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

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

The ruling by the U.S. Court of Appeals for the Sixth Circuit in Ohio upholds a district court summary judgment in the state that spurned AIG's attempts to deny coverage via several exclusions, including that the direct-loss provision in its Crime Insurance policy excluded the retailer's computer-hacking claim, according to law-firm Anderson Kill & Olick (AKO), which represented DSW.

Early in 2005, a computer hacker accessed DSW's local wireless network and downloaded the credit card and checking account information of more than 1.4 million customers, according to court documents. Many fraudulent transactions followed.

DSW's expenses from the hacking incident included fees for informing customers, public relations, customer claims and lawsuits, as well as attorney costs related to investigations by multiple state attorneys general and the Federal Trade Commission.

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

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

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

AIG could not immediately be reached for comment.

AKO attorney and DSW counsel Joshua Gold says the appeals court ruling is significant to buyers of Fidelity, Crime and Financial Institution bond coverage “because the direct-loss argument is a recurring defense.

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

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