Meth Is Not “All Natural”: Failure To Conform Exclusion Bars Coverage for False Advertising Lawsuits

In General Star Indemnity Co. v. Driven Sports, Inc., 2015 U.S. Dist. LEXIS 7966 (E.D.N.Y. Jan. 23, 2015), General Star Indemnity Co. (“Gen Star”) issued a commercial lines policy to Driven Sports, Inc. (“Driven”), a producer and seller of an energy supplement called Craze.  Driven had been sued in three separate actions alleging that Craze improperly contained a methamphetamine analog.  Gen Star provided a defense under reservation of rights.  Gen Star then brought a declaratory judgment action, and the parties cross-moved for summary judgment.

The district court held that Gen Star had no duty to defend or indemnify Driven because the failure to conform exclusion applied.  The exclusion applied 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 the policyholder’s advertisement.  The district court concluded that all of the underlying actions arose out of Craze’s failure to conform with Driven’s statements about its quality because they all alleged that Driven claimed Craze contained natural ingredients when in fact it contained an illegal and/or dangerous methamphetamine analog.

The district court rejected the policyholder’s arguments to invalidate the applicability of the failure to conform exclusion.  The district court specifically rejected the argument that the exclusion did not apply to all claims because none of the underlying claims could be proved without showing that Craze failed to conform with the policyholder’s statements.  The district court explained, “The gravamen of the Nutrition complaint is not that defendant’s advertising made its competitor’s product appear inferior, either by explicit or implicit statements, but instead that Craze actually was a more potent product, which left the Nutrition plaintiff unable to compete. …  [T]he crux of the Nutrition action is that Driven Sports obtained an unfair competitive advantage by making misrepresentations about Craze’s ingredients.  It is alleged that Driven Sports would not have been able to obtain this competitive advantage if its consumers had known the truth about the contents of Craze.”  Also, the district court rejected the argument that the term “quality” in the exclusion was vague because under any reasonable definition, the presence of an illegal and potentially dangerous synthetic substance failed to conform with a product’s “quality” when the product was advertised as all natural.

Does this decision conform with your jurisdiction’s treatment of the failure to conform exclusion or exclusions generally?  Please share your comments below.