The opinion of the court was delivered by: Matthew F. Kennelly, District Judge
MEMORANDUM OPINION AND ORDER
Wausau Business Insurance Company filed this suit to obtain a declaratory judgment that a commercial general liability insurance policy that it issued to Fisher Printing Company does not cover a lawsuit that Ashley Furniture Industries, Inc. filed against Fisher. Fisher counterclaimed, seeking a declaratory judgment of coverage, recovery of its losses and defense costs in the Ashley suit, and damages for bad faith denial of coverage. Both Wausau and Fisher have moved for summary judgment. For the following reasons, the Court grants Fisher's motion in part and denies Wausau's motion.
Fisher Printing is a printing and graphic services provider that primarily offers advertising support for commercial clients. Fisher's main service lines include graphic design and printing services for inserts, circulars, and other advertisements.
Fisher purchased a commercial general liability insurance policy from Wausau for the period from October 31, 2006 through October 31, 2007. SOMF ¶ 38. The policy provided, among other things, that Wausau would "pay those sums that [Fisher] becomes legally obligated to pay as damages because of 'personal and advertising injury' to which this insurance applies" and would be obligated to defend Fisher against any suit seeking such damages. Id. ¶ 39.
In April 2007, Ashley filed suit against Fisher, alleging "unlawful and intentional copying of copyrighted images." Compl., Ex. B ¶1. Ashley sought damages and an injunction based on Fisher's repeated use of Ashley's protected trademarks and images. Id. ¶¶120A & C. Ashley alleged that in February 2006, it warned against using protected Ashley trademarks and other images but that in an April 2006 advertising circular, Fisher used the mark ASHLEY FURNITURE HOMESTORE. Id. ¶¶ 15 & 17. Ashley also alleged that despite further warnings, id. ¶19 & 22, Fisher used terms and images protected by copyright or trademark again in 2006 and 2007. Id. ¶¶ 21 & 24. Ashley filed suit after Fisher disseminated a circular in March 2007 in which it again allegedly used Ashley's protected images and marks. Id. ¶ 24; Pl. Resp. to SOMF ¶ 6.
Fisher sent Wausau a copy of the Ashley lawsuit and requested a defense under the "advertising injury" provision of its insurance policy. Wausau responded by informing Fisher that it would not provide Fisher "'with defense or indemnity' for the Ashley Lawsuit." SOMF ¶ 42. Wausau contended that Ashley's claims were excluded from coverage under various provisions of the policy, including the "knowing violation" and "prior publication" exclusions. Id. ¶ 43.
On July 3, 2007, Wausau filed the present suit, requesting a declaratory judgment that it had no duty to defend or indemnify Fisher. As noted earlier, Fisher counterclaimed, seeking a declaratory judgment of coverage (Count 1), recovery of its losses and defense expenses in the Ashley suit (Count 2), and damages for bad faith denial of coverage (Count 3). Both parties have moved for summary judgment.
Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). When determining whether a genuine issue of material fact exists, the Court must view the facts in the light most favorable to the nonmoving party and draw all reasonable inferences in its favor. See Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986). Because the Court is presented with cross-motions for summary judgment in this case, it considers each party's motion separately and draws reasonable inferences against the party whose motion is under consideration. See Crespo v. Unum Life Ins. Co. of Am., 294 F. Supp. 2d 980, 991 (N.D. Ill. 2003).
It appears to be undisputed that Ashley's claims involved "advertising injury" within the meaning of the insurance policy. Wausau argues, however, that the policy's "prior publication" exclusion applies because Fisher had started using Ashley's protected trademarks and images before the inception of its insurance policy. Wausau also argues that the policy's "knowing violation" exclusion applies because Ashley contended in the underlying suit that Fisher acted knowingly, after Ashley warned it not to use protected material in advertising circulars.
A liability insurer has a duty to defend the insured if the allegations in the underlying lawsuit "fall within, or potentially fall within, the policy's coverage." Outboard Marine Corp. v. Liberty Mut. Ins. Co., 154 Ill. 2d 90, 108, 607 N.E.2d 1204, 1212 (1992) (citing U.S. Fidelity & Guaranty Co. v. Wilkin Ins. Co., 144 Ill. 2d 64, 73, 578 N.E.2d 926, 930 (1991)). If even one of the injuries alleged in the underlying complaint falls or potentially falls within the scope of the insurance policy, the insurer must defend against the entire complaint. Roman Catholic Diocese v. Maryland Cas. Co., 139 F.3d 561, 565 (7th Cir. 2001); Maryland Cas. Co. v. Peppers, 64 Ill.2d 187, 194, 355 N.E.2d 24, 28 (1976).In determining whether coverage exists, the Court construes the underlying complaint in favor of coverage. U.S. Fidelity & Guaranty Co., 144 Ill. 2d at 73, 578 N.E.2d at 930. In addition, because the insurer's duty to defend depends on the allegations in the underlying complaint and not the actual facts, the duty arises even if the allegations lack merit. Nautilus Ins. Co. v. Vuk Builders Inc., 406 F. Supp. 2d 899, 902 (N.D. Ill. 2005).
In determining whether an insurer has a duty to defend its insured, a court must construe any ambiguous terms in the insurance policy in favor of the insured. Nautilus Ins. Co., 406 F. Supp. 2d at 903 (citing Allstate Ins. Co. v. Smiley, 276 Ill. App. 3d 971, 977, 659 N.E.2d 1345, 1350 (1995)). This same principle applies to any exclusion that the insurer invokes. Oakley Transp. v. Zurich Ins. Co., 271 Ill. App. 3d 716, 721, 648 N.E.2d 1099, 1103 (1995). In addition, to obtain the benefit of an exclusion, an insurer most show that the claim "unambiguously falls within the claimed exclusion." Nautilus Ins. Co. v. v. 1452-4 N. Milwaukee ...