A U.S. appeals court has rejected an insurer's “direct loss”defense and ruled that a national retailer is entitled to recovernearly $7 million for a computer hacking claim.

The case involved DSW Shoe Warehouse and National Union FireInsurance Co.—a subsidiary of American International Group Inc.(AIG).

The ruling by the U.S. Court of Appeals for the Sixth Circuit inOhio upholds a district court summary judgment in the state thatturned away AIG's attempts to exclude coverage with severalexclusions, including that the “direct loss” provision in its crimeinsurance policy excluded the retailer's computer hacking claim,according to law firm Anderson Kill & Olick (AKO), whorepresented DSW.

The appeals court says the exclusion language in the policy wasnot unmistakably clear. The judges say, “The phrase 'resultingdirectly from' does not unambiguously limit coverage to lossresulting 'solely' or 'immediately' from the theft itself.”

The ruling is “good news for any business that accepts creditcards or stores customer data in any form,” AKO says.

AIG could not immediately be reached for comment.

Early in 2005 a computer hacker accessed DSW's local wirelessnetwork and downloaded credit card and checking account informationto more than 1.4 million customers of more than 100 stores,according to court documents. Fraudulent transactions followed.

DSW's expenses from the hacking incident included customercommunications, public relations, customer claims and lawsuits, andattorney fees related to investigations by multiple state attorneysgeneral and the Federal Trade Commission (FTC).

Upon receiving the claim, AIG's counsel concluded DSW's losseswere not the direct result of the theft and the insurer appealed asummary judgment of $5.3 million in losses and about $1.5 millionin interest.

AKO attorney and DSW counsel Joshua Gold says the appeals courtruling is significant to buyers of fidelity, crime and financialinstitution bond coverage “because the direct loss argument is arecurring defense.”

“The case is also very significant given the ever-growing threatof computer data breaches and lack of judicial guidance oninsurance coverage for such risks and losses,” Gold adds in astatement.