Triggered Despite Allegations That Defamation Made Knowingly.

A federal court for the Central District of Illinois, in an opinion written by Judge Shadid, applied Illinois law and granted an insured’s motion for summary judgment on the duty to defend.  The court found that because the policy at issue arguably provided coverage for libel or slander, the insurer had a duty to defend when the underlying lawsuit alleged defamation, despite the fact that the defamation was alleged to have been made knowingly. There was a duty to defend even if all of the other allegations in the underlying lawsuit were not covered.  The district court stayed the remainder of the coverage action pending the resolution of the underlying lawsuit.

Dyno Tech Services, LLC (“Dyno Tech”) designs, manufactures, sells, and services a unique type of brake system, commonly known as a dynamometer.  David Koons was a Dyno Tech employee for approximately 10 months before he started working for AW Dynamometer, Inc. (“AW”).  Dyno Tech filed a lawsuit in Iowa state court against AW and Koons (“the underlying lawsuit”).  Dyno Tech alleged Koons stole confidential trade secrets and other confidential information and gave it to AW.  Dyno Tech also claimed that AW made knowingly false and malicious statements about Dyno Tech and began manufacturing and servicing dynamometers to the same specifications by using Dyno Tech’s business records, which Koons allegedly stole.  The complaint in the underlying lawsuit alleged (1) misappropriation of trade secrets; (2) conversion and civil theft; (3) intentional interference with an existing contractual relationship; (4) intentional interference with prospective business relationship, advantage or contract; (5) unfair competition; (6) defamation; (7) fraud; (8) civil conspiracy; and (9) unjust enrichment.  

AW tendered the defense of the underlying lawsuit to its insurer, Cincinnati Insurance Company (“Cincinnati”).  Cincinnati denied that it had a duty to defend or indemnify AW and filed a declaratory judgment action. 

Cincinnati argued that the underlying complaint failed to allege damages arising from a personal and advertising injury.  The applicable policy defined personal and advertising injury as injury arising out of “[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.”  According to Cincinnati, the policy excluded coverage for (1) injuries caused by an offense arising out of the business; (2) injuries caused by or at the direction of the insured with knowledge that the act would violate the rights of another and inflict personal and advertising injury; and (3) injuries that arise out of the infringement of intellectual property rights.  

AW filed a motion for partial summary judgment regarding Cincinnati’s duty to defend.  According to AW, Cincinnati had a duty to defend because Dyno Tech sought damages due to alleged “defamatory or disparaging statements or writings caused by an offense arising out of AW’s business.”  According to AW, the policies support their contention that “’[p]ersonal and advertising injury’ incudes injury from libel, slander, or disparagement caused by an offense arising out of AW’s business[].”  The district court found the policy language unambiguous and held Cincinnati had a duty to defend because the underlying complaint alleged defamatory conduct, and such conduct “is, at least, potentially covered under the policies at issue because they explicitly cover libel and slander.”  Cincinnati argued that coverage was excluded because the underlying complaint contains general allegations, which were incorporated into the defamation count, that AW “knowingly” made false statements.  The district court did not find this argument persuasive as to the duty to defend: “The AW Defendants’ specific actions might permit Cincinnati to exclude them from policy coverage for indemnification purposes.  The Court does not yet have sufficient information to make that determination. Cincinnati has failed to establish, however, that they are justified in refusing to defend the action against the AW defendants in Iowa state court.”  The district court also granted AW’s motion to stay the remainder of the proceedings until the underlying lawsuit concluded.  Cincinnati Ins. Co. v. AW Dynamometer, Inc., No. 1:17-CV-01164-JES-JEH (C.D. Ill. Sept. 11, 2018).