuming that St. Paul’s adjusters weren’t adequately trained, that isn’t itself deceptive or fraudulent absent false promises by St. Paul about their training or expertise on which Dollar relied. This was a breach of contract case, not a deceptive practice case.