The Ohio Supreme Court recently reversed the decision of an appellate court and reinstated the trial court’s grant of summary judgment in favor of an insurer and against an insured company on the company’s claim for breach of contract and bad faith denial of insurance coverage relating to damages arising from a ransomware attack.
In so ruling, the Ohio Supreme Court held that because a ransomware attack caused no “direct physical loss of or damage to” the company’s software — a requirement for coverage under the policy at issue — the insurer was not responsible for covering the resulting loss.
A copy of the opinion in EMOI Servs., L.L.C. v. Owners Ins. Co. is available at: Link to Opinion.
As background, the insured company became the target of a ransomware attack when a hacker illegally gained access to the company’s computer systems and encrypted files needed for using its software and database systems. After looking into the timing and financial feasibility of recovering the files through the assistance of a third-party company, the insured company decided to pay the ransom.
At the time of the ransomware attack, the company was insured under a businessowners insurance policy issued by the defendant insurer. Thus, the insured company’s general manager contacted the insurer to file an insurance claim within a day of the attack. However, the insurer denied coverage because, among other reasons, there was no “direct physical loss of or damage to ‘media’,” as defined in the electronic-equipment endorsement in the policy.
The policy’s electronic-equipment endorsement provided:
When a limit of insurance is shown in the Declarations under ELECTRONIC EQUIPMENT, MEDIA, we will pay for direct physical loss of or damage to “media” which you own, which is leased or rented to you or which is in your care, custody or control while located at the premises described in the Declarations. We will pay for your costs to research, replace or restore information on “media” which has incurred direct physical loss or damage by a Covered Cause of Loss. Direct physical loss of or damage to Covered Property must be caused by a Covered Cause of Loss.
Furthermore, the electronic-equipment endorsement defined “media” as “materials on which information is recorded such as film, magnetic tape, paper tape, disks, drums, and cards.” The definition section further stated that “media” included “computer software and reproduction of data contained on covered media.”
The insured company filed a lawsuit against the insurer, alleging that the insurer breached the insurance policy by denying coverage under the electronic-equipment endorsement and that the insurer denied coverage in bad faith.
The insurer answered the complaint by denying the insured company’s legal claims and counterclaimed for a declaratory judgment that “no coverage, payment or indemnity is owed” to the company under the policy. Thereafter, the insurer filed a motion for summary judgment on the insured company’s claims and its counterclaim for declaratory judgment.
The trial court granted summary judgment to the insurer and explained that the evidence showed that the software and database systems were not damaged by the encryption but that the insured company was prevented from accessing or using those systems because of the ransomware encryption.
The insured company appealed the trial court’s grant of summary judgment, and the appellate court reversed the trial court’s decision. The appellate court determined that the language of the electronic-equipment endorsement potentially applied to the insured company’s claim if the company could prove that its media, i.e., its software, was in fact damaged by the encryption. The insurer timely appealed.
This appeal turned on the legal interpretation of the electronic-equipment endorsement in the businessowners insurance policy issued by the insurer. The Ohio Supreme Court found the language in the electronic-equipment endorsement to be clear and unambiguous in its requirement that there be direct physical loss of, or direct physical damage to, electronic equipment or media before the endorsement is applicable. Because software is an intangible item that cannot experience direct physical loss or direct physical damage, the Court determined that the endorsement did not apply in this case.
The Ohio Supreme Court concluded that the most natural reading of the phrase “direct physical loss of or damage to” was that the company was insured for direct physical loss of its media and insured for direct physical damage to its media. See Ward Gen. Ins. Servs., Inc. v. Emps. Fire Ins. Co., 114 Cal.App.4th 548, 554, 7 Cal.Rptr.3d 844 (2003); see also Santo’s Italian Café, L.L.C. v. Acuity Ins. Co., 15 F.4th 398, 402 (6th Cir.2021). Similarly, although the term “computer software” was included within the definition of “media,” the Court held that it was included only insofar as the software was “contained on covered media” and that “covered media” means media that has a physical existence.
Accordingly, because the insurance policy at issue did not cover the type of loss the insured company experienced, the Ohio Supreme Court held that the insurer did not breach its contract with the company. Therefore, the Court reversed the judgment of the appellate court and reinstated the trial court’s grant of summary judgment in favor of the insurer.