The United States District Court for the District of Minnesota denied a policyholder’s motion for summary judgment and granted an insurer’s motion for summary judgment, ruling that an electronic and information technology errors and omissions policy afforded coverage to defend a policyholder only against claims arising out of a “wrongful act” in the performance of or failure to perform electronic and information technology services, as defined by the policy, and not for a contract dispute that did not arise out of such a “wrongful act.” FirePond Liquidating Trust v. Vigilant Ins. Co. and Federal Ins. Co., No. 06-3050 (D. Minn. Sept. 11, 2007).

Background

FirePond involved allegations by Plaintiff FirePond Liquidating Trust (“FirePond”) that Defendants Vigilant Insurance Company (“Vigilant”) and Federal Insurance Company (“Federal”) (collectively, “Chubb”) wrongfully refused to defend and indemnify FirePond for losses incurred by FirePond in connection with a lawsuit brought against FirePond by General Motors Corporation (“GM”). FirePond provided sales and marketing solutions through e-commerce systems. In 1994, FirePond and GM entered into an agreement (“1994 Agreement”) whereby FirePond agreed to create and maintain an exclusive computerized information system to support certain GM e-commerce activities. FirePond procured an Electronic and Information Technology Errors and Omissions Policy (“EIT Policy”) from Vigilant and excess coverage from Federal. The EIT Policy afforded coverage for “damages the insured becomes legally obligated to pay for any claim arising out of a wrongful act, to which insurance applies, by or on behalf of the insured.” Coverage was limited, by its terms, however, to wrongful acts that occurred “in the performance or failure to perform electronic and information technology services” or “in the failure of electronic and information technology products to perform the function or serve the purpose intended.” The EIT Policy further defined “wrongful act” to mean “a negligent act, error or omission” and “electronic and information technology services” to mean computer-related services. The terms of the EIT Policy were made part of the excess coverage.

In late 1999, a dispute arose between GM and FirePond regarding billing and payment. Almost two years later, GM filed a complaint against FirePond in Massachusetts state court asserting claims based on FirePond’s alleged premature termination of the 1994 Agreement (“GM Lawsuit”). FirePond tendered defense of the GM Lawsuit to Chubb and demanded that Chubb indemnify FirePond for any losses incurred as a result. Chubb responded, asserting that it could neither defend nor indemnify FirePond under the EIT Policy or excess coverage because, among other reasons, the allegations in GM’s complaint did not meet the definition of a “wrongful act” as defined by the EIT Policy. GM and FirePond subsequently settled the GM Lawsuit.

Thereafter, FirePond filed suit against Chubb for allegedly wrongfully refusing to reimburse FirePond for losses incurred in defending and settling the GM Lawsuit. Chubb maintained that it did not have a duty to defend FirePond. Both FirePond and Chubb moved for summary judgment. Chubb asserted that the plain and unambiguous terms of the EIT Policy limited coverage to claims arising out of a wrongful act in the performance or failure to perform electronic and information technology services, not for claims arising out of what it argued was a billing dispute between FirePond and GM.

FirePond countered that because the words “professional liability” did not appear on the policies, the court should not interpret the policies as if coverage was limited to professional liability. Additionally, FirePond argued that the “arising out of” requirement should be interpreted broadly and was satisfied if a claim asserted in the GM Lawsuit has a “causal connection” to the activity covered by the EIT Policy. FirePond further argued that because GM’s claims were “set in the context of FirePond’s performance of ‘electronic and information technology services’ for GM, those services had a causal connection to GM’s lawsuit.”

The Court’s Decision

The district court disagreed with the policyholder’s interpretation of the EIT Policy. First, the court noted that technically, the terms “arising out of” modify the terms “wrongful act” and not the terms “the performance or failure to perform electronic and information technology services.” The court also pointed out that under either Minnesota and Massachusetts law, the “arising out of” language is interpreted to mean originating or flowing from. Second, the court determined that, even under a broad interpretation of “the performance or failure to perform electronic and information technology services,” the plain and unambiguous language of the EIT Policy limited any coverage to claims arising out of, or flowing from, a wrongful act in the performance of or failure to perform electronic and information services, which were defined by the EIT Policy to mean computer-related services.

The court reasoned that the claims asserted in the GM Lawsuit did not arise out of an act that was done in the performance of or failure to perform computer-related services. Instead, GM’s claims all stemmed from the alleged premature termination of the 1994 Agreement, which flowed from a breach of payment. Thus, even though the 1994 Agreement was entered into for the purpose of having FirePond perform electronic and technology services, the asserted claims did not flow from the performance of those services.

Consequently, the court concluded that the GM Lawsuit was outside the scope of coverage afforded by the EIT Policy as a matter of law, and, therefore, Chubb did not have a duty to defend or indemnify FirePond. Chubb’s motion for summary judgment was granted, and FirePond’s motion for summary judgment was denied.

Implications

FirePond demonstrates that courts may not be receptive to attempts by policyholders to read electronic and information technology E&O policies as covering all contract disputes under IT contracts. FirePond also illustrates that the phrase “arising out of,” while broad, should not be read to eliminate or restrict specific coverage limitations under other contract terms and definitions.