Underwater Kinetics LLP v. Hanover Am. Ins. Co.

483 F.Supp.3d 942

UNDERWATER KINETICS LLP, a California Limited Liability Partnership; Alan K. Uke, an individual, Plaintiffs,

v.The HANOVER AMERICAN INSURANCE COMPANY, a New Hampshire Corporation; and Does 1 through 20, Defendants.

Case No.: 3:19-cv-01218-H-LL

United States District Court, S.D. California.

Signed September 1, 2020

Craig A. Miller, Law Office of Miller & Calhoun, James H. Pyle, Law Offices of James H. Pyle, La Jolla, CA, for Plaintiffs.

Stephen Michael Hayes, Tyler R. Austin, Hayes Scott Bonino Ellingson Guslani Simonson & Clause LLP, San Carlos, CA, for Defendants.

ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AS TO PLAINTIFF ALAN K. UKE

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AS TO PLAINTIFF UNDERWATER KINETICS LLP

MARILYN L. HUFF, District Judge

On July 8, 2020, Defendant The Hanover American Insurance Company filed a Motion for Summary Judgment or in the Alternative Partial Summary Judgment. (Doc. No. 26.)¹ Defendant seeks summary judgment on Plaintiffs’ claims for breach of contract and breach of the implied covenant of good faith and fair dealing. On July 27, 2020, Plaintiffs Underwater Kinetics LLP and Alan K. Uke filed their Opposition. (Doc. No. 29.) On August 3, 2020, Defendant filed its Reply. (Doc. No. 30.)

The Court held a hearing on the motion on August 10, 2020. (Doc. No. 34.) Craig A. Miller appeared on behalf of Plaintiffs, and Tyler R. Austin appeared on behalf of Defendant. (Id. ) Following the hearing, the Court requested supplemental briefing from the parties addressing coverage under the Business Income Form of the insurance policy. (Doc. No. 35.) Defendant filed its supplemental brief on August 21, 2020. (Doc. No. 36.) Plaintiffs filed their opposition to Defendant's supplemental brief on August 28, 2020. (Doc. No. 38.) For the reasons below, the Court denies in part and grants in part Defendant's motion for summary judgment.

Background

This case arises out of an insurance coverage dispute between Underwater Kinetics LLP and its insurer The Hanover American Insurance Company ("Hanover"). Underwater Kinetics LLP ("UK") is a manufacturer of scuba diving accessories, waterproof cases, and industrial flashlights. (Doc. No. 26-4 Ex. 1 Uke Depo. at RT: 16:24–17:2.) Alan K. Uke is the founder, President, and CEO of UK. (Doc. No. 1 Ex. 1 ¶ 4.) Between August 1, 2017 to August 1, 2018, UK was covered under The Hanover American Insurance Company Policy No. ZZ3 912145807 (the "Policy"). (Doc. No. 26-4 Ex. 15 at UWK_CP_001.)

A. The Policy

The Policy named "Underwater Kinetics LLP" as the named insured and was effective from August 1, 2017 to August 1, 2018. (Id. at UWK_CP_002.) The Policy provided coverage relevant to the case at hand under a Building and Personal Property Coverage Form ("Property Form") and a Business Income (and Extra Expense) Coverage Form ("Business Income Form"). (Id. at UWK_CP_124, 140.) Both forms generally required a "direct physical loss" for coverage. (Id. ) The Policy also included a Gold Property Broadening Endorsement (the "Gold Endorsement"), which amended and extended the coverage provided under the Property Form and the Business Income Form. (Id. at UWK_CP_064.) The Gold Endorsement added three additional coverages relevant to this case: (1) an "E-Commerce" coverage, (2) an "Extra Expense" coverage, and (3) a "Prototypes" coverage. (Id. at UWK_CP_064–065.)

The E-Commerce coverage contained provisions for "Electronic Vandalism – Direct Damage," and "Electronic Vandalism – Interruption of Computer Operations." (Id. at UWK_CP_070.) The Direct Damage section of the E-Commerce coverage required a "direct physical loss," but the Interruption of Computer Operations section did not. (Id. at UWK_CP_70–71.) The Interruption of Computer Operations provision amended the Business Income Form to provide coverage "to a ‘suspension’ of ‘operations’ caused by an interruption in computer operations at the described premises due to ‘electronic vandalism’ anywhere in the world." (Id. ) The E-Commerce coverage provided that the most that would be paid "for all loss or damage from both Electronic Vandalism – Direct Damage and Electronic Vandalism – Interruption of Computer Operations in any one ‘occurrence’ is $10,000 or the Limit of Insurance shown in the Amended Limits Section of this Endorsement." (Id. at UWK_CP_071.) The Amended Limits Section of the Gold Endorsement showed a new limit for E-Commerce coverage of $350,000. (Id. at UWK_CP_064.)

The Gold Endorsement defined several key terms:

"Electronic vandalism" means "computer hacking", computer virus or a "denial of service attack".

"Occurrence" means all loss or damage that is attributable to:

a. An act, event, cause or series of similar, related acts, events or causes involving one or more persons; or

b. An act, event, cause or series of similar, related acts, event or causes not involving any person.

(Id. at UWK_CP_099, 101.) The Gold Endorsement also had an anti-stacking provision that limited the coverage UK was entitled to as follows:

If any of the property covered by this endorsement is also covered under any other provisions of the policy of which this endorsement is made a part, or if more than one coverage under this endorsement applies, in the event of loss or damage, you may choose only one of these coverages to apply to that loss. The most we will pay in this case is the limit of insurance applying to the coverage you select.

(Id. at UWK_CP_064.)

B. The Malware Attacks

Between October 3, 2017 and January 4, 2018, UK suffered a series of malware attacks. (Doc. No. 29-3 Uke Decl. ¶¶ 3–5.) The first intrusion in October "encrypted the electronic data in the company computer network, locked out its users, and physically damaged the tape backup system ...." (Id. ¶ 3.) On October 6, 2017, UK submitted a claim related to the October intrusion to Hanover and Hanover adjuster, Chris Guittar, began to process the claim. (Doc. No. 27 at 3.) That same day Guittar retained Loss Solutions Group ("LSG") to act as a technological consultant on the claim in order to provide "guidance for [the] insured, confirmation on cause of loss so [Hanover] can confirm coverage and [a] repair cost analysis." (Doc. No. 26-4 Ex. 2.) Concurrently, UK had directed its own IT provider, Corporate Technologies, to attempt to fix the damage caused by the hack. (Doc. No. 29 at 10.)

Barely over a month later, on November 14, 2017, UK's computer system was again attacked by a computer virus and rendered inoperable, "causing a suspension of its business operations." (Doc. No. 29-3 Uke Decl. ¶ 4.) On November 20, 2017, Guittar in a letter to the UK CEO, Alan Uke, acknowledged receipt of UK's new claim stemming from the November intrusion. (Doc. No. 29-4 Ex. 13.) In this correspondence, Guittar wrote that "[e]ach incident of loss would be a separate claim with applicable deductible" and that the E-Commerce coverage has a "policy period limit so that if it is determined their [sic] are separate losses the one policy period limit would apply for all events in the policy period." (Id. at 1–2.) The existence of a policy period limit would limit UK's coverage within a one-year period regardless of the number of incidents that it suffered.

Following the November malware attack, UK's IT provider, Corporate Technologies, mistakenly lost the data that was relevant to the first two attacks. (Doc. No. 26-4 Ex. 1 Uke Depo. at RT: 64:13-65:9, 70:2-71:22.) Following this, UK fired Corporate Technologies and hired SpotLink. (Doc. No. 29-3 Uke Decl. ¶ 4.) In correspondence between Hanover's IT consultant Jon Pullin ("Pullin"), of LSG, and Guittar, Pullin wrote that SpotLink had been "unable to tell if this current infection is the same as the previous one or is related to it in any way." (Doc. No. 29-4 Ex. 15.)

On January 4, 2018, Plaintiffs’ computer system was hacked for a third and final time. (Doc. No. 29-3 Uke Decl. ¶ 5.) The next morning, January 5, 2018, UK's IT consultant at SpotLink, David Wing, wrote to Alan Uke that the intrusion was the result of someone trying to "brute force the local administrator account ...." (Doc. No. 29-4 Ex. 18.) Shortly after this attack UK hired ICE Cyber Security ("ICE") to "analyze what's going on with the network ... [and] to get [UK] back up and running." (Doc. No. 26-4 Ex. 9 Rahseparian Depo. at RT: 12:20–14:2.)

In an internal note following the third attack, dated January 8, 2018, Guittar wrote that contrary to Hanover's prior representations to UK, there was in fact no policy period limit under UK's Policy and that coverage was on an occurrence basis. (Doc. No. 26-4 Ex. 7.) This significantly changed the nature of the coverage afforded to UK since each occurrence had a $350,000 limit regardless of the amount claimed in a year.

On January 29, 2018, Guittar wrote to UK's insurance broker, Jennifer Clements, and clarified that "the ecommerce coverage has a $350k occurrence limit" with a "$10k deductible" for each claim. (Doc. No. 29-4 Ex. 23.) On March 23, 2018, UK's controller Robert Emery ("Emery") wrote to Guittar arguing that the claims should be related because the "second hack was part of the first hack." (Doc. No. 26-4 Ex. 13.) A week later, March 30, 2018, Emery reiterated this position to UK's insurance broker. (Id. Ex. 14 at 1.)

C. Ford Winslow's April 9, 2018 Email

On April 4, 2018, Ford Winslow, ICE's President, wrote to Hanover's IT consultant Jon Pullin, of LSG, to discuss ICE's ongoing work. (Id. Ex. 16.) Winslow wrote that the ICE team suspected the attacks were part of "an ongoing persistent malware or malicious attack that had been un-addressed by previous IT teams." (Id. ) That same day, Pullin specifically asked Winslow whether in his "professional opinion and based upon information provided to you by ICE Cybersecurity personnel involved in the matter, is it likely that the subsequent virus infections and network intrusions are directly related to the initial breach...