Mass. Court: Professional Liability Policy Excludes Document Theft

A document management company that allowed a client’s sensitive documents to be taken is not covered by a professional liability policy with an intellectual property exclusion, the Massachusetts Supreme Judicial Court has ruled.

The case – which pitted Uniscribe Professional Services Inc. against its insurer, National Union Fire Insurance Co. of Pittsburgh, Pennsylvania – stemmed from a settlement reached between Uniscribe and the Los Angeles law firm Jones Day, from which documents were taken.

Uniscribe provides records management, document imaging and electronic printing services to law firms and corporations. According to court records, Jones Day hired Uniscribe in 2002 to provide litigation support services in connection with the representation of its client, DirecTV. Three Uniscribe employees were assigned to work on the DirecTV case at the Jones Day office. Jones Day would not allow documents related to the DirecTV litigation to be removed from its office and the employees signed agreements pledging to maintain the confidentiality of information entrusted to them by Jones Day.

But in September 2002, a Uniscribe supervisor authorized an employee working on the DirecTV project to bring his nephew to assist the Uniscribe employees in meeting Jones Day’s deadlines. The nephew worked for approximately 10 days and was paid cash by his uncle, who recorded the nephew’s hours as overtime. The nephew came across documents containing confidential trade secret information from DirecTV and sent that information to a Web site to help the “hacker” community.

In January 2003, Jones Day notified Uniscribe of the disclosure. Uniscribe promptly notified National Union of the incident, indicating that Jones Day had written off a substantial legal fee for services it had performed for DirecTV and that Jones Day “may eventually look to [Uniscribe] to compensate them for this matter.”

National Union, through its claims handler, disclaimed coverage based on the intellectual property exclusion.

By November 2004, Jones Day’s patience with Uniscribe’s efforts to resolve the coverage dispute with National Union had been exhausted. Jones Day informed Uniscribe by letter that it would no longer defer pursuit of its claims against Uniscribe and gave Uniscribe five days to consider a settlement proposal under which Uniscribe would pay Jones Day $1.5 million over a five-year period. Uniscribe forwarded Jones Day’s letter to the insurer, which did not respond.

Given the time constraints on Jones Day’s offer and the anticipated costs of defending itself in litigation, Uniscribe negotiated a settlement agreement with Jones Day in which Uniscribe agreed to pay Jones Day nearly $1.2 million over five years.

Uniscribe had argued that its professional liability policy required National Union to indemnify and defend the company. But the insurer argued that its policy excluded claims arising out of misappropriation of trade secrets – also known as an intellectual property exclusion.

The decision affirms an earlier decision by a lower court which ruled in National Union’s favor.