On May 21, 2025, the United States District Court for the Central District of California applied California’s Blue Ridge rule to resolve the issue of whether an insurer should accept a demand to settle within its limits if it has a valid coverage defense. This issue arises when the insurer appears to have a coverage defense; however, the insurer risks having to pay an excess verdict if the defense fails. This issue was addressed in an intellectual property rights suit, Liberty Mutual Fire Ins. Co. v. ACI International, Inc., 2024 WL 5410364 (C.D. Cal. May 21, 2025) (“the Coverage Action”).

Liberty Mutual issued two CGL policies and two Commercial Umbrella policies to ACI effective June 14, 2021 to June 15, 2023. The policies provide coverage for the insured’s “personal and advertising injury,” meaning injury arising out of one or more of the following offenses: “… g. Infringing upon another’s copyright, trade dress or slogan in [their] ‘advertisement’.” “Advertisement” is defined as a “paid announcement that is broadcast or published in the print, broadcast or electronic media to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters. For the purposes of this definition: a. Announcements that are published include material placed on the Internet or on similar electronic means of communication; and b. Regarding web-sites, only that part of a web-site that is about your goods, products or services for the purposes of attracting customers or supporters is considered an advertisement.”

The Coverage Action seeks declaratory relief and reimbursement arising out of an underlying lawsuit, Vans Inc. v. Walmart, Inc., et al., Case No. 8:21-cv-01876-DOC-KES (C.D. Cal. Oct. 11, 2023), 2023 WL 6927344, in which Vans sued ACI and Walmart for the infringement of intellectual property rights (“the Underlying Action”). Liberty Mutual, ACI’s insurer, defended ACI in the Underlying Action and paid a settlement to Vans on behalf of ACI. Liberty paid $3,000,000 towards settlement and nearly $2,000,000 in defense costs, and seeks reimbursement for the settlement amount and its defense costs. During discovery in the Underlying Action, it was determined that Walmart advertised the allegedly infringing shoes designed and manufactured by ACI on its website.

Liberty Mutual argued that the claims against ACI in the Underlying Action were not potentially or actually covered by the CGL or Commercial Umbrella policies and thus did not trigger the duty to defend or indemnify. Liberty Mutual also argued that the claims were not covered because the complaint in the Prior Action did not allege or present any facts supporting claims for damages for “advertising injury” from ACI’s advertisements as required by the policies. ACI argued that Liberty Mutual’s duty to defend was triggered, no policy exclusions apply, and the claims were covered so the duty to indemnify applies.

The court denied reimbursement of Liberty Mutual’s defense costs, noting that Liberty Mutual attempted to split causes of action themselves into potentially covered claims about advertising and those not about advertising.

However, the court agreed with Liberty Mutual that it had no duty to indemnify. In reaching this decision, the court considered the technical requirements for reimbursement and an insurer’s duty to indemnify under Blue Ridge Ins. Co. v. Jacobsen, 25 Cal. 4^th 489 (2001). The court in Blue Ridge stated that, “were we to conclude insureds could, as in this case, refuse to assume their own defense, insisting an insurer settle a lawsuit or risk a bad faith action, but at the same time refuse to agree the insurer could seek reimbursement should the claim not be covered, the resulting Catch-22 would force insurers to indemnify noncovered claims. If an insurer could not unilaterally reserve its right to later assert noncoverage of any settled claim, it would have no practical avenue of recourse other than to settle and forgo reimbursement. An insured’s mere objection to a reservation of right would create coverage contrary to the parties’ agreement in the insurance policy and violate basic notions of fairness.” Here, the court found that all the requirements for reimbursement had been met, so Liberty Mutual did not owe a duty to indemnify ACI in the underlying Prior Action. Therefore, Liberty Mutual was entitled to reimbursement from ACI for the full $3,000,000 settlement amount.

About the Author

Benjamin (Ben) Bishay is an associate attorney in Tressler’s Insurance Services Practice Group in our Orange County, CA office. He focuses his practice on insurance coverage analysis and litigation. Ben worked as a law clerk in Tressler’s Orange County office for over a year and a half while completing law school and passing the California Bar. Prior to joining Tressler, Ben worked as a law clerk for a personal injury firm. Click here to read Ben’s full attorney bio.