Tzumi Innovations LLC v. Twin City Fire Insurance Company

Background

Tzumi was the named insured under a commercial general liability policy issued by Twin City. The policy covered certain “personal and advertising injuries,” including injury arising from publication of material that disparages a person’s or organization’s goods, products, or services. It also contained exclusions for injuries arising from material published by or at the insured’s direction with knowledge of its falsity and for products failing to conform to advertised quality or performance statements.

A consumer class action alleged that Tzumi falsely labeled three products in a way that led consumers to believe the products were approved for use as surface disinfectants, although Tzumi had not received that approval from the Environmental Protection Agency. The underlying complaint also alleged that Tzumi used packaging resembling registered disinfectant products and that retailers placed the products near other household cleaning products.

Tzumi tendered the underlying action to Twin City for a defense, but Twin City disclaimed coverage. Tzumi then sought a declaration and damages concerning Twin City’s alleged duties to defend and indemnify Tzumi. Tzumi moved for partial summary judgment on the duty to defend, while Twin City moved to dismiss for failure to state a claim.

Court’s Analysis

The court applied the rule that an insurer must defend when the underlying complaint suggests a reasonable possibility of coverage. The duty to defend is broader than the duty to indemnify, but there is no duty to indemnify when there is no duty to defend.

The court rejected Tzumi’s theory that its misleading labels disparaged competing products by causing consumers to question whether those products were properly registered. The underlying complaint focused on alleged harm caused by Tzumi’s own products. Its references to similar packaging and shelf placement did not make unfavorable statements about competing products.

The court also held that the theory would fail under New York, California, and Massachusetts law because commercial disparagement generally requires a specific statement referring to and derogating a competitor’s product or business. The court said Tzumi’s theory depended on an implausible inference rather than a specific unfavorable assertion. Although the underlying complaint used the word “disparaging” once, the court found that reference conclusory and unsupported by factual allegations.

Tzumi had also asserted coverage under a policy definition involving copying an advertising idea or style, but the court treated that claim as abandoned because Tzumi did not address it in opposition to the dismissal motion or in its own summary-judgment motion. The court added that the claim would fail because the policy excluded packaging and labeling from the definition of “advertisement.”

Finally, the court stated that even if the underlying complaint alleged a covered personal or advertising injury, the Knowledge of Falsity Exclusion would apply because the complaint alleged that Tzumi intentionally made false and misleading claims. The court also discussed the Non-Conformance Exclusion, but noted that the policy’s definition of “advertisement” excluded packaging and labeling, meaning that the labeling allegations could not invoke that exclusion. The court nevertheless concluded that the Knowledge of Falsity Exclusion would apply to all of the underlying complaint’s claims.

Disposition

The court granted Twin City’s motion to dismiss and denied Tzumi’s motion for partial summary judgment. The Clerk was directed to terminate the pending motions and close the case.