Spyware Coverage Granted Under E&O, CGL

In an important ruling this summer, the Eighth Circuit Court of Appeals decided that an online marketing firm was entitled to defense cost coverage under two different types of liability policies for the same spyware download incident.

Lawyers Richard J. Bortnick and Stephanie Gantman of Cozen O'Connor detailed the facts of the underlying case and the subsequent ruling by the July 23, 2010 ruling by the appeals court in Eyeblaster Inc. v. Federal Ins. Co. in a special article published in this week's edition of National Underwriter's print magazine.

The court found concurrent coverage for an online marketing company, known as Eyeblaster, under both its commercial general liability insurance policy and a separate Information and Network Technology errors and omissions liability policy in circumstances where the company had installed software on a consumer's computer system, allegedly corrupting the consumer's operating system, the two attorneys reported.

Mr. Bortnick and Ms. Gantman revealed in the article that one of the specific coverage issues addressed by the Eighth Circuit court included whether there was "property damage" as defined in a CGL policy--"physical injury to tangible property, including resulting loss of use of that property."

Also addressed was the question of whether there was a "wrongful act," defined in the E&O policy--as "an error, an unintentional omission, or a negligent act."

Detailing the court's reasoning to find coverage under both policies, the lawyers concluded that the Eighth Circuit's ruling "demonstrates the importance of a well-crafted insurance policy, particularly in our evolving technological age."

They wrote, "It is axiomatic that courts are protective of policyholders, many reaching to find coverage where none was intended to exist or was never contemplated. Needless to say, it is incumbent on insurers to continually review and refine their CGL, E&O and other policy wordings."

In the underlying tort action, a consumer sued Eyeblaster--a firm that creates and manages online advertising--for allegedly "enticing" him to "visit" an Internet website.

His complaint alleged that this "visit" resulted in spyware, tracking cookies, JavaScript and other alleged rogue programs being downloaded onto his computer. He further alleged that the programs hijacked his computer, causing changes to his computer's security settings, and introduced spyware that caused his computer to freeze up or operate so slowly that it was inoperable--descriptions that convinced the appeals court that the CGL policy language referring to "loss of use" was applicable.

The court found defense cost coverage for under the E&O policy finding that Eyeblaster's activities were intentional, but not intentionally wrongful, according to the Cozen O'Connor lawyer's account of the ruling.