Citizens Ins. Co. v. Pro-Seal

• Citation: 710 N.W.2d 547,268 Mich. App. 542
• Decision Date: 01 November 2005
• Docket Number: Docket No. 262759.
• Parties: CITIZENS INSURANCE COMPANY, Plaintiff/Counter Defendant-Appellee, v. PRO-SEAL SERVICE GROUP, INC., d/b/a Pro-Seal Inc., Defendant/Counter Plaintiff-Appellant, and Seth Short, Randy Quincy, Flowserve Corporation, and Flowserve Management Company, Defendants.
• Court: Court of Appeal of Michigan (US)

Page 547

710 N.W.2d 547

268 Mich. App. 542

CITIZENS INSURANCE COMPANY, Plaintiff/Counter Defendant-Appellee, v. PRO-SEAL SERVICE GROUP, INC., d/b/a Pro-Seal Inc., Defendant/Counter Plaintiff-Appellant, and Seth Short, Randy Quincy, Flowserve Corporation, and Flowserve Management Company, Defendants.

Docket No. 262759.

Court of Appeals of Michigan.

Submitted October 18, 2005, at Detroit.

Decided November 1, 2005, at 9:10 a.m.

Released for Publication January 23, 2006.

COPYRIGHT MATERIAL OMITTED

Plunkett & Cooney, P.C. (by James R. Lilly, Jeffrey C. Gerish, and David Dworetsky), Bloomfield Hills, for Citizens Insurance Company.

Pierce, Duke, Farrell & Tafelski, PLC (by Mark C. Pierce), Bloomfield Hills, for Pro-Seal Service Group, Inc.

Before: COOPER, P.J., and FORT HOOD and BORRELLO, JJ.

PER CURIAM.

In this action for declaratory relief, defendant Pro-Seal Service Group, Inc. (Pro-Seal), appeals as of right the trial court order granting plaintiff Citizens Insurance Company (Citizens) summary disposition. The trial court held that Citizens had no duty to defend or indemnify Pro-Seal in an underlying trademark infringement action filed by Flowserve Corporation and Flowserve Management Company (Flowserve) against Pro-Seal because the allegations in the underlying complaint fell within an exclusionary clause under the commercial general liability insurance policy that Citizens issued to Pro-Seal. We vacate and remand.

I. FACTS AND PROCEDURAL HISTORY

Pro-Seal is a Michigan corporation that is in the business of selling and repairing mechanical seals. Pro-Seal was insured under a commercial general liability policy and an umbrella policy, which were both issued by Citizens. Flowserve is a New York corporation¹ that manufactures, sells, and refurbishes mechanical seals and is a competitor of Pro-Seal in the sale of new seals and the repair of used seals. Flowserve sued Pro-Seal in federal court in Alaska, alleging that Pro-Seal had violated federal and state laws prohibiting trademark infringement, trademark counterfeiting, unfair competition, and trade-secret misappropriation. Flowserve sought recovery of damages from and injunctive relief against Pro-Seal. Pro-Seal notified Citizens about the Flowserve lawsuit and requested that Citizens defend it in the action, but Citizens refused to defend Pro-Seal, contending that the bulk of the allegations in Flowserve's complaint constituted trademark infringement claims that did not constitute an "advertising injury" as defined by the insurance policy. Regarding Flowserve's allegations of trade dress infringement, which Citizens conceded was "enumerated" in the commercial general liability policy, Citizens contended that there was no causal connection between the advertising and any alleged injuries and therefore concluded that it had no duty to defend Pro-Seal. Citizens thereafter brought an action for declaratory judgment to determine whether it had a duty, under either the commercial general liability policy or the umbrella policy, to defend and indemnify Pro-Seal in the underlying Flowserve litigation. Pro-Seal counter-claimed for a declaratory judgment in its favor and reimbursement of costs incurred in the underlying action.

Pro-Seal moved for summary disposition under MCR 2.116(C)(8) and (10), and Citizens opposed the motion and filed a countermotion for summary disposition under MCR 2.116(I)(2). The trial court denied Pro-Seal's motion and granted Citizens' motion. The trial court observed that while the general commercial liability policy included coverage for "personal and advertising injury," the policy specifically excluded coverage for personal or advertising injury caused by the insured with the knowledge that the act would violate the rights of another and inflict personal or advertising injury. According to the trial court, the intent of the insurance policy was to cover inadvertent trade dress violations, but not intentional trade dress violations. The trial court ruled that the underlying action against Pro-Seal by Flowserve alleged intentional conduct on the part of Pro-Seal and that such intentional conduct did not fall within the scope of the limited coverage for advertising injury provided in the insurance policy. Therefore, the trial court granted Citizens' motion for summary disposition.

II. STANDARD OF REVIEW

This Court reviews de novo a trial court's decision granting or denying summary disposition in a declaratory judgment action. Unisys Corp. v. Comm'r of Ins., 236 Mich.App. 686, 689, 601 N.W.2d 155 (1999). The construction and interpretation of the language in an insurance contract is also a question of law that this Court reviews de novo. Klapp v. United Ins. Group Agency, Inc., 468 Mich. 459, 463, 663 N.W.2d 447 (2003); Shefman v. Auto-Owners Ins. Co., 262 Mich.App. 631, 636, 687 N.W.2d 300 (2004).

III. ANALYSIS

A. Scope of Policy Coverage

The first issue on appeal is whether the trademark violation allegations in the underlying complaint filed by Flowserve against Pro-Seal constitute an "advertising injury" under the commercial general liability insurance policy that Citizens issued to Pro-Seal and therefore engender a duty for Citizens to defend Pro-Seal in the underlying action. In granting Citizens' motion for summary disposition, the trial court concluded that the policy exclusion for trademark violations made with "knowledge" precluded any duty to defend Pro-Seal without addressing the issue whether the allegations in the underlying complaint constituted an "advertising injury" under the policy. Appellate review is generally limited to issues decided by the trial court. Candelaria v. B C Gen. Contractors, Inc., 236 Mich.App. 67, 83, 600 N.W.2d 348 (1999). However, in this case, appellate review is appropriate because the interpretation and construction of an insurance contract is an issue of law, Shefman, supra at 636, 687 N.W.2d 300, and all the facts necessary for resolution of the issue have been presented. Miller v. Inglis, 223 Mich.App. 159, 168, 567 N.W.2d 253 (1997). Furthermore, the proper analysis of whether an insurer has a duty to defend and indemnify an insured under an insurance policy first necessitates "a determination of whether coverage exists under the policy, and if coverage exists, then there must follow a determination of whether the exclusionary clause applies." Allstate Ins. Co. v. Freeman, 432 Mich. 656, 661, 443 N.W.2d 734 (1989). Therefore, we will review this issue notwithstanding the trial court's failure to address the issue below.

An insurer's duty to defend is broader than its duty to indemnify. Shefman, supra at 637, 687 N.W.2d 300. To determine whether an insurer has a duty to defend its insured, a court must consider the language of the insurance policy and construe its terms to find the scope of the coverage of the policy. Id. "The duty of an insurance company to defend its insured is dependent upon the allegations in the complaint filed by a third party against the insured[.]" Illinois Employers Ins. of Wausau v. Dragovich, 139 Mich.App. 502, 506, 362 N.W.2d 767 (1984). However, the insurer has the duty to look behind the third party's allegations to analyze whether coverage is possible. Radenbaugh v. Farm Bureau Gen. Ins. Co. of Michigan, 240 Mich.App. 134, 137-138, 610 N.W.2d 272 (2000). The duty to defend extends to those cases where the allegations in the complaint filed against the insured even arguably come within the policy coverage. Id. at 137, 610 N.W.2d 272. Furthermore, if there is any doubt regarding whether a complaint alleges liability that is covered under the policy, the doubt must be resolved in the insured's favor. Id. at 138, 610 N.W.2d 272.

The commercial general liability policy at issue in this case provides for coverage for "personal and advertising injury." The definition of "personal and advertising injury" includes "[i]nfringing upon another's... trade dress ... in your `advertisement[.]'" The policy defines an "advertisement" as "a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters."

Two elements must be satisfied in order to find that Citizens had a duty to defend Pro-Seal. First, there must be an "advertising injury" as defined by the policy; and, second, there must be proof of a causal connection between the advertising injury and the advertising activities. GAF Sales & Service, Inc. v. Hastings Mut. Ins. Co., 224 Mich.App. 259, 262, 568 N.W.2d 165 (1997).²

We must first determine whether any allegations in Flowserve's complaint against Pro-Seal arguably constitute a "personal and advertising injury" as defined by the policy. Specifically, on the basis of the definition of "personal and advertising injury" articulated above, we must determine whether Flowserve's complaint alleges an infringement of Flowserve's trade dress in an advertisement. Flowserve's complaint against Pro-Seal specifically alleges "trademark infringement" and "trademark counterfeiting," among other allegations, but does not explicitly allege a "trade dress" infringement. However, the United States Supreme Court has recognized that there is no functional distinction between trademarks and trade dress. See Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 773-774, 112 S.Ct. 2753, 120 L.Ed.2d 615 (1992). According to the Supreme Court, "the protection of trademarks and trade dress ... serves the same statutory purpose of preventing deception and unfair competition." Id. at 773, 112 S.Ct. 2753. Therefore, it is arguable that Flowserve's explicit allegation of "trademark infringement" is sufficient to encompass a trade dress violation.

Even if the allegations of "trademark infringement" were not sufficient to encompass a trade dress violation, however, we conclude that Flowserve's complaint did allege a trade dress infringement even though the complaint...