Loss of Computer and Property Damage Definition

The insured brought a declaratory judgment action against the insurer seeking coverage for a lawsuit based on damage to a computer. This case is Eyeblaster, Inc. v. Federal Insurance Company, 2010 WL 2869547 (C.A. Minn.).

Eyeblaster is a worldwide online marketing campaign management company that advertisers and publishers use to run campaigns across the Internet; it delivers online marketing campaigns. Sefton alleges that his computer was infected with a spyware program from Eyeblaster and this caused his computer to immediately freeze up. He further alleges that he lost all data on a tax return, incurred many thousands of dollars of loss, and that his computer is no longer usable. When Sefton filed a lawsuit against Eyeblaster, the company turned the lawsuit over to its insurer, Federal Insurance. The insured had a general liability policy and an information and network technology errors or omissions policy. The insurer denied coverage under both policies and Eyeblaster filed a lawsuit seeking the coverage. The U.S. District Court for the District of Minnesota ruled in favor of the insurer and an appeal went to the Eighth Circuit.

Federal argued that it owed no coverage to Eyeblaster under the general liability policy because Sefton did not assert claims for property damage as defined in the policy. As for the errors or omissions policy, the insurer said Sefton had not alleged that Eyeblaster committed a wrongful act as defined in the policy in connection with a product failure or in performing or failing to perform its service.

The circuit court noted that the district court concluded that the Sefton complaint did not allege damage to tangible property because it only claims damage to software. Software is by definition in the general liability policy not considered tangible property for purposes of property damage. The district court therefore said there was no property damage claim involved in the underlying lawsuit. Eyeblaster countered that the second part of the definition of property damage (loss of use of tangible property that is not physically injured) was met since Sefton alleged that his computer froze up and could not operate. The appeals court said that Federal did not include a definition of tangible property in its general liability policy and so, the plain, ordinary everyday meaning of tangible property would include computers. Since Sefton alleged loss of use of his computer, there was a claim for loss of use of tangible property. The court concluded that the allegations against the insured are within the scope of the general liability policy.

The insurer argued that even if it owes a duty to defend in the underlying action, that coverage is barred by the impaired property exclusion. The insurer claimed that the loss of use of the computer would be impaired property or that it would be property not physically injured so as to be in accordance with the terms of the exclusion (and its accompanying definitions) because it was damaged by the allegedly defective and dangerous condition in Eyeblaster's software. The appeals court disagreed. The court said that Federal had not met its burden of proving that the exclusion applies; Sefton's computer cannot be considered impaired property because no evidence exists that the computer can be restored to use by removing Eyeblaster's product or work from it.

As for the errors or omissions policy, the circuit court found that the policy obligates Federal to pay for loss due to financial injury caused by a wrongful act that results in the failure of Eyeblaster's product to perform its intended function or to serve its intended purpose. Federal conceded that Sefton did allege a financial injury but claimed that there was no wrongful act because the complaint alleges that Eyeblaster acted intentionally in placing its software on Sefton's computer, and a wrongful act is defined in the policy as an unintentional omission or a negligent act.

The circuit court said that Eyeblaster did install technology on Sefton's computer intentionally, but the insurer could not point to any evidence that doing so was intentionally wrongful. The insurer could not label such conduct as intentionally wrongful merely because it is included in the Sefton complaint; Federal has a duty to show that the use of the technology is outside its policy coverage by being an intentionally wrongfully act. Therefore, the errors or omissions policy also gave the insured coverage for the underlying claims.

The ruling of the district court was reversed and the judgment was remanded.

Editor's Note: The court in this case dealt with the definition of property damage and wrongful act.

The definition of property damage does depend on something happening to tangible property—either actual physical damage or loss of use. And while it is true that the electronic data in a computer is not tangible property, the computer itself is tangible property. The complaint in the underlying action here did allege loss of use of the computer, an allegation that fulfilled the definition of property damage, and this required the insurer to mount a defense for the insured.

As for the wrongful act, the court made the distinction—as many courts today do—between a wrongful act and a wrongful intent. Even though the insured does in fact do something intentionally, such as loading its software into another's computer, or cutting down another's tree, this does not necessarily mean that the insured intended to cause harm.