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Insured’s Alleged False Promises About Its Own Product Do Not Constitute ‘Advertising Injury’
Insurance Law Update
In Total Call Intern. Inc. v. Peerless Ins. Co., 2010 WL 188213 (Cal. Ct. App. January 21, 2010), the California Court of Appeal, Second District, held that allegations in an underlying complaint did not constitute “advertising injury” under a commercial general liability (CGL) policy and affirmed they were subject to the policy’s “nonconformity” exclusion, such that the lower court properly sustained Peerless’ demurrer without leave to amend.
The insured Total Call International (TCI) provides telecommunication services and products, including prepaid phone cards. TCI was sued by two competitors in New Jersey federal court for deceptive business practices and false advertising under the Lanham Act and several state laws, including California Business and Professions Code sections 17200 et seq. and 17500 et seq. The complaint alleged TCI’s advertising overstated the number of minutes provided on its cards and that this advertising was “false, misleading and deceptive.” TCI submitted the claim to its CGL carrier, Peerless, but Peerless denied coverage on the grounds that the underlying complaint alleged only that TCI’s advertising misrepresented TCI’s phone cards (rather than making a false statement about a competitor). Peerless’s denial was further based on the policy’s noncomformity exclusion for advertising injury “arising out of the failure of goods, products or services to conform with any statement of quality or performance made in [the insured’s] ‘advertisement.’”
TCI sued Peerless for breach of contract, bad faith and other related claims. The trial court sustained Peerless’ demurrer, holding the underlying claims were barred from coverage by the policy's nonconformity exclusion. On appeal, TCI argued that the underlying allegations fell within the policy’s coverage for “[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services, ” and were not subject to any policy exclusions.
The court agreed with Peerless in finding that the underlying complaint did not allege “advertising injury” because the claims asserted were that TCI’s advertising misrepresentedthe performance of TCI’s phone cards, not that TCI made a false statement about a competitor. The court separately concluded that the policy’s “nonconformity” exclusion was not ambiguous and also served to bar coverage for claims by both consumers and competitors concerning TCI's alleged misrepresentations about its product.
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