## Facts

- Eyeblaster, Inc., an online advertising services company, purchased from Federal Insurance Company a Commercial General Liability (CGL) policy and a technology errors-and-omissions (E&O) policy for 2005–2007.
- A computer user, David Sefton, sued Eyeblaster alleging that visiting an Eyeblaster-related website caused his computer to be “infected” with spyware-like code.
- Sefton alleged the infection made his computer stop running properly, freeze or crash, and become unusable for a time; he also alleged pop-up ads, degraded performance, a hijacked browser, and the need to reconstruct files.
- Eyeblaster tendered defense of the Sefton action to Federal under both policies; Federal denied any duty to defend, asserting the suit did not allege covered “property damage” or an “occurrence,” and that any harm was to software excluded from “tangible property.”
- Eyeblaster filed a declaratory-judgment action seeking a ruling that Federal owed a defense under both policies.
- The district court granted summary judgment to Federal, concluding Sefton alleged only software damage and therefore no covered “property damage” under the CGL policy.
- Eyeblaster appealed.

## Issues

1. Whether Sefton’s allegations plausibly alleged “property damage” under the CGL policy as “loss of use of tangible property that is not physically injured,” triggering a duty to defend.
2. Whether the CGL policy’s impaired-property exclusion barred a defense based on the allegations in the underlying complaint.
3. Whether Federal proved, as a matter of law, that Sefton’s claims fell outside coverage under the technology E&O policy.

## Decision

- The Eighth Circuit reversed the summary judgment for Federal and remanded.
- The court held Federal had a duty to defend under the CGL policy because the complaint alleged loss of use of tangible property (the computer hardware), even if the alleged cause involved software or code.
- The court held the impaired-property exclusion did not clearly apply on the face of the complaint to defeat the duty to defend.
- The court held Federal failed to establish that the Sefton complaint fell outside the technology E&O policy’s coverage at the summary-judgment stage.

## Legal Principles

- Under Minnesota law, an insurer’s duty to defend is broader than its duty to indemnify and is triggered if any part of a claim is arguably within coverage, based on the complaint’s factual allegations.
- “Property damage” that includes “loss of use of tangible property that is not physically injured” can be alleged by facts showing temporary inoperability or functional impairment of computer hardware.
- A policy’s exclusion of software from “tangible property” does not preclude a defense when the allegations include loss of use of the computer itself as tangible property.
- Exclusions are construed narrowly against the insurer at the duty-to-defend stage; the insurer bears the burden to show an exclusion clearly eliminates coverage.
- On summary judgment concerning an E&O policy, the insurer must show the claim is outside coverage (including through applicable exclusions); failure to do so precludes judgment denying a defense.

## Conclusion

The court required Federal to defend because the underlying allegations plausibly included loss of use of tangible computer hardware, and Federal did not show that either the CGL impaired-property exclusion or limits under the technology E&O policy clearly eliminated the duty to defend.


Eyeblaster, Inc. v. Fed. Ins. Co., 613 F.3d 797 (8th Cir. 2010)