United States Court of Appeals

FOR THE EIGHTH CIRCUIT

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No. 08-3640

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Eyeblaster, Inc., *

*

Plaintiff - Appellant, *

* Appeal from the United States

v. * District Court for the 

* District of Minnesota.

Federal Insurance Company, *

*

Defendant - Appellee. *

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Submitted: June 10, 2009

Filed: July 23, 2010

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Before COLLOTON, JOHN R. GIBSON, and BEAM, Circuit Judges.

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JOHN R. GIBSON, Circuit Judge.

Eyeblaster, Inc. (“Eyeblaster”) appeals from an adverse entry of summary

judgment in its action against Federal Insurance Company (“Federal”) arising out of

Federal’s denial of coverage under two insurance policies. A computer user sued

Eyeblaster, alleging that Eyeblaster injured his computer, software, and data after he

visited an Eyeblaster website. Eyeblaster tendered the defense of the lawsuit to

Federal, seeking coverage under a General Liability policy and an Information and

Network Technology Errors or Omissions Liability policy. Federal denied that it had

a duty to defend Eyeblaster, and Eyeblaster brought this action seeking a declaration

that Federal owed such a duty. The district court entered summary judgment in favor

of Federal, and Eyeblaster appeals. We reverse.
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Eyeblaster is a worldwide online marketing campaign management company

that advertisers, advertising agencies, and publishers use to run campaigns across the

Internet and other digital channels. Its primary product assists in the creation,

delivery, and management of on-line interactive advertising. The company was

established in 1999 and has fourteen offices worldwide, with six employees located

in North America. In 2007, Eyeblaster delivered online marketing campaigns for

nearly 7000 brand advertisers and served ads across more than 2700 global web

publishers.

The industry in which Eyeblaster provides services is known as rich media

advertising. Rich media allows customers to create interactive ads in a wide range of

formats, and to track and manage the performance of the advertising campaigns.

Eyeblaster has the capacity to deliver ads simultaneously to billions of users globally

and to constantly monitor its systems with network and system technicians and

engineers. Its service uses cookies, which are typically used in the advertising

industry to measure and enhance the effectiveness of an advertising campaign. It also

uses JavaScript and Flash technology, which enliven web pages and increase the

Internet’s utility. Eyeblaster does not use spyware or introduce malicious contact such

as spam, viruses, or malware.

Eyeblaster purchased General Liability and Information and Network

Technology Errors or Omissions insurance policies from Federal for the period from

December 5, 2005 to December 5, 2007. Subject to the policies’ terms, Federal had

a duty to defend Eyeblaster against lawsuits, even if such suits were false, fraudulent,

or groundless.

David Sefton filed a lawsuit against Eyeblaster in Harris County, Texas in

October 2006. Eyeblaster removed the action to federal court, where Sefton filed his

First Amended Complaint the following month. Eyeblaster provided notice of and

tendered defense of the First Amended Complaint to Federal in December 2006. On
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March 12, 2007, Federal sent Eyeblaster a letter denying all coverage. When Sefton

amended his complaint a second time, Eyeblaster once again tendered defense of the

suit to Federal, and again Federal denied coverage. Federal’s position was that it

owed no coverage under the General Liability policy because Sefton did not assert

claims for bodily injury caused by an occurrence, as defined by the policy. In

addition, to the extent that Sefton alleged property damage, he did not allege that the

property damage was caused by an accident or occurrence as the policy required.

Federal also noted three exclusions but offered no explanation as to why they would

apply.

With respect to the Information and Network Technology Errors or Omissions

coverage, Federal acknowledged that Sefton had complied with the requirement of

claiming financial injury during the policy period. However, Federal claimed that

Sefton had not alleged that Eyeblaster committed a wrongful act (as defined by the

policy) in connection with a product failure or in performing or failing to perform its

service. Federal also pointed to general exclusionary language in the policy and to

three specific exclusions.

In his Second Amended Complaint, Sefton alleges that his computer was

infected with a spyware program from Eyeblaster on July 14, 2006, which caused his

computer to immediately freeze up. He further alleges that he lost all data on a tax

return on which he was working and that he incurred many thousands of dollars of

loss. Sefton hired a computer technician to repair the damage. Although he alleges

that no repair was possible, he stated that his computer became operational again.

Sefton asserted that he has experienced the following: numerous pop-up ads; a

hijacked browser that communicates with websites other than those directed by the

operator; random error messages; slowed computer performance that sometimes

results in crashes; and ads oriented toward his past web viewing habits.
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Sefton dismissed his action against Eyeblaster in December 2007 pursuant to

a confidential settlement.

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Sefton alleged violations of the Computer Fraud and Abuse Act, 18 U.S.C.

§1030, and the Texas Business and Commercial Code §§ 48.052 and 48.101, a

deceptive trade practice under Texas law, prima facie tort under Texas law, trespass,

conversion, fraud, nuisance, invasion of privacy, intrusion upon seclusion, and

conspiracy. In stating these alleged violations, Sefton accused Eyeblaster of

intentionally accessing a protected computer without authorization, knowingly

committing deceptive trade practice violations, intending to deceive Sefton, and

intentionally installing unwanted spyware onto a user’s computer.1

Eyeblaster asserts that Federal knew of its business because Eyeblaster

completed an application to obtain professional liability insurance. Eyeblaster

disclosed to Federal that its core business activity is the technology used for

interactive advertising content delivery and management, and any allegation that

Eyeblaster intentionally served an ad would have been in the ordinary course of its

business. Eyeblaster points out that it reasonably expected to be covered by Federal’s

policies at issue, and to suggest otherwise would reduce Federal’s coverage to the

point where it had no commercial justification.

The parties brought cross-motions for summary judgment. The district court

granted Federal’s motion and denied Eyeblaster’s, thus concluding the case in

Federal’s favor. The district court determined that Federal owed no duty to defend

under either policy and, having made that decision, did not reach any of the

exclusions.

Eyeblaster asserts on appeal that the district court erred in failing to address

coverage under the General Liability policy for “loss of use of tangible property that

is not physically injured,” and in failing to recognize that the Sefton complaint alleged
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“physical injury to tangible property.” Eyeblaster also asserts that the district court

erred in determining that the Sefton complaint did not accuse Eyeblaster of

committing a “wrongful act” and that Federal therefore owed no duty to defend under

the Errors or Omissions policy.

I.

We review the district court’s grant of summary judgment de novo, viewing the

facts in the light most favorable to Eyeblaster, the non-movant. See Northland Cas.

Co. v. Meeks, 540 F.3d 869, 872 (8th Cir. 2008). We apply the same de novo review

to the district court’s interpretation of the insurance contracts at issue, id., which is an

issue of state law, Meister v. W. Nat’l Mut. Ins. Co., 479 N.W.2d 372, 376 (Minn.

1992). There is no dispute that the Federal policies are controlled by Minnesota law.

Under Minnesota law, an insurer’s duty to defend is distinct from and broader

than its duty to indemnify the insured. SCSC Corp. v. Allied Mut. Ins. Co., 536

N.W.2d 305, 316 (Minn. 1995), overruled on other grounds by Bahr v. Boise Cascade

Corp., 766 N.W.2d 910 (Minn. 2009). The burden is on the insurer to prove that it has

no duty to defend, SCSC Corp., 536 N.W.2d at 316, and in so doing the insurer must

show that “each claim asserted in the lawsuit clearly falls outside the policy.” Murray

v. Greenwich Ins. Co., 533 F.3d 644, 648 (8th Cir. 2008) (applying Minnesota law).

Although the duty is generally determined by comparing the allegations in the

underlying complaint to the policy, if the insured presents facts that arguably

demonstrate coverage or if the insurer becomes aware of such facts, the insurer then

bears a “heavy burden” of proving that it has no such duty. Id. at 648-49.

II.

The General Liability policy Eyeblaster purchased from Federal obligates the

insurer to provide coverage for property damage caused by a covered occurrence.
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Property damage means “physical injury to tangible property, including resulting loss

of use of that property . . . ; or loss of use of tangible property that is not physically

injured.” The definition of “tangible property” excludes “any software, data or other

information that is in electronic form.”

The district court concluded that the Sefton complaint does not allege damage

to tangible property because it only claims damage to software, which is by definition

excluded. The district court relied on America Online, Incorporated v. St. Paul

Mercury Insurance Company, 347 F.3d 89 (4th Cir. 2003), in which America Online,

Inc. (“AOL”) attempted to require its insurer to defend against claims that AOL’s

proprietary software package had “altered the customers’ existing software, disrupted

their network connections, caused them loss of stored data, and caused their operating

systems to crash.” 347 F.3d at 93. The Fourth Circuit rejected AOL’s argument

because its insurance policy covered liability for “physical damage to tangible

property,” and the court identified the configuration instructions, data, and

information as intangible and abstract. Id. at 96. Eyeblaster attempts to distinguish

this portion of the AOL case without success. The Sefton complaint alleges direct

injury to the operation of his computer, but it alleges no damage to the hardware itself.

The complaint would have had to make a claim for physical injury to the hardware in

order for Eyeblaster to have coverage for “physical injury to tangible property.” 

Eyeblaster argues that the district court erred in failing to consider Federal’s

duty under the second part of the definition of “property damage,” which obligates the

company to provide coverage if Eyeblaster is alleged to have caused the “loss of use

of tangible property that is not physically injured.” The tangible property is Sefton’s

computer, and Eyeblaster points to language from the Sefton complaint in which he

alleges his computer was “taken over and could not operate,” “froze up,” and would

“stop running or operate so slowly that it will in essence become inoperable.” Sefton

also alleges that he experienced “a hijacked browser - a browser program that

communicates with websites other than those directed by the operator,” and “slowed
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computer performance, sometimes resulting in crashes.” Sefton asserts that his

computer has three years of client tax returns that he cannot transfer because he

believes the spyware files would also be transferred, and he therefore must reconstruct

those records on a new computer. He thus argues that his computer is no longer

usable, as he claims among his losses “the cost of his existing computer.”

Federal did not include a definition of “tangible property” in its General

Liability policy, except to exclude “software, data or other information that is in

electronic form.” The plain meaning of tangible property includes computers, and the

Sefton complaint alleges repeatedly the “loss of use” of his computer. We conclude

that the allegations are within the scope of the General Liability policy. See Am.

Online, Inc. v. St. Paul Mercury Ins. Co., 207 F. Supp. 2d 459, 470 (E.D. Va. 2002)

(district court found loss of use of tangible property when complaint alleged that AOL

caused loss of use of computers and computer functionality, but concluded no

coverage existed because allegations were otherwise excluded), aff’d, 347 F.3d 89

(4th Cir. 2003); State Auto Prop. & Cas. Ins. Co. v. Midwest Computers & More, 147

F. Supp. 2d 1113, 1116 (W.D. Okla. 2001) (in case with “property damage” language

identical to language of Eyeblaster policy, court holds that “[b]ecause a computer

clearly is tangible property, an alleged loss of use of computers constitutes ‘property

damage’ within the meaning of plaintiff’s policy”).

Federal argues that, even if it owes a duty to defend because Sefton alleged a

loss of use of tangible property, that coverage is barred by the exclusion for Impaired

Property/Property Not Physically Injured. Under Minnesota law, an insured is entitled

to have its case considered by the fact-finder once it has established a prima facie case.

The insurer then has the burden to prove that an exclusion applies. SCSC Corp. v.

Allied Mut. Ins. Co., 536 N.W.2d 305, 313 (Minn. 1995), overruled on other grounds

by Bahr v. Boise Cascade Corp., 766 N.W.2d 910 (Minn. 2009). Exclusions are

narrowly interpreted against the insurer. SCSC Corp., 536 N.W. 2d at 314.
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Federal points to an exclusion in the General Liability policy entitled “Damage

to Impaired Property or Property Not Physically Injured,” which states that the

insurance does not apply to property damage to impaired property or property that has

not been physically injured if the damage arises out of any defect, deficiency,

inadequacy, or dangerous condition in Eyeblaster’s product or work. “This exclusion

does not apply to the loss of use of other tangible property resulting from sudden and

accidental physical injury to your product or your work after it has been put to its

intended use.” The policy also defines “impaired property:”

Impaired property means tangible property, other than your product or

your work, that cannot be used or is less useful because:

• it incorporates your product or your work that is known or 

thought to be defective, deficient, inadequate or dangerous; or

• you have failed to fulfill the terms or conditions of a contract

or agreement;

if such property can be restored to use by:

• the repair, replacement, adjustment or removal of your product

or your work; or

• your fulfilling the terms or conditions of the contract or

agreement.

Federal asserts that, if Sefton lost the use of his hardware, it would be “impaired

property.” It also asserts that Sefton’s computer would be “property not physically

injured” because it was damaged by the allegedly defective and dangerous condition

in Eyeblaster’s software.

We conclude that Federal has not met its burden of proving that the exclusion

applies. Sefton’s computer cannot be considered “impaired property” because no
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evidence exists that the computer can be restored to use by removing Eyeblaster’s

product or work from it. The record shows that Eyeblaster provides advertising

services to its clients to enable those clients to reach and interact with online computer

users such as Sefton. It is not clear that an Eyeblaster product or Eyeblaster’s work

ever existed on Sefton’s computer, and thus it is equally unclear that such product or

work could be removed from the computer. Sefton alleges that the website that he

believes caused the damage to his computer “was owned and operated by Eyeblaster

or person’s [sic] or entities that are controlled directly or indirectly by Eyeblaster.”

Such a broad characterization does not suffice to satisfy the requirement that

Eyeblaster incorporated its product or work into Sefton’s computer.

Even if the Sefton complaint could be read to meet the first part of the

definition of “impaired property,” Sefton alleges that he unsuccessfully attempted to

have the damage to his computer repaired. Federal thus cannot demonstrate that

Sefton’s computer could be restored by the removal of Eyeblaster’s product or work.

See Corn Plus Coop. v. Cont’l Cas. Co., 444 F. Supp. 2d 981, 990 (D. Minn. 2006)

(applying Minnesota law to identical exclusionary language, court holds that repair

and replacement of defective welds in piping system cannot restore damaged product

running through the system and thus does not fall within definition of “impaired

property,” citing cases from other jurisdictions).

Federal suggests that two more exclusions to its General Liability policy apply.

The first is the “Expected Or Intended Injury” exclusion, which precludes coverage

for property damage arising out of an act that is intended by the insured or that would

be expected from the standpoint of a reasonable person in the circumstances of the

insured to cause property damage. The second is the “Intellectual Property Laws Or

Rights” exclusion, which excludes damages related to infringement or violation of any

intellectual property law or right. Federal advances no convincing argument in favor

of either, and we conclude that these exclusions likewise do not apply.
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III.

Eyeblaster next asserts that the district court erred by concluding that the Sefton

complaint does not allege a cause of action covered by Federal’s Information and

Network Technology Errors or Omissions policy. The policy obligates Federal to pay

loss for financial injury caused by a wrongful act that results in the failure of

Eyeblaster’s product to perform its intended function or to serve its intended purpose.

“Financial injury” is defined as economic injury resulting from property that cannot

be used or is less useful. As the name of the policy suggests, the Errors or Omissions

policy specifically covers intangible property such as software, data, and other

electronic information. Under the policy, a “wrongful act” is an error, an

unintentional omission, or a negligent act.

Federal concedes that Sefton’s complaint does allege a “financial injury,” which

the district court acknowledged. However, the district court determined that the

Sefton complaint does not claim a “wrongful act” because the complaint alleges that

Eyeblaster acted intentionally in placing its software on Sefton’s computer. The

district court rejected Eyeblaster’s argument that the policy covers allegedly intended

acts resulting in unintended injuries, and concluded that the “substance of the

allegations” is that Eyeblaster intended to place its product on Sefton’s computer.

Recognizing that Minnesota law places the burden on the insurer to prove that

it has no duty to defend, and in so doing it must show that “each claim asserted in the

lawsuit clearly falls outside the policy,” Murray v. Greenwich Ins. Co., 533 F.3d 644,

648 (8th Cir. 2008), we conclude that Federal owes a duty under its Errors or

Omissions policy.

The Sefton complaint is lengthy and contains many, many allegations. Both

parties can selectively cite words and phrases to support their arguments. However,

under the appropriate standard of review, Federal cannot demonstrate that each claim
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in the Sefton complaint falls outside the coverage of its Errors or Omissions policy.

This court has defined “error” in a technology errors and omissions policy to include

intentional, non-negligent acts but to exclude intentionally wrongful conduct. St. Paul

Fire & Marine Ins. Co. v. Compaq Computer Corp., 539 F.3d 809, 815 (8th Cir.

2008). Sefton alleges that Eyeblaster installed tracking cookies, Flash technology, and

JavaScript on his computer, all of which are intentional acts. However, Federal can

point to no evidence that doing so is intentionally wrongful. As Eyeblaster points out

in an affidavit filed with the district court, Federal’s parent company utilizes

JavaScript, Flash technology, and cookies on its own website. Federal cannot label

such conduct as intentionally wrongful merely because it is included in the Sefton

complaint; Federal has a duty to show that the use of such technology is outside its

policy’s coverage. Federal points to no evidence that the allegations concerning

tracking cookies, etc. spoke of intentional acts that were either negligent or wrongful.

Under St. Paul, therefore, the Sefton complaint does allege a wrongful act.

The record also contains the Consent Judgment and Permanent Injunction

entered by the United States District Judge in the Sefton action, which includes the

following stipulation:

Sefton acknowledges that after a review of the evidence supplied in

discovery, he had no basis in fact to allege that [Eyeblaster] had acted

willfully, intentionally, or otherwise with malice aforethought, to injure

him or his business or to violate any laws and accordingly he is now

willing to submit himself . . . to the within permanent injunction against

pursuing claims like those asserted in this case against [Eyeblaster].

While the Consent Judgment and Permanent Injunction obviously did not exist until

the Sefton lawsuit was concluded, the quoted language serves to confirm that

Eyeblaster’s use of technology was subject to coverage under Federal’s Errors or

Omissions policy. Under Minnesota law, if the insured presents facts that arguably

demonstrate coverage or if the insurer becomes aware of such facts, the insurer then
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bears a “heavy burden” of proving that it has no duty to defend. Murray, 533 F.2d at

648-49 (internal quotation marks omitted). Federal did not meet that burden.

Just as with the General Liability policy, Federal argues that several exclusions

would apply if we were to conclude that coverage exists under the Errors or

Omissions policy. Those exclusions speak of intentional conduct that Federal has not

carried its burden to show.

IV.

For the foregoing reasons, we reverse the district court judgment and remand

for further proceedings.

COLLOTON, Circuit Judge, concurring in the judgment.

I agree, substantially for the reasons stated by the court, that Federal Insurance

Company has not established that all parts of David Sefton’s claims against

Eyeblaster, Inc., fall clearly outside the scope of coverage provisions under the

General Liability and Errors or Omissions policies that Eyeblaster purchased from

Federal, although I would not rely on the consent judgment cited by the court, ante,

at 12, because it did not exist at the time of Federal’s disputed denial. I do not join the

court’s conclusion about exclusions under the General Liability policy. While I agree

that Sefton’s computer is not “impaired property” for purposes of the first exclusion,

the computer is “property that has not been physically injured” – indeed, the court

concludes elsewhere that the computer is “tangible property that is not physically

injured.” Ante, at 6-7. And it is likely that Sefton’s complaint should be read to allege

that the damage to his computer arose out of a dangerous condition in Eyeblaster’s

product or work, thus satisfying the second criterion for the exclusion. I do agree,

however, that there is no applicable exclusion that bars coverage under the Errors or

Omissions policy. Because an insurer’s duty to defend arises when any part of the
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claim against the insured is arguably within the scope of coverage afforded by the

policy, Metro. Prop. & Cas. Ins. Co. v. Miller, 589 N.W.2d 297, 299 (Minn. 1999),

I agree that Federal had a duty to defend. Therefore, I concur in the judgment.

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