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Netscape Communications Corporation, et al. v. Federal Insurance Company, et al.

No. C 06-00198 JW (N.D. Ca., October 10, 2007)

Court grants summary judgment motion of defendant St. Paul Mercury Insurance Company (“St. Paul”), and holds St. Paul has no duty to defend or indemnify plaintiff America Online (“AOL”) for losses sustained as a result of its defense and settlement of lawsuits brought against its Netscape subsidiary arising out of Netscape’s collection of information about the internet activities of users of its ‘Smart Download’ software.  Such activities were alleged to constitute violations of both the Electronic Communications Privacy Act and the Computer Fraud and Abuse Act.  The Court held that St. Paul had no obligation to indemnify AOL for such losses because the General Liability Policy it issued excluded coverage for ‘personal injury’ arising out of ‘online activities,’ which activities included ‘providing internet access to third parties.’  As interpreted by the Court, this phrase encompassed activities which allowed users to ‘make use of’ the Internet.  As the Smart Download software assisted users in downloading files over the Internet, the conduct at issue was an “online activity’ within the meaning of St. Paul’s insurance policy, and accordingly was excluded from coverage thereunder.

Netscape made available to users ‘Smart Download’ software, to assist them in downloading files over the Internet.  Among other features, this software allowed the user to resume an interrupted download from the point of interruption, rather than commencing the download anew.

The software also had a Smart Download Profiling feature, which transmitted to Netscape information concerning the users’ Internet activities.  Netscape used this information ‘to create opportunities for targeted advertising.’

Claiming this conduct violated, inter alia, the Electronic Communications Privacy Act and the Computer Fraud and Abuse Act, a number of users commenced lawsuits against Netscape.  Netscape tendered the suits to St. Paul for defense under a General Liability policy it issued.  St. Paul refused to defend, saying it had no obligation to do so under the insurance policy at issue.  Netscape subsequently brought this suit, seeking to recover the costs incurred in both defending, and settling these actions.  Agreeing with St. Paul, the Court granted St. Paul summary judgment, and dismissed plaintiff’s claim.
 The policy in question provided AOL with insurance against losses sustained for ‘personal injury.’  As defined in the insurance policy, ‘personal injury’ included losses arising from ‘making known to any person or organization written or spoken material that violates a person’s right to privacy.’  The Court held this definition broad enough to cover the injuries at issue, as they arose out of the internal disclosure within Netscape and AOL of information concerning users’ internet activities, and were alleged to constitute a violation of the Electronic Communications Privacy Act.

The Court further held that St. Paul could not avoid coverage by an exclusion that excluded coverage for personal injuries arising out of criminal acts.  As defined in the policy, ‘criminal acts’ included ‘deliberately breaking the law’ where ‘the protected person  knowingly break[s] any criminal law.’  The Court held that this exclusion did not apply notwithstanding the fact that the underlying complaints alleged that Netscape violated criminal statutes – including the Electronic Communications Privacy Act and the Computer Fraud and Abuse Act – for which the plaintiffs therein sought civil remedies.  Said the Court:

In this case, Plaintiffs’ were not found to have committed a ‘breaking’ of a criminal law as required by the ‘deliberately breaking the law’ exclusion.  Therefore, the exclusion was never triggered.  The mere allegation that Plaintiffs’ broke a criminal law in the Underlying Actions is not enough to support the assertion that Plaintiffs’ knowingly broke or consented to the breaking of a criminal law.  This is especially true because the Underlying Actions were civil in nature and settled without a court finding on liability or for that matter guilt.  Accordingly the Court finds the ‘deliberately breaking the law’ exclusion inapplicable.

The Court held that the policy’s exclusion of coverage for ‘personal injury’ arising out of ‘online activities’ did, however, absolve St. Paul of liability under the policy at issue.  This insurance policy defined ‘Online Activities”:

as providing email services, instant messaging services, 3rd party advertising, supplying 3rd party content and providing internet access to 3rd parties.  However, it is understood that America Online’s own advertising is not considered “Online Activity” regardless of the medium or format in which it is expressed.

The Court held that the phrase “providing internet access to 3rd parties” meant to assist or allow users to “to make use” of the Internet.  Because the Smart Download software at issue assisted users in downloading large files successfully over the Internet, it constituted “online activity’ within the meaning of St. Paul’s insurance policy because it assisted users in ‘mak[ing] use’ of the Internet, and accordingly was excluded from coverage under this policy.  In reaching this result, the Court rejected AOL’s argument that this phrase only barred coverage for providing users with connections to the Internet.

The Court’s determination was reached under California law, and supported by the negotiation history of the policy, in which “both parties attached broad meaning to the online activities exclusion at the time it was drafted.”  According to the Court, under California law, ambiguous terms in  contracts of insurance “are interpreted as the insurer believed the insured understood them at the time of formation.  If the ambiguities persist, they are construed against the party who caused them to exist.”  In this case, that was AOL, the draftsman of the clause  at issue.

As a result, the Court granted St. Paul’s motion for summary judgment, and dismissed AOL’s claim seeking coverage under the insurance policy at issue.

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