Untimely Notice of Server Outage and Related Client Communications Bars Coverage for Claim Filed against Technology Service Provider

An Illinois federal district court has ruled that a technology company’s failure to provide timely notice of a computer outage and related email demand barred coverage for a later-filed lawsuit.  Hartford Fire Ins. Co. v. iNetworks Servs., LLC, 2020 WL 1491139 (N.D. Ill. Mar. 27, 2020).

An insured technology company stored data for its clients.  The insured’s server became infected with malware, and its client’s data was destroyed.  The client and insured exchanged emails about the incident and potential terms for settlement, but they did not come to a resolution.  Two years later, the client filed suit against the insured for negligence in connection with the incident.  The insured waited six months before tendering that lawsuit under a technology E&O policy and providing notice of the underlying incident for the first time.  The E&O insurer filed a coverage lawsuit seeking a determination of its rights and obligations.

In the coverage suit, the insurer argued that the company’s failure to provide timely notice of the dispute barred coverage.  The policy was a claims-made policy, which required notice of a claim or “glitch” “as soon as practicable” but did not otherwise require notice to be provided during the operative policy period.  Nonetheless, the court noted that Illinois courts “strictly construe notice requirements in claims-made policies” and ruled that the insured’s untimely notice barred coverage as a matter of law.  While the court noted that prejudice was “not a dispositive factor,” the court also observed that the insurer appeared to have been prejudiced by the delay given that it “was unable to investigate the [incident] in real time” and was “unable to provide [the insured] with experts that could have mitigated the data loss,” among other issues impacting any potential investigation.  On the basis of late notice, the court ruled that the insurer had no duty to defend or indemnify the company.


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