Insurers Had No Duty to Defend Insured in Spyware Action

June 21, 2017 | Robert Tugander | Insurance Coverage

The U.S. Court of Appeals for the Ninth Circuit has ruled that insurers were not obligated to defend their insured against claims that the insured had violated a person’s “right of privacy” where one complaint had not alleged publication of private material and the other fell within the Recording and Distribution exclusion.

The Case

Aspen Way Enterprises, Inc., was sued for allegedly using spy software to track rented laptops by secretly taking photographs using the laptop webcam, capturing keystrokes, and taking screenshots.

Customers sued Aspen Way alleging invasion of privacy. The state of Washington also sued, alleging violations of the state’s consumer protection and computer spyware acts.

Aspen Way sought coverage for both suits from its insurers under the “personal and advertising injury” provisions of the policies. The “personal and advertising injury” definition included “oral or written publication, in any manner, of material that violates a person’s right of privacy.”  The policies, however, contained a Recording and Distribution exclusion that precluded coverage for personal and advertising injury “arising directly or indirectly out of any act or omission that violates … any federal, state or local statute ….”

The insurers agreed to defend Aspen Way under a reservation of rights, subject to their right to seek reimbursement for expenses incurred if it was later determined that coverage was excluded. The insurers then filed a declaratory judgment action seeking to get clear of the duty to defend.

Applying a broad definition of “publication,” the U.S. District Court for the District of Montana ruled that customers’ suit potentially implicated coverage because the customers’ private information was allegedly forwarded to “unknown persons.” The state of Washington suit, however, did not implicate the personal and advertising injury coverage because the state did not allege that Aspen Way published private material.

The court next considered the Recording and Distribution exclusion with respect to the customers’ suit. The customers’ case ultimately came down to the violation of the Electronic Communications Privacy Act (ECPA), a federal statute that prohibits disclosure or use of any intercepted electronic communication.   The trial court rejected Aspen Way’s contention that the exclusion was unambiguous, stating that it “cannot imagine a reasonable construction … that would render the Recording and Distribution Exclusion inapplicable….”

The trial court also held that the insurers could recoup their defense costs. Aspen Way appealed to the Ninth Circuit.

The Ninth Circuit’s Decision

The circuit court affirmed.

It agreed with the trial court that the state of Washington suit did not trigger coverage because the complaint had not “specifically allege[d]” that Aspen Way had “published private material.” It also agreed that the customers’ suit was excluded because the injury arose directly or indirectly out of the ECPA, a statute that prohibits the distribution or transmission of material.

Additionally, the circuit court upheld the insurers’ request to recoup their defense costs.

The case is American Economy Ins. Co. v. Hartford Fire Ins. Co., No. 16-35059 (9th Cir. May 26, 2017).

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