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(Article from Insurance Law Alert, June 2017)

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Our October 2015 Alert reported on a Montana federal district court decision holding 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 Enters., Inc., 2015 WL 5680134 (D. Mont. Sept. 25, 2015).  Last month, the Ninth Circuit affirmed the ruling.  Am. Econ. Ins. Co. v. Hartford Fire Ins. Co., 2017 WL 2323440 (9^th Cir. May 26, 2017).

A class action suit 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 take photographs with the computer’s webcam, capture keystrokes and take screen shots without the consumer’s knowledge.  The complaint alleged violations of federal statutory law and the 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 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 paid this sum on behalf of Aspen Way, but reserved the right to seek recoupment upon a declaration of non-coverage.  Thereafter, Liberty filed suit seeking reimbursement from Aspen Way and a declaration that it had no duty to defend either suit. 

The Ninth Circuit ruled that coverage for the class action suit was barred by an exclusion relating to violations of statutes that address the collection or distribution of material or information.  With respect to the Washington State action, the court concluded that Liberty had no duty to defend because the complaint did not allege “publication” of personal information to third parties.  Finally, the court ruled that the insurers were entitled to recoup defense costs, explaining that under Montana law, Aspen Way “implicitly accepted” their defenses under a reservation of rights.