St. Paul Fire & Marine Insurance Co. v. National Computer Systems, Inc.
490 N.W.2d 626, 1992 Minn. App. LEXIS 941, 1992 WL 213178 (1992)
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Rule of Law:
The misappropriation of confidential, proprietary business information is not considered "damage to tangible property" under a standard commercial general liability insurance policy. The information itself is intangible, even when it is stored on a physical medium like paper.
Facts:
- Jerome Peters worked for Boeing Computer Systems on a government contract and had access to confidential pricing and technical information, which he agreed to keep secret.
- Peters left Boeing and was eventually hired by a competitor, National Computer Systems, Inc. (NCS), which was preparing a bid for the same government contract.
- Peters provided NCS employees with Boeing documents that were marked "Boeing Proprietary."
- NCS employees photocopied these documents, sometimes covering or removing the "Boeing Proprietary" legend, and distributed them to personnel involved in preparing NCS's bid.
- Boeing discovered the situation and sent letters to NCS demanding the return of its proprietary information.
- When NCS's response was deemed inadequate, Boeing sued NCS for, among other things, misappropriation of its trade secrets and unfair competition.
Procedural Posture:
- Boeing Computer Systems sued National Computer Systems, Inc. (NCS) in federal district court for misappropriation of trade secrets and unfair competition.
- NCS's insurer, St. Paul Fire & Marine Insurance Company, denied coverage and refused to defend the lawsuit.
- NCS settled the lawsuit with Boeing and paid for its own defense costs.
- St. Paul Fire then commenced a declaratory judgment action in state trial court against NCS, seeking a ruling that it had no obligation to cover the loss.
- On cross-motions for summary judgment, the trial court ruled in favor of NCS, ordering St. Paul Fire to indemnify NCS for the settlement and reimburse its defense costs.
- St. Paul Fire, as appellant, appealed the trial court's summary judgment ruling to the Minnesota Court of Appeals.
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Issue:
Does the misappropriation of confidential proprietary information constitute "damage to tangible property" covered by a commercial general liability insurance policy, thereby requiring the insurer to indemnify its insured?
Opinions:
Majority - Schumacher, J.
No. The misappropriation of confidential proprietary information does not constitute "damage to tangible property" under the insurance policy. The court reasoned that the true nature of Boeing's claim was not for the physical loss of the paper binders, but for the loss of the confidential nature and exclusive use of the information contained within them. The information itself is intangible property, and the competitive advantage it provided was the basis for Boeing's lawsuit. While the information was stored on a tangible medium (paper), the essence of the harm was the theft of the intangible idea, not damage to the physical object. Therefore, the policy, which covers only tangible property, does not provide coverage for the settlement (indemnification). However, the court separately held that the insurer did have a duty to defend NCS because, at the outset of the litigation, the claim was arguably within the policy's scope, and this legal uncertainty required the insurer to provide a defense under a reservation of rights.
Analysis:
This decision clarifies the distinction between tangible and intangible property in the context of commercial liability insurance. It establishes that the economic value of information is separate from the physical medium on which it is stored, and standard policies covering "property damage" will not apply to claims of trade secret theft. This ruling significantly limits the scope of coverage for intellectual property disputes under traditional CGL policies, compelling businesses to seek specialized insurance for such risks. The case also reinforces the principle that an insurer's duty to defend is broader than its duty to indemnify, arising whenever a claim is even arguably covered.
