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
2

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

____________
3

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.
 In addition, the Foundation maintained a website that 1

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

The Foundation created a series of television and radio

ads branded “the truth(TM).” 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
5

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.
The Chancery Court’s denial of injunctive relief on the 2

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

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

7

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, ceaseand-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.
8

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
9

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.
10

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).
 It may have been a strategic move on the part of the 3

Foundation to exclude independent insurance counsel from

controlling litigation that could have resulted in numerous

11

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
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

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 openended, 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
13

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,
 Although they are distinct entitlements, the District 4

Court as well as the parties sometimes used the terms “duty to

defend” and “duty to advance defense costs” interchangeably.

14

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
 Most courts that have confronted this issue “have ruled 5

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

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
 This test appears to be more flexible than strict 6

adherence to the text of the underlying complaint as is the

practice with duty to defend provisions.

16

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. Id. at 346-47. The court 6

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.
 The Foundation here has broadly alleged that “all . . . 7

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’srequirement 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

Instead, the Foundation’s complaint in the District Court

sought a monetary judgment of at least $16,828,946.41. This 7

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
18

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
For the same reasons, we conclude that coverage for 8

defense against Lorillard’s counterclaim for “Breach of the Duty

and Covenant of Good Faith and Fair Dealing” is likewise

19

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
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

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.
21

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.
 The District Court found that the underlying Travelers 9

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

At oral argument, the Foundation reiterated that it was

making no claims under coverage A. We proceed then to 9

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
23

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,
 The District Court also decided that “Advertising 10

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

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
 Lorillard’s sole request for damages was based upon its 11

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

disparagement of product. The requests for relief were founded

on alleged breaches of contract. The ad damnum clauses, 11

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.
1

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
2

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
3

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.