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Do commercial crime & employee dishonesty insurance cover illegal acts of software informant?

Posted by Steve Vondran | Nov 05, 2016 | 0 Comments

Computer crime copyright infringement insurance

Copyright infringement damages – will your corporate insurance policy cover your losses?

Introduction

We have written other blogs regarding whether or not a business can recover money under their insurance policie(s) where they are subjected to paying a fine for unlicensed software on their laptops, computers and servers.  See “advertising injury” insurance blog.  This blog talks a little more about this concept, and incorporates concepts of a commercial crime insurance policy, and employee dishonesty policy of insurance.  In some cases it is an employee who knows they have “one foot out the door” that may notify the business software alliance (BSA), or the SIIA (software information industry association) about infringement under the guise of being a “whistleblower” seeking a monetary reward.  When a company is forced to settle a case due to the intentional, willful, or malicious acts of an employee, agent, contractor or other representative, will a commercial insurance company save the day and should the defense of the case be tendered to the insurance company?  This blog explores this concept in general.

Copyright infringement insurance

Can you buy insurance to protect against your employees downloading, installing and using unlicensed software (ex. to cover an architect, designer, or engineer, draftsman, against charges of illegally using AutodCad or Revit or 3Ds Max on their personal computers to work on side projects).  This is an interesting topic.  One case I reviewed discussed one policy in Retail Ventures, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 691 F.3d 821, 826–27 (6th Cir. 2012):

The only coverage provisions at issue are found in Endorsement 17's “Insuring Agreement XVIII,” entitled “Computer & Funds Transfer Fraud Coverage.” Specifically, defendant agreed in pertinent part to pay the insured for:
XVIII. Loss which the Insured shall sustain resulting directly from:
A. The theft of any Insured property by Computer Fraud;
Endorsement 17 defines “Computer Fraud” to mean “the wrongful conversion of assets under the direct or indirect control *827 of a Computer System by means of: (1) The fraudulent accessing of such Computer System; (2) The insertion of fraudulent data or instructions into such Computer System; or (3) The fraudulent alteration of data, programs, or routines in such Computer System.” As for “Insured property,” the policy generally defines the property interests covered as follows:
Section 5. The Insured property may be owned by the Insured, or held by the Insured in any capacity whether or not the Insured is liable for the loss thereof, or may be property as respects which the Insured is legally liable; provided, Insuring Agreements II, III and IV apply only to the interest of the Insured in such property.

In these types of cases, the company is having its computers damaged (being affected by illegal software installed by a corporate insider, disgruntled IT person, or outside software vendor that may install the software as a “career informant” who has no plans to do business with the company in the future. There are many different types of scenarios that could arise in the software audit investigation setting. We have had other cases where the “informant” is still sitting at the IT desk, which creates a real issue when it comes time to fill out the software audit spreadsheet.  But certainly issues of indemnification and contribution should be explored, in addition to reviewing all applicable insurance policies.

What is a “commercial crime” policy?

XL Catlin offers an insurance policy that might cover the types of damages that are suffered in a typical software infringement audit / investigation.  Check with their company representatives to be sure.  Here is what I found on their website:

Coverage

Social Engineering Fraud/Fake President Investigation

Extortion Demands

Reputational Expenses Interest

Receivable / Payable Corporate Identity Fraud

Criminal Damage expenses

Contractual Penalties

Computer Violation Expenses

Data Breach Expenses

Arguably, if a company is caught having software installations used in the business to help generate profits, and the software is not supported by a dated proof of service, this could lead to a settlement with companies like Microsoft, Adobe and Autodesk, and could lead to six figure damages suffered by a company.  This is real money.  There is often an argument to be made if you look at your general corporate insurance policies, and especially if you have special gap coverage for commercial crime, or employee dishonesty.  As federal courts have recognized:

“Without ignoring that this is a commercial crime policy directed at the insured's loss and not a commercial liability policy, our task is to determine the intention of the parties from the plain and ordinary meaning of the specific language used. A policy prepared by an insurer “must be construed liberally in favor of the insured and strictly against the insurer if the language used is doubtful, uncertain or ambiguous.” Am. Fin. Corp. v. Fireman's Fund Ins. Co., 15 Ohio St.2d 171, 239 N.E.2d 33, 35 (1968).   See Retail Ventures, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 691 F.3d 821, 831 (6th Cir. 2012).

Using the examples above “reputational damage” comes to mind.  For example, in many software compliance cases we have handled, the intellectual property lawyers for the software publishers will often “negotiate” the price of confidentiality.  To me this crosses the line, but this is they way it goes right now.  So if you don't pay the demand to keep the settlement a secret your company could suffer reputational harm.  In this event, does the insurance company have a legal obligation to defend and pick up the tab for the settlement amount?  Interesting question.

The word “contractual penalties” may also arouse a need to take a closer look at what your company insurance policy covers.  For example, some software infringement cases are premised as a company “exceeding the scope of the license” (for example using a personal copy of Microsoft Home Office and using that product for Commercial purposes.  The software vendors consider this to be both (a) a breach of contract and (b) copyright infringement, at least according to one IP collection attorney I spoke with.  Under this scenario, the breach of the contract has triggered a claim for money damages.  Would this software settlement award be covered under the terms of the policy, which should be liberally construed in favor of the policy holder?  This is something that should be investigated.

Employee dishonesty insurance

Here is another policy I have heard of recently by a cyber-security expert.  In my research, I did discover one company that offered this type of insurance (I am sure there are many others).  The company website for Naplia explains their insurance policy in this area and they note:

“Employee Dishonesty Liability Insurance Fraud and Embezzlement in the workplace is on the rise The Association of Certified Fraud Examiners (ACFE) estimates business losses at $400 billion per year or about 6% of total annual revenue. The increasing trend in workplace fraud and the relatively low cost of these policies, makes Employee Dishonesty Insurance a coverage that we recommend highly to each of our clients.

Small companies can be especially effected by theft and embezzlement because they can't afford extensive safeguards and aren't large enough to absorb losses. Consider too, your Office Package policy (BOP) and other Employee Dishonesty Policies may not provide coverage if the theft is of your client funds, or if the theft is by a third party (non employee).

Employee Dishonesty policy provides: – Coverage for a loss involving money, securities and other property committed by the fraudulent act of any employee.”

If your company has any type of insurance policy that may protect your business, these need to be brought to our attention so a copyright infringement lawyer can look it over to see if there is a case to be tendered to the insurance company for them to defend.  We can help examine this interesting piece to a compliance investigation.

Contact a software audit intellectual property law firm

If your company has received the dreaded audit notification letter (which usually implicitly makes threats of federal copyright infringement of $150,000 per title), but which also suggest the BSA or SIIA, or Autodesk is willing to work with you amicably, the first thing to do is call our firm.  Let us review the letter and see what is at issue.  We offer no cost initial consultations to business owners who receive what we jokingly refer to as “the love letter.”  We can help review insurance policies, possible defenses, mitigating factors, and come up with a strategy to seek to get your case settled with confidentiality and at the lowest possible exposure to your business.  We have helped many companies from across the United States in resolving software disputes and unlike our competitors, we offer low flat rate (predictable) legal fees that avoids a SHOCKING LEGAL BILL when you have two or three attorneys billing on your case for 9 months.  We are an industry leader.  Call (877) 276-5084. 

About the Author

Steve Vondran

Welcome to the SHORT BIO page for Attorney Steve®  (Yes, I was able to get a trademark for Attorney Steve®) Click here to go to a more COMPLETE BIO. AZ Bar Lic. #025911 CA. Bar Lic. #232337 Introduction I have done a lot of things in my 15 years of law practice and in my life in general.  ...

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