Insurer Must Defend Computer Fraud Act Claim — Despite Exclusions

Although an insurer’s general liability policy — which provides coverage for property damage — may exclude software from the definition of tangible property, the U.S. Court of Appeals for the eighth circuit said an insurer must defend a lawsuit.

According to court documents in Eyeblaster Inc. v. Federal Insurance Co., Eyeblaster Inc. is an online marketing campaign management company that advertisers, ad agencies and publishers use to run campaigns across the Internet and other digital channels. When distributing ads, the company uses cookies, JavaScript, and Flash technology, but not spyware. Eyeblaster purchased a general liability and information and network technology errors and omissions policies from Federal to cover Dec. 5, 2005 to Dec. 5, 2007. According to the policy, Federal had a duty to defend Eyeblaster against lawsuits, “even if the lawsuits were false, fraudulent or groundless.”

In Oct. 2006, David Sefton of Harris County, Texas, sued Eyeblaster, alleging that Eyeblaster injured his computer, software and data after he visited an Eyeblaster Web site. Eyeblaster subsequently provided notice of and tendered defense of the complaint to Federal in December 2006. And when Sefton amended his complaint a second time, Eyeblaster again tendered defense of its lawsuit to Federal.

Federal denied coverage both times, saying there was no coverage under the general liability policy because Sefton did not claim bodily injury caused by an occurrence, and he did not allege that property damage was caused by an accident or occurrence, as the policy required. Furthermore, Federal said Sefton did not claim that Eyeblaster had committed a “wrongful act” in connection with a product failure.

The district court said Federal had no duty to defend under either of its insurance policies.

Eyeblaster then appealed, saying, “the district court erred in failing to address coverage under the general liability policy for the ‘loss of use of tangible property that is not physically injured.'”

The Court of Appeal said the GL policy Eyeblaster purchased from Federal required Federal to provide coverage for property damage caused by an occurrence. And although Federal’s GL policy excluded “software, data or other information that is in electronic form,” the court said, “[b]ecause a computer is clearly tangible property, an alleged loss of computers constitutes ‘property damage’ within the meaning of the plaintiff’s policy.”

Exclusions in Federal’s policy don’t apply because the exclusions “speak of intentional conduct, that federal has not carried its burden to show,” the Court of Appeal wrote.

“Federal Insurance Company has not established that all parts of David Safton’s claims against Eyeblaster Inc. fall clearly outside the scope of coverage provisions under the general liability and errors or omissions policies that Eyeblaster purchased from Federal,” wrote Circuit Judge Colloton, concurring in the judgment. … “Because an insurer’s duty to defend arises when any part of the claim against the insured is arguably within the scope of coverage afforded by the policy, I agree that Federal had a duty to defend” under Minnesota law.

Thus, the Court of Appeal reversed the district court decision and remanded the case back for further proceedings.