In the course of advising business clients, I have urged those with intellectual property (“IP”) rights to take precautions to avoid being engulfed in costly infringement disputes. The first line of defense to such threats is to use best practices with the handling of your IP, i.e., to know its provenance. However, as with all risk management, another path is to acquire adequate insurance coverage.

For those of you who carry commercial general liability insurance, check to see whether and to what extent your coverage extends to IP infringement. Your carrier may have specifically exempted most intellectual property claims from your coverage, to your surprise. The facts of the following case illustrate the dilemma in which you could find yourself.

In Santa’s Best Craft, LLC v. St. Paul Fire and Marine Insurance Co., the Seventh Circuit examined whether the insurer (“St. Paul”) had an obligation to defend Santa’s Best Craft (“SBC”) and others in an IP infringement matter. Read more here.

SBC was sued by JLJ, Inc., (“JLJ”) over how it marketed certain holiday lights. JLJ alleged that SBC copied its “Stay Lit” lights packaging design and used false and deceptive language, thereby co-opting the look and slogans of JLJ’s Stay Lit Lights.

SBC settled with JLJ for $3.5 million. In the SBC-St. Paul’s litigation, although St. Paul, which originally questioned its duty to defend SBC, was found to have the obligation. However, the facts in the case were such that it is easy to imagine the Court ruling in St. Paul’s favor. St. Paul’s policy contained an IP exclusion disallowing coverage for “injury or damage . . . that results from any actual or alleged infringement or violation of any of the following rights or laws: “. . . trade dress . . .trademark, other intellectual property rights or laws.” The St. Paul policy did provide coverage for “[u]nauthorized use of . . . any slogan . . . of others in your advertising.”

Despite the fact that the JLJ complaint did not clearly allege an infringement of its slogan, luckily for SBC, the Court found enough facts in JLJ’s allegations to fall within the St Paul policy coverage.

But can a business owner take much comfort from the outcome in this case? Even if commercial liability insurance contains such an advertising exception to the general IP exclusion, is that enough to insulate you from potentially large damage claims by third parties?

The IP rights and laws typically covered in a commercial general liability policy include copyrights, patents, and trademarks. It is therefore critical to determine to what extent your business activities rely on any IP. Then, have a heart to hear discussion with your insurance agent that specifically focuses on your IP issues and to determine whether special insurance coverage is available and whether you should include such in your liability policy. A little effort now is better than to discover the limits of your coverage later – to your regret.