(Article from Insurance Law Alert, October 2015)
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A Montana federal district court ruled that primary and umbrella insurers had no duty to defend two suits alleging that the policyholder secretly installed spyware programs on consumers’ computers. Am. Econ. Ins. Co. v. Aspen Way Enterprises, Inc., 2015 WL 568013 (D. Mont. Sept. 25, 2015).
A class action suit against Aspen Way, a “rent-to-own” store, alleged that Aspen Way installed undetectable software on computers that were leased or sold to customers. According to the complaint, the software allowed Aspen Way to secretly take photographs with the computer’s webcam, capture keystrokes and take screen shots – all without the consumer’s knowledge. The complaint alleged violations of state statutory law and common law right to privacy. The common law claims were dismissed, leaving only the cause of action alleging a violation of the Electronic Communications Privacy Act. Liberty Mutual agreed to defend the suit under a reservation of rights. A second suit was filed against Aspen Way by the State of Washington alleging violations of state statutory law. This suit was resolved by a consent decree, under which Aspen Way agreed to pay $150,000. Liberty Mutual paid this sum on behalf of Aspen Way, but reserved the right to seek recoupment upon a declaration of non-coverage. Thereafter, Liberty mutual filed suit seeking reimbursement from Aspen Way and a declaration that it had no duty to defend either suit. The court granted Liberty Mutual’s summary judgment motion as to the duty to defend.
The court ruled that the class action complaint alleged “Personal and Advertising Injury” under Liberty Mutual’s primary and umbrella policies because it alleged “publication . . . of material that violates a person’s right of privacy.” The court explained that under Montana law, “publication” occurs when information “is transmitted to a third party.” Here, because the complaint alleged that customers’ personal information was “forwarded to unknown persons and locations,” the publication requirement was met. However, the court held that coverage was barred by a “Recording and Distribution of Material or Information in Violation of Law Exclusion,” which excluded coverage for violations of statutes that address the collection or distribution of material or information. Notably, the exclusionary language in two of the umbrella policies contained typographical errors which rendered the provision nonsensical. However, the court reformed the language to mirror the grammatically-correct language in the primary and other umbrella policies, finding that Liberty Mutual had established by clear and convincing evidence that the omission was a mistake that Aspen should have suspected.
With respect to the Washington State action, the court concluded that Liberty Mutual had no duty to defend because the complaint did not allege facts that, if proven, would constitute “publication.” As the court explained, the allegations were based only on Aspen Way’s installation of the spyware and its retention of data, rather than on any alleged transmission to third parties.