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By Kristin C. Cummings
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In the world of general liability insurance policies, it is not uncommon for policies to exclude coverage for claims resulting from copyright or trademark infringement, while covering claims resulting from “advertising injury.” A recent decision from the Fifth Circuit has blurred the lines on these two separate types of injuries by holding that a house can be an “advertisement,” triggering coverage under a general liability policy’s advertising injury provision.

On Feb. 26, 2015, the Fifth Circuit issued its opinion in Mid-Continent Casualty Company v. Kipp Flores Architects LLC, a coverage dispute involving a general liability insurer and its homebuilder insured.[1]

Kipp Flores Architects was an architecture firm that designed homes and licensed those designs to homebuilders. Hallmark Design Homes entered into several architectural services and license agreements with KFA. Under these agreements, Hallmark was authorized to build each of 11 house designs once. If Hallmark wanted to build an additional house with the same design after the initial licensed house, it was required to pay KFA for another license.

Hallmark built hundreds of houses using 11 different designs, without obtaining the additional licenses from KFA. KFA thus filed a copyright infringement lawsuit against Hallmark. Hallmark requested that its general liability insurer, Mid-Continent, defend it in the suit. Mid-Continent defended Hallmark under a reservation of rights, and the jury returned a verdict for KFA, finding that by building hundreds of houses without the appropriate license, Hallmark had infringed KFA’s designs resulting in damages of over $3 million.

Once the verdict was rendered, Mid-Continent filed a declaratory judgment action and then a motion for summary judgment in the U.S. District Court for the Western District of Texas seeking a declaration that it had no duty to indemnify Hallmark under the policy because the policy excluded damages arising out of the “infringement of copyright, patent, trademark or trade secret.” KFA filed a cross-motion for summary judgment arguing that the policy’s exception to the copyright infringement exclusion for damages arising out of “advertising injury” provided coverage for the claim. The district court agreed with KFA and granted its motion for summary judgment, finding coverage under the policy and awarding attorneys’ fees to KFA.

Mid-Continent appealed both the coverage and attorneys’ fees rulings to the Fifth Circuit.

The Fifth Circuit first looked to the policies, which provided, “we will pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies.”

The policies defined “personal and advertising injury” as “injury … arising out of one or more of the following offenses: … infringing upon another’s copyright, trade dress or slogan in your ‘advertisement.’” An advertisement was defined as “a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.” The policies also contained an exclusion for injury arising out of “infringement of copyright, patent, trademark, trade secret or other intellectual property rights.” But an exception to the exclusion stated that the exclusion did not apply to infringement “in your ‘advertisement’ of copyright, trade dress or slogan.”

The Fifth Circuit summed up the issue before it as “whether the underlying judgment, which established that Hallmark infringed the copyrights of KFA by constructing homes from KFA’s designs without a license to do so, triggered coverage for an ‘advertising injury’ under the policy terms.” The court further explained that because the jury determined the houses themselves infringed KFA’s copyright, the determinative question for coverage was whether the houses themselves were “advertisements” such that the jury verdict potentially gave rise to coverage as an “injury ... arising out of of … infringing upon another’s copyright, trade dress or slogan in your ‘advertisement.’”

Examining the evidence in the underlying trial, the court noted testimony from Hallmark’s representatives that homebuyers never bought houses unseen, but would look at the model homes Hallmark built as well as elevations and floor plans in the sales office or on the website to decide if they wanted to enter a contract with Hallmark to build. Hallmark also put up yard signs with its contact information on the sites of homes it built to attract customers.

Mid-Continent did not dispute that Hallmark used the infringing homes to market to customers, but instead argued that an infringing house can never be an “advertisement” under the policies, because an advertisement was defined as a “notice that is broadcast or published to the general public … for the specific purpose of attracting customers …” The Fifth Circuit noted that the policy did not specify that a notice had to take any particular form and did not say it couldn’t be a physical object. Moreover, the court noted that the notice only needed to be broadcast or published, and that while “broadcast” generally implied radio or television advertisement, “publish” was much broader and could include “to make public or generally known.” The Fifth Circuit thus found that Hallmark’s use of the infringing houses satisfied the expansive definition of “advertisement” in the policies as well as “common sense.”

The Fifth Circuit when on to examine whether Hallmark’s liability was “because of” a covered “advertising injury,” another requirement for coverage under the policies, and concluded that because Hallmark infringed KFA’s copyright in its advertisement (i.e., the homes) the injury was an “advertising injury” as defined by the policies.

Mid-Continent also argued that KFA was barred from recovering under the concurrent causation doctrine. Specifically, Mid-Continent argued that even if the houses were advertisements, the damages award included both covered “advertising injury” damages and noncovered damages for infringement in the construction and sale of the houses themselves. Thus, Mid-Continent argued, all of the damages were barred under the concurrent causation doctrine because a covered and noncovered event acted together to cause the plaintiff’s injuries. The Fifth Circuit disagreed, holding that because the infringement in an advertisement alone would give rise to precisely the same damages as the infringement by construction and sale, the two causes were separate and independent and the full recovery was covered as an “advertising injury.”

Mid-Continent also asserted a handful of other defenses to coverage that the Fifth Circuit quickly rejected, including the breach of contract exclusion and the prior publication exclusion.

Ultimately, this decision expands the definition of “advertisement” under a general liability policy to include the very products the insured is selling, and not just writings or media created for the purpose of selling the product. As long as the insured (or injured party) can establish that the insured relied on the product itself to help market its product (arguably not a very hard thing to prove), the product can be an “advertisement,” thus implicating coverage under the “advertising injury” coverage grant of its general liability policy.

—By Kristin C. Cummings, Zelle Hofmann Voelbel & Mason LLP

Kristin Cummings is a senior associate in Zelle Hofmann Voelbel & Mason's Dallas office. 

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Nos. 14-50649, 14-50673 (5th Cir., Feb. 26, 2015) (interpreting Texas law).