Watchword Worldwide v. Erie Ins. Exch.

308 A.3d 294

WATCHWORD WORLDWIDE, a 501(C)(3) Non-Profit Entity, Appellant

v.ERIE INSURANCE EXCHANGE

Watchword Worldwide, a 501(C)(3) Non-Profit Entity

v.Erie Insurance Exchange, Appellant

No. 1221 WDA 2022

No. 1290 WDA 2022

Superior Court of Pennsylvania.

Argued November 15, 2023

Filed January 9, 2024

Appeal from the Judgment Entered October 21, 2022, In the Court of Common Pleas of Allegheny County, Civil Division, at No(s): GD-19-002791, Michael A. Della Vecchia, J.

Wilbur M. Otto, Rockwood, for appellant.

Richard W. DiBella, Pittsburgh, for appellee.

BEFORE: BOWES, J., KUNSELMAN, J., and COLINS, J.^*

OPINION BY COLINS, J.:

These matters are consolidated cross-appeals from an $88,750 judgment entered in favor of Watchword Worldwide (Watchword) and against Erie Insurance Exchange (Erie) in an insurance breach of contract and bad faith case following trial. For the reasons set forth below, we vacate the judgment on the ground that Erie was entitled to judgment in its favor as a matter of law on both the breach of contract and bad faith claims.

This case arises out of an insurance claim for loss of electronic data as a result of a computer hacking incident. Watchword, a 501(c)(3) non-profit entity, produces videos of the New Testament of the Bible. Trial Court Opinion, 3/14/23, at 1; N.T. Trial at 132-33. Watchword sold its videos and transmitted them to its customers’ iPhones through a server owned and operated by GoDaddy, Inc. (GoDaddy) and a server owned and operated by Apple Inc. (Apple). Trial Court Opinion, 3/14/23, at 1-2; N.T. Trial at 133-36. This process required both a mobile application that customers used to order and pay for the videos and an application programing interface (API) that authenticated the sale and delivered the video. N.T. Trial at 133-36, 212. Watchword’s videos and API were stored on the GoDaddy server. Id. at 135-36, 151-52, 170, 211-12. The mobile application was on the Apple server. Id. at 134, 177, 181. Watchword paid GoDaddy a license fee to use the GoDaddy server or leased an account on that server, but the server was owned by GoDaddy and not by Watchword. Id. at 170, 151-52, 298, 304-05.

In early April 2017, Watchword discovered that an unknown hacker had deleted Watchword’s videos and API from the GoDaddy server. N.T. Trial at 183-84, 189-90. No electronic data was deleted from any computer owned by Watchword. Id. at 183-84, 303. Watchword had copies of the videos that were unaffected by the hack of the GoDaddy server, and Truefit Solutions (Truefit), Watchword’s consultant that had developed the video dissemination system for Watchword, had a copy of the API. Id. at 136-37, 172, 195, 213. The mobile application on Apple’s server was not damaged by the hack of the GoDaddy server. Id. At 183-85, 189. On May 7, 2017, Watchword, however, removed the mobile application from Apple’s server to prevent adverse reactions from customers and Apple because the mobile application could not work without the videos and API on the GoDaddy server. Id. at 137-38, 154-55, 191-92.

At the time that the videos and API were deleted from the GoDaddy server, Watchword was insured by Erie under a property damage and liability insurance policy that included coverage for the reproduction or replacement of electronic data. N.T. Trial at 354-56; Erie Insurance Policy Q970967190 (the Policy), Commercial Property Coverage Part at 11 § IV(C)(2). The Policy provided with respect to electronic data coverage:

We will cover the expenses incurred to reproduce or replace your "electronic data" when destruction or corruption is caused by a peril insured against including loss by theft. This includes your "electronic data" that is destroyed or corrupted by magnetic injury, "accident", "electronic circuitry impairment", virus, harmful code, or similar instruction introduced into or enacted on a computer system (including "electronic data") or a network to which it is connected, designed to damage or destroy any part of the system or disrupts its normal operation.

Coverage is limited to "electronic data" which is owned by you, licensed or leased to you, originates and resides in your computers, and is used in the e-commerce activity of your business.

* * *

"Loss" or damage to "electronic data" will be valued at the cost of reproduction or replacement including the cost of data entry, re-programming, and computer consultation services. But we will notpay the cost to duplicate research that led to the development of your "electronic data".

To the extent that "electronic data" is not reproduced or replaced, the "loss" will be valued at the cost of replacement of the "media" on which "electronic data" was stored, with blank "media" of substantially identical type.

* * *

"Media" means materials on which "electronic data" are recorded, such as magnetic tapes, disc packs, paper tapes, and cards.

We will pay for the expenses incurred in the reproduction or replacement of your "electronic data" which is in excess of the deductible amount shown in the "Declarations".

Policy, Commercial Property Coverage Part at 11 § IV(C)(2) (emphasis added). The Policy declarations set forth a deductible of $2,500. Id., Declarations at 1. The Policy also contains an exclusion that excludes from coverage electronic data "which cannot be replaced with the same kind or quality." Id., Commercial Property Coverage Part at 12 § IV(C)(4). Although the electronic data reproduction or replacement section of the Policy contained a coverage limit of $25,000, id., Commercial Property Coverage Part at 11 § IV(C)(2), the Policy contained an endorsement that provided up to a total of $250,000 in coverage for expenses of reproduction or replacement of electronic data, damage to electronic data processing equipment, and a number of other types of business losses. Id., Office Enhancements Endorsement Commercial Property Coverage Part at 1 § B.

On July 17, 2017, Watchword filed a claim with Erie for the loss caused by the deletion of its electronic data from the GoDaddy server. N.T. Trial at 84. Erie denied Watchword’s claim on the grounds, inter alia, that the Policy did not cover the loss because the electronic data that was destroyed was not on Watchword’s computers and on the ground that the cost of replacing the videos on the GoDaddy server from the copies that Watchword still had was less than the $2,500 deductible. Id. at 121-23, 248-50, 253-56.

On February 22, 2019, Watchword filed this action against Erie. In its complaint, Watchword asserted claims for breach of contract for the failure to pay its claim for the cost of replacing electronic data, bad faith denial of its claim, and violation of the Uniform Trade Practices and Consumer Protection Law (UTPCPL). Amended Complaint ¶¶14-85. Erie in its answer denied that the Policy covered Watchword’s loss, denied that it breached the insurance contract, and denied that it acted in bad faith. Answer and New Matter ¶¶14-21, 24-30, 48-59. Following discovery, Erie filed a motion for summary judgment seeking judgment in its favor on all of Watchword’s claims. On June 8, 2020, the court granted the motion with respect to Watchword’s UTPCPL claim and dismissed that claim with prejudice but denied summary judgment on the breach of contract and bad faith claims. Trial Court Order, 6/8/20.

Watchword’s breach of contract claim was tried to a jury from September 15 to 21, 2021. At trial, Watchword claimed damages of $168,000. N.T. Trial at 156. These damages were based on the cost of creating a new mobile application, upgraded to the standards required by Apple to put it on Apple’s server after the original mobile application had been deleted, and upgrading the videos. Id. at 156, 159-60, 172-73, 179, 181. Watchword admitted that the mobile application on Apple’s server would have worked properly and would not have had to be removed if Watchword had put the videos and API back on the GoDaddy server from the copies that it had of those items. Id. at 193-94. Watchword also admitted that it did not attempt to have the videos and API put back on the GoDaddy server. Id. at 194-95. Truefit’s CEO, called by Watchword as a damages witness, testified that the cost of having the videos and API put back on the GoDaddy server would have been $1,500 to $2,500 if Watchword had hired it to do so in 2017 and that the cost of restoring Watchword’s system with the upgrades required by Apple at the time of the 2021 trial was $10,000 to $20,000. Id. at 213-14, 221-22. Erie moved for a compulsory nonsuit at the end of Watchword’s case and for a directed verdict at end of trial on the grounds, inter alia, that there was no coverage for Watchword’s loss because the electronic data that was deleted was not on a Watchword computer and that the amount of loss payable did not exceed the deductible. Id. at 813-18, 373. Both motions were denied by the trial court. Id. at 319, 374.

The jury returned a verdict in favor of Watchword, finding that Erie had breached the insurance contract and awarding Watchword $18,750 in damages. N.T. Trial at 454-55; Verdict Slip. Erie filed a post-trial motion seeking judgment notwithstanding the verdict (JNOV) on the same grounds as it sought a compulsory nonsuit and directed verdict, including the grounds that there was no coverage for Watchword’s loss because the electronic data that was deleted was not on a Watchword computer and that the amount of loss payable under the Policy did not exceed the deductible, and seeking in the alternative a new trial. On November 16, 2021, the trial court entered an order denying Erie’s post-trial motion.

A nonjury trial of Watchword’s bad faith claim was scheduled for February 2022. Prior to the date of that trial, the parties agreed to proceed by argument based on the trial evidence and written submissions, and on February 16, 2022, the parties presented argument to the final court on the bad faith claim. N.T. Bad Faith Hearing at 2-3. The only additional testimony at this bad faith...