Insurer’s duty to defend under a cyberinsurance E&O not triggered by an allegation of intentional misconduct, a federal court held

On May 11, 2015, the Utah District Court ruled against the policyholder and offered a narrow interpretation of the cyberinsurance policy involved in the dispute.

In this case, Defendants – the policyholders – are in the business of providing processing, storage, transmission, and other handling of electronic data for their customers. They kept cyberinsurance under a CyberFirst Policy offered by Plaintiff Travelers Property Casualty Company of America (“Travelers”).

Once Global Fitness filed suit against Defendants alleging that they refused to transfer billing, withheld data, and refused to transfer funds, Defendants tendered defense of the action to Travelers. Eventually Travelers accepted the tender of defense. However, it did so under a full and complete reservation of rights, including the right to seek a judicial declaration as to its rights and obligations under the CiberFirst Policy. Later, the cyber insurance company filed an Amended Complaint in the relevant action. Defendants sought a determination that Plaintiff owed them a duty to defend.

In order to decide the issue, the Court was called to resolve whether the Global Fitness action triggered the insurer’s duty to defend under CyberFirst Policy. According to the “Technology Errors and Omissions Liability Form” included in the insurance agreement, coverage was provided if the loss was caused by “errors and omissions wrongful act.” “Errors and omissions wrongful act” is defined as “any error, omission or negligent act.”

The insurance company argued that it “does not have a duty to defend because the alleged damages did not arise from an error, omission or negligent act.” Defendants, on the other hand, argue that the refusal “is based upon its improper inference and assumption about [Defendants’] intent to injure and ignores the potential that [Defendants] may be found liable for an error, omission or negligent act relating to the holding, transferring or storing of data.”

The Court held that Defendants’ argument did not withstand scrutiny: “While the policy covers errors, omissions, and negligent acts, Global’s claims against Defendants allege far different justifications for the data to be withheld. Global does not allege that Defendants withheld the data because of an error, omission, or negligence. Global alleges that Defendants knowingly withheld this information and refused to turn it over until Global met certain demands.” Accordingly, the Court denied Defendants’ Motion for Partial Summary Judgment.

Travelers Property Casualty Co. of America v. Federal Recovery Services, Inc., No. 2:14-cv-170 TS, slip op. (D. Utah May 11, 2015) is available at…     Open Pdf

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