Loss of Use Coverage Key to Court’s Decision Requiring Insurer to Defend

A recent appellate court decision in the case of Eyeblaster, Inc. v. Federal Insurance Company offers a potentially unexpected interpretation of the property damage provisions of a General Liability policy.

In the case, Eyeblaster, an online marketing campaign company, was sued by a third party alleging Eyeblaster infected his computer with a spyware program. The claimant alleged he lost tax return data and incurred a financial loss.  Among the many allegations, were trespass, invasion of privacy and intentionally accessing a protected computer without authorization. The claimant advised he experienced pop-up ads, hijacked browser, slow computer performance and random error messages and alleged that while no repair was possible, his computer did become operational again.

When Eyeblaster tendered the complaint to its General Liability and Professional Liability insurer, Federal Insurance Company, the insured denied it had a duty to defend.  After a partial summary judgment motion was filed by Eyeblaster and a cross motion for summary judgment was filed by Federal Insurance Company, the U.S. District Court in Minnesota granted Federal’s motion and denied Eyeblaster’s.  Eyeblaster appealed and the decision by the district court was reversed by the 8th U.S. Circuit Court of Appeals and remanded for further proceedings.

Perhaps the most interesting part of the case is how the appellate court interpreted the General Liability policy’s definition of property damage in the case.  The policy defined property damage as “physical injury to tangible property, including resulting loss of use of that property; or loss of use of tangible property that is not physically injured.”  Software, data and other electronic information were excluded under the definition of tangible property.

The appellate court determined that Federal had a duty to defend Eyeblaster under that portion of the definition of property damage allowing for loss of use of tangible property that is not physically injured.  The court declared the claimant’s computer to fit within the meaning of tangible property and noted the claimant repeatedly alleged loss of use of the computer. 

Federal further argued coverage did not apply because of three General Liability policy exclusions including one for “Damage to Impaired Property or Property Not Physically Injured.”  The appellate court found Federal did not meet its burden of proof to show any of the exclusions apply.  Whether or not future versions of Federal and/or other insurer’s General Liability policies are edited in attempt to tighten up the language and preclude coverage for this type of scenario remains to be seen but it does seem possible.  Read more about the case (pdf) or review our previous article on the property damage exclusion.