Connecticut High Court Upholds Coverage Denial in IBM Data Loss Case

The Connecticut Supreme Court on Monday upheld a lower court’s ruling that Federal Insurance Company and Scottsdale Insurance Company are not required to defend or indemnify the insureds for the loss of computer tapes that exposed personal information of some 500,000 current and former IBM Corp. employees.

Court documents show that Recall Total Information Management, a data management firm, contracted with IBM Corp. to transport and store computer tapes containing personal information of current and former IBM employees.

Recall Total subsequently subcontracted with Executive Logistics, a shipping and trucking firm, to provide transportation services for the tapes. Under the agreement, Executive Logistics was required to maintain various insurance policies, including a $2 million commercial general liability policy and a $5 million umbrella liability policy.

In connection with these agreements, Federal Insurance and Scottsdale Insurance issued, respectively, a commercial general liability policy and an umbrella liability policy to Executive Logistics. Both policies also named Recall Total as an additional insured.

In February 2007, Executive Logistics dispatched a transport van to move computer tapes from an IBM facility in New York to another location. But during transport, a cart containing the tapes fell out of the back of the van. Some 130 tapes were retrieved from the roadside by an unknown individual and were never recovered.

These lost tapes contained employment-related data for approximately 500,000 past and present IBM employees. This information included social security numbers, birth dates, and contact information.

According to court documents, there is no evidence that anyone ever accessed the information on the tapes or that their loss caused injury to any IBM employee, but IBM spent significant sums providing identity theft services and, in informal negotiations, IBM claimed a total of more than $6 million in expenses for the mitigation measures it took and sought reimbursement of those sums from Recall Total and, by extension, Executive Logistics.

Federal Insurance and Scottsdale Insurance were notified of the loss of the computer tapes and the settlement negotiations but declined to participate in those negotiations or to provide coverage to the plaintiffs under the policies.

In July 2009, Recall Total and Executive Logistics commenced the present legal action against the Federal Insurance and Scottsdale Insurance, alleging a breach of the insurance contracts.

The plaintiffs alleged that the loss of the computer tapes constituted a “personal injury,” which was defined by the policies as an injury caused by an offense of electronic, oral, written or other publication of material that violates a person’s right of privacy.

The defendants filed separate motions for summary judgment with respect to the breach of contract count on the basis that they had no duty to defend the plaintiffs in the settlement negotiations and the plaintiffs’ loss was not covered by the policies.

The trial court granted the defendants’ motions for summary judgment after concluding that the defendants had not waived coverage defenses by failing to defend the plaintiffs and that the plaintiffs’ losses were not within the scope of the personal injury clauses of the policies. The plaintiffs appeal to the appellate court followed.

The appellate court affirmed the trial court’s rendering of summary judgment in favor of the defendants. The appellate court concluded that there was no breach of the duty to defend by the insurers and that the settlement negotiations involving the plaintiffs and IBM did not constitute a “suit” or “other dispute resolution proceeding,” which would have triggered a duty to defend.

The appellate court also concluded that the loss of the computer tapes did not constitute a “personal injury” as defined by the policies because there had been no “publication” of the information stored on the tapes resulting in a violation of a person’s right to privacy.

In upholding the lower court’s decision Monday, the Connecticut Supreme Court stated: “Our examination of the record and briefs and our consideration of the arguments of the parties persuade us that the judgment of the Appellate Court should be affirmed.”

The case is Recall Total Information Management Inc. et al v. Federal Insurance Company et al. (SC 19291).