In May 2015, the U.S. District Court for the district of Utah denied an insured’s motion for partial summary judgment in Travelers Property Casualty Company of America et al. v. Federal Recovery Serv. et al., Case No. 2:14-cv-00170. The court previously found no duty to defend under a CyberFirst Policy issued by Travelers. The defendants, Federal Recovery Services, Inc. and Federal Recovery Acceptance, Inc., (Federal Recovery) provided electronic data and information handling for its customer, Global Fitness Holdings, LLC, who in the underlying action, alleged Federal Recovery withheld this information and data. The central issue before the District Court in May 2015 was “whether the Global Fitness action triggered Travelers’ duty to defend under the Technology Errors and Omissions Liability Form.” And, the District Court held Traveler’s did not have a duty to defend Federal Recovery. The District Court’s decision only left Federal Recovery’s counterclaims to be litigated.

On January 12, 2016, the District Court denied Traveler’s motion for summary judgment seeking a dismissal of Federal Recovery’s counterclaims for breach of contract, breach of the implied covenant of good faith and fair dealing and breach of fiduciary duty. The court found the following concerning Federal Recovery’s three counterclaims:

  • Breach of Contract: Travelers argued this claim fails in light of the District Court’s finding that Federal Recovery was not entitled to coverage. The court refused to review its determinations related to coverage issues addressed in its May 2015 order granting Traveler’s motion for summary judgment (“It is improper for Defendants to now argue that extrinsic evidence must be used in determining the duty to defend when they failed to do so previously and failed to respond to Travelers’ argument that extrinsic evidence should not be considered”). In granting Traveler’s motion on this count, the District Court held it did not have to revisit its finding on this issue.
  • Breach of the Implied Covenant of Good Faith and Fair Dealing (defense obligation): The District Court denied Federal Recovery’s motion based on well-settled Utah law holding that “when an insured’s claim is fairly debatable, the insurer is entitled to debate it and cannot be held to have breached the implied covenant of good faith if it chooses to do so.” The District Court reasoned Travelers could not have breached any duty because Federal Recovery’s claim was “fairly debatable.

However, the portion of Federal Recovery’s breach of implied covenant of good faith and fair dealing claim related to Traveler’s attempt to recover defense costs survived Traveler’s motion for summary judgment. Federal Recovery’s expert witness opined that Travelers botched the initial reporting of Federal Recovery’s report of the claim by “requiring the filing of a lawsuit as a condition precedent to accepting Defendants’ claim report.” On this narrow issue, the District Court held the question of whether Travelers “inappropriately required the filing of suit papers in contravention of the CyberFirst Policy provisions, which may have resulted in a dilatory denial of defense causing severe financial consequences to the Defendants, is a factual issue and may be submitted to the jury.” Consequently, Federal Recovery is permitted to litigate this issue.

  • Breach of Fiduciary Duty: The District Court found no question of fact precluding dismissal of Federal Recovery’s breach of fiduciary claim based on its earlier finding that Travelers did not have a defense obligation (“Without a duty to defend, Defendants cannot show that Travelers breached its fiduciary duty to defend”).

Federal Recovery retained an expert who opined that Traveler’s claims handling was “contrary to industry customs, practices and standards.” This decision does not give sufficient information to determine whether Travelers acted appropriately. The District Court merely found this issue could be submitted to a jury. However, this case serves as a reminder that while cyber insurance may have a number of novel concepts, ultimately, this coverage is based on fundamental insurance principles. The court’s analysis focused on the insurance provision concerning Traveler’s “duties in the event of a Claim or Suit.” Consequently, the District Court’s reasoning in the Federal Recovery decision is based on case law from a number of run-of-the-mill insurance cases.