Up in Smoke: An Insurer Could Not Mount a Successful Coverage Defense Due to Vague Allegations in an E-Cigarette Lawsuit

An Illinois federal district court determined in Diamond State Insurance Company v. Duke that an insurer had a duty to defend its insured in a case involving alleged disparagement. This decision reminds insurers that courts have the ability to the allegations of the underlying complaint even more broadly than ever expected. The underlying lawsuit was brought by, in pertinent part, DR Distributors, LLC against 21 Century Smoking, Inc. alleging, causes of action for counterfeiting and trademark infringement under the Lanham Act, unfair competition and unfair designation of origin under the Lanham Act, common law unfair competition, and violations of the Illinois Deceptive Trade Practices Act. Notably, DR Distributors distributes e-cigarettes under the trademark “21st Century Smoke.” 21 Century is an e-cigarette vendor. After initially defending 21 Century under a reservation of rights, Diamond State Insurance Company initiated a declaratory judgment action seeking a ruling that it had no duty to defend. It also sought from its insured reimbursement of defense costs. On cross-motions for summary judgment, the district court ruled that Diamond had a duty to defend 21 Century in the underlying lawsuit. Although the district court rejected DR Distributors’ arguments that Diamond either waived its ability to contest coverage or was estopped, it determined the vague allegations of the underlying lawsuit triggered the duty to defend. In particular, the issue was whether all of the allegations in the underlying lawsuit “arose out of” trademark infringement, which was excluded under the language of the policies. While the district court admitted that the bulk of the allegations “arose out of” trademark infringement, it identified a separate disparagement claim distinct from trademark infringement. Significantly, the district court referred to allegations that (1) 21 Century contacted customers of DR Distributors and made false statements by indicating that 21 Century was affiliated with DR Distributors, and (2) 21 Century had the aim of selling its competing products to those customers. The district court noted that disparagement did not require the false statements to criticize the quality of the competitor’s product. As a result, the district court deemed it possible that misleading customers as to the affiliation between 21 Century and DR Distributors was distinct from the trademark infringement since one did not necessarily depend on the other. This decision reaffirms the broad application of the duty to defend under Illinois law. Indeed, the district court, itself, noted that under the broadest possible reading of the vague allegations in the underlying complaint, DR Distributors had a “very thin reed” on which to rest its disparagement claim. Further, the district court was highly cognizant that the potential losses would ultimately not be covered. However, caselaw distinguished by the district court gave clear indication of instances where trademark infringement was the basis for all claims thereby showing the limitations of the duty to defend. Insurers should beware the possibility that courts can rule in unanticipated ways. Because the duty to defend can be triggered by isolated claims, or claims inferred from the facts, courts have the ability to find that coverage is triggered even if an insurer believes there is none.

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Up in Smoke: An Insurer Could Not Mount a Successful Coverage Defense Due to Vague Allegations in an E-Cigarette Lawsuit

An Illinois federal district court determined in Diamond State Insurance Company v. Duke that an insurer had a duty to defend its insured in a case involving alleged disparagement. This decision reminds insurers that courts have the ability to the allegations of the underlying complaint even more broadly than ever expected. The underlying lawsuit was brought by, in pertinent part, DR Distributors, LLC against 21 Century Smoking, Inc. alleging, causes of action for counterfeiting and trademark infringement under the Lanham Act, unfair competition and unfair designation of origin under the Lanham Act, common law unfair competition, and violations of the Illinois Deceptive Trade Practices Act. Notably, DR Distributors distributes e-cigarettes under the trademark “21st Century Smoke.” 21 Century is an e-cigarette vendor. After initially defending 21 Century under a reservation of rights, Diamond State Insurance Company initiated a declaratory judgment action seeking a ruling that it had no duty to defend. It also sought from its insured reimbursement of defense costs. On cross-motions for summary judgment, the district court ruled that Diamond had a duty to defend 21 Century in the underlying lawsuit. Although the district court rejected DR Distributors’ arguments that Diamond either waived its ability to contest coverage or was estopped, it determined the vague allegations of the underlying lawsuit triggered the duty to defend. In particular, the issue was whether all of the allegations in the underlying lawsuit “arose out of” trademark infringement, which was excluded under the language of the policies. While the district court admitted that the bulk of the allegations “arose out of” trademark infringement, it identified a separate disparagement claim distinct from trademark infringement. Significantly, the district court referred to allegations that (1) 21 Century contacted customers of DR Distributors and made false statements by indicating that 21 Century was affiliated with DR Distributors, and (2) 21 Century had the aim of selling its competing products to those customers. The district court noted that disparagement did not require the false statements to criticize the quality of the competitor’s product. As a result, the district court deemed it possible that misleading customers as to the affiliation between 21 Century and DR Distributors was distinct from the trademark infringement since one did not necessarily depend on the other. This decision reaffirms the broad application of the duty to defend under Illinois law. Indeed, the district court, itself, noted that under the broadest possible reading of the vague allegations in the underlying complaint, DR Distributors had a “very thin reed” on which to rest its disparagement claim. Further, the district court was highly cognizant that the potential losses would ultimately not be covered. However, caselaw distinguished by the district court gave clear indication of instances where trademark infringement was the basis for all claims thereby showing the limitations of the duty to defend. Insurers should beware the possibility that courts can rule in unanticipated ways. Because the duty to defend can be triggered by isolated claims, or claims inferred from the facts, courts have the ability to find that coverage is triggered even if an insurer believes there is none.

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