Is Industrial Espionage Covered? – Understanding Business Interruption Claims, Part 82

In Coupled Products, LLC v. Harleysville Ins. Co., No. 1:09-CV-349, 2011 WL 3101357 (N.D. Ind. July 25, 2011), the court said, “unfortunately, no.”

Couple Products designed and manufactured component parts for the auto industry. At the time of the loss, the company had invested heavily in designing and developing unique and patented prototypes that were expected to meet its customers’ requirements far more efficiently than its competitors. The insured had a contract with General Motors and was preparing to launch a new business proposal with its new line of products. The insured’s direct competitor leased a space in the same building, and the two companies were competing for an exclusive contract with General Motors. In the heat of the race, the competitor’s engineer stole various component parts from the insured’s prototype and testing laboratory. Despite the theft, the insured was able to continue its normal operations.

Upon arrest, the thief confessed to police that he stole parts from the insured because he “didn’t have time” to obtain the parts lawfully before the competitor’s product was supposed to launch; the thief needed to figure out how the new components worked. A week after the theft, GM informed the insured that it lost the bid to the competitor and cancelled their existing contract.

The insured filed a claim with its insurer for the theft and claimed the loss of its competitive advantage constituted a loss under the policy’s business income provision. The parties stipulated that the theft was a covered loss and that it caused direct physical loss at the insured location. The insurer, however, argued that the loss of GM’s contract or the loss of future business was not covered under the policy’s business income provision.

The court was not persuaded by the insured’s unfortunate tale. In granting summary judgment in favor of the insurer, the court stated that:

Interpreting business interruption coverage to cover the loss of a competitive advantage suffered as a result of a theft of intellectual property would actually require insurers to subsidize insured victims of industrial espionage almost indefinitely—a result plainly contrary to both precedent and the reasonable expectations of the contracting parties.

Winters v. State Farm Fire and Casualty. Co., 73 F.3d 224 (9th Cir.1995), supports the proposition that the loss of a competitive advantage does not constitute a business interruption when operations continue unabated. In that case, a trial attorney filed a claim with his insurer after hand saws to be used as examples in an upcoming trial were stolen from his office. The attorney claimed that as a result of this theft, he lost the suit, which would have earned him over a million dollars in contingency fees. The court found that the policy did not provide coverage, since the attorney was able to continue his law practice after the theft, albeit without the competitive advantage of exemplar hand saws at trial. It is true, as CP points out, that the terms of the Winters policy differ from the Harleysville policy at issue here; the Winters policy required a suspension of operations, while the Harleysville policy covers a whole or partial business interruption. But the Winters court nevertheless focused on the plaintiff’s “operations”, not the strength of his case relative to that of his opponent, and denied coverage because “[i]t is undisputed that there was no suspension of operations attributable to the theft.” Id. at 229.

Numerous other cases have held that it is the inability to meet customer demand—not reduced customer demand—that triggers business interruption coverage. See, e.g., Ramada Inn Ramogreen, Inc. v. Travelers Indem. Co. of Am., 835 F.2d 812, 814–15 (11th Cir.1988) (denying recovery to hotel owner under business interruption policy when fire damaged nearby restaurant and hotel business slowed but hotel remained operational); Rothenberg v. Liberty Mut. Ins. Co., 115 Ga.App. 26, 153 S.E.2d 447, 448 (1967) (denying recovery under business interruption policy where theft of merchandise resulted in loss of business; court held insured had not suffered an interruption of business, but rather a diminution in volume); Howard Stores Corp. v. Foremost Ins. Co., 82 A.D.2d 398, 441 N.Y.S.2d 674 (N.Y.App.Div.1981) (denying recovery for water damage to business where there was no actual suspension of business, but rather an alleged adverse effect on continuing sales).

Since the insured continued to perform its normal operations at a “similar level of service” as it did before the theft, the court found that the insured could not recover for the lost GM contract.