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Third circle disputes regarding the insurer’s comprehensive defense obligation – litigation, mediation and arbitration

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Third circle disputes regarding the insurer’s comprehensive defense obligation

January 10, 2022

Marshall, Dennehey, Warner, Coleman & Goggin

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On January 5, 2022, the Third District Court of Appeals issued its judgment in Vitamin Energy, LLC v Evanston Insurance Company, reiterating the general manner in which courts in Pennsylvania interpret an insurer’s duty of defense.

Vitamin Energy arose out of an underlying intellectual property lawsuit filed by the companies that own the trademarks for 5-Hour Energy Liquid Energy Shots. According to the complaint, Vitamin Energy has operated “false and misleading comparative advertising” regarding the benefits of its own products versus 5-hour energy and misrepresented the impact of Vitamin Energy’s products on user performance. 5-hour Energy also claimed that Vitamin Energy advertised that its product would provide “up to 7 HOURS of energy” by using a language and font confusingly similar to 5-hour Energy’s registered trademarks.

After filing the underlying lawsuit, Vitamin Energy filed for defense and compensation from its CGL insurer Evanston, who refused coverage on the grounds that the complaint did not make claims that would qualify as “advertising damage,” and that, itself if these claims were asserted, insurance cover was otherwise excluded through various exclusions. As a result, Vitamin Energy filed a declaratory lawsuit against Evanston for an insurance claim determination.

In November 2020, Judge Joel H. Slomsky of the United States District Court for the Eastern District of Pennsylvania gave Evanston a summary judgment, in which he ruled that the allegations in the underlying lawsuit did not concern “advertising damage” within the meaning of the present CGL policy. The Third Circuit, in its recent opinion by Judge Kent A. Jordan (and that of Judge David J. Porter and Judge Marjorie O. Rendell) overturned that decision, stating that Evanston had a duty of defense based on the broad and liberal construction which is necessary for the determination of an insurer’s defense obligation.

In that decision, the District Court held a detailed discussion of the allegations set out in 5-hour Energy’s complaint. Ultimately, it was a single claim – that 5-hour Energy’s products did not contain 100% of the Recommended Daily Value of B vitamin – that the Third District made to differentiate claims against Vitamin Energy from previous court cases That insurers had no debt had a duty to defend their insured and sparked Evanston’s duty of defense. In particular, the court acknowledged that various aspects of the complaint were outside the scope of Evanston Policy (including representations relating to Vitamin Energy’s own products and those involving trademark infringement), but found that under the law of Pennsylvania “The question for us is whether one Claim against an insured is potentially covered, not whether the main claim is potentially covered. “(Italics in original.) The Third Circuit also denied the applicability of various exclusions in Evanston’s policy to excuse the carrier’s duty of defense as he is on their insignificance to the sole “covered” claim – because of alleged false or misleading representations regarding the content of 5-hour Energy’s products.

Ultimately, the Third Circuit justified its decision in the context of Pennsylvania’s comprehensive interpretation of an insurer’s defense obligation. Put simply, when asserting a large number of claims, each of which falls within the scope of a policy, the insurer owes the duty to defend its insured against the entire claim. However, as the Third Circuit carefully noted, this preliminary ruling does not determine the ultimate question of whether the insurer owes any liability to pay compensation. The outcome of this question will depend on the evidence presented by discovery and experiment.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.

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