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State Farm not on the hook for grocer’s cyber breach

State Farm not on the hook for grocer’s cyber breach

An Alabama grocer is not entitled to insurance coverage for a cyber breach under marine inland endorsements to its property and liability policy, says a federal court ruling in an insurance coverage dispute.

Camp’s Grocery Inc., which operates a grocery store in Hokes Bluff, Alabama, was sued along with its franchisor, Keene, New Hampshire-based Piggly Wiggly L.L.C., by three credit unions, which charged Camp’s is liable for losses they sustained following a cyber hack suffered by the grocer, according to Tuesday’s ruling by the U.S. District Court in Birmingham, Alabama, in Camp’s Grocery Inc. v. State Farm Fire & Casualty Co.

Camp’s then filed suit seeking a declaratory judgment that State Farm, a unit of Bloomington, Illinois-based State Farm Mutual Automobile Insurance Co., was obligated to defend and indemnify it.

Among its arguments, Camp’s contended it had coverage under the inland marine endorsements to its property and liability policy. The court agreed with State Farm that it had no coverage.

There is no language in either endorsement “whereby State Farm promises to ‘defend’ or ‘indemnify’ the insured, whether in regard to claims involving computer equipment, electronic data, or anything else for that matter,” said the ruling.

Rather, the general insuring agreement of the one of endorsements provides payment for “accidental direct physical loss” to computer equipment and removable data storage media. 

“Such promises to pay the insured’s ‘direct loss’ unambiguously afford first-party coverage only and do not impose a duty to defend or indemnify the insured against legal claims for harm allegedly suffered by others, as in third-party coverage,” said the ruling by Magistrate Judge John E. Ott, in granting State Farm’s motion for summary judgment.

Commenting on the ruling, Michael S. Levine, Washington-based counsel at Hunton & Williams L.L.P., said, “Legacy policies just don’t cover all of the cyber-type exposures that are out there, and as insurers become more attuned to the types of losses and the types of risks, they’re becoming more savvy in their arguments as to why the legacy policies don’t respond.”

Mr. Levine said the ruling also demonstrates how gaps in coverage can arise “even if they weren’t originally intended to be there.”