“Product Disparagement” Coverage for Consumer False Advertising Class Actions

December 4, 2013

Insurance LawStandard form commercial General Liability policies now include coverage for “injury … arising out of … [o]ral, written or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services[.]” In a previous post, I examined the unsettled state of the case law on what a product’s manufacturer must allege in order to trigger coverage for product disparagement under the defendant’s liability policy.  Today’s post considers whether allegations that an insured expressly defamed a product can trigger coverage when the plaintiff making the allegation is not the manufacturer but  consumers who refrained from purchasing the product after hearing the insured’s allegedly false representations.

The Meaning of “Arising Out of”

The issue in false advertising claims brought by consumers is whether the claims “arise out of” the insured’s disparagement of a competitor’s product. In one of the first cases to address the question, National Union Fire Ins. Co. of Pittsburgh, Pa. v. Mead Johnson, — F.3d —-, 2013 WL 5788652 (7th Cir. Oct. 29, 2013), Mead Johnson Company sought coverage for a consumer class action alleging that the company, in an effort to maintain the market dominance of its upscale infant formula, Enfamil, advertised that its competitor’s less expensive product was inferior and lacked two key fats that promote brain and eye development.

Mead Johnson acknowledged that the consumers’ contention that they would have purchased the less expensive infant formula if Mead Johnson had not disparaged that formula was not, itself, a claim for product disparagement. Mead Johnson instead argued that the consumers’ claims “arose out of” its disparagement of the competitor’s products.

Disagreeing, the Seventh Circuit, in an opinion authored by Judge Posner, limited the policy’s coverage to claims that fit the legal definition of product disparagement. Judge Posner expressed concern about “where Mead’s capacious conception of ‘arising out of’ could lead.” He observed that in a consumer fraud action “flowing from” or “traced to” claims of product disparagement is covered, so too would a mother’s claim that she suffered a nervous breakdown after Mead’s disparagement of its competitor’s formula convinced her she had inflicted irrevocable harm on her baby by using the competitor’s formula. Construing the policy to cover such remote consequences, Judge Posner reasoned, would make it very difficult for an insurer to estimate liability and thus fix a premium for injuries caused by product disparagement.

Implications

Curiously, Judge Posner distinguished cases interpreting the phrase “arising out of” in coverage exclusions broadly on the ground that the effect of those decisions was to limit coverage and thus assist insurers in assessing potential liability and fixing premiums. Apparently, the “law and economics” approach to interpreting insurance policies places the goal of price efficiency ahead of widely recognized rules of policy interpretation—i.e., “coverage provisions are to be construed broadly in favor of the insured while exclusions are to be construed narrowly against the insurer.” Nowhere does the policy limit coverage to claims of product disparagement. The policy covers injury “arising out of” certain “offenses,” including product disparagement. In arguing that consumer fraud claims based on product disparagement arise out of the product disparagement, policyholders may challenge Judge Posner’s characterization of the remoteness of the consumer fraud claims. The consumer fraud claims allege the very consequences that the disparagement aimed to achieve: consumers bought more from Mead Johnson and less from its competitors, enriching Mead Johnson and causing damages to both the competitor and the consumers. Arguably, if the damages to competitor were proximately caused by the disparagement, so too were the damages to consumers.