Lawyers representing clients as plaintiffs in litigation often overlook the fact that a cross-complaint or counterclaim may give rise to an obligation by the client’s liability insurer to provide a defense. A recent decision in favor of Hewlett-Packard, awarding it $51 million, serves as a reminder that insurance coverage must be examined when a cross-complaint or counterclaim is filed.

Hewlett-Packard filed a patent infringement, trademark infringement and false advertising lawsuit against a company called Nu-kote. The case related to HP’s ink jet cartridge technology. Nu-kote apparently marketed products designed to refill HP ink jet cartridges after they ran out of ink. HP argued that Nu-kote’s products infringed HP’s patented technology, and that Nu-kote used deceptive packaging that copied HP’s trade dress. Nu-kote filed counterclaims against HP alleging antitrust violations, unfair competition, trade libel, false advertising and other alleged wrongful conduct.

HP tendered the defense of the counterclaims to its insurer, Ace Property and Casualty Company, seeking a defense under the advertising liability provisions of its general liability policy. A coverage lawsuit between HP and Ace followed. The coverage lawsuit entitled Hewlett-Packard Company v. Ace Property and Casualty Insurance Company, Case No. C-99-20207, was venued in the Northern District of California. The district court judge, The Honorable James Ware, found that Ace had an obligation to defend the counterclaims.

HP purportedly incurred approximately $28 million in litigation fees and costs after it tendered the case to Ace for a defense. The parties stipulated to have a Special Master determine the amount of those litigation expenses that were incurred in connection with the defense of the covered counterclaims, and to make a recommendation to the district court. Ace argued that more than $13 million of the litigation expenses were not covered because Ace contended they were not related to the defense of the counterclaims, or were otherwise not appropriate defense expenses. The Special Master rejected the insurer’s arguments and held that all of the expenses were covered. The district court ultimately affirmed the Special Master’s decision overruling extensive objections filed by Ace. The court entered judgment for HP in the amount of $51 million, which includes the past litigation expenses plus costs and prejudgment interest.

The moral of this story is that cross-complaints and counterclaims must always be analyzed for coverage and tendered to insurance carriers where there might be a potential defense obligation. Defense expenses are often payable in addition to policy limits, so in many cases obtaining a defense can be even more important than obtaining indemnity coverage for an ultimate settlement or judgment.

As evident from the HP case, in many situations it is appropriate to argue that once a counterclaim or cross-complaint has been filed, all or substantially all of the subsequent litigation expenses should be covered as being related to defensive litigation activities, as opposed to being purely related to the offensive claims that started the litigation.