West American Ins. Co. v. Nutiva, Inc., 2018 WL 3861832: False Advertising Is Not An “Accident” Giving Rise To Coverage Under Coverage A Of A CGL Insuring Agreement

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On August 14, 2018, the district court for the Northern District of California granted summary judgment for three insurance companies in a declaratory relief action and denied the insured’s cross-motion.  The insured was a manufacturer of coconut oil products which had been sued in a putative class action that alleged the insured falsely and deceptively advertised its products as healthy when, in fact, the products caused detrimental health effects, including impaired endothelial function.  The insurers had accepted the defense of the class action and were continuing to pay defense costs for the lawsuit.  The insurers sued for declaratory relief and also sought reimbursement of their defense costs.

As the false advertising claims were excluded under Coverage B of the CGL policies at issue, the insured attempted to shoehorn coverage under the insuring agreement of Coverage A for “bodily injury” claims.

The Court rejected the insured’s speculative arguments that an “additional, unexpected, independent, and unforeseen happening” contributed to produce the adverse health effects alleged in the class action.  The Court also rejected the insured’s argument that it did not intend the alleged injurious side-effects.

The Court ruled that the CGL policies did not owe a duty to defend or indemnify the class action. The Court held:  “The false advertising claims in the Underlying Lawsuit do not arise from any `accident’ but rather from Nutival’s deliberate marketing decisions.”  The Court concluded that:  “No allegations in the Underlying Litigation raise the possibility that Nutiva’s actions in labeling, advertising, and selling its coconut oil, were accidental.  Therefore, there is no duty to defend, and no duty to indemnify.”

The decision thus rejected the insured’s efforts to avoid the limitations on personal and advertising injury coverage under a CGL policy by re-characterizing the claim as one for “bodily injury” under Coverage A.

The Nutiva decision demonstrates that, despite the uphill burden of insurers seeking to defeat a duty to defend, insurers do have a reasonable chance of securing declaratory relief and reimbursement of defense costs in appropriate cases.  Accepting a defense, reserving rights, and suing for declaratory relief to avoid a defense obligation and to seek reimbursement is often-times a better strategy than denying a defense and being sued for bad faith.