California Supreme Court Limits Scope of Insurer’s Duty to Defend Insured against a Possible Claim of Disparagement

July 31, 2014 | Insurance Coverage

The California Supreme Court has ruled that a claim of disparagement requires a plaintiff to show a false or misleading statement that specifically referred to the plaintiff’s product or business and that clearly derogated that product or business. 

The Case

Gary-Michael Dahl, the manufacturer of the “Multi-Cart,” sued Swift Distribution, Inc., doing business as Ultimate Support Systems. Dahl’s suit against Ultimate, which sold the “Ulti-Cart,” included allegations of patent and trademark infringement, false designation of origin, and damage to business, reputation, and goodwill.

Ultimate tendered defense of the suit to its insurance carrier. The insurer denied coverage on the ground that the suit did not allege that Ultimate had disparaged Dahl or the Multi-Cart.

The coverage dispute reached the California Supreme Court, which issued a decision clarifying the principles governing the scope of a commercial general liability insurer’s duty to defend an insured against a claim alleging disparagement.

The California Supreme Court’s Decision

The court held that a claim of disparagement required a plaintiff to show a false or misleading statement that specifically referred to the plaintiff’s product or business and that clearly derogated that product or business. The court said that both requirements had to be satisfied “by express mention or by clear implication.”

The court then found that Dahl had not asserted a claim for disparagement against Ultimate. First, the court said, Dahl’s claim that the similarity of the Ulti-Cart’s design and product name to the Multi-Cart’s design and product name led consumers to confuse the Ulti-Cart with the Multi-Cart did not amount to disparagement. According to the court, a “false or misleading statement that causes consumer confusion, but does not expressly assert or clearly imply the inferiority of the underlying plaintiff’s product, does not constitute disparagement.”

The court also ruled that Dahl’s contention that Ultimate’s advertisements included false statements of superiority that implied the inferiority of the Multi-Cart did not amount to disparagement, declaring that if it were to find that to be disparagement, “almost any advertisement extolling the superior quality of a company or its products would be fodder for litigation.” The court concluded, therefore, that the insurer had no obligation to defend Ultimate.

The case is Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 59 Cal. 4th 277 (2014).

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