Kentucky Court Finds No Insurance Coverage for Trade-Secrets Claim

When a company faces a lawsuit, often one of the first questions asked is whether the company’s insurance policies cover the suit. In Liberty Corp. Capital Ltd. v. Security Safe Outlet, Inc., 2013 WL 1311231 (E.D. Ky. March 27, 2013), the court found that a commercial general liability policy did not cover a claim for misappropriation of trade secrets.

To make a long story short, a company that sold firearms online brought the underlying suit against a competitor. The defendant had hired the plaintiff’s former IT specialist, who signed a noncompete while working for the plaintiff. The plaintiff alleged that the IT specialist gave the defendant the plaintiff’s customer database, which the defendant used to send email marketing blasts  to the plaintiff’s customers.

The defendant had a commercial general liability policy with Liberty, which filed this suit seeking a declaratory judgment that there was no coverage. For our purposes, the central questions involved whether the customer list was “tangible property” and whether the underlying violation was based on a breach of contract.

Under the insurance policy, “property damage” was limited to tangible property. When determining whether the electronic customer database was tangible property, the court looked to Black’s Law Dictionary, which defined that term as “property that has physical form and characteristics.” The court concluded that a computer database “has no physical form or characteristics,” and thus was not tangible property.

The policy also covered personal and advertising injury. While the court found that the email blasts were advertisements, the policy excluded injuries arising out of a breach of contract. Because the defendant’s use of the database flowed from the IT specialist’s breach of his noncompete, the court found no coverage for personal and advertising injury.

The takeaway from this case is that companies that faces a real threat of a trade-secrets or noncompete lawsuit should find out from their insurance professionals whether they have coverage for such suits, and if not, what products are available that provide coverage.