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Beset by more than a dozen lawsuits, San Diego-based MP3.com recently agreed to cough up more than $130 million to settle claims by record labels that the online music company violated copyright laws by letting consumers download unlicensed songs from its Web site. MP3.com then turned to Westport Insurance Co., which had written MP3.com a $5 million excess liability policy. But the insurer last month responded by filing a declaratory relief action in New York federal court. It accused the Internet company of violating “basic prohibitions of copyright law” and noted that even some MP3.com employees had warned management that the download service was breaking the law. “With knowledge that [its] purported justification for avoiding copyright infringement liability was doubtful, MP3.com then allowed the public to access this unlicensed music,” the complaint states. “Had Westport known any one or more of the foregoing facts regarding MP3.com’s infringement of the copyrights of others, Westport would not have issued the policy.” Attorneys are pointing to Westport v. MP3.com, 01 Civ. 1899, as one of the latest cases heralding a new wave of insurance coverage litigation as companies use new technologies to engage in sometimes risky business practices that leave them wide open for liability. Today, Internet liability includes a range of intellectual property infringements. Companies looking for coverage have sought to stretch old terms and definitions under traditional commercial general liability policies to apply to new-economy scenarios. But as such policies get rewritten with significant exclusions for IP infringement and other costly types of legal battles, insurers have pushed a line of more specialized cyber-risk policies. “I have a drawer full of them,” says David Goodwin, a partner with San Francisco-based Heller Ehrman White & McAuliffe, who represents policyholders. But instead of bringing about clarification, the new disputes are expected to result in more coverage disputes as insurers and policyholders haggle over the fine print of insurance still in its infancy. “These are relatively new risks,” Goodwin says. “Startups don’t always have the money to take these insurance cases to the mat. And a lot of insurers now put in mandatory arbitration clauses because the insurers prefer you not hear about these cases.” And inevitably, still newer technologies are bound to raise more questions tomorrow, says Martin Myers, a partner with Gray Cary Ware & Freidenrich who has represented new-economy companies in disputes with insurers. “Digital music, peer-to-peer computing, digital transmission of video files — they haven’t resulted in significant insurance litigation yet,” says Myers. “But they almost certainly will because the alleged damages are so significant.” OLD POLICIES LEARN NEW TRICKS Insurance companies and policyholders haven’t seen eye to eye on computer-related coverage under commercial general liability policies. For years, attorneys wondered if the courts would recognize loss of electronic data caused by a hacker or a computer virus as property damage under the traditional sense of the term. Then last year a federal court judge in Arizona ruled in the closely watched case of American Guarantee & Liability Insurance Co. v. Ingram Micro Inc. that data lost during a power outage constitutes property damage. “At a time when computer technology dominates our professional as well as personal lives, the court must side with Ingram’s broader definition of ‘physical damage,’ ” wrote Senior U.S. District Judge Alfredo Marquez. The case is now pending before the 9th U.S. Circuit Court of Appeals. Another hot-button issue before the courts is whether alleged violations of intellectual property can be covered under advertising injury provisions in standard policies. Those provisions typically cover liability arising from the advertising of products or services, but generally do not apply to companies that are in the business of “advertising, broadcasting, publishing or telecasting.” Internet companies that take material from other companies or Web sites to incorporate into their own — examples include spamming, framing and other deep-linking — have been left to face a range of liability. Michael Donovan, a partner with San Francisco-based Hancock, Rothert & Bunshoft who has represented the Lloyds underwriters and other insurers, says that’s what the new cyber-risk insurance policies are for. Traditional policies simply don’t cover such risks, he argues. Not only were the original policies written before the term “cyberspace” was even coined, the more recent CGL policies expressly exclude coverage to patent infringement and other expensive potential litigation. He also says the Internet puts many business practices in the category of publishing — making them exempt, he says. But attorneys for policyholders don’t buy it. “CGL policies still are an important source of coverage for many risks facing technology companies,” says Gray Cary’s Myers. “Insurers will attempt to categorize a number of businesses as broadcasters and publishers.” Still, attorneys say we will hear little about such cases. Most settle. “We have seen a number of different disputes brought by Internet companies stemming from their business practices,” says Katherine Munter, a partner with Gordon & Rees who represents insurers. But she says, “The trend is to resolve the cases through mediation, outside the courtroom.” Munter was involved in an insurance dispute arising from the injunction against the online company Bidder’s Edge. Yahoo, eBay and Amazon had sued Bidder’s Edge over its practice of aggregating auction information collected from their independent Web sites. When Bidder’s Edge looked to its insurer for help, the insurer filed a declaratory relief action arguing that Bidder’s Edge had not alleged property damage or advertising injury within the meaning of the policy. The dispute settled early in the litigation process; Bidder’s Edge no longer operates its Web site. CYBER-RISK POLICIES EXPLODE Attorneys say they know of few litigated disputes over cyber-risk policies. Goodwin, of Heller Ehrman, says those policies, which are designed to fill “gaps” in CGL policies, are still very new. Many companies, especially now cash-strapped Internet startups, don’t have the money to take such cases to the mat, so cases often settle. And while disputes over cyber-risk coverage are bound to grow with each new generation of technology, attorneys say they don’t expect the level of litigation seen with the toxic torts of the 1980s and ’90s. The dynamic between parties in cyberdisputes is very different from that between litigants in an environmental case, says Donovan, of the Hancock firm. He says such cases often entailed well-established defendants digging up decades-old policies and searching desperately for coverage. And the stakes were higher under toxic torts, which often involved having to pay damages incurred by thousands of plaintiffs. Today, he says, “There’s a lot of incentive to work out the disputes because there’s an ongoing relationship between the insured and the insurer.”
Insurance Coverage Disputes. May 15-29.

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