Last month, the United States District Court for the District of Utah issued an order denying an insured’s argument that Travelers owed a duty to defend under a technology errors and omissions policy. Travelers Property Casualty Company of America v. Federal Recovery Services, Inc. (Case No. 2:14-CV-170 TS) arose from an underlying matter in which a customer brought suit against a Travelers insured alleging tortious interference, promissory estoppel, conversion, breach of contract and breach of implied covenant of good faith and fair dealing theories of recovery.
According to the Court’s order, the insured is in the business of providing processing, storage, transmission and other handling of electronic data for its customers. Among other things, the customer in the underlying lawsuit contends the insured a) withheld customer data unless/until the customer satisfied several demands for significant compensation above and beyond what was contemplated by the agreement between the customer and insured and b) willfully interfered with customer’s property (i.e. data) and refused to return the customer’s property without cause or justification. The customer also alleges that the insured knowingly harmed the customer’s rights, causing customer irreparable harm and loss.
The primary issue before the Court was whether Travelers owed a duty to defend the insured entity in the underlying matter under the technology errors and omissions policy. The Court’s analysis ultimately turned on whether the allegations in the underlying action sound in negligence. Under the subject policy, coverage is provided if the loss is caused by an “errors and omissions wrongful act,” which is defined in the policy as “any error, omission, or negligent act.” Travelers argued that its coverage wasn’t implicated and thus it owed no duty to defend in the underlying matter because the customer in that action did not allege damages arising out of an error, omission or wrongful act. The Court agreed, finding that an examination of underlying pleadings revealed no such allegations.
The foregoing scenario likely sounds familiar to professionals in the insurance defense/coverage arena. As the Court’s ruling illustrates, the same principles applying to traditional coverage purchases – such as understanding the extent of your coverage and factoring risk tolerance – should also be applied when purchasing products designed to cover your organization’s handling of data. Still, to my knowledge, this ruling is worth noting because it’s one of the first – if not the first –to discuss the applicability of technology E & O coverage as to a dispute over the handling of data. There will certainly be more to come.