In Penn National Mutual Casualty Insurance Company v. Beach Mart, Inc., — F.3d —-, 2019 WL 3483167 (4th Circ. Aug. 1, 2019) (North Carolina law), the Fourth Circuit Court of Appeals reversed and remanded a decision of the United States District Court for the Eastern District of North Carolina which found that an insurer’s exclusion precluding coverage for injuries arising out of oral or written publication of material whose first publication took place before the beginning of the policy period abrogated that insurer’s duty to defend its insured in a dispute with a competitor purveyor of beach merchandise.
By way of background, Beach Mart Inc. and L&L Wings Inc. historically operated beachwear/surf shops utilizing the “Wings” brand name. L&L alleged that since 1978, it continuously operated and marketed its stores under the “WINGS” trademark and registered that mark with the U.S. Patent and Trademark Office in 2008. In January 1995, contemporaneous to the establishment of Beach Mart, L&L and Beach Mart allegedly executed a one-year agreement wherein L&L licensed the WINGS mark to Beach Mart for use in two North Carolina stores, and subsequently agreed to extend the permitted use of the Wings trademark with Beach Mart agreeing to pay for the use of the license.
Subsequent to a formal 2005 Agreement between the parties, Beach Mart allegedly stopped paying for the license and violated the terms of the parties’ 2005 agreement with respect to the permitted use of the trademark. In September 2011, Beach Mart sued L&L in the District Court for the Eastern District of North Carolina to determine the parties’ rights and obligations with respect to the WINGS trademark. In connection with counterclaims asserted by L&L, Penn National, Beach Mart’s general liability carrier, agreed to defend Beach Mart under a reservation of rights.
In February 2014, Penn National filed a Declaratory Judgment action against Beach Mart seeking a declaration of no coverage based on application of the policy’s prior publication and other related exclusions. Following motion practice, the district court found that Penn National’s prior publication exclusion barred coverage concluding that L&L had plead that Beach Mart committed offensive conduct dating back to 1995 and that the prior publication exclusion applied as the advertising conduct of Beach Mart, over the course of several years prior to and following inception of the policy, was part of a common, clearly identifiable advertising objective approach and the offending wrongs were “substantially similar.” Beach Mart appealed the district court’s ruling and, on appeal, the 4th Circuit reversed and remanded finding that the District Court had erred in applying the prior publication exclusion to bar coverage.
The Fourth Circuit highlighted that Penn National’s duty to defend is measured only by facts as alleged in the pleadings and noted that an insurer’s defense obligation can only be abrogated if the facts are not even arguably covered by the policy. Working through the history of the various advertising and publications, the Court of Appeals found that an insurer is not excused from providing coverage to its insured by virtue of its prior publication exclusion simply because similar publications were published prior to the policy incepting. Instead, the 4th Circuit held that the exclusion will apply where an insured has continuously or repeatedly published substantially the same offending material previously published at a point of time before a policy incepts. The Circuit Court concluded that Beach Mart’s prior and subsequent publications differed in substance and thus the exclusion did not apply. It also held that there were distinct wrongs that were caused by subsequent publications providing further justification for its ruling that the exclusion could not be utilized to bar coverage. The Court also noted that the underlying pleadings identified at least one additional matter that was first published during the coverage period, the WINGS advertising slogan, and that the policies did not specifically exclude coverage for injuries arising out of the infringement of a slogan. Given the Court’s rulings, the court found that Penn National had a duty to defend Beach Mart in connection with L&L’s counterclaims.
The takeaway for Coverage B practitioners is an interesting one. At least in the 4th Circuit, the prior publication exclusion will be enforced in only limited circumstances. The exclusion will not be enforced where the offending publications published post the inception of the policy, while similar to those published prior to the policy period, differ in substance. An insurer endeavoring to rely on the exclusion to deny coverage will need to demonstrate clearly that the offending material published during the policy period was substantially the same to that published prior to the policy period.