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Insurer Wins Declaratory Judgment On Personal and Advertising Injury Claim (NY)

August 23, 2023

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The United States District Court for the Southern District of New York recently granted an insurer-defendant’s motion to dismiss in a coverage declaratory judgment action.

In <em><a href="https://www.wcmlaw.com/wp-content/uploads/2023/08/Tzumi-Innovations-LLC-v.-Twin-City-Fire-Insurance-Company.pdf">Tzumi Innovations LLC v. Twin City Fire Insurance Company</a>,</em> the action involves plaintiff Tzumi Innovations LLC, who brought an action against defendant Twin City Fire Insurance Company seeking defense and indemnity in an underlying consumer protection action.

Tzumi sought coverage under the policy’s “personal and advertising injury” coverage, arguing that the complaint in the underlying action alleged commercial disparagement. The policy defined “personal and advertising injury,” in relevant part, as injury arising out of “oral, written, or electronic publication of material that . . . disparages a person’s or organization’s goods, products or services.”

The underlying action alleged that Tzumi made false and misleading claims on the labels of three of its products — antibacterial wipes — that made the purchaser believe the wipes were approved “as safe and effective for use as an antimicrobial agent on surfaces in homes.” The underlying action alleged that Tzumi’s mislabeling was purposeful and reflected Tzumi’s intent to market its wipes as surface disinfectants rather than personal care products. The underlying action alleged that due to Tzumi’s deceptive practices, retailers placed Tzumi’s wipes with household surface cleaning and disinfection products, and in close proximity to EPA-registered disinfectants, rather than with personal care or hand sanitizing products in the health and beauty aisle.

Tzumi’s theory of coverage was that by misleading customers into thinking Tzumi’s products were approved for anti-microbial purposes and useful in cleaning surfaces, Tzumi “inevitably created doubt as to the authenticity of the claims of similarly situated products, thereby disparaging its competitors.” Put differently, Tzumi alleged that per the complaint, it disparaged its competitors by creating a link between its products and competitors’ products, thereby undermining the credibility of all products similar to its wipes.

The Court found no possible legal or factual basis in the underlying complaint to support Tzumi’s theory of a disparagement claim, and therefore found that Twin City did not owe Tzumi defense or indemnity in the underlying action. The Court noted that the allegations in the underlying complaint focused solely on Tzumi’s own products, and not on Tzumi’s competitors. Beyond the lack of allegations in the underlying complaint that Tzumi disparaged its competitors, the Court also noted that New York law clearly requires “specific assertions of unfavorable facts reflecting upon the rival product” in order for disparagement claims to be actionable.

This decision is noteworthy in that it demonstrates a court’s willingness to reject an insured’s theory of coverage — no matter how creative — where that theory is not supported by the allegations in a complaint.

Thanks to Erin Gallagher for her assistance with this post.  Should you have any questions, please contact <a href="tbracken@wcmlaw.com">Thomas Bracken</a>.

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