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Court refuses to dismiss Travelers cyber defense case

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A U.S. District Court in Utah has refused to dismiss a claim by a Travelers Cos. Inc. unit policyholder that the insurer failed to follow industry standards in its denial of defense coverage in a cyber case, in an ongoing dispute between the insurer and its policyholder.

The origins of the litigation is a cyber insurance policy provided by Travelers Property Casualty of America to Salt Lake City-based Federal Recovery Services Inc., which is in the business of providing processing, storage, transmission and other handling of electronic data for its customers, according to court papers in Travelers Property Casualty Co. et al. v. Federal Recovery Services Inc. et al.

Travelers had issued a CyberFirst policy to Federal Recovery that included a technology errors & omissions liability form stating coverage would be provided for an “errors and omissions wrongful act.”

Federal Recovery had allegedly refused to transfer some requested data until Lexington, Kentucky-based Global Fitness Holdings L.L.C., with which it had a contract, “satisfied several vague demands for significant compensation,” according to court papers. In March 2014, Global filed suit against Federal Recovery on charges including breach of contract.

Federal Recovery sought defense coverage from Travelers under its cyber policy, Travelers provided a defense, but with a reservation of rights.

In a May 2015 ruling the District Court in Salt Lake City said Travelers did not have a duty to defend Federal Recovery, holding that Global alleged Federal Recovery withheld the information until Global met certain demands, not because of an error, omission or negligence.

Federal Recovery then filed a countersuit, charging Travelers with breach of the implied covenant of good faith and fair dealing; breach of contract and breach of fiduciary duty.

The District Court ruled Tuesday that Federal Recovery could proceed with its breach of good faith claim. Federal Recovery's broker had testified that he was told by Travelers to wait to file a claim until formal papers in the Global Fitness lawsuit had been served, says the most recent ruling.

“Factual issues preclude summary judgment on this charge,” said the ruling. “Defendants provide expert testimony stating that Travelers' conduct did not measure up to the standard required for insurance claim investigations,” the ruling said.

The expert “contends that requiring the filing of a lawsuit as a condition precedent to accepting Defendants' claims report is contrary to industry customs, practices and standards.”'

The court did agree to dismiss Federal Recovery's breach of contract and breach of fiduciary claims. “Having lost its earlier motion, defendants cannot seek to relitigate the same issue,” said the ruling, on the breach of contract claim.