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by Christopher Edwards

In Site Jab v. Hiscox Insurance Company, Inc., United States District Judge Lee H. Rosenthal recently tackled whether a business owner’s insurance policy provided coverage for theft of information, including confidential client information, by the Insured’s employees on a motion for summary judgment.[1]

In this case, Hiscox Insurance Company (“Hiscox”) issued a business owner’s insurance policy (the “Policy”) to Site Jab (the “Insured”) providing Business Personal Property coverage for the building and personal property at the insured location. During the applicable policy period, Site Jab alleged that some of its past and present employees colluded to collect its confidential information for the purpose of stealing its clients.[2] Site Jab alleged that it lost nearly $1 million in revenue because of the theft of its data. Accordingly, Site Jab submitted a claim to recover alleged loss of business income pursuant to the Policy. Finding no basis in the policy to support Site Jab’s claim, Hiscox denied coverage. Subsequently, the Insured filed suit against Hiscox, asserting claims for breach of contract and violations of the Texas Insurance Code and Deceptive Trade Practices Act. In response, Hiscox filed a motion for summary judgment on the claim. In its motion, Hiscox alleged that the Policy did not cover the losses that the Insured alleged.

In relevant part, the Policy provided coverage for “direct physical damage to or direct physical loss of a building caused by or resulting from any covered cause of loss” during the policy period.[3] Under the Policy, the definition of “building” did not include any business personal property.[4] Moreover, “business personal property” coverage encompassed “direct physical damage to or direct physical loss of business personal property, caused by or resulting from any covered cause of loss” commencing during the policy period. In support of its motion, Hiscox argued that the theft of client information, or other similar intellectual property, fell outside the scope of coverage for “business personal property” because the theft of data did not cause physical damage or loss to covered property.[5] In response, the Insured sought refuge in the Policy’s additional coverage for Business Income. The policy provision provided coverage for income loss resulting from a halt to business activities “due to damage to or loss of covered property caused by or resulting from any covered cause of loss.”[6]

The court found this argument unpersuasive because (1) pursuant to the Policy’s definition of a “Covered Cause of loss,” the inability to continue business activities must be tied to “damage to or loss of covered property caused by or resulting from” damage or physical loss that is not otherwise excluded or limited under the Policy; and (2) pursuant to the definition of “Covered Property,” unlike buildings and business personal property, electronic data is excluded from the scope of covered property absent certain exceptions irrelevant to this case.[7] Put simply, the court reasoned that the Insured could not show direct physical damage or loss to the covered property. The court further highlighted that even though theft of its intellectual property may have resulted in economic loss, Texas law routinely requires the loss be “physical” and result in some “distinct, demonstrable, alteration of the property.”[8] Here, there was no such alteration.

The Insured argued there was coverage under the Policy’s Employee Dishonest Coverage extension, which provides coverage for “direct physical damage to or loss of covered property, money, and/or securities resulting directly from theft…by any of your employees…with the manifest intent to (a) cause [the Insured] to sustain damage or loss; and (b) obtain financial benefit… for any employee or any other person or entity.” The court disagreed, however. The court reiterated that business personal property, as defined by the Policy, excluded electronic data.[9] Moreover, the court reasoned that the Insured failed to plead a loss to money or securities. Because its allegations of theft of confidential client information and website files did not constitute a loss of covered property caused by a covered cause of loss under the Policy, the court determined this argument lacked merit.

Accordingly, the court granted Hiscox’s motion for summary judgment on the basis that despite the Insured’s alleged loss of intellectual property, it did not sustain direct physical damage to its covered property and thus could not obtain benefits for business losses under the Policy.

The Lowdown: Jab is a great reminder that Texas courts consistently require a showing of “physical” loss to make a plausible argument for coverage. Even though a policyholder may experience an intangible loss that very well may result in economic losses, such as losses involving intellectual property, Texas law requires some showing that the loss results in a “distinct, demonstrable, alteration” of the insured property.

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[1] Jab v. Hiscox Ins. Co., Inc., No. H-23-CV-3853, 2024 WL 5264705, at *1 (S.D. Tex. Dec. 31, 2024).

[2] Id.

[3] Id.

[4] Id. Per the policy, “building” is defined as a building or structure identified in the policy, including completed additions, fixtures, permanently installed machinery and equipment in or on such buildings or structures, as well as certain personal property and furniture. 

[5] Id. at *2. The court noted that Hiscox’s argument paralleled arguments made by carriers when the coronavirus pandemic caused businesses to close and opened the floodgates to claims seeking business interruption policy benefits. In particular, the court noted the general trend of courts ruling in favor of insurers by holding that the virus did not cause physical damage sufficient to invoke coverage.

[6] Id. at *3.

[7] Id.

[8] Id. (citing Fines v. State Farm Lloyds, 392 F.3d 802, 807 (5th. Cir. 2004)).

[9] Id.