Don’t Skip Steps When Analyzing the Foundation for a Covered Claim: No Publication and No Use of Advertising Ideas Means No Duty to Defend Beauty School Dispute

Desabato v. Assurance Co. of America et al., No. 2:15-cv-484, 2016 U.S. Dist. LEXIS 135389 (W.D. Pa. Sept. 30, 2016) represents a continuation of Pennsylvania law in the context of an insurer’s duty to defend personal and advertising injury claims. As articulated in Desabato, Pennsylvania adheres to a strict four-corners analysis of an insurer’s duty to defend. Since the underlying complaint failed to allege the elements of defamation or misappropriation of advertising ideas, the court held Assurance Company of America, Northern Insurance Company of New York, and Maryland Casualty Company (“Insurers”) had no duty to defend Paul Desabato, Anthony Desimone, Benjamin Pusateri, and Bella Capelli Academy, LLC (“BCA Members”) in the underlying lawsuit.

As background, Anthony Vargo started in 2002 a cosmetology school, BCA. Desabato, Desimone, and Pusateri provided capital for the school in exchange for an equitable interest. Vargo was BCA’s managing member as well as an owner and an employee. During a meeting on March 9, 2009, BCA members terminated Vargo for entering into a residential lease which was not authorized under the BCA Operating Agreement. In turn, Vargo filed an action in Pennsylvania state court against BCA and its remaining members, which the Insurers refused to defend. Ultimately, an arbitrator entered a substantial award in favor of Vargo.

Subsequently, the BCA Members filed this declaratory judgment action, alleging the Insurers breached their duty to defend. Ultimately, the district court granted the Insurers’ motion for summary judgment.

The court closely analyzed the allegations in the underlying complaint and the scope of coverage in accordance with Pennsylvania’s four-corners approach to the duty to defend. The court honed in “on two potential forms of injury covered: defamation and the use of one’s advertising ideas in another’s advertisement” and concluded that the Insurers’ duty to defend was not triggered.

First, according to the BCA Members, an incorrect statement in a March 9, 2009 letter notified the insurers of a potential defamation claim. While the court recognized the policy covered defamation claims, it simultaneously noted “oral or written publication” of an allegedly defamatory statement is a prerequisite to coverage. Here, there was no basis to infer publication of the March 9, 2009 letter. Second, the underlying complaint similarly failed to allege the elements of a claim for misappropriation, including any facts regarding BCA’s use of Vargo’s advertising ideas in BCA’s advertisements without Vargo’s permission. In addition, the court expressly rejected the BCA Member’s invitation to consider and disregarded their “advertising-idea assertions” extraneous to the allegations in the underlying complaint. Accordingly, the court concluded that the underlying complaint did not trigger the Insurers’ duty to defend under Coverage B.

Desabato stands among the many Pennsylvania decisions addressing an insurer’s duty to defend personal and advertising injury claims. The decision reinforces the requirement that each claim sets forth or at least sketches each element of a tort enumerated in the definition of “Personal and Advertising Injury.” The failure to do so can be fatal to policyholders’ claims for coverage.