A federal district court in Minnesota recently held that an insurer does not need to defend its insured under either a general liability policy or errors and omissions policy for claims related to spyware that the insured allegedly installed and monitored on a claimant’s computer. Eyeblaster, Inc. v. Federal Insurance Co., No. 07-4379 (D. Minn. Oct. 7, 2008). Click here to read the decision.

Eyeblaster, a company that specializes in online advertising, was sued by David Sefton in district court in Texas. Sefton alleged that Eyeblaster made fraudulent misrepresentations on its website and installed tracking cookies, executable code, java script and pictures on his computer, changed his computer’s security settings, installed pop-up advertising, renamed files and redirected his computer and web-browsing. Further, he alleged that Eyeblaster installed spyware on his computer causing his computer to freeze up and he claimed that his computer was “taken over’ by the spyware resulting in lost data and repair charges. Sefton alleged that Eyeblaster “intentionally accessed” his computer and that Eyeblaster’s actions were made knowingly with an intent to deceive.

Eyeblaster notified its insurer, which issued both a general liability policy (“GL”) and a network technology errors and omissions policy (“E & O”), to Eyeblaster. The insurer advised Eyeblaster that was no coverage or defense obligation under either policy and the district court affirmed both denials. With respect to the denial of coverage under the GL policy, the court observed that Eyeblaster’s alleged activity did not cause actual damage to Sefton’s computer hardware, but rather, all of the allegations addressed the effect of Eyeblaster’s spyware on the computer’s software. The policy reportedly provided coverage only for loss to tangible property and provided that tangible property does not include software. While the complaint used the term “computer,” the court found the complaint’s allegations demonstrated the damage was solely to software. Therefore, the court held that there were no allegations of damage to tangible property and therefore, no coverage under the GL policy.

In analyzing coverage under the E & O policy, the court first determined that the entirety of the allegations in the complaint were that Eyeblaster acted intentionally in placing its software on Sefton’s computer. Next, the court looked to the policy’s definition of “wrongful act” (“an error, unintentional omission or negligent act”) and held that Eyeblaster’s alleged design of its software to install itself on Sefton’s computer was intentional and therefore not a “wrongful act.” The court noted that Eyeblaster specifically intended that the software would install on Sefton’s computer and held the act not to be covered regardless of whether Eyeblaster intended the resulting injury. The court disagreed with Eyeblaster’s argument that the insurer’s denial made the coverage illusory and discussed a hypothetical situation in which Eyeblaster mistakenly provided its customers with a different version of the intended software that causes a problem as an example of when Eyeblaster would have coverage under the E & O policy.