The Truth in Domain Names Act: Criminal Punishment for Pornographic Cybersquatters

February 2004


In a recent decision involving insurance coverage, the United States Court of Appeals for the Fourth Circuit (located in Richmond, Virginia) held that software and data are not “tangible” property. America Online, Incorporated v. St. Paul Mercury Ins. Co. , 347 F.3d 89 (4th Cir. 2003). The significance of this ruling in the context of the insurance dispute was that AOL was not able to obtain insurance coverage for claims that its Version 5.0 access software contained numerous “bugs” and caused computers to crash when people tried to install the AOL software. AOL was left carrying the bag for numerous class actions lawsuits in which the plaintiffs asserted that AOL's software was “unreasonably dangerous” and that the software had been “rushed to market” to celebrate AOL's tenth anniversary after only minimal testing.

AOL had obtained a commercial liability policy from St. Paul. As is typical of most commercial liability policies, the policy provided coverage for “property damage,” which was defined as “physical damage to tangible property….” The definition of “property damage” also included “loss of use of tangible property of others that isn't physically damaged.” AOL argued that because its software had caused its customers' computers to crash, there was physical damage to tangible property. The court, on the other hand, held that the problem was with the software—not the hardware—and that there was no coverage because the software was “intangible” property.

According to the court, data, information and instructions, all of which are codified in a binary language and stored on the hard drive, are not tangible property. Although the customers' hard drives may have been reconfigured as a result of the AOL software, there was no “damage” to the hard drive, in the court's view, because the reconfigurations could be reversed. Thus, the court held that there was no physical damage to tangible property.

Similarly, the court held that there was no loss of use of tangible property because the AOL software damaged other software and operating systems, but it did not damage the physical or tangible components of any computer.

The case was argued before a three-judge panel, and only two of the judges joined in the majority opinion. The dissenting judge noted that the claimants in the underlying actions had alleged “system failures” and “computer freezes.” He concluded that the software had caused physical damage to the computer hardware by rendering it inoperable. This, according to the dissenting judge, was enough to trigger coverage under AOL's commercial liability policy.

America Online is the first case in which a federal appellate court squarely addressed the issue of whether software and data losses are covered under a typical commercial liability policy. Although the case was decided under Virginia law, courts in other jurisdictions faced with the same issue will likely look to America Online for guidance.

The lesson to be gleaned from the America Online case is that software companies, or any companies that provide software to their customers, should not rely solely on their commercial liability policies for coverage in the event of software failures. Some insurance companies offer E&O (errors and omissions) policies that are written specifically for technology companies and that would likely cover the types of losses incurred by AOL. Because E&O policies are not standardized within the industry, however, it is important to check with your insurance agent to determine whether your company is covered for losses caused by software failures. In addition, insurance companies are now writing policies specific to technology-related losses, and those types of specialty policies may be worth considering as well.

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Antoinette M. Tease, P.L.L.C.

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