Court Opinion

ID: 1010397
Source: CourtListenerOpinion
Date Created: 2013-07-04 20:10:53.179681+00
Date Added: 2024-06-11T09:01:04.082005
License: Public Domain

UNPUBLISHED

UNITED STATES COURT OF APPEALS
                FOR THE FOURTH CIRCUIT

NMS SERVICES INCORPORATED,               
               Plaintiff-Appellant,
                  v.
THE HARTFORD, a/k/a Hartford
Insurance Company of the Midwest,
a/k/a Hartford Fire Insurance
                                                   No. 01-2491
Company,
                 Defendant-Appellee.
JOHN D. POWELL,
                               Movant.
                                         
           Appeal from the United States District Court
        for the Eastern District of Virginia, at Alexandria.
              Claude M. Hilton, Chief District Judge.
                         (CA-01-667-A)

                       Argued: September 24, 2002

                         Decided: April 21, 2003

Before WIDENER, NIEMEYER, and GREGORY, Circuit Judges.

Reversed and remanded by unpublished opinion. Judge Gregory
wrote the opinion. Judge Widener wrote a concurring opinion. Judge
Niemeyer wrote a dissenting opinion.

                              COUNSEL

ARGUED: Alan Rosenblum, ROSENBLUM & ROSENBLUM,
Alexandria, Virginia, for Appellant. George Edwin Reede, Jr.,
2               NMS SERVICES INC. v. THE HARTFORD
NILES, BARTON & WILMER, L.L.P., Baltimore, Maryland, for
Appellee. ON BRIEF: Robert S. Reverski, Jr., NILES, BARTON &
WILMER, L.L.P., Baltimore, Maryland, for Appellee.

Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

                             OPINION

GREGORY, Circuit Judge:

   NMS Services, Inc. ("NMS"), a software development company,
brought suit against The Hartford Fire Insurance Company
("Hartford"), seeking coverage for claims made under NMS’s insur-
ance policy. Hartford subsequently filed a motion for summary judg-
ment, which the district court granted. We reverse and remand to the
district court.

                                  I.

   NMS is a software development company whose business is to
manufacture and sell Sales Force Automation and Call Center Man-
agement software to the telemarketing industry. Its operations are
fully computerized. NMS’s property was insured by Hartford under
a Special Property Coverage Form ("Special Property Form"), which
provided basic property coverage, and a Computer and Media
Endorsement ("Endorsement"), which provided optional computer
coverage.

   On July 22, 2000, NMS discovered that its computer systems had
sustained considerable damage, including the erasure of vital com-
puter files and databases necessary for the operation of the company’s
manufacturing, sales, and administrative systems. It was later deter-
mined that the damage was caused by a hacker who gained access to
the network during the evening of July 21, 2000. The hacker was John
Powell, who was employed by NMS as a technical systems adminis-
                 NMS SERVICES INC. v. THE HARTFORD                     3
trator until he was terminated on May 30, 2000. Unbeknownst to
NMS, Powell had installed two hacking programs on NMS’s network
systems while he was still employed at NMS. Those programs that
Powell installed allowed him to gain full access to NMS’s systems by
overriding security codes and unencrypting secured passwords, thus
enabling Powell to cause the damage discovered on July 22, 2000.

   NMS filed a claim with Hartford for recovery under its insurance
policy, which Hartford denied. NMS brought an action for declaratory
judgment against Hartford in the Circuit Court of Fairfax County,
Virginia. The action was removed to the United States District Court
for the Eastern District of Virginia based upon diversity of citizen-
ship. NMS amended its complaint, requesting damages in the amount
of $350,000 and attorney’s fees. NMS then moved for partial sum-
mary judgment, and Hartford filed a cross-motion for summary judg-
ment. The district court, finding that there was no coverage under the
policy, granted Hartford’s motion for summary judgment. This appeal
followed.

                                   II.

   This Court reviews grants of summary judgment de novo. JKC
Holding Co., LLC v. Washington Sports Ventures, Inc., 264 F.3d 459,
465 (4th Cir. 2001). Summary judgment is appropriate when "the
pleadings, depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled to
a judgment as a matter of law." Fed. R. Civ. P. 56(c).

                                  III.

   NMS assigns error to the district court’s finding that because NMS
entrusted Powell with its property, the dishonesty exclusion provi-
sions under the Special Property Form and the Endorsement pre-
cluded coverage. In reviewing the district court’s grant of summary
judgment, we examine the insurance policy to determine the effect of
the dishonesty exclusions under the Special Property Form and the
Endorsement on NMS’s coverage.
4               NMS SERVICES INC. v. THE HARTFORD
                                 A.

   NMS’s coverage under the Special Property Form is limited by the
dishonesty exclusion, which states:

    We will not pay for loss or damage caused by or resulting
    from:

    Dishonesty: Dishonest or criminal act by you, any of your
    partners, employees, directors, trustees, authorized represen-
    tatives or anyone to whom you entrust the property for any
    purpose:

    (1) Acting alone or in collusion with others; or

    (2) Whether or not occurring during the hours of employ-
        ment.

    This exclusion does not apply to acts of destruction by your
    employees; but theft by employees is not covered.

Form, ¶ B(2)(e) (emphasis in original). The district court held that
NMS placed its computer systems "in the entrustment of the former
employee [Powell] for their care and performance during his tenure."
NMS Servs., Inc. v. The Hartford Fire Ins. Co., Civil Action 01-667-
A (E.D. Va. Dec. 7, 2001). The district court found that because Pow-
ell was entrusted with NMS’s property while still employed at NMS,
NMS was precluded from coverage by the dishonesty exclusion of the
Special Property Form. If the district court’s reasoning was correct,
then any dishonest or criminal act committed by an employee (or for-
mer employee) that damaged property would preclude coverage if
that employee had also been entrusted with the property. Such an
interpretation would render the exception meaningless. Most employ-
ees, to some extent, are entrusted with property, but not all persons
entrusted with property are employees. Therefore, where the entrusted
person is also an employee, both the dishonesty exclusion clause pro-
hibiting coverage for "dishonest or criminal acts by an employee" and
the exception to the exclusion apply.
                 NMS SERVICES INC. v. THE HARTFORD                   5
   It is undisputed that Powell installed the software which allowed
him to destroy NMS’s data while he was still an employee of NMS.
Powell’s actions on July 21, 2000, were the final step in carrying out
his plan. Without the installation of the software, Powell could not
have destroyed the data. The substantial portion of Powell’s actions
took place while he was still an NMS employee, making Powell, for
purposes of the dishonesty exclusion of the Special Property Form, an
employee who committed a dishonest or criminal act. However,
NMS’s property was not only damaged, but was completely destroyed
by an employee, Powell, which triggers the exception to the dishon-
esty exclusion of the Special Property Form. Under the exception,
acts of destruction by employees do not preclude coverage. Form,
¶ B(2)(e). Therefore, we find that the dishonesty exclusion of the Spe-
cial Property Form does not preclude NMS’s coverage under the Spe-
cial Property Form.

                                  B.

   The dishonesty exclusion of the Endorsement mirrors the dishon-
esty exclusion of the Special Property Form, however, it does not
include the exception language found in the Special Property Form.
Without that language, whether Powell committed a dishonest or
criminal act as an NMS employee or as someone to whom NMS
entrusted its property, the dishonesty exclusion precludes coverage
under the Endorsement. Therefore, we affirm the district court’s find-
ing that NMS has no coverage under the Endorsement.

                                 IV.

   Having found that the dishonesty exclusion does not preclude
NMS’s coverage under the Special Property Form, we now examine
the relevant provisions of the Special Property Form to determine the
scope of NMS’s insurance coverage.

   First, NMS has coverage under the Business Income Additional
Coverage ("Business Income") provision. Under that provision, Hart-
ford "will pay for the actual loss of Business Income you sustain due
to the necessary suspension of your ‘operations’ during the ‘period of
restoration.’ The suspension must be caused by direct physical loss
of or damage to property at the described premises . . . ." Form,
6                NMS SERVICES INC. v. THE HARTFORD
¶ A(5)(k) (emphasis added). Such coverage is only available when the
loss or damage is caused by or results from any "Covered Cause of
Loss." There is no question that NMS suffered damage to its property,
specifically, damage to the computers it owned, and this Court has
already concluded that the damage constitutes a covered cause of loss.
Accordingly, we find that NMS has coverage under the Business
Income Additional Coverage provision of the Special Property Form.

   Second, NMS has coverage under the Additional Coverage for
Extra Expense provision. That provision covers costs incurred during
the restoration period that would not have been incurred if there were
no direct physical loss of or damage to the property. See Form
¶ A(5)(l). Like the Business Income Additional Coverage provision,
Additional Coverage for Extra Expense is only available if the dam-
age was caused by or resulted from a "Covered Cause of Loss." Id.
Because NMS suffered damage to its property and its loss constitutes
a covered cause of loss, we find that NMS has coverage under the
Additional Coverage for Extra Expense provision of the Special Prop-
erty Form.

   Finally, NMS has coverage under the Coverage Extension: Valu-
able Papers and Records-Cost of Research provision of the Special
Property Form. That provision states that the insured "may extend the
insurance that applies to Business Personal Property to apply to your
[the insured’s] costs to research, replace or restore the lost informa-
tion on lost or damaged ‘valuable papers and records,’ including those
which exist on electronic or magnetic media, for which duplicates do
not exist." Form, ¶ A(6)(e). "Valuable papers and records" are "in-
scribed, printed or written documents, manuscripts or records, includ-
ing abstracts, books, deeds, drawings, films, maps or mortgages. But
‘valuable papers and records’ does not mean ‘money and securities,’
converted data, programs or instructions used in your data processing
operations, including the materials on which the data is recorded."
Form, ¶ G(8). Because the destroyed property is a "record" within the
definition of "valuable papers and records," we find that NMS is cov-
ered under this provision of the Special Property Form.
                 NMS SERVICES INC. v. THE HARTFORD                    7
                                  V.

   In conclusion, we find that NMS has coverage under the Special
Property Form and therefore reverse the district court’s grant of sum-
mary judgment and remand for further proceedings consistent with
this opinion.*

                                       REVERSED AND REMANDED

WIDENER, Circuit Judge, concurring:

   I concur in the majority opinion but I would add a word. The insur-
ing clause of the policy requires a "direct physical loss."

   The Special Property Coverage Form states in paragraph A(3) that
for something to constitute a "Covered Cause[ ] of Loss" it must be
a "direct physical loss," unless excluded in Section B or limited in
paragraph A(4). My concurrence is dependent on the fact that, when
the employee erased the data on NMS’s computers, this erasure was
in fact a "direct physical loss" under the requirements of the policy.
Indeed, a computer stores information by the rearrangement of the
atoms or molecules of a disc or tape to effect the formation of a par-
ticular order of magnetic impulses, and a "meaningful sequence of
magnetic impulses cannot float in space." Comptroller of the Trea-
sury v. Equit. Trust Co., 296 Md. 459, 484 (C.A. Md. 1983). It is the
fact that the erasure was a "direct physical loss" that enables NMS to
recover under the policy and enables me to concur.

NIEMEYER, Circuit Judge, dissenting:

   Because the losses sustained in this case by NMS Services, Inc.
involved damage to its computer programs and data and were the
product of a scheme by one of its disgruntled employees who was
intent on causing NMS Services, Inc. harm, the losses were not, in my
judgment, covered by the policy of insurance issued by The Hartford
Fire Insurance Company to NMS Services. That policy included a

   *We decline to address NMS’s claims for attorney’s fees, leaving that
issue to be resolved by the district court at the appropriate time.
8                NMS SERVICES INC. v. THE HARTFORD
specific endorsement addressing coverage for "computers and media"
which indicated that coverage under the policy for losses involving
computers must be provided under the endorsement. That endorse-
ment provides that it "modifies" the underlying policy by adding cov-
erages and exclusions. One of the additional exclusions added by the
endorsement excludes coverage of any loss "caused by or resulting
from [the] dishonest or criminal acts by . . . any of your . . . employ-
ees . . . or anyone to whom you entrust the property." Because I
believe this exclusion is applicable, I would affirm the judgment of
the district court.