Personal Injury Coverage Does not Apply to Data Breach

by Hinshaw & Culbertson LLP
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According to a Law360 report, Sony Units Denied Coverage For Suits Tied To Cyber Attack (subscription required), a New York state judge ruled last Friday in the Zurich v. Sony insurance litigation that the stealing of consumer information through a cyber attack did not constitute “personal injury” under a commercial general liability policy because third-party hackers and not the insured committed the offense.  If upheld on appeal, the decision would compliment other authority holding that personal injury coverage applies only to potential liability from the insured’s purposeful acts.  

The Sony coverage litigation resulted from a 2011 data breach. Zurich American Insurance Company and Mitsui Sumitomo Insurance Company had issued primary commercial general liability policies to Sony. In April 2011, computer hackers broke into Sony networks and stole personal and financial information of over 100 million users. 

Immediately following the breach, Sony was named as a defendant in numerous class actions. Sony tendered the defense of these actions to its insurers. Mitsui denied coverage. Zurich responded by filing a declaratory relief action in New York state court seeking a declaration that Zurich had no duty to defend.

The parties later filed cross-motions for partial summary judgment. The resolution of the motions turned on whether the data breach constituted a “personal injury” offense. Among other enumerated offenses, the policies provided coverage for a “publication, in any manner, of material that violates a person’s right of privacy”

Emphasizing that the policies covered a publication “in any manner,” Sony argued that the unauthorized collection and use of personal information necessarily constituted a publication that violates privacy rights. Sony cited authority holding that there could be a “publication” even though the company that inappropriately accessed personal information never disseminated it to others or used it only for targeted advertisements. See, e.g., Lenscrafters, Inc. v. Liberty Mut. Fire Ins. Co., 2005 U.S. Dist. LEXIS 47185 (N.D. Cal, Jan. 20, 2005) (improper use of private medical information to sell products to customers).

The insurers countered that “personal injury” coverage encompassed only offenses that the insured committed. Because Sony did not publish any private information – instead unauthorized third parties stole it – there was no potential coverage as a matter of law.

In support, the insurers relied heavily on the New York Court of Appeals decision in Columbia v. Continental Ins. Co., 83 N.Y.2d 618, 634 N.E.2d 946 (1994). There, Columbia sought coverage for environmental contamination under a personal injury endorsement.  Personal injury was defined to include “wrongful entry or eviction or other invasion of the right of private occupancy.” The policy’s pollution exclusion barred coverage under an occurrence-based property damage theory.  

Upholding a dismissal in the insurer’s favor, the Court of Appeals interpreted personal injury coverage to reach only the insured’s “purposeful acts,” not indirect, incremental harm from environmental pollution.

Courts in other jurisdictions have reached the same conclusion with respect to pollution claims but sometimes have used different reasoning.  In Titan Corp. v. Aetna Cas. & Sur. Co., 22 Cal. App. 4th 457 (1994), a California court of appeal held that personal injury coverage for “wrongful entry or eviction or other invasion of the right to private occupancy” did not apply to injury to realty.  Construed otherwise, the court reasoned, the pollution exclusion would be rendered superfluous and never apply.

Yet, some courts have applied the purposeful acts rationale outside the pollution context. In Butts v. Royal Vendors, Inc., 202 W. Va. 448, 504 S.E.2d 911 (1998), the West Virginia Supreme Court concluded that personal injury coverage for violation of privacy rights applied only where the insured had published material invading privacy rights. Third-party publications could not trigger coverage.

The trial judge in Zurich v. Sony sided with the insurers, concluding that personal injury coverage applies only to the insured’s own conduct. The Law360 report quotes the judge as finding that the policy “requires the policyholder to commit the acts, it does not extend to third parties.” 

Even if Sony were able to convince the judge that third-party conduct could trigger coverage, Sony still would have to establish that the violation of privacy rights arose from a “publication.” Sony contends that the term has been broadly construed to encompass any transmittal of information from one person to another.

Though the trial judge apparently did not rule on this issue, it remains to be seen whether Sony’s position on publication would withstand appellate scrutiny. Sony’s construction is so broad as to render the publication requirement practically meaningless.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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