Court Finds Ambiguity But No Bad Faith by Insurer in Bible App Data Claim

The Pennsylvania Supreme Court has let stand a state appeals court ruling that tackled for the first time what is meant by “your computers” under electronic data coverage in a commercial property policy.

The case involves claims by Bible video creator Watchword over its loss of electronic data that was hacked while stored on a server controlled by a third party.

The appellate Superior Court held in January that an Erie Insurance policy that covered destroyed or corrupted electronic data that “resides in your computers” was ambiguous because it did not clarify if “your computers” refers only to computers at the insured’s physical location as Erie argued, or if it also includes computers that the insured licenses or leases and that are controlled by a third party as Watchword maintained.

The Superior Court found the term “your computers” can reasonably be understood to mean both. The interpretation that it means the insured’s own computer is supported by the policy’s use of the terms “leased” and “licensed” in describing the electronic data that is covered and the omission of these terms when referring to the location where insured data must reside. However, “your computers” could also reasonably be understood to encompass a computer that the insured licenses or leases, given the common understanding of “your” as sometimes including items that someone does not own but has a right to use and uses.

Because the policy language is ambiguous, the appeals court said the term must be construed in favor of the insured Watchword to trigger coverage for the company’s loss of its videos and data on a server controlled by a third party.

Watchword sells videos of the New Testament of the Bible and transmits them to its customers’ iPhones. Watchword’s videos and application programing interface (API) are stored on a GoDaddy server. The mobile application is on an Apple server.

In 2017, Watchword filed a claim with Erie for the loss caused by the deletion of its videos from the GoDaddy server. Erie denied Watchword’s claim because the electronic data that was destroyed was not on Watchword’s own computers and that the cost of replacing the videos on the GoDaddy server from copies that Watchword had was less than the $2,500 deductible. In 2019, Watchword sued Erie, alleging breach of contract for the failure to pay its claim for the cost of replacing electronic data and bad faith denial of its claim.

In the end, the appeals court found that Erie did not breach its contract or act in bad faith with Watchword. It said Erie was not unreasonable in its interpretation of the “your computers” term and that Erie also had another ground for denying the claim: that the cost to replace the lost videos with copies would fall below the policy’s $2,500 deductible.

“Erie denied payment of Watchword’s claim on the ground that there was no coverage because the policy required that the destroyed or corrupted electronic data ‘resides in your computers’ and the deleted electronic data was on a GoDaddy computer, and on the ground that the loss, even if covered, did not exceed the deductible. Both of those grounds were reasonable grounds for denying Watchword’s claim,” the Superior Court stated.

The appeals court reversed the trial court that had faulted Erie for its “unreasonable” interpretation of “your computers” and for not accepting Watchword’s claim that its costs would exceed the deductible. The lower court had ruled against Erie, despite Watchword’s own evidence that its data replacement could cost less than the deductible and indications that Watchword instead sought $10,000 to $20,000 to create an updated Apple mobile app.

The Superior Court vacated the trial court judgment and the state Supreme Court this week affirmed that appeals court ruling without comment.