Insurance Coverage for Internet
and Computer-Related Claims
Joshua Gold
“CGL” refers to commercial general liability; “E&O,” to errors & omission; “EFT,”
to electronic fund transfer; and “SEC,” to the United States Securities and
Exchange Commission.
A. Introduction
1. The advent of the Internet has created boundless new opportunities, but it has
also created the potential for enormous liability for those who use it. Policyholders of all kinds should immediately think insurance to offset losses or liabilities that arise from their activities on the Internet. Whether the policyholder is a for-profit firm, government agency, municipality, or charitable organization, insurance coverage can prove a welcome safety net for Cyberspace-related perils. Although not every risk presented by the Internet is
novel, the potential magnitude of losses and damage in Cyberspace is unparalleled. Accordingly, smart risk management in the technology realm is becoming essential for policyholders of all kinds.
Joshua Gold is a shareholder in the New York City, Newark, New Jersey, Washington, DC,
Philadelphia, Pennsylvania, and Chicago, Illinois, law firm of Anderson Kill & Olick, P.C. He is a
frequent author and lecturer on insurance coverage issues.
A complete set of the course materials from which this outline was drawn may be purchased
from ALI-ABA. Call 1-800-CLE-NEWS and ask for Customer Service. Have the number of the
course materials—SG004—handy.
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April 2002
2. Because specialized insurance products for online risks are still limited in
number and untested, policyholders should be mindful of the scope of insurance coverage under the insurance policy forms that they currently have.
Several types of insurance commonly purchased by businesses may respond
to a variety of risks posed by conducting business and communicating in
Cyberspace. Once an inventory of existing insurance coverage is undertaken,
most policyholders are better-positioned to evaluate the need, if any, for the
specialty computer-risk insurance products currently available in the insurance marketplace.
B. Cyberspace Insurance Coverage Issues Insurance
To Cover Liabilities and Losses
1. Insurance coverage should be available for a host of liabilities arising from
activities of the policyholder over the Internet. Insurance coverage under
standard form CGL or umbrella liability insurance policies may be available
for claims stemming from activities on the Internet.
2. In 1976, the insurance industry began marketing the advertising injury coverage provision as part of the “broadest package of coverage available to the
average insured.” See Kay Millonzi and William G. Passannante, Beware Of
The Pirates: How To Protect Intellectual Property, 43 Risk Mgmt. 39, 42 (Aug.
1, 1996). For a detailed discussion concerning insurance coverage under the
CGL policy, see Eugene R. Anderson, et al., Environmental Insurance Coverage
In New Jersey: A Tale Of Two Stories, 24 Rutgers L.J. 83 (1992).
a. Today, the advertising injury provisions remain a valuable component
of the CGL policy. A sampling of cases evinces the value of CGL policies
to cover claims stemming from the policyholder’s advertising activities.
See Sentex Sys., Inc. v. Hartford Accident & Indem. Co., 93 F.3d 578 (9th Cir.
1996) (finding insurance coverage for claims against a policyholder
alleging misappropriation of trade secrets and liability for breach of
non-competition agreement); Mass. Bay Ins. Co. v. Penny Preville, Inc.,
No. 95 Civ. 4845 (RPP), 1996 U.S. Dist. LEXIS 9671 (S.D.N.Y. July 9, 1996)
(finding insurance coverage for defense costs for claims of copyright
and trade dress infringement against policyholder); B.H. Smith, Inc. v.
Zurich Ins. Co., 676 N.E.2d 226 (Ill. App. Ct. 1996) (finding insurance
coverage for policyholder for claims of trademark infringement and
unfair competition).
Insurance for Internet Claims 7
b. This coverage includes payment for the policyholder’s attorneys’ fees and
for judgments or settlements reached in the underlying case against the
policyholder.
C. General Liability Coverage
1. Umbrella and CGL insurance policies often provide insurance coverage for
claims stemming from the policyholder’s advertising activities that involve
claims of libel, slander, defamation, violation of right of privacy, piracy, unfair
competition, or infringement of copyright, title, or slogan.
a. In Sentex Sys., Inc. v. Hartford Accident & Indem. Co., 93 F.3d 578 (9th Cir.
1996), a Federal court of appeals held that interpretation of the advertising
injury provisions of a CGL policy required a contemporary approach. “In
this day and age, advertising cannot be limited to written sales materials,
and the concept of marketing includes a wide variety of direct and indirect advertising strategies.” Id. at 580. For example, in Bensusan Restaurant
Corp. v. King, 937 F. Supp. 295 (S.D.N.Y. 1996) aff’d, 126 F.3d 25 (2d Cir.
1997), the policyholder, an owner of a small jazz club in Missouri, was
sued for trademark infringement, trademark dilution, and unfair competition after he advertised his jazz club by creating a Web site. The claimant,
a New York City jazz club, brought its lawsuit in Federal court in New
York. The policyholder’s lawyers were successful in getting the claims
against their client dismissed by the court. For policyholders, the most
important aspect of this case was the fact that the policyholder’s insurance
company provided insurance coverage for the Internet-related claim
under a CGL policy it had sold to the jazz club owner. See Susan Dominus,
Simpson Thacher’s Blues Club Connection, AmLaw Tech at 28 (1996).
b. Interestingly, it is worth noting that some insurance companies are beginning to eliminate CGL insurance coverage for advertising injuries for those
policyholders who have risk exposures by reason of their involvement
with the Internet.
2. Enabling technology, sometimes called “little brothers,” permits the constant
tracking of Internet users. The tracking information is then often sold to
“direct marketers, collection agencies, private investigators, Web-site designers, mortgage brokers, prospective employers and [the Internet user’s] future
litigants.” See Wendy R. Leibowitz, Personal Privacy And High Tech: Little Brothers Are Watching You, Nat’l L. J., Apr. 7, 1997, at B16.
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April 2002
D. Allegations of Damage To Data and Loss of Use
1. General liability policies and umbrella policies often protect the policyholder
against claims of “property damage.” Common insurance policy definitions
of property damage include “physical damage to tangible property of others,
including all resulting loss of use of that property; or…loss of use of tangible
property of others that is not physically damaged….”
2. Many insurance companies argue that data, information stored on computer
drives and other electronically captured material do not constitute tangible
property under liability insurance policies. See, e.g., Magnetic Data, Inc. v. St.
Paul Fire and Marine Insurance Co., 442 N.W.2d 153 (Minn. 1989). The few cases
reported dealing the issue of whether data or media constitute “tangible
property” are divided with little meaningful analysis offered by the courts in
those decisions.
3. One pro-coverage case was decided by the Court of Appeals of Minnesota in
Retail Systems, Inc. v. CNA Insurance Companies, 469 N.W.2d 735 (Minn. Ct.
App. 1991). In Retail Systems, the court addressed the issue of whether “computer tapes and data are tangible property” under a general liability insurance policy. In finding for coverage, the court held that:
“At best, the policy’s requirement that only tangible property is covered is ambiguous. Thus
this term must be construed in favor of the insured. Other considerations also support the
conclusion that the computer tape and data are tangible property under this policy. The data
on the tape was of permanent value and was integrated completely with the physical property of the tape.” Id. at 737.
4. Other pro-policyholder cases on the issue of whether loss of data constitutes
“property damage” include Centennial Insurance Co. v. Applied Health Care Systems, Inc., 710 F.2d 1288 (7th Cir. 1983) (holding that insurance company must
defend suit against policyholder for allegations of data processing malfunction and random loss of computer data as a result of defective data processing system controllers) and St. Paul Fire & Marine Insurance Co. v. National
Computer Systems, Inc., 490 N.W.2d 626 (Minn. Ct. App. 1992) (holding that
complaint against policyholder for misappropriation of confidential information did not allege property damage, but nevertheless held insurance company had defense obligation to policyholder).
5. The cases are split on this question, however. Decisions favoring the insurance companies include Peoples Telephone Co., Inc. v. Hartford Fire Insurance Co.,