Contractual Liability Exclusion – Stolen Customer Credit Card Information
Bars Coverage Even If Policyholder Would Have Been Liable Absent Contractual Indemnity.
A federal district court in Arizona granted a motion for summary judgment filed by Federal Insurance Co. (“Chubb”) in a coverage case filed by P.F. Chang Bistro, Inc. In 2014, P.F. Chang discovered that approximately 60,000 customer credit card numbers had been stolen from 33 of its restaurants and published on the internet. MasterCard incurred about $1.9M notifying customers, issuing replacement cards and reimbursing fraudulent charges, which it billed to Bank of America Merchant Services (“BAMS”), P.F. Chang’s payment processer. P.F. Chang sought reimbursement of these expenses from Chubb. This was in addition to $1.7M that Chubb had already paid P.F. Chang for costs including a forensic investigation into the data breach and the costs of defending litigation filed by customers whose information was stolen.
P.F. Chang claimed that it was entitled to coverage under its Chubb CyberSecurity policy because it provided insurance for “extra expenses an insured incurs during the period of recovery services due to the actual or potential impairment or denial of operation resulting directly from fraudulent access or transmission.”
The court found that the policy excluded coverage for BAMS expenses by virtue of its contractual liability exclusion which provided that the policy did not respond to “any loss on account of any claim (for) liability assumed by any insured under any contract or agreement.” The court found that “in no less than three places” in the Master Services Agreement, P.F. Chang had agreed to reimburse the payment processer for any fees, fines or penalties assessed against it by a credit card company. Because P.F. Chang had assumed BAM’s liability in their processing agreement, the court found the exclusion applied.
In so doing, the court rejected P.F. Chang’s argument that the contractual liability exclusion did not apply when the obligation is one that “the insured is responsible for absent any assumption of liability.” The court looked to cases involving CGL policies and the contractual liability exclusion and generally found no support for this argument. Furthermore, it noted that there was no evidence in the record indicating that P.F. Chang would have been liable for fines, penalties, assessments, etc. absent its agreement with BAMS. The court found that even construing the exclusion narrowly against the insurer as it must, “even while looking through this deferential lens … these exclusions unequivocally bar coverage for the Assessments.”
On June 27, 2016, P.F. Chang filed a Notice of Appeal to the Ninth Circuit Court of Appeals of the May 31 order granting summary judgment to Chubb. P.F. Chang’s China Bistro, Inc. vs. Federal Insurance Co., CV-15-1322-PHX-SMM, U.S.D.C., Arizona (June 27, 2016), appealing the May 31, 2016 Order of the same court and caption.