In late July 2010, the Eighth Circuit Court of Appeals held that an insurer that issued  a General Liability policy and an Information and Network Technology Errors or Omissions Liability policy must provide a defense to its insured under both policies for a claim that alleges the insured infected the underlying claimant’s computer with a spyware program, allegedly affecting the operation of the computer.  Eyeblaster, Inc. v. Federal Ins. Co., No. 08-3640 (8th Cir., July 28, 2010).  In doing so, it reversed the lower court’s decision in which it held that the insurer need not provide a defense to its insured under either policy, which we discussed here.

The Court’s decision applied Minnesota law.  In its discussion of the general liability policy, the Court focused on that portion of the definition of “property damage” that obligates the insurer to provide coverage for a claim alleging “loss of use of tangible property that is not physically injured.”  The underlying claimant had alleged that the spyware caused his computer to freeze, crash, and operate so slowly that it had in essence become inoperable.”  While the policy excluded “software, data or other information that is in electronic form” from its definition of “tangible property,” the Court found that the “plain meaning” of tangible property includes computers, and that the underlying claimant’s  complaint “alleges repeatedly the ‘loss of use’ of [the] computer.”  Therefore, the Court found that the allegations regarding the computer becoming inoperable constituted a claim of the loss of use of tangible property as defined by the policy, and the insurer owed a duty to defend the insured with respect to those claims.  The Court also found that the insurer had not met its burden in proving that an exclusion for “Damage to Impaired Property or Property not Physically Injured” applied to the claims regarding the inoperable computer.  In addition, the Court noted that there had been “no convincing argument” that  “Expected or Intended Injury” or “Intellectual Property Laws or Rights” exclusions applied.  The decision also notes that the insured’s services are known as “rich media advertising’ that allows customers to track and manage the performance of advertising campaigns, and “uses cookies, which are typically used in the advertising industry to measure and enhance the effectiveness of an advertising campaign” and “does not use spyware or introduce malicious contact such as spam, viruses or malware.”

In deciding that there was also a duty to defend under the Information and Network Technolgy Errors or Omissions Liability policy , the Court noted that it has defined “error” in a technology errors and omissions policy “to include intentional, non-negligent acts but to exclude intentionally wrongful conduct.”   It further noted that the insurer had not pointed to evidence that the intentional acts alleged were intentionally wrongful.

The case was remanded for further proceedings.

Please click here to read a copy of the court’s decision.