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In June 2000, approximately 43 complaints against AOL alleging that installation and operation of AOL’s Internet software caused substantial damage to users’ computer systems were consolidated in a federal multidistrict litigation proceeding. AOL then sued its commercial general liability insurance carrier, arguing that the insurer had a duty to defend AOL in the consumer litigation. See America Online, Inc. v. St. Paul Mercury Insurance Co. (E.D. Va. 2002). The U.S. District Court for the Eastern District of Virginia ruled June 20 that AOL was not entitled to a defense from the insurer because the loss asserted by the consumers did not amount to damage to “tangible” property. Needless to say, insurers likely will rely on this decision in other cases. CASE BACKGROUND The consumer lawsuits against AOL alleged that the ISP’s new Internet access software, AOL 5.0, caused physical damage to and loss of use of the consumers’ property in the form of computers, computer data, software and systems. In short, the consumers complained that AOL 5.0 caused the loss of computer use by causing their computers to “crash,” rendering them inoperable. AOL, in its suit against its insurer, argued that such losses were covered by the terms of its general commercial liability policy. That policy expressly covered loss to “tangible” property, but “tangible” was not defined. COURT RULES AGAINST COVERAGE The court in the insurance action ruled against coverage, reasoning that computer data, software and operating systems are not tangible products within the ordinary meaning of the word “tangible.” As stated by the court, tangible property is something that “can be touched,” which was not the case here. Indeed, “computer data, software and systems are incapable of perception by any of the senses and are therefore intangible.” Nevertheless, the loss of “computers” did constitute a loss of tangible property, according to the court, as a computer is a “tactile, corporeal item.” However, the court found that computer loss was specifically excluded from coverage by the impaired policy exemption and the economic loss rule. In short, the true loss suffered was the loss of use of the computers, not “physical” damage to the computers themselves. Thus, the loss was economic, and as such, was recoverable in contract and not tort, and the policy specifically excluded such coverage. TIP OF THE ICEBERG? Computers can crash for a variety of reasons. When that happens, fingers can be pointed and others can be blamed. More than that, lawsuits can be and will be filed. Naturally, those sued will look to their insurers for defense and indemnity. With the AOLdecision, insurers may feel all the more justified in denying such claims. Still, specific policy language will need to be examined and applied to the particular facts of a given case. Moreover, we will need to watch the courts and observe whether this decision truly marks a trend in the law. Eric J. Sinrod is a partner in the San Francisco office of Duane Morris, where he focuses on technology and litigation matters. His Web site is sinrodlaw.com and his firm’s site is Duane Morris.Mr. Sinrod may be reached by e-mail at [email protected]

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