SOUTHERN DISTRICT JUDGE FINDS NO COVERAGE FOR LIQUOR RETAILER’S CHALLENGE TO INDEMNITY CLAIMS FOLLOWING CYBER BREACH

U.S. District Judge Gray H. Miller of the Southern District of Texas recently found that Texas liquor store chain, Spec’s Family Partners Ltd., is not entitled to coverage for approximately $4 million charged by its credit card processor following two data breaches.

In Spec’s Family Partners Ltd. v. The Hanover Insurance Co., case number 4:16-cv-00438, in the U.S. District Court for the Southern District of Texas, Specs sought coverage under its insurance policy for losses stemming from data breaches in 2012 and 2014. Spec’s filed suit against its insurer, Hanover Insurance Co., alleging Hanover breached both its policy and an agreement to fund a lawsuit against credit card processing company FirstData Merchant Services Corp.

After the data breaches, the credit card companies issued fines to FirstData totaling about $9.5 million for credit monitoring, replacement cards and reimbursement of fraudulent transactions. Based on indemnity provisions in their merchant agreements, FirstData then made demands on Spec’s for claims arising from the data breaches totaling almost $10 million.  After making the demands, FirstData over time withheld $4.2 million from Spec’s daily payment card settlements. Spec’s eventually filed suit over the withheld receipts against FirstData in Tennessee. Hanover refused to pay litigation costs for that lawsuit.

Hanover argued that filing a suit didn't constitute a defense. The court agreed and also found that the demands from FirstData were made under the indemnification provisions of the merchant agreement with Spec’s and did not trigger coverage under the Policy. Finding no coverage under the Policy, the court dismissed the lawsuit with prejudice. A sealed memorandum opinion and order granting a motion for judgment was entered on March 15. After considering the parties’ arguments, the judge unsealed the order.