Technology Errors and Omissions Liability Coverage

 August 10, 2015

 The cyber liability insurer brought an action against the insured seeking a declaratory judgment that the insurer had no duty to defend the insured for claims arising from the insured's refusal to return electronic data to its customer. This case is Travelers Property Casualty Company v. Federal Recovery Services, 2015 WL 2201797.

 Federal Recovery Services is in the business of providing processing, storage, transmission, and other handling of electronic data for its customers. One of the customers, Global Fitness, entered into a servicing retail installment agreement with Federal to process member accounts and transfer the members' fees to Global Fitness. Later, Global Fitness informed Federal that it was transferring its business to another company and requested Federal to return the member accounts data.

 Federal produced that member accounts data, but the data was missing several critical pieces of information. Later on, Federal provided more information but did not provide credit card, checking account, and savings account information. Federal withheld this information, claiming that Global Fitness had to first satisfy several vague demands for significant compensation. Global filed a lawsuit, alleging conversion, tortious interference, and breach of contract. Federal turned the lawsuit over to its insurer, Travelers Property Casualty Company.

 The insurer filed this declaratory judgment action seeking a declaration as to its duties toward the insured.

 The United States District Court for Utah noted that the issue before it was whether the Global Fitness action triggered Travelers' duty to defend under its technology errors and omissions liability coverage form issued to Federal Recovery. Coverage is provided under this form if the loss is caused by an errors and omissions wrongful act as defined in the policy. Travelers argued that it does not have a duty to defend because Global does not allege damages from an error, omission, or negligent act. Federal countered that the refusal to defend is based on the insurer's improper inference and assumption about the insured's intent to injure, and also ignores the potential that the insured may be found liable for an error, omission, or negligent act relating to the holding, transferring, or storing of data.

 The court found that the insured's argument does not withstand scrutiny. The court said that while the policy covers errors, omissions, and negligent acts, Global's claims allege far different justifications for the data to be withheld. Global did not allege that Federal withheld the data because of an error, omission, or negligence; rather, Global alleges that Federal withheld the data knowingly and refused to turn the information over to Global until Global met certain demands. The Global lawsuit alleged knowledge, willfulness, and malice.

 The court said that the Global action provided no uncertainty. To trigger the duty to defend, there had to be allegations that sounded in negligence and there are no such allegations. Since none of the allegations against the insured involved errors, omissions, or negligence, Travelers had no duty to defend.

 Editor's Note: The U.S. District Court rules that the allegations in the complaint against the insured when matched against the policy language mean that a duty to defend does not exist in this instance. The allegations against the insured claimed willfulness and malice in the insured's actions; the policy applied to errors, omissions, and negligence. Thus, the court decided that the insurer had no duty to defend.