Advising a Client To Not Request a Defense From Its Insurers Is Fraught With Peril

In a recent case IP defense counsel determined that no potential coverage could arise for claims of “implicit disparagement.”  Defense counsel found no potential coverage arose despite trademark dilution claims alleged injury to reputation flowing from alleged “tarnishment” activity, leading potential consumers to think less of the leading brand’s products.  Defense counsel did not consider that: (1) facts rather than labels of causes of action determine a duty to defend; (2) the potential for amendment of the claims must be asserted; and (3) that inferences from the facts asserted that evidence potential coverage may give rise to a defense.

Although the policy included an IP exclusion, it did not mention trademark dilution claims.  Nor did it have a “catch-all” provision that encompassed “other intellectual property claims.”

Where defense counsel leaves the decision of whether coverage arises up to the client, they may lack internal resources to make a proper assessment.  Nor is reliance on an insurance broker’s opinion of coverage proper, as they are not licensed to render such opinions, nor typically knowledgeable about recent potential coverage case law.

Under California law, pre-tender fees are not recoverable because they precede notice of a claim of injury or suit. Loss of pre-tender fees could have been avoided if notice had been promptly provided to all insurers on risk.

The client lost policy benefits because it followed his recommendation and did not provide notice to client’s insurers.  Defense counsel’s representation raised the specter of legal malpractice.

For more information on case law addressing these issues, click here.

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