On August 17, in the case of Carolina Casualty Insurance Company, et al v. Red Coats Inc., the Eleventh Circuit reinstated a suit brought by Admiral Security Services against two of its insurers, Continental Casualty and National Union, in the district court for the Northern District of Florida. Admiral was seeking coverage under commercial general liability (CGL) polices issued by Continental Casualty and National Union for settlement payments that Admiral made to AvMed Inc. after AvMed suffered damages from a security breach. The district court granted summary judgment in favor of the two insurers but the Eleventh Circuit reversed based on its conclusion that the availability of coverage under these policies turned on the state law applicable to the insurance contracts. Given the relative paucity of cases involving coverage for security breaches, this case is one to watch, especially as the Eleventh Circuit has suggested that coverage may ultimately come down to which State’s law applies – an issue that can potentially “make or break” coverage in any case.
By way of background, Admiral had been hired by AvMed to provide security services at one of AvMed’s facilities, when one of Admiral’s security guards allegedly stole laptop computers from AvMed that contained personal information of AvMed members protected by the Health Insurance Portability and Accountability Act (HIPAA). The coverage action originated when one of Admiral’s carriers, Carolina Casualty, filed a declaratory judgment in a Florida district court seeking a judicial determination as to whether the Employment Practice Liability Policy that it had issued to Admiral provided coverage for the security breach suit filed by AvMed against Admiral. Admiral filed an answer and a counter-claim, which brought three other of Admiral’s carriers into the suit – Continental Casualty, National Union and Travelers that had issued policies to Admiral.
Admiral, Carolina Casualty, Continental Casualty and National Union all moved for summary judgment (Travelers and Admiral reached a settlement and Travelers was removed from the case). The district court denied Admiral’s motions for summary judgment and granted summary judgment in favor of the carriers. Specifically, with respect to Carolina Casualty Employment Practices Liability Policy, the district court concluded that the relationship between AvMed and Admiral was not an “employment relationship” which would be required for coverage under the policy. With respect to the Continental Casualty and National Union CGL policies, the district court concluded that coverage was also unavailable, because Admiral’s claims were not for property damage, but were instead for but economic loss (which would not be covered under the policies).
On appeal, the Eleventh Circuit affirmed that Carolina Casualty’s policy does not provide coverage for AvMed’s suit against Admiral. But as to the two CGL policies, the Eleventh Circuit vacated the district court’s grant of summary judgment. Although the Eleventh Circuit declined to rule on the ultimate issue of whether the CGL policies provide coverage for Admiral’s claims, the Court explained that coverage may turn on whether Florida or Maryland law applies to the insurance policies. The Court further indicated that its coverage determination would hinge on whether the damages at issue are “damages because of . . . property damage” and whether the electronic-data exclusion (which excludes coverage for damages “arising out of the loss of [or] loss of use of . . . electronic data”) precludes coverage of the settlement payments. And in this regard, the Court explained that under Florida law, ambiguities in policy language are construed liberally in favor of the policyholder, but under Maryland law ambiguities are not necessarily construed against the carrier and in favor of the policyholder. Thus, to the extent a court determines that the language in the National Union and Continental Casualty policies is ambiguous, whether there is coverage under these policies may depend on what state’s law is applied. And now that this case is moving forward, it will be interesting to see whether the district court’s determination of coverage does, in fact, turn on the application of Maryland or Florida law.