Knowing Conduct Is Not An “Error, Omission or Negligent Act” Under Technology E&O Policy

A Utah federal district court has held there was no coverage under a technology E&O policy because an underlying complaint against two insureds alleged that they knowingly failed to provide certain customer information to the claimant, the insureds’ business customer, which did not qualify as an “error, omission or negligent act.” Travelers Prop. Cas. Co. of Am. v. Fed. Recovery Servs., Inc., No. 2:14-cv-170 TS (D. Utah May 11, 2015).

The insureds, related businesses providing processing, storage, transmission, and other handling of electronic data for their customers, were hired by an owner/operator of fitness centers to manage payments and automatic debits for its customers. Later, the owner/operator was acquired by another company, and it agreed to transfer its customer information to its acquiror. The insureds agreed to do so, but they apparently omitted certain information. A dispute between the owner/operator and the insureds later ensued, and the owner/operator alleged that the insureds failed to provide certain customer information “until [the owner/operator] satisfied several vague demands for significant compensation.” The underlying suit contained causes of action for conversion, tortious interference, and breach of contract. The insureds tendered the suit to an insurer under a “Technology Errors and Omissions Liability” policy, and the insurer agreed to defend the insureds under a reservation of rights. The insurer then filed a declaratory judgment action concerning coverage.

In the coverage action, the court granted summary judgment in favor of the insurer. The policy at issue afforded coverage for loss caused by an “errors and omissions wrongful act,” which was defined to include “any error, omission or negligent act.” The court ruled that there was no coverage in this case because, in order to trigger coverage, “there must be allegations … that sound in negligence.” Here, the court ruled that there were no such allegations; the operative complaint alleged that the insureds knowingly withheld information unless and until the claimant met certain demands, which was not an “error, omission, or negligence.” As a result, the court ruled that coverage was not triggered under the policy.