Court Holds Insurer Must Defend, Even Though Complaint Did Not Expressly Assert Cause Of Action For Advertising Injury
A California federal district court, applying California law, held that an insurer must defend a home health care company for allegations of fraudulent use of advertising materials because the underlying factual allegations potentially included a covered advertising injury, even though the named causes of action did not explicitly plead such a claim.
Anthony Nieves purchased the right to be an Area Representative for ABCSP, Inc. (“ABCSP”), a home health care and assisted living franchisor. The transaction gave Nieves the right to award ABCSP’s Always Best Care Senior Services franchises in an area of Southern California and to provide marketing and business support for those franchises. Nieves subsequently formed Convergence Investments LLC (“Convergence”) to operate the Area Representative business. Nieves also purchased a home health company, which he did not make into an ABCSP franchise.
ABCSP served Nieves and Convergence with an Arbitration Demand, asserting claims for breach of contract, fraud in the inducement of a contract, fraudulent misrepresentation, and tortious interference with contract. ABCSP’s claim for fraud in the inducement alleged, in part, that Nieves represented to ABCSP that he intended to purchase a home health company that would become part of an ABCSP franchise and ABSCP relied on statements by Nieves in selling him the Area Representative business and revealing to Nieves trade secrets regarding marketing. The claim for fraudulent misrepresentation alleged that “Nieves intended to learn about and use ABCSP’s confidential, trade secrets concerning how to successfully market a home health care business to referral sources.” The Demand further alleged that Nieves and/or Convergence downloaded over 150 confidential ABCSP documents, including marketing materials.
Nieves and Convergence tendered the Demand to Travelers Casualty Insurance Co. of America (“Travelers”), whose policy covered advertising injury. Travelers denied the tender. The plaintiffs sent additional letters to Travelers, calling attention to the portion of the Demand and interrogatory responses regarding marketing materials. Travelers repeated its denial of the tender. Nieves and Convergence subsequently filed a bad faith suit against Travelers.
The court denied Travelers’s motion for summary judgment as to Nieves and Convergence, concluding that Travelers had a duty to defend in the underlying action because the conduct alleged “falls squarely within the policy’s coverage for the ‘use of another’s advertising idea.’” The court reasoned that in California, the duty to defend is broad and an insurer must provide a defense if there is a potential for coverage under the policy. The court rejected Travelers’s argument that an express claim for advertising injury was required to trigger coverage, holding that whether coverage exists does not depend on the labels given to the causes of action, but instead, on whether the facts alleged a covered liability. However, the court did find that questions remained as to whether Nieves himself was insured under the policy, because Nieves’s actions were only covered if performed in his capacity as a member of Convergence. Nieves v. Travelers Cas. Ins. Co. of America, No. 2:14-cv-05536-CAS-VBKx (C.D. Cal. Mar. 24, 2015).