In a competitive industry trade secrets can be incredibly valuable. As a result, when trade secrets are stolen, litigation is common. Customer information, supply-chain strategies, marketing plans: all of these have been the subject of lawsuits, typically driven by a high-level executive leaving one company and joining another. Will insurance cover these kinds of trade secrets claims? Maybe—and as a result, every business faced with a trade secrets claim should examine their policies to see whether they could be entitled to at least coverage for their defense costs.
With insurance coverage, the devil is always in the details of the policy and the specific allegations. That said, there are generally two sources of potential coverage for claims of trade secret misappropriation: the “advertising injury” coverage provided in most Commercial General Liability (CGL) policies, and provisions offered in most private-company Directors and Officers (D&O) policies.
CGL Coverage. Many CGL policies cover “personal and advertising injury,” defined to include libel, slander, invasion of privacy, copyright infringement, and misappropriation of advertising ideas. Earlier standard forms provided relatively broad coverage for claims relating to trade secrets. See Sentex Systems, Inc. v. Hartford Accident & Indemnity Co., 93 F.3d 578 (9th Cir. 1996). But revisions to the standard forms, and in particular the 2001 revisions, narrowed the scope of potential coverage, in some cases limiting it to copying of an “advertising idea” and excluding non-advertising “trade secrets.” But some coverage may still be available if the complaint alleges violations of copyright relating to advertising, Caveo, LLC v. Citizens Insurance Co. of America, Inc., 2016 WL 5477537 (N.D. Ill. Sept. 29, 2016), or other claims such as breach of implied contract relating to advertising ideas. Crum & Forster Specialty Ins. Co. v. Willowood USA LLC, 696 Fed. Appx. 276 (9th Cir. Aug. 17, 2017).
Directors & Officers Coverage. Private-company D&O policies frequently cover a broad range of claims against the company itself for “wrongful acts,” which includes a wide range of errors and omissions. While these policies often exclude “trade secrets” claims per se, the insurer may at least have an obligation to defend if the complaint is not limited to trade secrets—for example, if the suit alleges misappropriation of information that is merely “confidential,” Medassets, Inc. v. Federal Insurance Co., 705 F. Supp. 2d 1368 (N.D. Ga. 2010), or alleges computer fraud. Woodspring Hotels v. National Union Fire Insurance, 2018 WL 2085197 (Del. Sup. Ct. May 2, 2018).
The take-away is that while coverage for trade secrets claims may be a long shot, it is worth reviewing your insurance policies and the allegations carefully to see if there is a potential for coverage. Even if insurance ends up only covering defense costs—because the claims with real value are excluded under the policy—that can still add up to hundreds of thousands of dollars in value.