Don’t Believe the Hype: Over-Touting One’s Own Products Triggers Non-Conformity Exclusion

A Virginia federal court rendered an important decision on product disparagement coverage, holding that a policy’s Non-Conformity Exclusion barred coverage for the underlying false advertising claim. In Selective Way Insurance Co. v. Crawl Space Door System, Inc., the United States District Court for the Eastern District of Virginia was confronted with the question of whether there was coverage for a suit between two competing vent vendors, Crawl Space Door System, Inc. (CSD) and Smart Vent Products. Smart Vent had sued CSD. It alleged CSD engaged in false and misleading advertising and trademark infringement because CSD, in particular, advertised its flood vents were compliant with Federal Emergency Management Agency requirements, misstated the coverage area of its flood vents, touted its products as being the best in the market and “unparalleled by industry standards,” incorrectly stated its flood vents cover more space than Smart Vent flood vents, and misled consumers into believing CSD products were protected by utility patents.

Additionally, Selective Way Insurance Co. issued a CGL policy to CSD. After receiving a tender of coverage, Selective initiated this declaratory judgment action. Selective and CSD ultimately filed cross-motions for summary judgment.

In analyzing the parties’ cross-motions, the district court bypassed the question of whether the underlying complaint alleged “disparagement” under the Disparagement Offense found within the definition of “personal and advertising injury.” It opted instead to decide the application of the Policy’s Non-Conformity Exclusion. That exclusion applies to “‘personal and advertising injury’ arising out of the failure of goods, products, or services to conform with any statement of quality or performance made in your ‘advertisement’….”

The district court concluded the exclusion applied and precluded coverage for the underlying lawsuit. The district court began by noting the language of the exclusion was unambiguous. It then found the exclusion applied here because Smart Vent’s injuries arose from the “failure of CSD’s products to live up to statements if quality and performance contained in its advertisements.” The district court relied on Harleysville Mutual Insurance Co. v. Buzz Off Insect Shield, L.L.C., 364 N.C. 1, 692 S.E.2d 605 (2010), and rejected JAR Laboratories LLC v. Great American E&S Insurance Co., 945 F. Supp. 2d 937 (N.D. Ill. 2013). Moreover, the district court found compelling that the allegations in the underlying complaint centered on the mistruths in CSD’s advertisements about the products satisfying the lofty standards they set forth. The district court also found compelling that the statements made by CSD did not falsely describe Smart Vent’s products. Rather, they concerned the performance of CSD’s own products. Thus, the district court concluded that the essence of Smart Vent’s injuries arose “from the CSD product’s failure to conform to the advertised claim.” Therefore, the exclusion barred coverage.

Product disparagement claims, and in particular those arising from alleged false advertising by the insured, are one of the most troubling issues facing CGL insurers today. The reassurance provided by the district court, and previously by the North Carolina Supreme Court in Buzz Off, that the non-conformity exclusion can limit some of the exposure faced by these insurers is sure to be welcomed by the insurance industry.