The Wisconsin Supreme Court held last week in West Bend Mut. Ins. Co. v. Ixthus Med. Supply, Inc., that West Bend Mutual Insurance Co. (“West Bend”) could not escape its duty to defend by relying on the knowing violation and criminal acts exclusions in a commercial general liability policy issued to Ixthus Medical Supply, Inc. (“Ixthus”).  The court required the insurer to defend notwithstanding underlying allegations that Ixthus acted wrongfully and knowingly in defrauding Abbott Laboratories (“Abbott”).

In 2015, Abbott brought suit in New York federal court against Ixthus and more than 100 other pharmacies and medical supply distributors asserting federal statutory and common law claims that the defendants were importing and advertising foreign versions of Abbott’s FreeStyle blood glucose diabetes test strips, and reselling them to U.S. customers at lower prices. Abbott alleged that Ixthus’ conduct caused a variety of injuries including consumer confusion and mistake, damage to its goodwill and trademarks, and the loss of millions of dollars in unreimbursable and uninsurable rebates.

West Bend denied Ixthus’s tender of defense and filed an action seeking a declaratory judgment that it need not defend or indemnify Ixthus in the Abbott lawsuit. On summary judgment, the trial court held that, although Abbott’s allegations fell within Ixthus’s initial grant of coverage under the “personal and advertising injury liability” section of its insurance policy, coverage was bared by the policy’s exclusion for claims arising from Ixthus’s “knowing violation of rights of another,” thereby eliminating West Bend’s duty to defend.

On appeal, the Wisconsin Court of Appeals reversed the trial court’s decision, holding that the knowing violation exclusion did not apply because at least some of Abbott’s claims (specifically its counts for deceptive business practices and trademark infringement and dilution under the Lanham Act) could be established without proving Ixthus’s actions were intentional. Thus, because there was a potential for liability not subject to the policy’s knowing violation exclusion, the Court of Appeals held that West Bend had a duty to defend Ixthus.

The Wisconsin Supreme Court affirmed the lower court’s decision, finding that West Bend could not avoid its duty to defend. In reaching its conclusion, the Wisconsin Supreme Court provided valuable guidance on two issues.

First, the court rejected West Bend’s argument that the underlying complaint did not allege a sufficient causal connection between the injury suffered by Abbott and any advertising activity of Ixthus. West Bend argued that, because Ixthus was a “distributing” defendant rather than an “advertising” defendant and did not advertise or sell products directly to end users, Abbott’s allegations of a causal relationship between the advertising acts of all “defendants” were not sufficient to trigger coverage under the advertising portion of Ixthus’ policy. In a favorable decision for policyholders, the court found that, although fleshing out the factual allegations at trial may affect Ixthus’ ultimate indemnification under the policy, it did not bear on West Bend’s duty to defend. Indeed, the court held that the causation test under Wisconsin law (which looks to whether the complaint alleges that “the advertising did in fact contribute materially to the injury”) was satisfied by the general allegations in Abbott’s complaint.

Second, the Wisconsin Supreme Court rejected West Bend’s argument that the duty to defend was eliminated by the policy’s knowing violation and criminal acts exclusions. West Bend argued that the exclusions applied because the overall “story” told in Abbott’s complaint was that Ixthus “deliberately and willfully” participated in a “fraudulent scheme.” The court rejected West Bend’s argument, stating that: “We do not base insurance coverage decisions on stories or themes. We apply the law . . . [which] requires us to compare the allegations in the complaint to the words of the exclusion.” The court noted that, unless the exclusions knocked out every pleaded claim, leaving no potentially covered advertising-injury claim for which Ixthus could be liable, the duty to defend remained intact. Accordingly, the Wisconsin high court held that West Bend’s duty to defend remained, as it found that Abbott could prevail on several advertising injury claims without establishing that Ixthus knowingly violated Abbott’s rights and that the complaint included multiple counts not rooted in criminal conduct.

West Bend Mut. serves as a reminder for policyholders that a general liability insurer’s broad duty to defend will typically remain intact even where some of the claims fall squarely within a policy exclusion, making it important to assess every potential for coverage when faced with a potentially applicable exclusion.  The decision also reinforces already existing Wisconsin law providing that allegations in the complaint should be construed liberally as to support all reasonable inferences triggering an insurer’s duty to defend.