Trial News

An insurer has a duty to defend a policyholder against a lawsuit when the allegations in the complaint fall within the initial grant of coverage regardless of a knowing violation that would otherwise void coverage if claims are sufficiently pleaded that do not involve the insurer’s intentional conduct. (West Bend Mut. Ins. Co. v. Ixthus Med. Supply, Inc., 2019 WL 963358 (Wis. Feb. 28, 2019).)

Abbott Laboratories sued Ixthus Medical Supply and other defendants for federal statutory and common law claims for allegedly importing Abbott’s glucose testing strips at a lower price from international sellers and then re-selling them in the domestic market for a higher price to increase their profits. Ixthus’s insurance policy with West Bend Mutual Insurance Co. included an advertising injury clause that would pay damages for actions by Ixthus that used another party’s advertising idea in its advertising or that infringed on a copyright, trademark, or slogan. The coverage included two exclusions for knowing violations and criminal acts.

Ixthus informed West Bend of Abbott’s lawsuit, and it refused to defend Ixthus, stating that the policy did not cover the claims, and it filed a request for a declaratory judgment that it had no duty to defend or indemnify Ixthus. The trial granted the insurer’s motion for summary judgment, finding that although the claims fell within the policy’s coverage, the knowing violation exclusion applied. Abbott appealed, and the state appellate court reversed, holding that the knowing violation exclusion did not apply because the complaint included claims that did not rely on Ixthus’s intentional conduct and therefore would not be excluded under the policy. West Bend petitioned the state supreme court for review.

The Wisconsin Supreme Court affirmed. It considered the “four corners” of the complaint and noted that “the duty to defend is ‘necessarily broader than the duty to indemnify because the duty to defend is triggered by arguable, as opposed to actual, coverage'.” The court explained that if any claims in the complaint would be covered if proven true, then the insurer has a duty to defend.

Following a three-part test, the court looked at whether the policy granted initial coverage for the allegations; whether any coverage exclusions apply; and if an exclusion applies, whether an exception exists that would restore coverage. Referring to the third step in the analysis, the court stated, “‘If the policy, considered in its entirety, provides coverage for at least one of the claims in the underlying suit, the insurer has a duty to defend its insured on all the claims alleged in the entire suit.’”

The state supreme court agreed with the lower court that the complaint adequately pleaded an injury from Ixthus’s advertising activity that would be covered by that policy clause. It rejected the defendant’s argument that its actions were in the realms of importation and distribution rather than advertising because advertising—particularly the use of Abbott’s trademarks and trade dress—materially contributed to the plaintiff’s injury, such as loss of revenue, damage to its trademarks, and consumer confusion about the product.

The court then considered whether the knowing violation exclusion applied since Abbott alleged that Ixthus acted with intent to defraud and had knowledge of the fraud when it sold imported testing strips at a higher price domestically. The court disagreed with the insurer that the characterization of Ixthus’s actions in the complaint as intentional and knowing was sufficient to taint all claims and thus exclude them. Instead, the language of the exclusion must be compared to each allegation. “Unless an exclusion knocks out every pleaded claim . . . the duty to defend remains.” Because Abbott also alleged claims such as trademark dilution and deceptive business practices that do not require intent to prove, the exclusionary language did not apply to the complaint in its entirety. The court concluded that while a fact-finder could decide that the insurer was not responsible for indemnifying Ixthus for its knowing actions, the duty to defend is broader and requires that the insurer mount a defense for potentially covered conduct.