American Legacy Foundation, RP v. National Union Fire Insurance

PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________

No. 09-3336
____________

AMERICAN LEGACY FOUNDATION, RP
Appellant

v.

NATIONAL UNION FIRE INSURANCE COMPANY
OF PITTSBURGH, PA; TRAVELERS INDEMNITY
COMPANY OF AMERICA
____________

Appeal from the United States District Court
for the District of Delaware
(D.C. Civ. No. 1-07-CV-00248)
District Judge: Honorable Sue L. Robinson
____________

Argued July 15, 2010
Before: FUENTES, VANASKIE and WEIS, Circuit Judges.

(Filed: October 12, 2010)

Richard D. Shore, Esquire (ARGUED)
Mark A. Packman, Esquire
Kami E. Quinn, Esquire
John D. Niles, Esquire
GILBERT LLP
1100 New York Ave., NW, Suite 700
Washington, D.C. 20005

Laura Davis Jones, Esquire
Timothy P. Cairns, Esquire
PACHULSKI, STANG, ZIEHL, & JONES LLP
919 N. Market Street, 17th Floor
Wilmington, DE 19899

Attorneys for Appellant

Barbara I. Michaelides, Esquire (ARGUED)
Matthew J. Fink
Agelo L. Reppas
BATES & CAREY LLP
191 North Wacker Drive, Suite 2400
Chicago, IL 60606

Attorneys for Appellees

____________

OPINION
____________

2
WEIS, Circuit Judge.

In this appeal, a policyholder seeks to recover expenses
incurred in defending against claims for which the insurance
company denied coverage. Wending through a thicket of
inclusions and exclusions leads to the conclusion that the
District Court properly entered summary judgment in favor of
the insurer. Accordingly, we will affirm.

A. Alleged Liability of The Foundation to
Lorillard: The Underlying Suit

American Legacy Foundation, a Delaware non-profit
corporation, was formed by the terms of the 1998 Master
Settlement Agreement (“MSA”) between 46 states’ attorneys
general and the country’s largest tobacco companies. Among
these was Lorillard Tobacco Company, whose dispute with the
Foundation is at the root of the case now before us. The
Foundation’s mission, as initially set forth in the MSA and
incorporated into its own bylaws, was to educate the public
about the dangers of tobacco products in order to reduce their
use among America’s youth.

The MSA provided that the tobacco companies would
fund advertising campaigns, developed by the Foundation, that
demonstrated the negative impact of tobacco product usage.
The ads were to be concerned only with the “addictiveness,
health effects, and social costs related to the use of tobacco
products.” Ads that amounted to a “personal attack on, or
vilification of,” tobacco companies or their employees were
prohibited.

3
 The Foundation created a series of television and radio
ads branded “the truth(™).” These ads were brash, edgy,
impertinent, and disrespectful, to appeal to those teens and
young adults who were believed to be more likely to use tobacco
products. The ads portrayed Lorillard and other tobacco firms
in a mocking and unfavorable light.1

In 2001, Lorillard sent a cease-and-desist letter to the
Foundation, threatening to file suit over one of those ads. A
draft complaint included with the letter alleged various torts,
including slander per se and per quod, libel per se and per quod,
secondary libel, and unfair or deceptive acts or practices.
Lorillard’s letter also suggested that it might also pursue breach
of contract claims.

In a letter of January 18, 2002, Lorillard followed up with
a “Notice of Intent to Initiate Enforcement Proceeding Under
MSA.” There, Lorillard asserted that the Foundation had
improperly used the funding designated by the MSA for public

1
In addition, the Foundation maintained a website that
permitted visitors to complete and send a pre-formatted email to
tobacco company employees by inserting adverbs, adjectives,
verbs and nouns. The website instructed users not to use
profane or harassing language in their messages, but Lorillard
employees received many abusive and profanity-laced emails
through this program. Eventually, Lorillard installed a filter that
blocked these messages, and the Foundation removed the email
feature from its website.

4
education and failed to meet its obligations under that
agreement.

The Foundation peremptorily filed a declaratory
judgment action against Lorillard in Delaware Chancery Court
on February 13, 2002. Six days later, Lorillard brought suit
against the Foundation in North Carolina state court. That
complaint included no tort claims but alleged breach of the
MSA and of the covenant of good faith and fair dealing.

Lorillard counterclaimed against the Foundation in the
Delaware Chancery Court in September 2002, asserting breach
of the MSA; breach of the duty and covenant of good faith and
fair dealing implied in the MSA; violations of the Foundation’s
bylaws and certificate of incorporation; a declaratory judgment
that the Foundation was not eligible for public funding under the
MSA; and trespass to chattel. The North Carolina suit was
stayed and remained pending while the parties litigated the
Delaware matter.

In January 2003, the Delaware Court of Chancery held
that the Foundation, though not a signatory to the MSA, could
be held liable for violations of that agreement. Granting
summary judgment to Lorillard on this issue, the Chancery
Court found that the Foundation had adopted the MSA, both
expressly and “implicitly by accepting its benefits with
knowledge of its terms.” Am. Legacy Found. v. Lorillard
Tobacco Co., 831 A.2d 335, 348-50 (Del. Ch. 2003). Therefore,
the Court concluded that the Foundation was bound by the
MSA’s provisions. Id. at 351.

5
 After lengthy discovery and motions practice, including
cross-motions for summary judgment, the Chancery Court found
that the ads in question did not breach the MSA. Specifically,
the ads did not violate the anti-vilification clause because they
did not incorporate “scurrilous [or] vitriolic attacks[,]” nor did
they amount to “cruel slander. . . . public ridicule, traduction, or
calumny.” Am. Legacy Found. v. Lorillard Tobacco Co., 886
A.2d 1, 32-33 (Del. Ch. 2005). In addition, the ads did not
contain personal attacks because “none of the ads specifically
identif[ied] a target of an alleged attack.” Id. at 43.
Accordingly, summary judgment was granted in favor of the
Foundation in August 2005. Id. at 46.

On appeal, the Delaware Supreme Court affirmed the
holdings of the Chancery Court on both the standing and
liability issues. Lorillard Tobacco Co. v. Am. Legacy Found.,
903 A.2d 728 (Del. 2006). Having carefully scrutinized four of
the ads that Lorillard had asserted were contrary to the MSA, the
court found that “[t]he advertisements are not invidious,
disparaging, offensive, belligerent, nor fiercely or severely
critical. Nor are they denouncements that are both unfounded
and abusive or slanderous. . . . [They] do not qualify as personal
attacks or vilifications.” Id. at 742.2

2
The Chancery Court’s denial of injunctive relief on the
e-mail messages was affirmed because the website had been
removed and damages, if any, were de minimus. Although those
communications were personal attacks, that claim had been
dismissed by the Vice Chancellor for failure to prosecute, and
Lorillard did not appeal that dismissal. Lorillard Tobacco Co.

6
 Moreover, because Delaware law provided that a
corporation was bound by its preincorporation agreement “if [it]
expressly adopts th[at] . . . agreement or implicitly adopts it by
accepting its benefits with knowledge of its terms,” the
Delaware Supreme Court found the Foundation’s cross-appeal
to be “without merit.” Id. at 745.

B. The Foundation v. National Union: The
Current Litigation

During the time it was publishing the ads at issue in the
Lorillard suits, the Foundation had in effect a number and
variety of insurance policies. Of the four comprehensive
general liability (“CGL”) policies, three had been written by
Travelers Indemnity Company of America and another by
Scottsdale Insurance Company. In addition, National Union
Fire Insurance Company of Pittsburgh, Pa., had issued an
Individual and Organization (“I&O”) Policy as well as umbrella
insurance to the Foundation.

After receiving Lorillard’s November 13, 2001, cease-
and-desist letter, outside legal counsel for the Foundation
instructed its broker to “immediately put on notice – and
demand defense and indemnity from – all insurers (primary,
umbrella and excess; general liability, D&O, etc.) that issued
potentially applicable policies.” The broker responded by
sending a notice of occurrence form to National Union and
Travelers on December 4, 2001.

v. Am. Legacy Found., 903 A.2d 728, 743-44 (Del. 2006).

7
 In April 2002, Travelers denied coverage for the North
Carolina claim but did not address the Delaware litigation. In a
letter of December 6, 2002, two months after Lorillard filed its
counterclaims, National Union similarly advised that the claims
presented in the North Carolina suit were not insured under the
I&O Policy because suits arising out of breach of contract were
excluded. In addition, that insurer – evidently unaware of
Lorillard’s counterclaims, filed two months earlier – wrote that
no costs from the Delaware action would be covered because
“affirmative prosecution of a lawsuit is not a Claim under the
Policy.”

Nearly three months later, on February 26, 2003, the
Foundation advised its broker that the Delaware suit was
moving forward on Lorillard’s counterclaims and requested that
the broker “immediately contact all insurers . . . and demand any
defense and indemnity as may be owed.”

In April 2003, National Union told the Foundation that its
umbrella policies would not insure liability from the lawsuits
under either of the two coverage options, A or B. On August
13, 2003, that insurer further advised that it did not believe
coverage was applicable under the I& O Policy.
Notwithstanding its denials of coverage, National Union
requested, and the Foundation provided, six litigation status
reports between December 2003 and March 2006.

In February 2007, Scottsdale Insurance Company
reviewed the “Suit Papers” from the Lorillard lawsuits, which it
apparently had not received until that time. In its
acknowledgment, Scottsdale informed the Foundation that it had

8
no knowledge of Lorillard’s counterclaims until one year after
they had been adjudicated and, because of late notice, would
provide no insurance.

In May 2007, after all of the potentially applicable
insurers had denied coverage, the Foundation filed this action in
the United States District Court for the District of Delaware, to
recover the approximately $17 million it claims to have spent
defending against Lorillard’s suit. After an extensive review of
the various policies’ provisions, the Court concluded that no
insurance was applicable and entered judgment in favor of
National Union. This appeal followed.

I.

The District Court had jurisdiction over this diversity
action under 28 U.S.C. § 1332. Appellate review is authorized
by 28 U.S.C. § 1291. We review de novo the grant of summary
judgment. The District Court’s interpretation of the insurance
policies at issue is likewise a determination of law subject to
plenary review. See Alexander v. Nat’l Fire Ins. of Hartford,
454 F.3d 214, 219 n.4 (3d Cir. 2006); Universal Underwriters
Ins. Co. v. Travelers Ins. Co., 669 A.2d 45, 47 (Del. 1995). The
parties agree that no conflict of laws issue is present because
controlling law in the District of Columbia, where the
Foundation has it offices, and Delaware, the state in which
National Union is incorporated, are similar.

9
 II.

As with all contracts, insurance policies are interpreted
to give effect to their plain language:

“Clear and unambiguous language in an insurance
policy should be given its ordinary and usual
meaning. . . . [W]hen the language of an insurance
contract is clear and unequivocal, a party will be
bound by its plain meaning . . . . To the extent that
ambiguity does exist, the doctrine of contra
proferentum requires that the language of an
insurance contract be construed most strongly
against the insurance company that drafted it.”

Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co.,
616 A.2d 1192, 1195-96 (Del. 1992) (citations omitted) (second
alteration in original).

In addition, “[t]he duty to defend may . . . be broader than
the duty to ultimately indemnify.” Am. Ins. Grp. v. Risk Enter.
Mgmt., Ltd., 761 A.2d 826, 830 (Del. 2000). To determine
whether an obligation to defend exists under the usual liability
policy, the “court typically looks to the allegations of the
complaint to decide whether the third party’s action against the
insured states a claim covered by the policy.” Id. at 829. So
long as one count or claim is covered under the policy, the duty
to defend is triggered. Any doubt or ambiguity as to the
pleadings or the policy terms should be resolved in favor of the
insured. See Cont’l Cas. Co. v. Alexis I. duPont Sch. Dist., 317
A.2d 101, 105 (Del. 1974).

10
 III.

In the interests of clarity, we will discuss the pertinent
provisions of each insurance agreement at issue, and analyze the
coverage available under it, separately.

A. The I&O Policy

In its I&O Policy, National Union agreed to

“pay on behalf of the [Foundation] Loss arising
from a Claim . . . against the [Foundation] . . . for
any actual or alleged Wrongful Act [defined in
relevant part as] “any breach of duty, neglect,
error, misstatement, misleading statement,
omission or act by or on behalf of the [Foundation
as well as] libel, slander, defamation or
publication or utterance in violation of an
individual’s right of privacy.”

Unlike typical liability insurance, the I&O Policy
explicitly stated that National Union “d[id] not assume any duty
to defend” unless defense of the case was tendered in writing by
the policyholder. The Foundation does not contend that
National Union was asked or required to assume the defense of
the Lorillard litigation.3

3
It may have been a strategic move on the part of the
Foundation to exclude independent insurance counsel from
controlling litigation that could have resulted in numerous

11
 Rather, the Foundation’s coverage claim is based on
another provision of the I&O Policy, which obligated National
Union to

“advance . . . at the written request of the
[Foundation], Defense Costs prior to the final
disposition of a Claim. Such advanced payments
by [National Union] shall be repaid to [National
Union] by [the Foundation] . . . in the event and to
the extent that [the Foundation] shall not be
entitled under the terms and conditions of this
policy to payment of such Loss.”

National Union’s undertaking to advance costs was not open-
ended, however. The policy further stipulated that the
Foundation

“shall not . . . incur any Defense Costs without the
prior written consent of [National Union]. Only
those . . . Defense Costs which have been
consented to by [National Union] shall be

claims in multiple states, with either the purpose or effect of
evading or unraveling the MSA. We note that amicus curiae
briefs were filed in the Chancery Court on behalf of 34 states
and 20 other organizations concerned with tobacco-related
health issues. Thus, there may well have been subtle, underlying
concerns more important to the Foundation at that time than the
cost of defending Lorillard’s counterclaims.

12
 recoverable as Loss under the terms of this
policy.”

Another limitation was detailed in the I&O Policy’s
Exclusion (k), which denied coverage for claims

“alleging, arising out of, based upon or
attributable to any actual or alleged contractual
liability of [the Foundation] under any express
contract or agreement.”

Nevertheless, this exclusion would not apply, and coverage
would be provided, if “liability . . . would have attached in the
absence of such express contract.”

1.

The District Court concurred with the Chancery Court’s
conclusion that the Foundation “had an explicit relationship to
the MSA.” Am Legacy Found. v. Nat’l Union Fire Ins. of
Pittsburgh, Pa., 640 F. Supp. 2d 524, 538 (D. Del. 2009).
Alternatively, the District Court observed, “the MSA can be
held to be an implied in fact contract as it relate[d] to [the
Foundation],” which “implied in fact contract ha[d] the legal
equivalency of an express contract.” Id. n.33. Finding that
Lorillard’s claims in the underlying suit were based upon breach
of that express contract, the District Court held that Exclusion
(k) of the I&O Policy precluded coverage. Id. at 537-38.

Furthermore, the District Court decided that because
Lorillard had not alleged libel or slander in the underlying cases,

13
Exclusion (k)’s “escape clause,” restoring insurance for those
contractual claims that would have “attached in the absence of
[an] express contract,” did not apply. Id. at 538-39. No basis
therefore existed to invoke National Union’s “duty to defend.” 4
Id. at 539.

2.

The Foundation’s request for relief in the case before us
is not based on a refusal to assume the defense but rather the
failure to advance the costs of the defense. These are discrete
concepts. When an insurance company assumes a defense, it
retains and remunerates counsel; ordinarily no reimbursement of
legal fees is required, even if the underlying claim proves false,
fraudulent, or unfounded. In contrast, if an insurer agrees to
advance the costs of a defense, as stated earlier, the insured must
request in writing the insurer’s consent before incurring defense
costs and may be required to repay the insurer for advanced
payments.

The starting point of the coverage analysis is whether the
duty to advance costs was activated, and if so, when. National
Union’s policy does not state when the advance payments were
due other than “prior to the final disposition of a Claim.” The
record reveals no explicit requests for National Union’s prior
approval of particular, designated defense expenses, nor any

4
Although they are distinct entitlements, the District
Court as well as the parties sometimes used the terms “duty to
defend” and “duty to advance defense costs” interchangeably.

14
demands by the Foundation for payment of accrued defense
costs, at any time before final resolution of the Lorillard suit.
Nor did the Foundation challenge National Union’s denial of
coverage, based on Exclusion (k), until the filing of this suit.
Both parties, in short, seemed content to await the ultimate
disposition of the Lorillard claims before turning to the
insurance coverage issues.

Policyholders in other cases were more forceful in
asserting their positions. In Little v. MGIC Indemnity Corp.,
836 F.2d 789 (3d Cir. 1987) (applying Pennsylvania law), it was
“undisputed that [the policyholder] ha[d] obtained from [the
insurer] whatever consent” was required as to the defense costs
incurred. Id. at 795. The dispute there involved when the
advance payments were to be made. In a declaratory judgment
action filed before resolution of the underlying suit, this Court
held that the insurer had the duty to advance costs as they came
due rather than wait for termination of the underlying claim. Id.
at 793-95.5

5
Most courts that have confronted this issue “have ruled
that defense costs should be paid contemporaneously as they are
incurred.” Barry R. Ostrager & Thomas R. Newman, Handbook
on Ins. Coverage Disputes, § 20.02[i], at 1525-26 (15th ed.)
(citing cases). “Other courts, however, have ruled that absent a
specific provision addressing the timing of reimbursement of
defense costs, insurers must reimburse defense costs only upon
a determination that the losses are covered under the policy.”
Id. at 1526 (citing cases).

15
 Brown v. American International Group, 339 F. Supp. 2d
336 (D. Mass. 2004), was likewise a declaratory judgment
action. There, the court concluded that the duty to advance costs
was in effect so long as the underlying complaint suggested a
reasonable potential for coverage.6 Id. at 346-47. The court
also held that an exclusion cited by the insurance company to
deny all coverage did not control. Accordingly, the duty to
advance costs remained viable. Id. Like Little, Brown was filed
after the underlying litigation began but before any
determination on liability had been made there. And, as with
Little, Brown did not result in a monetary judgment. Id. at 347.

The Foundation argues that the duty to advance payment
of defense costs was triggered by Lorillard’s allegations in the
counterclaims, the same criterion for determining when the
obligation to defend arises in most liability policies. Although
that argument may have some weight when an I&O policyholder
seeks an interim determination of coverage, it does not win the
day here. At no point before suit was filed in the District Court
did the Foundation seek a declaratory judgment contesting the
application of Exclusion (k), nor did it demand payment of
expenses as they came due. A free-floating obligation must be
tied to something of substance to be enforceable, in this case, a
demand for specific sums of defense costs. Nor was a written
request for National Union’s consent sought by the Foundation
at any time before it brought this suit.

6
This test appears to be more flexible than strict
adherence to the text of the underlying complaint as is the
practice with duty to defend provisions.

16
 Instead, the Foundation’s complaint in the District Court
sought a monetary judgment of at least $16,828,946.41.7 This
legal action did not commence until after the Delaware Supreme
Court had resolved the underlying dispute, holding that the
Foundation had not committed any wrongful act against
Lorillard. At that point, final determination of the issues arising
under the I&O Policy as to the Lorillard claim had been reached.
Speculation at an earlier stage in the Delaware suit as to what
might have been the outcome of that litigation should not now
be the basis for a monetary judgment.

The case before us is akin to American Insurance Group
v. Risk Enterprise Management Ltd., supra, 761 A.2d 826.
There, a personal injury proceeding had settled after many
months of discovery. At that point, the insurer denied a putative
additional insured’s request for reimbursement of the cost of

7
The Foundation here has broadly alleged that “all . . .
conditions and prerequisites to coverage under the [various]
Policies have been satisfied or waived.” Compl. ¶¶ 34, 40, 46.
However, its complaint does not explicitly assert compliance
with the I&O Policy’s requirement of prior approval by National
Union of defense costs, and nothing in the record suggests that
the Foundation sought any insurer’s written approval of defense
costs prior to incurring them. In that respect, this case is unlike
Little and falls within the comment in Rhone-Poulenc, that “[i]n
order for an insured to establish the contractual liability of an
insurer for breach of an insurance contract, the insured must
show that he has complied with all conditions precedent to the
insurer’s performance.” 616 A.2d at 1198.

17
defending the tort action along with the amounts paid in
settlement. Id. at 827. The Delaware Supreme Court,
commenting on the purported insured’s delay in demanding a
defense, observed that the “determination of whether a duty to
defend existed is being made after the underlying litigation has
already been settled. For th[is] reason[ ], the urgency that often
exists at the outset of litigation is not present.” Id. at 829.
Accordingly, the Court ruled that determination of coverage
must be based on the whole record, including the evidence
developed through discovery. Id. at 829-30.

The same rationale is pertinent under the I&O Policy
dispute here. The legal and factual basis for resolution of the
Lorillard suit had been finally adjudicated before the Foundation
filed this action to recover defense expenditures. Whatever
might have been an obligation to advance moneys during early
stages of the Lorillard litigation we need not decide. Reality,
not conjecture, establishes that the Foundation is not now
entitled to recovery of unadvanced costs of defense under the
I&O Policy.

3.

Even if this were not the case, we agree with the District
Court that coverage under the I&O Policy for the Lorillard
claims was barred by Exclusion (k), which provided that
National Union would not be liable to make

“any payment for Loss . . . alleging, arising out of,
based upon or attributable to any actual or alleged
contractual liability of an insured under any

18
 express contract or agreement; provided,
however, that this exclusion shall not apply to
liability which would have attached in the absence
of such express contract or agreement[.]”

According to the Foundation, Lorillard’s North Carolina
complaint and Delaware counterclaims alleged violations of an
implied contract as well as an express one. The Foundation
argues that the Chancery Court found that it had adopted the
MSA “implicitly” as well as expressly and, therefore, Exclusion
(k) was not operative.

We reject that argument. The discussion in the Chancery
Court opinion upon which the Foundation relies involved the
question of standing – specifically, whether the Foundation had
“adopted” the MSA and could be held liable for breach of that
agreement. That court held, and the Delaware Supreme Court
affirmed, that the Foundation had adopted the MSA and was
bound to its terms and conditions.

Lorillard alleged breaches of the MSA, not of any
“implied” obligation to adopt or adhere to that agreement. As
the Chancery Court summarized the litigation, “[B]oth [parties]
agree that the matter presented is a straightforward contractual
issue that turns on the legal interpretation of the words of the
[MSA].” 886 A.2d at 8.8

8
For the same reasons, we conclude that coverage for
defense against Lorillard’s counterclaim for “Breach of the Duty
and Covenant of Good Faith and Fair Dealing” is likewise

19
 Additionally, the Foundation asserts that Lorillard’s
allegations – that the Foundation’s ads breaching the MSA’s
proscriptions against “vilification” of and “personal attacks”
against the tobacco companies – were, in effect, tort claims and
therefore not affected by Exclusion (k).

We disagree. The opinions of the Delaware courts make
clear that the rulings against Lorillard were not founded on torts
of libel, slander, or disparagement. See, e.g., Barry R. Ostrager
& Thomas R. Newman, Handbook on Ins. Coverage Disputes,
§ 20.02[h][3] (15th ed.) (where same or similar exclusion was
present, coverage for claims was excluded, whether such claims
sounded in tort or contract, so long as they were “undeniably
linked” to contractual claims).

We are persuaded that Exclusion (k) remained in effect
and, for this additional reason, the I&O Policy did not provide
insurance for any part of the Lorillard claims.

precluded by Exclusion (k) of the I&O Policy. As that claim
explicitly stated,“Implied in the MSA is a duty and covenant of
good faith and fair dealing.” Def.’s Answer & Countercl. to 1st
Am. Compl. 40, ¶65 (emphasis added). In other words,
Lorillard alleged a breach of a duty that was an inherent part of
the MSA – and indeed, part of all contracts. The mere presence
of the word “[i]mplied” in the counterclaim does not invoke
Exclusion (k)’s escape clause. See generally Dunlap v. State
Farm Fire & Cas. Co., 878 A.2d 434, 441-42 (Del. 2005)
(implied covenant of good faith and fair dealing attaches to all
contracts).

20
 B. National Union Umbrella Policy: Coverage A

The National Union Umbrella Policy provided two
differing coverages, A and B.

Coverage A was “excess follow-form;” that is, it adhered
to “the terms, definitions, conditions and exclusions of
Scheduled Underlying Insurance.” This additional protection
was in force only if the underlying policies were in effect and
their limits had been exhausted. The District Court considered
the CGL policy written by Travelers as being “Scheduled
Underlying Insurance” to the National Union Umbrella. The
Foundation initially named Travelers as a co-defendant in the
suit before us, but dismissed after a settlement and no longer has
any claim against that company.

Another potentially underlying policy, though not
characterized as such, had been issued by the Scottsdale
Insurance Company. That insurer did not receive any notice of
the Lorillard suit until February 2007, many years after it was
filed, and denied coverage for lack of notice. The Foundation
does not assert any claim that National Union’s obligation
“dropped down” to fill the gap caused by Scottsdale’s rejection.

21
 At oral argument, the Foundation reiterated that it was
making no claims under coverage A.9 We proceed then to
Coverage B.

C. National Union Umbrella Policy: Coverage B

Coverage B provided umbrella insurance that would

“pay on behalf of the Insured those sums . . . that
the Insured bec[a]me[ ] legally obligated to pay as
damages by reason of liability imposed by law . . .
because of . . . Property Damage, Personal Injury
or Advertising Injury not covered by Scheduled
Underlying Insurance.”

The underlying policy written by Travelers excluded
personal injury coverage “arising out of [the insured’s]
business” if such business was “advertising, . . . broadcasting or
telecasting done by or for [the insured].” Therefore, the

9
The District Court found that the underlying Travelers
policy “specifically exclude[d] coverage for ‘advertising injury’
resulting from ‘breach of contract’” and, therefore, National
Union’s Coverage A was not invoked. 640 F. Supp. 2d at 540.
The Court also held that, because the primary policy issued by
Scottsdale overlapped the National Union umbrella by only
eight days, the Scottsdale policy was not scheduled underlying
insurance. Id. In light of the Foundation’s abandonment of any
claim under Coverage A, we decline to address these findings of
the Court.

22
Foundation argues, because Travelers did not cover such
personal injury, the umbrella came into effect. National Union’s
umbrella policy insured against “personal injury,” defined in
relevant part as

“oral, written or electronic publication of material
that slanders or libels a person or organization, or
disparages a person’s or organization’s goods,
products or services.”

We agree that, if the alleged “Personal Injury” came
within the scope of Coverage B and applicability was not
otherwise excluded, National Union would have a duty to
defend. Because the umbrella policy did not contain an
obligation to advance costs, but provided only for the duty to
defend, the customary test for assumption of defense is utilized
– that is, we examine the allegations in the complaint, rather
than proceeding to the ultimate result of the underlying suit. In
this respect, the umbrella differs from the defense cost
advancement provisions of the I&O Policy.

The District Court held that, because Lorillard’s claims
sounded in contract rather than tort, Coverage B was not
available for protection against allegations of Personal Injury,

23
and, accordingly, National Union had had no duty to defend.10
640 F. Supp. 2d at 541.

The Foundation here asserts that Lorillard charged that
the ads amounted to disparagement, libel or slander and so fell
within the definition of Personal Injury under Coverage B.
Accordingly, National Union had a duty to defend.

That argument fails. Lorillard’s complaint and
counterclaims did not allege that the ads were slanderous,
libelous, or disparaging. No challenge to the truthfulness of the
ads’ contents was before the state courts. The fact of falsity is
a predicate for libel, slander or commercial disparagement, and
in its absence no cause of action for these torts was claimed,
much less established. See, e.g., Neurotron Inc. v. Med. Serv.
Ass’n of Pa., 254 F.3d 444 (3d Cir. 2001); see also Gannett Co.
v. Kanaga, 750 A.2d 1174, 1183 (Del. 2000) (plaintiff in libel
case “had to demonstrate ‘actual injury,’ absent a showing of
knowledge of falsity or reckless disregard for the truth”).
Therefore, the counterclaims failed to set out a tort cause of
action.

Moreover, Lorillard was specific in its claims for relief.
Nowhere in its meticulously drafted counterclaims, numbering
88 paragraphs, did Lorillard seek damages for libel, slander or

10
The District Court also decided that “Advertising
Injury” was barred by Exclusion O. 640 F. Supp. 2d at 541.
Because the Foundation is not now pressing a claim for
Advertising Injury, we need not review that determination.

24
disparagement of product. The requests for relief were founded
on alleged breaches of contract.11 The ad damnum clauses,
specifically directed to each counterclaim, requested declaratory
judgments; entry of an order that the Foundation had breached
the MSA and directing compliance with it; and injunctive
action.

Because Lorillard did not allege facts constituting
“Personal Injury” as defined in the Umbrella Policy, a duty to
defend under Coverage B was not triggered. We conclude that
none of National Union’s policies entitle the Foundation to
recover expenses incurred in defending the Lorillard claims.

The judgment of the District Court will be affirmed.

11
Lorillard’s sole request for damages was based upon its
claim for trespass to chattel, that is, the Foundation’s
“intentional[ ] intermeddl[ing] with Lorillard’s e-mail system
and computer network.” Def’s. Answer & Countercl. to 1st Am.
Compl. 45 ¶ 84. That claim, which sought $1,000 for the cost
of installing an e-mail filter, was abandoned during the
proceedings in the Chancery Court. In any event, the umbrella
policy’s Exclusion R, which precludes insurance for “Property
Damage expected or intended from the standpoint of the
Insured,” would bar any coverage for the trespass to chattels
claim.

25
Fuentes, Circuit Judge, Concurring:

This appeal presents the question of an insurer's duty to
advance costs, not the question of an insurer's duty to assume
a defense. I agree that these are distinct concepts. Once this
distinction is recognized, the most important question in this
case is not whether National Union was obligated to pay for a
defense but when and how it was obligated to do so. From
this perspective, the question is whether the Foundation is
entitled to recover the costs of its defense at the end of its
dispute with Lorillard or whether it should have been
encouraged to pursue its contractual right to advance
payments at the earliest stages of that dispute. While I agree
with the majority's excellent opinion and its conclusion, I
write separately to emphasize the importance of this question
of timing: when and how should a request for advance
defense costs be presented?

Typically, this question is answered by application of
the so-called "eight corners rule," under which an insurer's
duty to defend is determined solely by reference to the
complaint and the insurance policy. See Stevens v. United
Gen. Title Ins. Co., 801 A.2d 61, 66 n.4 (D.C. 2002). If even
one count or claim of the complaint is covered by the policy,
the duty to advance costs is triggered. See Cont'l Cas. Co. v.
Alexis duPont Sch. Dist., 317 A.2d 101, 105 (Del. 1974). Of
course, any doubts as to whether the claim is covered, and any
ambiguities in the contract, are resolved in favor of the
insured. Id. The eight corners rule serves an important
purpose, encouraging the swift preliminary resolution of
coverage disputes. Early resolution is advantageous "both to

1
provide the insured with a defense at the beginning of the
litigation and to permit the insurer, as the defraying entity, to
control the defense strategy." Am. Ins. Group v. Risk Enter.
Mgmt., Ltd., 761 A.2d 826, 830 (Del. 2000).

I agree with the majority that this is not a typical case.
As the majority points out, the record is devoid of evidence
that the Foundation challenged National Union's denial of
coverage, demanded payment for accrued defense costs, or
requested National Union's approval of particular expenses at
any time before the final resolution of the Lorillard suit. Slip
Op. at 17, 19-20. Under these circumstances, the
Foundation's delay in seeking advanced cost eliminated any
urgency that might have been present at the outset of the
litigation and placed this case within the exception described
in American Insurance Group, 761 A.2d at 829.

The exception announced in American Insurance
Group applies whenever an insured is dilatory in pursuing its
rights under an insurance contract. In this situation, the eight
corners rule does not apply and the court may look at the
factual record developed during litigation. The exception, and
the majority opinion's conclusion that the exception is
applicable in this case, should not be read as a sign the eight
corners rule is enervated. Rather, the exception described in
American Insurance Group adds vitality to the rule by
encouraging insureds to pursue early resolution of coverage
disputes. As this case illustrates, failure on the part of an
insured to forcefully pursue its claims early in an insurance
dispute exposes the insured to the risk that the record
developed during a lawsuit will be unfavorable to its

2
insurance case. In order to avoid this risk, insureds should
forcefully pursue their claims, a course of action that
ultimately benefits the insured, which may then receive the
resources necessary to mount a defense; the insurer, which
acquires the ability to supervise the costs of a defense; and the
court system, which can more expeditiously and efficiently
address coverage issues when they are presented in the same
forum, and at the same time, as the underlying lawsuit.

3