Claim based on Failed IT Transition Does Not Involve Property Damage or Loss of Use

A Colorado federal district court, applying Colorado law, has held that a claim against an information technology consulting firm arising from the firm’s alleged mismanagement of a project to replace its client’s systems did not involve “property damage” (including “loss of use”) under a CGL policy.  Ciber, Inc. v. Federal Ins. Co., No. 16-cv-01957-PAB-MEH (D. Colo. Mar. 5, 2018).

The policyholder, an information technology consulting company, contracted to replace an agency’s legacy financial management computer system.  The insured did not successfully complete the project, and the agency terminated its contract.  In subsequent litigation, the agency filed a counterclaim against the insured for breach of contract and fraud.  Among other things, the agency alleged that the insured’s defective performance rendered its computer systems unable to “perform simple transactions” or “save basic data,” and it claimed that its systems were “brought to a standstill by flashing ‘error’ messages” as a result of the insured’s programming.  The agency also maintained that its “staff spent hundreds of hours reviving and updating the legacy [computer] system” due to the failed rollout of the new system.  The insured tendered the claim to its CGL insurer and sought coverage under the “property damage” insuring agreement, asserting that the claim alleged “loss of use.”  The insurer declined coverage.

In ensuing coverage litigation, the court granted summary judgment for the insurer, holding that there were no allegations of “property damage,” including loss of use of tangible property.  The court reasoned that while there were allegations of defective performance, there were no allegations “that [the agency] lost use of the legacy system or that the legacy system was damaged.”  On that basis, the court distinguished prior case law, including Eyeblaster, Inc. v. Federal Insurance Co., 613 F.3d 797 (8th Cir. 2010) and American Guarantee & Liability Insurance Co. v. Ingram Micro, Inc., No. 99-185 TUC ACM, 2000 WL 726789 (D. Ariz. Apr. 18, 2000), which involved impairment and loss of use of computer systems.  By contrast, the agency’s claims here did not allege any loss of use of its legacy system or any computers or hardware.  The court also ruled that claims alleging the “loss of programming and custom configurations” and “bug-ridden code” did not involve physical injury and thus also did not involve property damage.