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Watchword Worldwide v. Erie Ins. Exch., 2024 Pa. Super. LEXIS 3 (January 9, 2024) (Colins, J.).

This case arises out of an incident for loss of electronic data as a result of computer hacking. Watchword sells videos on the Christian Bible. Watchword’s videos and API are stored on GoDaddy server.

Watchword paid GoDaddy a license fee for the server use.

In April 2017, Watchword discovered that an unknown hacker had deleted Watchword’s videos and API from the GoDaddy server. No electronic data was deleted from any computer owned by Watchword.

The policy with respect to electronic data coverage covered expenses incurred to reproduce or replace, “electronic data” when destruction or corruption is caused by a peril insured against including loss by theft. Coverage is limited to “electronic data”.

Throughout the policy, what is covered are “electronic data”.

Watchword sued Erie Insurance. The claim of breach of contract was tried to a jury, which awarded $168,000 in damages.

The jury returned a verdict in favor of Watchword, explaining that Erie had breached the insurance contract and awarded Watchword $18,750 in damages.

As to bad faith, the jury denied it. Total verdict $88,750.

Erie claimed that there was no coverage for Watchword’s loss, and it was entitled to JNOV on the breach of contract claim because the deductible was not breached.

The court noted that the burden is on the insured to show that its claim is within the policy’s coverage. Insurance provisions that are ambiguous must be construed in favor of the insured. The policy’s insurance for reproduction and replacement of electronic data provides coverage only if the electronic data has been destroyed or corrupted. This is a case of first impression.

Watchword’s own evidence establishes the cost of replacing its lost electronic data, the videos and API did not exceed the policy’s $2,500 deductible. Hence, Erie’s failure to pay obligation under the policy did not exist. Erie therefore was entitled to JNOV on Watchword’s breach of contract claim. Erie argued it was entitled to judgment in its favor on the bad faith claim. The issue likewise merits relief. The court looked at the bad faith statute and found that no contention could show that Erie had no reasonable basis for denying benefits under the policy, let alone show a lack of reasonable basis by clear and convincing evidence. Whatever statements it made or conclusions reached, Erie denied payment of Watchword’s claim on the ground that there was no coverage because the policy required that destroyed or corrupted electronic data “resides in your computers” and that deleted electronic data was on a GoDaddy computer and on the ground that the loss, even if covered, did not exceed the deductible. Both of these grounds were reasonable grounds for denying Watchword’s claim.

There was no evidence at trial from which a jury could conclude that the cost of replacing Watchword’s videos and API exceeded the deductible. Accordingly, the court vacated the trial court’s judgment against Erie and remanded to enter JNOV in favor of Erie.