1

Sentry originally sued BYK, Inc. (“BYK”), and BYK

counterclaimed against Sentry. BYK is now bankrupt. In view of

the bankruptcy, Sentry does not seek relief as to BYK, and the

court dismisses BYK’s counterclaim without prejudice. 

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

SENTRY INSURANCE, A MUTUAL §

COMPANY, §

 §

Plaintiff- §

counterdefendant, §

 § Civil Action No. 3:04-CV-1043-D

VS. §

 §

DFW ALLIANCE CORP., et al., §

 §

Defendants- §

counterplaintiffs. §

MEMORANDUM OPINION

 AND ORDER 

In this insurance coverage dispute, the dispositive question

presented by the parties’ cross-motions for summary judgment is

whether under the “known loss” doctrine the insurer had a duty to

defend its insured in litigation allegedly covered by liability

insurance for advertising injury. Concluding that it did not, the

court grants the insurer’s motion for summary judgment and denies

the insured’s cross-motion for partial summary judgment.

I

Plaintiff-counterdefendant Sentry Insurance, A Mutual Company

(“Sentry”), sues defendant-counterplaintiff DFW Alliance

Corporation (“DFW”)1 seeking a declaratory judgment that it had no

 

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2

At least at one point in its motion, Sentry refers to the

duty to indemnify. In most instances, however, it addresses only

the duty to defend. And DFW recognizes in its response to Sentry’s

motion, and in its own motion, that issues concerning indemnity are

not presented by Sentry’s or DFW’s respective motions.

3

NDS filed two lawsuits. The first was filed in California

superior court, removed to federal court in California, and then

transferred to the Eastern District of Texas, where it was

dismissed voluntarily, NDS then refiled the case in Texas state

district court. DFW prevailed against NDS following a jury trial.

The court refers to these cases collectively as the Underlying

Litigation.

4

The pleading actually refers to the “Expiration Date,” which

is a defined term that means June 30, 2000. See P. May 1, 2006

App. 217.

- 2 -

duty to defend2 DFW in litigation brought by National Diversified

Sales, Inc. (“NDS”) against DFW and others (the “Underlying

Litigation”).3

 DFW counterclaims for declaratory judgment and

breach of contract, contending that Sentry had such a duty and

breached it by not tendering a defense.

In the Underlying Litigation, NDS alleged that DFW and other

affiliated entities and individuals had engaged in unfair

competition, infringed patents and trademarks, and breached a

contract regarding the patents and trademarks. NDS specifically

averred on information and belief that “prior to [June 30, 2000],”4

Jim McKinnon (“McKinnon”), Jeff Nielsen (“Nielsen”), BYK, Inc.

(“BYK”), and Alliance Marketing and Manufacturing Group, Inc.

(“Marketing”) had “embarked on a program of subterfuge to prepare

themselves to unfairly compete with NDS including, but not limited

to, creating molds to manufacture . . . parts, bearing marks and

 

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part numbers confusingly similar to NDS’s registered trademark

‘DFW,’ the unregistered mark ‘NDS,’ [and] the unregistered

trademark ‘DFW/HPI.’” P. May 1, 2006 App. 218. NDS also asserted

that “defendants, with full knowledge of NDS’s ownership of the

trademarks ‘NDS,’ ‘DFW’ and ‘DFW/HPI’, have manufactured,

distributed and sold plastic goods under the name ‘DFW’ and ‘DFW

Plastics’ . . . since at least as early as January 1, 2001.” Id.

at 221. No later than January 1, 2001 all of the assets of

McKinnon, BYK, and Marketing were transferred to defendant DFW.

NDS maintained, inter alia, that DFW was created as part of an

alleged conspiracy to perpetrate a subterfuge to defraud NDS. It

alleged that DFW was liable, as a successor-in-interest, for the

wrongful conduct of McKinnon, BYK, and Marketing, and that it was

entitled to pursue against DFW any claims it may have had against

these three entities. 

After its formation, DFW obtained two commercial general

liability and two umbrella insurance policies from Sentry. The

first two——a primary policy and an umbrella policy——were in force

from May 1, 2002 through May 1, 2003. The second two——also a

primary policy and an umbrella policy——were in force from May 1,

2003 through May 1, 2004. All four policies provided coverage for

“Advertising injury,” P. May 1, 2006 App. 48, but “only if the

offense was committed in the ‘coverage territory’ during the policy

period,” id. The policies define “Advertising injury” as an

 

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5

Because the Underlying Litigation involves federal and state

lawsuits, the pleadings are not all referred to as “complaints.”

For simplicity, the court will refer to the pleadings as

“complaints” and will use other terms, such as “petition,” only

when quoting a case. 

6

Sentry refers to this as the “prior publication” exclusion.

E.g., P. May 1, 2006 Br. 7. The court will refer to it by the term

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injury arising out of one or more of the

following offenses:

a. Oral or written publication of material

that slanders or libels a person or

organization or disparages a person’s or

organization’s goods, products or

services; 

b. Oral or written publication of material

that violates a person’s right of

privacy;

c. Misappropriation of advertising ideas or

style of doing business; or

d. Infringement of copyright, title or

slogan.

Id. at 57. The policies contain a “first publication” exclusion

for advertising injuries “[a]rising out of oral or written

publication of material whose first publication took place before

the beginning of the policy period[.]” Id. at 48. 

DFW contends that the complaints5

 in the Underlying Litigation

contain allegations that trigger “advertising injury” coverage in

the policies. Sentry seeks summary judgment declaring that it had

no duty to defend DFW in the Underlying Litigation because the

offenses that gave rise to the claims arose at least as early as

January 1, 2001, and therefore long before the policies went into

force and effect on May 1, 2002. It relies on the “first

publication” exclusion6 and the “known loss” doctrine to contend

 

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used in the caselaw and in the policies.

- 5 -

that it had no duty to defend. DFW moves for partial summary

judgment establishing that Sentry did have a duty to defend DFW in

the Underlying Litigation and that, by failing to do so, it

breached the insurance policies and is therefore liable for breach

of contract. Because the cross-motions largely present opposite

sides of the same issues, the court will consider them in the

context of Sentry’s defenses and will then turn to DFW’s claim that

a favorable jury verdict in the Underlying Litigation has triggered

a duty of Sentry to defend DFW.

II

In Texas “the duty to defend and duty to indemnify are

distinct and separate duties creating distinct and separate causes

of action.” Am. Alliance Ins. Co. v. Frito-Lay, Inc., 788 S.W.2d

152, 153 (Tex. App. 1990, writ dism’d w.o.j.). The duty to defend

is “broader than the duty to indemnify.” E & L Chipping Co. v.

Hanover Ins. Co., 962 S.W.2d 272, 274 (Tex. App. 1998, no pet.).

“The duty to defend arises when a third party sues the insured on

allegations that, if taken as true, potentially state a cause of

action within the terms of the policy.” St. Paul Guardian Ins. Co.

v. Centrum GS Ltd., 283 F.3d 709, 713 (5th Cir. 2002) (citation and

internal quotation marks omitted). 

 

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7

“Mixed” or “overlapping” extrinsic evidence refers to

evidence that is relevant both to coverage and liability. GuideOne

Elite, 197 S.W.3d at 309.

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Under the eight-corners or

complaint-allegation rule, an insurer’s duty

to defend is determined by the third-party

plaintiff’s pleadings, considered in light of

the policy provisions, without regard to the

truth or falsity of those allegations. The

rule takes its name from the fact that only

two documents are ordinarily relevant to the

determination of the duty to defend: the

policy and the pleadings of the third-party

claimant. Facts outside the pleadings, even

those easily ascertained, are ordinarily not

material to the determination and allegations

against the insured are liberally construed in

favor of coverage. 

GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d

305, 308 (Tex. 2006) (citations omitted). Under

the “eight-corners rule” . . . [i]f the four

corners of a petition allege facts stating a

cause of action which potentially falls within

the four corners of the policy’s scope of

coverage, the insurer has a duty to defend.

If all the facts alleged in the underlying

petition fall outside the scope of coverage,

then there is no duty to defend, but we

resolve all doubts regarding duty to defend in

favor of the duty.

Liberty Mut. Ins. Co. v. Graham, 473 F.3d 596, 599-600 (5th Cir.

2006). The Texas Supreme Court has rejected the use of

“overlapping [extrinsic] evidence as an exception to the

eight-corners rule because it poses a significant risk of

undermining the insured’s ability to defend itself in the

underlying litigation.” GuideOne Elite, 197 S.W.3d at 309.7 “A

 

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8

Neither Sentry nor DFW relies on extrinsic evidence to

support its position concerning whether Sentry had a duty to defend

DFW in the Underlying Litigation.

- 7 -

plaintiff’s factual allegations that potentially support a covered

claim is all that is needed to invoke the insurer’s duty to defend

. . . .” Id. at 310.8 

III

The court first considers Sentry’s motion for summary

judgment. 

A 

Under Texas law, “[t]he insurer bears the burden of

establishing that one of the policy’s limitations or exclusions

constitutes an avoidance or affirmative defense to coverage.”

State Farm Fire & Cas. Co. v. Blythe, 2001 WL 1148111, at *3 (N.D.

Tex. Sept. 18, 2001) (Fitzwater, J.) (citing Tex. Ins. Code Ann.

art. 21.58(b) (Vernon 2001)), aff’d, 107 Fed. Appx. 442 (5th Cir.

2004) (per curiam). When the party who will have the burden of

proof at trial concerning an affirmative defense seeks summary

judgment on the basis of that defense, it “must establish ‘beyond

peradventure all of the essential elements of the . . . defense.’”

Bank One, Tex., N.A. v. Prudential Ins. Co. of Am., 878 F.Supp.

943, 962 (N.D. Tex. 1995) (Fitzwater, J.) (quoting Fontenot v.

Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986)). This means that,

to obtain summary judgment, Sentry must establish beyond

peradventure that it did not have a duty to defend DFW in the

 

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9

Sentry does not contest that the Underlying Litigation

involves claims that would constitute “advertising injury.” 

- 8 -

Underlying Litigation, either because of the “first publication”

exclusion or the “known loss” doctrine.

B

Sentry maintains that the “first publication” exclusion

excuses it from defending DFW because part of the offending conduct

began before the policy period.9 It argues that, according to the

four corners of the underlying pleadings, all the alleged

misconduct that gave rise to the “advertising injury” allegedly

began around June 2000, or at least as early as January 2001, i.e.,

almost two years before the first policy took effect.

DFW responds that the only potential allegations that

conceivably allege prior infringement in the federal- and statelawsuits that comprise the Underlying Litigation can be reasonably

read to mean that DFW knew of NDS’s alleged trademarks as early as

January 1, 2001; it is unclear whether NDS alleged that DFW’s use

of the mark “DFW” was itself a trademark infringement of NDS’s

trademark “DFW”; Sentry does not allege that DFW made any oral or

written publication of material before the beginning of the policy

period, as required by the policies; and NDS’s pleadings

potentially state a claim within coverage and any doubt must be

resolved in DFW’s favor. It asserts that even if the court

concludes that these allegations refer to “prior publication,” they

 

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- 9 -

are only raised with respect to NDS’s trademark “DFW,” and no

contentions are made concerning the marks “NDS” and “DFW/HPI,” even

though NDS also alleged infringement of these marks. Therefore,

NDS’s contentions of trademark infringement concerning the marks

“NDS” and “DFW/HPI” are separate claims that are within the scope

of insurance coverage and not subject to the “first publication”

exclusion.

DFW also contends that, under the literal terms of the

policies, the “first publication” exclusion does not apply to the

type of “advertising injury” at issue in the Underlying Litigation.

It reasons that the exclusion only applies to contentions involving

slander, libel, or a violation of a person’s right of privacy.

According to DFW, because the definition of “advertising injury”

includes four different offenses, only two of which pertain to the

“[o]ral or written publication of material,” and because the “first

publication” exclusion is restricted to “oral or written

publication of material,” the exclusion only applies to the two

offenses that involve the “[o]ral or written publication of

material,” i.e., material that slanders, libels, or disparages a

person or organization or the person’s or organization’s goods,

products, or services, or that violates a person’s right-ofprivacy. DFW maintains that because NDS’s claims against DFW are

for advertising injury covered by the remaining two offenses that

do not involve “oral or written publication of material,” the

 

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- 10 -

“first publication” exclusion does not apply.

The court rejects DFW’s second argument: that the “first

publication” exclusion does not apply to the type of advertising

injury at issue. In Matagorda Ventures, Inc. v. Travelers Lloyds

Insurance Co., 208 F.Supp.2d 687 (S.D. Tex. 2001) (on motion for

reconsideration) (“Matagorda II”), Judge Rosenthal of the Southern

District of Texas interpreted a similar insurance policy and

concluded that the “first publication” exclusion could apply to all

four offenses. Id. at 689. Concerning the offenses for

misappropriation and infringement, she held that “[i]f the

misappropriation or infringement does not arise from the

publication of oral or written material, it would still fall within

the Policy definition of ‘advertising injury,’ but the first

publication exclusion would be irrelevant and inapplicable.” But

when the alleged misappropriation or infringement does arise from

the publication of oral or written material, the “first

publication” exclusion applies. See id. (addressing alleged

misappropriation arising from written published material). The

court agrees with Judge Rosenthal’s conclusion and the cases on

which she relies, and it holds that the exclusion applies to all

four offenses, including those involving misappropriation or

infringement, provided the misappropriation or infringement arises

from the publication of oral or written material.

The court must therefore decide whether Sentry has established

 

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- 11 -

beyond peradventure that the claims that NDS brought against DFW

and others in the Underlying Litigation are subject to the “first

publication” exclusion. Because Sentry is relying on the third and

fourth offenses listed in the definition of “advertising injury,”

for the exclusion to apply, NDS must have alleged that the

misappropriation or infringement arose from the publication of oral

or written material. If Sentry makes that showing, it must also

establish beyond peradventure that NDS alleged that its claims

arose from material that DFW published before the beginning of the

policy period. Sentry has not made this showing.

NDS alleged that before June 30, 2000, McKinnon, Nielsen, BYK,

and Marketing “embarked on a program of subterfuge to prepare

themselves to unfairly compete with NDS including, but not limited

to, creating molds to manufacture . . . parts, bearing marks and

part numbers confusingly similar to NDS’s registered trademark

‘DFW’, the unregistered mark ‘NDS’, [and] the unregistered

trademark ‘DFW/HPI[.]’” P. May 1, 2006 App. 218. This is the only

allegation in the complaint that could link DFW to infringing

activity before June 30, 2000. But this allegation alone does not

establish beyond peradventure that DFW “published” infringing

materials. Drawing all inferences in favor of DFW as the summary

judgment nonmovant, the averment demonstrates nothing more than

preparation for infringement. Preparation is not the same as

publication. Thus this allegation does not establish beyond

 

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peradventure that DFW published material before the inception of

the insurance policies.

NDS also alleged in its complaint that DFW and other

defendants, “with full knowledge of NDS’s ownership of the

trademarks ‘NDS’, ‘DFW’ and ‘DFW/HPI’, have manufactured,

distributed and sold plastic goods under the name ‘DFW’ and ‘DFW

Plastics’ in California, Texas, and other places since at least as

early as January 1, 2001.” P. May 1, 2006 App. 221. Sentry argues

that the caselaw all consistently holds that the “prior

publication” exclusion applies to trademark infringement, even

though trademark infringement may not involve “publication” in the

popular sense of publishing a newspaper or magazine. The court

concludes that Sentry’s argument is not supported by the cases on

which it relies. 

None of the cases Sentry cites for this proposition holds that

the manufacture, distribution, or sale of infringing products

constitutes “publication,” as that term is understood in the

context of the “first publication” doctrine. In Matagorda

Ventures, Inc. v. Travelers Lloyds Insurance Co., 203 F.Supp.2d 704

(S.D. Tex. 2000) (“Matagorda I”), recon. denied, 208 F.Supp.2d 687

(S.D. Tex. 2001), the infringing material was actually published on

a website. Id. at 714 (“The placement of this material on the

wristwatch.com site is ‘written publication of material’ within the

meaning of the language of the ‘first publication’ exclusion.”).

 

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- 13 -

In Advance Watch Co. v. Kemper National Insurance Co., 878 F. Supp.

1034 (E.D. Mich. 1995), the insured published a sales promotion

catalog that contained a picture and description of the infringing

item, id. at 1043. In Applied Bolting Technology Products, Inc. v.

United States Fidelity & Guaranty Co., 942 F. Supp. 1029 (E.D. Pa.

1996), the underlying complaint did not contain an allegation of

trademark infringement. Id. at 1033-35. Thus none of the cases

Sentry cites stands for the proposition that manufacture,

distribution, or sale of infringing goods constitutes a

“publication.” Sentry does not even argue that the manufacture,

distribution, or sale of goods under the name “DFW” involved any

kind of “publication.” And drawing all inferences in favor of DFW

as the summary judgment nonmovant, the court cannot say that an

allegation that DFW manufactured, distributed, or sold infringing

goods establishes beyond peradventure that DFW “published” these

goods and therefore falls within the scope of the “first

publication” exclusion. 

Accordingly, the court concludes that Sentry is not entitled

to summary judgment based on the “first publication” exclusion.

C

Sentry argues in the alternative that it had no duty to defend

DFW because the underlying claims are excluded under the “known

loss” doctrine. It asserts that the wrongful conduct about which

NDS complains in the Underlying Litigation occurred long before the

 

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- 14 -

inception of the insurance policies and was known to have begun,

thus barring coverage.

DFW responds first on the basis of an argument that it applies

both to the “first publication” exclusion and to the “known loss”

doctrine. It asserts that NDS’s contentions of trademark

infringement concerning the marks “NDS” and “DFW/HPI” are separate

claims that are within the scope of insurance coverage and not

subject to the “known loss” doctrine. DFW also contends that the

doctrine does not apply to allegations under the Lanham Act because

intent is not a required element of a trademark infringement claim,

and even if it does apply, there are no contentions in the

Underlying Litigation that DFW knew of the alleged trademark

infringements or advertising injuries before coverage took effect.

Instead, NDS alleged that on June 19, 2002 its attorney advised DFW

and the other defendants of its ownership of the trademarks and

requested that they immediately cease and desist from using them.

DFW argues that a reasonable interpretation of the pleadings is

that DFW first knew of the alleged trademark infringement when it

received the attorney’s letter, which was forwarded during the

coverage period. It also maintains that NDS may have alleged a

prior infringement only regarding the mark “DFW.” DFW asserts that

the pleadings may be unclear as to whether NDS contends that DFW

committed a prior infringement of the mark “DFW,” but they are

clear that no prior infringements are alleged regarding the marks

 

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- 15 -

“NDS” and “DFW/HPI,” and that no knowledge of the prior

infringement was alleged or imputed to DFW before NDS’s attorney’s

demand letter in June 2002.

Under the “known loss” or “loss in progress” doctrine,

“insurance coverage is precluded where the insured is, or should

be, aware of an ongoing progressive loss or known loss at the time

the policy is purchased.” Franklin v. Fugro-McClelland (Sw.),

Inc., 16 F.Supp.2d 732, 734-35 (S.D. Tex. 1997). “The ‘loss in

progress’ principle is recognized as part of standard insurance

law.” Id. “An insured cannot insure against something that has

already begun and which is known to have begun.” Id. (citing Two

Pesos, Inc. v. Gulf Ins. Co., 901 S.W.2d 495, 502 (Tex. App. 1995,

no writ)). “Texas has long recognized that it is contrary to

public policy for an insurance company knowingly to assume a loss

occurring prior to its contract.” Two Pesos, 901 S.W.2d at 501

(citing Burch v. Commonwealth County Mut. Ins. Co., 450 S.W.2d 838,

840-41 (Tex. 1970)).

In support of its “known loss” defense, Sentry cites Matagorda

I for the proposition that when an individual who is the owner of

a later-formed entity was also allegedly involved in earlier

ongoing activity, the new entity is considered to have the

individual’s knowledge that would bar coverage under the “known

loss” doctrine. In Matagorda I the insured entity, Matagorda, was

created as the result of a joint venture agreement whereby

 

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plaintiff Birdsong merged his Internet business, Megasaurus, with

another similar company. Matagorda I, 203 F.Supp.2d at 706-707.

Before the creation of Matagorda, however, and before Matagorda was

added to the insurance policy issued by Travelers, Birdsong

received a letter from Movado Group accusing Birdsong and

Megasaurus of trademark infringement. Id. at 707. Movado Group

eventually sued the newly-formed entity, Matagorda, for trademark

infringement, and Matagorda sought a defense from Travelers. Id.

at 710-711. Travelers denied the request, and in the ensuing

lawsuit, asserted the “first publication” exclusion. Id. at 712.

Discussing the “known loss” doctrine in connection with the “first

publication” exclusion, Judge Rosenthal held that Travelers did not

owe Matagorda a duty to defend for trademark infringement that

allegedly began before the policy period started. Id. at 715-16.

She reasoned:

Matagorda Ventures, through its two owners,

Birdsong and Doohaluk, knew when it became

insured that it was soon to assume the

operation and management of the wristwatch.com

site. Movado Group had already sent a demand

letter to Birdsong, objecting to the

Megasaurus web site’s content and threatening

legal action. By adding Matagorda Ventures

and Birdsong as insureds on the Farmington

Policy that Doohaluk had previously obtained

for Watch Wholesalers, Inc., and by asking

Travelers to provide insurance from the

beginning of the Policy period, Matagorda

Ventures and Birdsong in effect asked

Travelers to provide insurance against a risk

known to the additional insureds, but not the

insurer. This is precisely the sort of

circumstance the “first publication” exclusion

 

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10The court thus rejects DFW’s assertion that NDS’s contentions

of trademark infringement concerning the marks “NDS” and “DFW/HPI”

are separate claims that are not subject to the “known loss”

- 17 -

was designed to prevent. The “first

publication” exclusion and the “known loss”

doctrine bar plaintiffs’ claims.

Id. at 716; see also Essex Ins. Co. v. Redtail Prods., Inc., 1998

WL 812394, at *4 (N.D. Tex. Nov. 12, 1998) (Fitzwater, J.) (holding

insurer owed insured no duty to defend trademark infringement

claim, on grounds of both “first publication” exclusion and “known

loss” doctrine, when demand letter had been received prior to

beginning of policy period), aff’d, 213 F.3d 636 (5th Cir. Apr. 12,

2000) (per curiam) (unpublished table decision). 

In evaluating whether the “known loss” doctrine applies,

“[t]he relevant inquiry is whether [the insureds] knew at the time

they entered the insurance policy that they were engaging in

activities for which they could possibly be found liable.”

Matagorda I, 203 F.Supp.2d at 724 (citing Franklin, 16 F.Supp.2d at

737). In the complaint in the Underlying Litigation, NDS alleged

that “prior to [June 30, 2000],” McKinnon, Nielsen, BYK, and

Marketing “embarked on a program of subterfuge to prepare

themselves to unfairly compete with NDS including, but not limited

to, creating molds to manufacture . . . parts, bearing marks and

part numbers confusingly similar to NDS’s registered trademark

‘DFW’, the unregistered mark ‘NDS’, [and] the unregistered

trademark ‘DFW/HPI[.]’” P. May 1, 2006 App. 218.10 Even drawing all

 

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doctrine. DFW argues that the contentions in the “sole paragraph

in [NDS’s] pleadings which alleges a date prior to the dates of

coverage” are only made with regard to the trademark “DFW.” D.

Aug. 6, 2006 Resp. 2. The paragraph (¶ 45 of the federal lawsuit

and ¶ 29 of the state lawsuit) to which DFW refers, however,

ignores the separate allegation that “prior to the Expiration Date

[June 30, 2000],” DFW “embarked on a program of subterfuge to

prepare themselves to unfairly compete with NDS including . . .

creating molds to manufacture . . . parts, bearing marks and part

numbers confusingly similar to NDS’s registered trademark “DFW”,

the unregistered mark “NDS”, [and] the unregistered trademark

“DFW/HPI”[.]” P. May 1, 2006 App. 218. It is this paragraph on

which Sentry bases its “known loss” argument, and this paragraph

does not allege that the “program of subterfuge to prepare” for the

infringement only applied with respect to the “DFW” trademark.

Rather, it clearly refers to NDS’s registered trademark “DFW,” the

unregistered mark “NDS,” and the unregistered trademark “DFW/HPI.”

See id. 

- 18 -

reasonable inferences in favor of DFW, the court holds based on

this allegation that the underlying complaint alleges that the

infringing activity began before June 2000. It specifies the

activities that allegedly were undertaken, when they started, and

who were the actors. Although the allegation itself does not

specifically implicate DFW, NDS also avers that DFW “is not an

independent, lawful corporation, but rather is the illegal

successor for fraudulent inadequate consideration to the assets of

BYK, Marketing and Jim McKinnon, and . . . NDS, as a claimant

against BYK and Marketing, is entitled to pursue against [DFW] any

claims it may have against BYK, Marketing and Jim McKinnon.” Id.

at 9. As in Matagorda I, the creation of a new entity does not of

itself prevent the underlying plaintiff from alleging a claim for

infringing activity that began before the policy period started.

 

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Matagorda I, 203 F.Supp.2d at 715. Although the court must draw

all reasonable inferences in favor of DFW, it must also accept the

allegations in the underlying complaint as true. See, e.g., St.

Paul Guardian Ins. Co., 283 F.3d at 713 (“The duty to defend arises

when a third party sues the insured on allegations that, if taken

as true, potentially state a cause of action within the terms of

the policy.”). Given this requirement, the court concludes that

Sentry has established beyond peradventure that, according to the

allegations of the complaint, the infringing activity of BYK,

Marketing, and McKinnon that can be attributed to DFW began in June

2000, almost two years before the beginning of the policy period.

Accordingly, the court holds that Sentry has established beyond

peradventure that under the “known loss” doctrine, it did not have

a duty to defend DFW in the Underlying Litigation.

The court also rejects DFW’s contention that the doctrine does

not apply to allegations under the Lanham Act because intent is not

a required element of a trademark infringement claim. DFW cites

Finger Furniture Co. v. Travelers Indemnity Co., 2002 WL 32113755

(S.D. Tex. Aug. 19, 2002), for this proposition. In that case, the

insurance policy contained a provision that excluded coverage for

“advertising injury” “arising out of oral or written publication of

material, if done by or at the direction of the insured with

knowledge of its falsity.” Id. at *13. The plaintiff in the

underlying action specifically alleged trademark infringement,

 

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dilution, and unfair competition under the Lanham Act. Id. at *1.

The court held that because the insured could be found liable under

the Lanham act even without a finding that it had knowledge of

“falsity,” coverage was not barred under the insurance policy

exclusion. Id. at *13. The “known loss” doctrine does not depend,

however, on a specific exclusion in the text of an insurance

policy. Rather, it is recognized under standard insurance law, and

is based on Texas public policy that an insurance company must not

knowingly assume a loss that occurs before it enters into its

insurance contract. See Two Pesos, 901 S.W.2d at 501. Insurers

are thus protected against assuming liability for a loss that the

insured knew or should have known about before it purchased the

insurance policy. Therefore, the allegations of knowledge in the

underlying complaint are relevant because they establish knowledge

of infringing activity and of potential liability before the

inception of the Sentry policy. DFW’s Lanham Act-based argument

lacks force in this context. 

Accordingly, Sentry is entitled to summary judgment declaring

that it did not have a duty to defend DFW in the Underlying

Litigation because the “known loss” doctrine excused it from that

duty.

 

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IV

In addition to seeking partial summary judgment establishing

that Sentry had a duty to defend it in the Underlying

Litigation——relief that the court has now rejected for the reasons

explained above——DFW maintains that Sentry’s duty to defend is

ongoing and, because the jury in the Underlying Litigation returned

a verdict that exonerated DFW from any “first publications” or

“known losses,” Sentry has a continuing duty to defend DFW from the

date of the verdict until the conclusion of the Underlying

Litigation. In its reply brief, DFW concedes that it has been

unable to locate case authority for this proposition. D. Sept. 1,

2006 Reply Br. 7. It asserts that it proffers this argument “in

support of a proposition of law, or extension of law, not yet

addressed by the Supreme Court of Texas.” Id. DFW relies on the

public policy of the state of Texas and holdings of the Supreme

Court of Texas, and it maintains that, once the jury in the

underlying case has returned a verdict, the verdict is

determinative concerning the ongoing duty to defend from the date

of the verdict until the conclusion of the trial. DFW reasons

that, once the jury has decided the facts, “it would be an unjust

result to deny a defense by giving preference to self-serving

allegations in a pleading” rather than the actual facts, as found

by the trier of fact. Id. at 8.

The court’s jurisdiction in this case is based on diversity of

 

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citizenship. As an Erie tribunal, the court applies the law as

would a Texas court. Erie R.R. Co. v. Tompkins, 304 U.S. 64

(1938). Federal courts in Erie cases apply existing law or predict

what the state’s supreme court will do. They do not enlarge state

law on their own initiative. See City Pub. Serv. Bd. v. Gen. Elec.

Co., 947 F.2d 747, 748 (5th Cir. 1991) (opinion denying rehearing)

(it is not for court, Erie-bound to apply state law as state courts

would do, to incorporate innovative theories of recovery into Texas

law). 

DFW’s contention that the court should resolve Sentry’s duty

to defend based on the jury verdict in the Underlying Litigation is

essentially an argument for a new exception to the “eight-corners”

rule. DFW candidly concedes that it cannot cite a single Texas

case that suggests that the Supreme Court of Texas would recognize

such exception. Nor does DFW cite a case that provides a basis for

this court to predict that the Supreme Court of Texas will do so

when the question is presented. It thus has presented no basis to

support an “Erie guess” that such an exception to the “eightcorners” doctrine will be adopted. 

Because Sentry has established that the “known loss” doctrine

excused its duty to defend DFW in the Underlying Litigation, and

because DFW has established no basis entitling it to summary

judgment in its favor, DFW’s motion for partial summary judgment

must be denied.

 

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11DFW’s request for oral argument is denied. See N.D. Tex.

Civ. R. 7.1(g) (“Unless otherwise directed by the presiding judge,

oral argument on a motion will not be held.”). After considering

the briefs, the court has determined that oral argument would not

meaningfully assist the decisional process in this case.

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* * *

For the reasons set out, the court grants Sentry’s May 1, 2006

amended motion for summary judgment and denies DFW’s August 2, 2006

motion for partial summary judgment.11 By judgment filed today, the

court enters a judgment declaring that Sentry had no duty to defend

DFW in the Underlying Litigation and dismissing DFW’s counterclaim

with prejudice.

SO ORDERED.

February 16, 2007.

_________________________________

SIDNEY A. FITZWATER

UNITED STATES DISTRICT JUDGE

 

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