Insurance Coverage and Bad Faith

On January 9, 2024, the Superior Court of Pennsylvania reaffirmed prior precedent that an erroneous insurance coverage decision is not in bad faith where “the insurer denied coverage based on an interpretation of the policy language that is consistent with policy language and the law on the question is unclear.” In Watchword Worldwide v. Erie Insurance Exchange, --- A.3d ----, 2024 WL 106954 (Pa. Super. 2024), a three-judge panel unanimously held that an insurer’s coverage denial, although ultimately incorrect, was reasonable because it was “supported by the Policy language and there was no decisional law contrary to that interpretation.”

Watchword Worldwide produces religious videos which were stored on a server owned and operated by GoDaddy, Inc. In a 2017 hacking incident, Watchword’s videos and related application programming interface (API) were deleted from the GoDaddy server. Watchword’s Erie Insurance Exchange policy stated:

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.

Erie denied Watchword’s claim on the grounds that the deleted data “was not on Watchword’s computers” and the cost of replacing the data was less than the $2,500 deductible. Watchword sued and won a $88,750 judgment for breach of contract and bad faith.

On appeal, in “a question of first impression,” the Superior Court held that the term “your computers,” when undefined in an insurance policy, was ambiguous and should be construed to provide coverage for Watchword’s data which was stored on GoDaddy’s server. Despite this conclusion, the court still held that Erie was entitled to judgment notwithstanding the verdict (“JNOV”) on the breach of contract claim because the cost of replacing the data did not exceed the policy’s $2,500 deductible.

The court also found that Erie was entitled to JNOV on the bad faith claim, as the interpretation of “your computers” was an issue of first impression for Pennsylvania courts and, despite its denial being incorrect, Erie’s grounds for denial were reasonable:

Both of [Erie’s] grounds were reasonable grounds for denying Watchword’s claim. While we have concluded that Watchword’s videos and API on the GoDaddy server fall within the Policy’s coverage because the term “your computers” is ambiguous, the conclusion that “your computers” is limited to Watchword’s own computers was a reasonable interpretation of the Policy, as it is supported by the Policy language and there was no decisional law contrary to that interpretation. Because it was reasonable, even though erroneous, this ground for denial of Watchword’s claim as a matter of law was not bad faith.

The Superior Court vacated the judgment and remanded the case with instructions for the trial court to enter JNOV in favor of Erie.