America Online, Inc. v. St. Paul Mercury Ins. Co., Civ.A. 01-1636-A.

• Decision Date: 20 June 2002
• Docket Number: No. Civ.A. 01-1636-A.,Civ.A. 01-1636-A.
• Citation: 207 F.Supp.2d 459
• Court: U.S. District Court — Eastern District of Virginia
• Parties: AMERICA ONLINE, INC., Plaintiff, v. ST. PAUL MERCURY INSURANCE CO., Defendant.

207 F.Supp.2d 459

AMERICA ONLINE, INC., Plaintiff, v. ST. PAUL MERCURY INSURANCE CO., Defendant.

No. Civ.A. 01-1636-A.

United States District Court, E.D. Virginia, Alexandria Division.

June 20, 2002.

COPYRIGHT MATERIAL OMITTED

John F. Anderson, Richards McGettingan Reilly & West, Alexandria, Virginia, for plaintiff.

Mark A. Miller, Baker Botts, Washington, D.C., for defendant.

MEMORANDUM OPINION AND ORDER

LEE, District Judge.

This matter is before the Court on Plaintiff America Online Inc.'s ("AOL") Motion for Partial Summary Judgment on Count One of its First Amended Complaint against Defendant St. Paul Mercury Insurance Company ("St.Paul"). AOL is an Internet Service Provider who provides Internet access to its customers through access software. AOL was sued by various customers alleging that Version 5.0 of AOL's Internet access software ("AOL 5.0") damaged their computers. AOL now seeks St. Paul to defend AOL against these claims under the commercial general liability policy between the two parties. The issue presented is whether St. Paul has a duty to defend AOL under the parties' insurance policy against complaints alleging AOL 5.0 caused physical damage to, and loss of use of, customers' tangible property in the form of computers, computer data, software and systems.

For the reasons stated below, the Court holds that St. Paul does not have an obligation to defend AOL against the legal claims arising from AOL 5.0. An insurance policy is a contract, and like any other contract the Court is bound by the plain terms of the agreement and cannot rewrite the policy to bind the parties to obligations they did not consent to. If there is any ambiguity in the terms to be interpreted, Virginia law instructs that ambiguity to be construed against the insurer. An insurer's duty to defend attaches whenever a complaint alleges claims that if proven would fall within the risk covered by the policy.

Applying these standards, the allegations in the underlying complaint are not covered by the policy between AOL and St. Paul. First, the Court holds that computer data, software and systems are not "tangible" property in the common sense understanding of the word. The plain and ordinary meaning of the term "tangible" is property that can be touched. Computer data, software and systems are incapable of perception by any of the senses and are therefore intangible. Accordingly, St. Paul has no duty to defend AOL against allegations in the underlying complaint alleging harm to consumers' computer data, software and systems. By the same token, the Court finds that the computer itself is tangible property because it is obviously a tactile, corporeal item. Because the claims in the underlying complaint allege the loss of use of consumers' computers, such claims are potentially covered by the parties' insurance policy.

However, the Court holds that the loss of use of consumers' computers is nonetheless excluded from coverage by the impaired policy exemption. The underlying complaint alleges that AOL 5.0 is a defective product that caused the loss of computer use by causing consumers' computers to "crash," rendering them inoperable. These claims are clearly barred by the impaired policy exclusion, which states that harm to property that is not physically damaged is excluded from coverage where it is caused by a faulty or dangerous product. Finally, the allegations of harm to consumers' computers run squarely into the common law economic loss rule. At bottom, the underlying complaint alleges that AOL 5.0 is a defective component incorporated into a larger product, the consumers' computers. Any damages stemming from the loss of computer use are purely economic, do not constitute harm to property other than the integrated product, and are thus not recoverable under any tort theory. Accordingly, St. Paul does not have a duty to defend under the parties' insurance policy and partial summary judgment in favor of AOL is DENIED.

I. BACKGROUND

Plaintiff AOL, a Virginia based corporation, produces and distributes software to be used by its members to access the Internet and other on-line services. In October 1998, AOL entered into an insurance contract with Defendant St. Paul. (Pl.'s Ex. 1, Excerpts from Technology Commercial General Liability Protection Policy ("Policy") at 2.) The Policy provides coverage to AOL for the period from April 1, 1999 through June 1, 2000.

A. The Terms of the Policy.

The Policy states in pertinent part that St. Paul will "pay amounts [AOL] is legally required to pay as damages for covered bodily injury, property damage, or premises damage that: happens while this agreement is in effect and is caused by an event." (Policy at 2.) Property damage is defined as "physical damage to tangible property of others, including all resulting loss of use of that property; or loss of use of tangible property of others that isn't physically damaged." (Id.) The Policy defines an "event" as "an accident, including continuous or repeated exposure to substantially the same generic harmful conditions." (Id.) The Policy also states that "[St. Paul has a] duty to defend [AOL] against a claim or suit for injury or damage covered by this agreement. [St. Paul has such] duty even if all of the allegations of that claim or suit are groundless, false, or fraudulent." (Id. at 3.)

The Policy sets forth certain events that are excluded from coverage. For instance, the Policy will not "cover bodily injury or property damage that's expected or intended by [AOL]." (Id. at 16.) St. Paul is also not obligated under the Policy to "cover property damage to impaired property, or to property which isn't physically damaged, that results from: [1] [AOL's] faulty or dangerous products or completed work; or [2] a delay or failure in fulfilling the terms of a contract or agreement." (Id.) "Impaired property" is defined as "tangible property, other than [AOL's] products or completed work, that can be restored to use by nothing more than: [1] an adjustment, repair, replacement, or removal of [AOL's] products or completed work which forms a part of it; or [2] [AOL] fulfilling the terms of a contract or agreement." (Id.)

B. The AOL 5.0 Lawsuits.

AOL released AOL 5.0 in October 1999. AOL 5.0 is essentially a software program consumers install on their computer to access the Internet through AOL's proprietary network. In January 2000, various class action lawsuits were filed against AOL alleging that installation and operation of AOL 5.0 was causing substantial damage to users' computer systems. Ten class action complaints were filed in various state courts and one in Canada. Approximately forty three complaints were consolidated in a multidistrict litigation ("MDL") proceeding in the United States District Court for the Southern District of Florida in June 2000. The MDL plaintiffs subsequently filed a consolidated complaint ("MDL Complaint") in that proceeding which lies at the heart of this action. (Pl.'s Ex. 2, In Re America Online, Inc., Version 5.0 Software Litigation, No. 00-1341-MD-GOLD, First Cons.& Am.Compl. (S.D.Fl. April 20, 2001) ("MDL Compl."))

The MDL Complaint generally alleges that "AOL 5.0 was deceptively marketed in that it was not `risk free,' `easy to use' and did not provide `superior benefits,' but could actually harm computers" by, inter alia, disrupting Internet and local area network connections, causing "material instability" and crashing computers, and corrupting computer systems and files. (MDL Compl. ¶¶ 3-4.) Specifically, the MDL Complaint alleges that AOL 5.0 caused:

(1) interference to users' host systems communications configurations and settings such as non-AOL communications software and online services the plaintiffs are using or might want to use in the future; (2) the inability of users to connect to other ISPs, competitors of AOL; (3) the inability to run non-AOL email programs, or connect to local networks; (4) the addition or alteration of hundreds of files on the users' system, including many essential components of the Windows operating system, which may cause the system to become unstable; and (5) the inability of users to remove the AOL 5.0 software, so as to restore their computer's communications configuration, so that other competitor online services could be used.

(Id. ¶ 61.) The MDL Complaint alleges that the installation of AOL 5.0 "is so large or invasive that thousands of Class members have publicly complained of resulting system application instability, loss of data, loss of work and resulting loss of use, time and money." (Id. ¶¶ 65, 101.) Further removal of AOL 5.0 "would be virtually impossible . . . without jeopardizing the operating system itself." (Id. ¶ 101.) As a result of AOL's conduct, the plaintiffs allege that their computers have suffered damage and an impairment to the integrity or availability of data, software programs, operating systems, and information contained in their computers. (Id. ¶¶ 101-102.) In addition, the MDL Complaint alleges that the plaintiffs lost the use of their computers and computer functionality after installing AOL Version 5.0. (See id. ¶¶ 11, 65, 67-70, 76, 99, 101, 102, 106.)

According to the MDL Complaint, AOL 5.0 was designed to change or reconfigure a users' computer systems. (Id. ¶¶ 43-48, 92, 98.) The MDL Complaint alleges that faced with increasing competition "AOL looked to a new software release—5.0—as a tool to unlawfully maintain and/or increase its market share." (Id. ¶ 42.) Part of the overall strategy, plaintiffs allege, was to "lock in" AOL subscribers by designing 5.0 with certain exit barriers. (Id. ¶ 43.) To further that purpose, the MDL Complaint alleges that AOL supplied consumers with "software which, unknown to the consumer is designed to modify the user's computer's operating system in such a manner as to make it difficult thereafter to connect to the networks of competing ISPs." (Id. ¶ 48.)

The MDL Complaint asserts seven...