Beware negligence allegations – they may negate exclusions and support a duty to defend liability claims for social media activity as personal and advertising injury under Coverage B. Two cases decided in 2021, one from the Northern District of Illinois and one from Southern District of Texas, illustrate how claims that negligence resulted in culpable social media posts may provide an avenue for savvy plaintiff lawyers to artfully plead to find coverage that would otherwise not exist.¹ Specifically, in the Northern District of Illinois, the underlying plaintiffs’ claims that an employer’s negligence proximately caused the misappropriation of images posted to Facebook and Instagram were found to be outside Coverage B exclusions and, therefore, obligated a defense, while the Southern District of Texas ruled that similar claims that did not advance a negligence theory were excluded.²

1. Commercial General Liability, Coverage B.

Commercial General Liability (“CGL”) policies are generally broken down into Coverage A and Coverage B. Coverage A covers bodily injury and property damage.³ Coverage B provides coverage for personal and advertising injury, including the obligation to defend against any suit for such damages. Coverage B often has additional requirements, such as the personal and advertising injury must arise out of the insured’s business or that the offense be committed during the policy period and within the coverage territory.⁴ “Personal and advertising injury” is typically defined as follows:

“Personal and advertising injury” means injury, including consequential “bodily injury,” arising out of one or more of the following offenses:

Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products, or services. Oral or written publication, in any manner, of material that violates a person’s right of privacy. The use of another’s advertising idea in your “advertisement.”Infringing on another’s copyright, trade dress or slogan in your “advertisement.”⁵ However, this coverage is limited by the Coverage B exclusions, which generally preclude coverage for intentional or knowing acts that result in personal or advertising injury, acts that violate specific statutes or other law, acts that breach contracts, copyright infringement, or the unauthorized use of material.⁶

2. Great American Insurance Company v. Beyond Gravity Media, Inc.: Coverage B exclusions preclude coverage and the duty to defend social media liability in the absence of negligence allegations.

In Great American Insurance Company v. Beyond Gravity Media, Inc., the Southern District of Texas considered coverage for a dispute between Beyond Gravity Media and Code Ninjas, LLC, under Coverage B of the commercial general liability policy Great American issued to Beyond Gravity.⁷ Code Ninjas and Beyond Gravity contracted for Beyond Gravity to open franchises of Code Ninjas centers, which teach computer programming, math, and logic to children. In the underlying suit, Code Ninja claimed Beyond Gravity and its sole shareholder, Brandon Matalon, received Code Ninjas’ proprietary and confidential information through Code Ninjas’ training, communications, and an annual franchise conference. According to Code Ninjas’ Complaint, Beyond Gravity attempted to rescind the franchise agreement while simultaneously working to misappropriate Code Ninjas’ confidential information and trademark to “create and advertise (through a website, social-media pages, and a job listing) a competing education center called ‘Dojo Tech’ or ‘CoDojo’.”⁸

Code Ninjas brought the following causes of action: (1) breach of franchise agreement; (2) intentional, willful, and malicious misappropriation of trade secrets; (3) declaratory judgment on notice of contractual rescission; (4) unjust enrichment; (5) knowing, malicious, willful, and intentional unfair competition; and (6) breach of personal guarantees by Matalon.⁹ Code Ninjas did not advance any claim of negligence. Before Code Ninjas and Beyond Gravity settled their dispute, Great American Insurance Company filed a declaratory judgment action against Beyond Gravity seeking a determination that it did not owe a duty to defend or indemnify Beyond Gravity in the Code Ninjas suit.

Great American argued that Beyond Gravity’s social media posts about its server, business concepts, missions, and a job listing, did not constitute use of Code Ninjas’ advertising ideas.¹⁰ Similarly, the alleged misappropriation of confidential information and trade secrets, was also not use of Code Ninjas’ advertising ideas. Further, Great American claimed Code Ninjas’ allegations about Beyond Gravity’s website and social media postings / pages did not state an injury arising out of Beyond Gravity’s advertising or infringement of Code Ninjas’ copyright, trade dress, or slogan. However, the Court disagreed.

The Court noted that the Complaint repeatedly stated that Beyond Gravity gained access to Code Ninjas’ confidential information to use it for promotion of Tech Dojo on social media. Further, Beyond Tech registered a Tech Dojo trademark, which was very similar to Code Ninjas in name and appearance, and used it to promote Beyond Gravity’s new venture on social media, its website, and a job listing.¹¹ Most importantly, the Court concluded that the promotion of the new venture, trademark, and use of Code Ninjas’ confidential information on social media and websites constituted advertisement because “[b]usiness websites and social-media pages are by design digital storefronts – their entire point is to garner attention and attract customers.”¹² The Court concluded that Beyond Gravity used Code Ninjas’ advertising ideas, triggering Coverage B under the Great American CGL. However, the Court then continued to consider the Coverage B exclusions. The Court found that the knowing violation, unauthorized use, infringement of copyright, patent, trademark, or trade secret, and breach of contract exclusions precluded coverage and any duty to defend.¹³ Consequently, the Court awarded summary judgment to Great American.

3. First Mercury Insurance Company v. Triple Location LLC: Allegations of negligence circumvent Coverage B exclusions, obligating a defense.

In the underlying suit involved in First Mercury Insurance Company v. Triple Location LLC, three professional models alleged Triple Location used their images without consent to promote its strip club, Club O.¹⁴ According to the models, Triple Location posted their photographs on Club O’s Instagram account and Facebook page on three occasions without their authorization. The models alleged the postings gave the false impression that they had consented to promote Club O, damaged their brands, images, and marketability, and destroyed any copyright that existed in their photographs by editing the original images.

Importantly, the models alleged that Triple Location negligently failed to promulgate policies and procedures about the misappropriation of the models’ images that were used on the Club O website and social media accounts. Moreover, even if such policies and procedures existed, the models contended Triple Location was negligent in the enforcement of the policies and training and supervision of its employees to ensure the policies, federal law, and state law were not violated.¹⁵ The images were posted without permission as a proximate result of Triple Location’s alleged negligence.

Based on these allegations, the models advanced claims of state law negligence, false advertising under the Lanham Act, and violations of the Illinois Right of Publicity Act. First Mercury sued Triple Location seeking a declaratory judgment that it did not owe a duty to defend against the models’ lawsuit. First Mercury claimed Coverage B exclusions precluding coverage for acts that would knowingly violate the rights of another or publication of material with knowledge of its falsity prevented coverage.¹⁶ However, because the models’ Complaint advanced negligence allegations and did not rest solely on allegations of intentional misconduct, the Court concluded the knowing violation and intentional publication exclusions did not preclude coverage. The negligence allegations did not fall within the exclusions First Mercury relied on and it was obligated to defend Triple Location.¹⁷

Additionally, the First Mercury case illustrates the limitations of exclusionary language. First Mercury also relied on a third exclusion that excluded “personal and advertising injury” that arose “directly or indirectly out of any action or omission that violates or is alleged to violate” the Telephone Consumer Protection Act (“TCPA”), the CAN-SPAM Act of 2003, or any other “statute, ordinance[,] or regulation ... that prohibits or limits the sending, transmitting, communicating or distribution of material or information.”¹⁸ The Court found that the TCPA and CAN-SPAM Act of 2003 regulated methods of communication, such as email and phone calls. According to the Court, the exclusion’s catch-all provisions, therefore, were limited to other statutes, ordinances, and regulations limiting the sending or sharing of certain information. This did not encompass the Lanham Act or IRPA claims advanced by the underlying plaintiffs, and the third exclusion was inapplicable.¹⁹

Ultimately, these cases demonstrate that artfully pleading that negligent conduct resulted in culpable social media posts could bypass exclusions and result in a duty to defend under CGL Coverage B. This is a risk carriers need to be cognizant of when reviewing liability claims for social media activity that advance negligence theories.

FOOTNOTES

1. See, First Mercury Ins. Co. v. Triple Location LLC, 536 F.Supp.3d 326 (N.D. Ill. 2021); Great American Inx. Co. v. Beyond Gravity Media, Inc., No. 3:20-cv-53, 2021 WL 4192738 (S.D. Tex. Sept. 15, 2021).

2. Id.

3. See, Cassandra Cole & Kathleen McCullough, Editors, Insurance for Social Media Liability, Journal of Insurance Regulation, Vol. 4, No. 4, p. 4 (2021).

4. Id. at 20-21.

5. Id.

6. See, First Mercury, 536 F.Supp.3d at 328-329; see also Great American, 2012 WL 419292738, at *8-11.

7. See, Great American, 2012 WL 419292738.

8. Id. at *1

9. Id. at *4.

10. Id. at *6.

11. Id. at *6-7.

12. Id. at *7.

13. Id. at *7-11.

14. First Mercury, 536 F.Supp.3d at 327.

15. Id. at 327-328.

16. Id. at 328-329.

17. Id. at 330-331.

18. Id. at 329.

19. Id. at 331-332.