Court of Appeal upholds lower court’s finding that insurer has duty to defend for advertising liability pursuant to two commercial general liability policies and overturns award of special costs

Insurance law – Commercial general liability insurance – Duty to defend – Advertising injury – Exclusions – Interpretation of policy – Practice – Pleadings – Appeals – Costs – Special or increased costs

Blue Mountain Log Sales Ltd. v. Lloyd’s Underwriters, [2019] B.C.J. No. 1200, 2019 BCCA 240, British Columbia Court of Appeal, June 28, 2019, H. Groberman, N.J. Garson and G. Dickson JJ.A.

The plaintiffs in the underlying U.S. action advanced claims against the insured parties for, inter alia, misappropriation of trade secrets and unfair competition relating to insured parties’ formulation and manufacture of a fire retardant product used to treat wood products (“CPX”). The CGL policies provided coverage for “advertising liability”, which included unfair competition committed in any advertisement and arising out of the insured’s advertising activities.

The insurer initially agreed to participate in the defence of the insured parties and issued a reservation of rights acknowledging a duty to defend certain covered causes of action under the two CGL policies; however, it withdrew from defending the petitioners when the plaintiffs amended their pleadings such that only one cause of action remained – misappropriation of trade secrets and confidential information contrary to Washington State’s Uniform Trade Secrets Act (the “UTSA”).

The insureds petitioned the court for a declaration that the insurer had a duty to defend.

The court concluded that the plaintiffs’ claim included allegations that the insureds engaged in unfair competition by stealing its trade secrets and, in part, through its advertising activities, which triggered the duty to defend under both policies. The court also awarded special costs.

On appeal, the insurer contended that the chamber’s judge erred by concluding that the plaintiffs’ pleadings alleged liability for injury caused by advertising when, in fact, the pleadings only alleged liability for trade secret misappropriation which was unrelated to advertising. In addition, the insurer submitted that the trial judge erred by concluding that the allegation of trade secret misappropriation involved a claim for unfair competition.

The Court of Appeal stated that, in construing the meaning and scope of advertising injury in the context of the duty to defend, the court must assess the extent of the causal relationship required by the policy and then examine the pleadings in the underlying action to determine whether such a relationship was alleged by the plaintiff, “bearing in mind the “mere possibility” threshold that applie[s] to the duty to defend”.

The Court found that the plaintiffs’ allegations that the insureds used the plaintiffs’ misappropriated information to market and sell the insureds’ CPX treated products by representing them to purchasers as identical to the plaintiffs’ products, its competition, pleaded a sufficient causal link between the alleged injury and advertising activities.

The Court of Appeal found that the chambers judge did not err in concluding that the allegations concerned advertising activities and that those activities were central, not coincidental, to the wrong alleged. The Court held that the advertising activities were “part and parcel” of the injuries alleged in the underlying action and potentially covered by the policies, thus triggering the duty to defend.

With respect to the second ground of appeal, the Court found no error in the judge’s conclusion that the pleading alleged a claim for unfair competition within the meaning of the policies. The Court held that the policy definitions of “advertising liability” and “advertising injury” were strikingly broad and general in nature and they referred to forms of conduct, “not to the technical elements or legal labels that may apply to particular causes of actions in particular jurisdictions.”

The Court also rejected the insurer’s submission that the evolution of the pleadings should be considered for purposes of interpreting the pleading and deciding whether coverage was triggered. The Court held that “[i]t is the pleadings in their current form that must be examined and assessed when the court determines whether there is a duty to defend.”

Although the insurer did not include as a specific ground of appeal, the court considered the judge’s award of special costs against the insurer. Based on the decision in West Van Holdings Ltd. v. Economical Mutual Insurance Company, 2019 BCCA 110, the court replaced the award of special costs with ordinary costs.

This case was digested by Tricia M Milne, and first published in the LexisNexis® Harper Grey Insurance Law Netletter and the Harper Grey Insurance Law Newsletter. If you would like to discuss this case further, please contact Tricia M. Milne at tmilne@harpergrey.com.

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