Eyeblaster, Inc. v. Federal Insurance Company
613 F.3d 797, 2010 WL 2869547, 2010 U.S. App. LEXIS 15152 (2010)
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Rule of Law:
An insurer's duty to defend under a general liability policy may be triggered by allegations of loss of use of tangible property, such as a computer, even when the property is not physically damaged. An errors and omissions policy covering a "wrongful act" defined as an "error" can provide coverage for an intentional act, like deploying cookies, if the resulting injury was unintended.
Facts:
- Eyeblaster, Inc. is an online marketing company that uses technology such as cookies, JavaScript, and Flash to deliver interactive advertising for its clients.
- Eyeblaster purchased a General Liability policy and an Information and Network Technology Errors or Omissions policy from Federal Insurance Company.
- A computer user, David Sefton, alleged that after visiting a website associated with Eyeblaster, his computer was infected with spyware.
- Sefton claimed the alleged spyware caused his computer to freeze, crash, and operate slowly, resulting in the loss of data and rendering the computer effectively inoperable.
- Sefton stated he could not transfer his files to a new computer because he believed the spyware would also be transferred, and attempts to have the computer repaired were unsuccessful.
- Eyeblaster's business activities, including its use of cookies and similar technologies, were disclosed to Federal in its insurance application.
Procedural Posture:
- David Sefton filed a lawsuit against Eyeblaster, Inc. in a Texas state trial court.
- Eyeblaster removed the action to the United States District Court.
- Eyeblaster tendered the defense of the lawsuit to its insurer, Federal Insurance Company.
- Federal denied coverage and refused to defend Eyeblaster.
- Eyeblaster filed an action in U.S. District Court seeking a declaration that Federal owed a duty to defend.
- The parties filed cross-motions for summary judgment.
- The district court granted summary judgment for Federal, holding that it had no duty to defend under either policy.
- Eyeblaster, as the appellant, appealed the summary judgment ruling to the U.S. Court of Appeals for the Eighth Circuit.
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Issue:
Does an insurer have a duty to defend a technology company under either its General Liability policy or its Errors or Omissions policy against a lawsuit alleging that the company's software rendered the plaintiff's computer inoperable?
Opinions:
Majority - Gibson
Yes. Federal has a duty to defend Eyeblaster under both policies. The General Liability policy covers the "loss of use of tangible property that is not physically injured," and the allegations that Sefton's computer became inoperable fall within this definition, as a computer is tangible property. Federal failed to meet its burden to prove that the 'impaired property' exclusion applies because it did not show that Sefton's computer could be restored to use simply by removing Eyeblaster's product. Furthermore, the Errors or Omissions policy covers a 'wrongful act,' which includes an 'error.' While Eyeblaster's actions of deploying cookies were intentional, an intentional act causing an unintended injury can constitute a covered 'error.' Federal did not prove that Eyeblaster's conduct was intentionally wrongful, and thus it must defend under this policy as well.
Concurring - Colloton
Yes. Federal has a duty to defend, but the reasoning should rest solely on the Errors or Omissions policy. The duty to defend arises if any part of the claim is arguably within the scope of coverage, and the E&O policy clearly applies. However, the majority's reasoning on the General Liability policy's 'impaired property' exclusion is questionable, as Sefton's computer likely is 'property that has not been physically injured' and the damage arose from a 'dangerous condition in Eyeblaster's product,' which could trigger the exclusion. Because the E&O policy provides a clear basis for the duty to defend, it is unnecessary to resolve the more difficult question under the General Liability policy.
Analysis:
This decision is significant for interpreting insurance coverage in the context of cyber torts and technology-related liabilities. It affirms that traditional General Liability policies can extend to modern electronic harms, specifically recognizing loss of computer functionality as a 'loss of use' of tangible property. The ruling also clarifies the scope of Errors or Omissions policies by distinguishing between an intentional business act (like deploying cookies) and intentionally wrongful conduct, thereby broadening coverage for tech companies whose standard products or services result in unintended harm. This precedent pressures insurers to define exclusions for electronic data and software-related damages with greater specificity.
