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Vol. 7 - Issue 8
November 7, 2018


Wow!: Court Holds That Trade Secrets, Being Tangible Property, Are “Property Damage”

While a standard commercial general liability policy provides coverage, under “personal and advertising injury,” for certain types of intellectual property claims, under certain circumstances, theft of trade secrets is not one of them. But in Richerme v. Trumball Insurance Co., 18-1286 (N.D. Ill. Oct. 23, 2018) an Illinois federal court would have found coverage, for theft of trade secrets, under a homeowner’s policy (if not for an unrelated exclusion). And the court went the “property damage” route.

Theft of trade secrets claims, under homeowner’s policies, is probably not keeping insurers awake at night. But since the rationale for this decision would apply to CGL policies – and such types of claims are sometimes made -- it is worth a look see here.

Engineered Abrasives sued Edward and Karen Richerme for theft of trade secrets. The facts – quite technical – were described by the court as follows: “Engineered Abrasives, Inc., manufactured automated blast-finishing, shot-peening equipment, and replacement parts for those machines. On April 27, 2017, it served the Richermes and their son (Edward C. Richerme) with a complaint alleging trade-secret violations, conversion, tortious interference with prospective economic advantage, and civil conspiracy. In the complaint, Engineered Abrasives alleged that their shot-peening valve sleeves, springs, and seats contained a trade secret, and that over the years it had accumulated numerous trade secrets and confidential information including tooling designs, drawings, fixtures, special designs, spare parts, pricing information, manufacturing, distribution processes, patented machines and patented processes, all of which Edward Richerme and his son had access to while they worked there. When Engineered Abrasives terminated Edward C. Richerme, the complaint asserted, he began using its trade secrets to sell replacement parts and with his parents help published the trade secrets to Engineered Abrasives’s customers and competitors.”

The Richerme’s sought coverage for the suit from their homeowner’s insurer, Trumball Insurance Company. Trumball denied a defense and the Richerme’s filed the coverage action.

The court addressed whether the theft of trade secrets qualified as “bodily injury” or “property damage” to trigger coverage under the homeowner’s policy. Clearly “bodily injury” was not at issue so the court turned to whether there was “property damage.” “Property damage” was defined to include “physical injury to, destruction of, or loss of use of tangible property.”

Trumball argued, as you would expect, that trade secrets are intellectual property, and, therefore, not “property damage.” But the court saw it differently, noting that, under the Illinois Trade Secrets Act, a trade secret can be tangible property. The Act defined “trade secret” as “information, including but not limited to . . . [a] device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers that is sufficiently secret to derive economic value and subject to reasonable efforts to maintain its secrecy.

Based on this definition, the court concluded that the complaint alleged “property damage,” as Engineered Abrasives alleged that the Richermes misappropriated its trade secrets, including its designs and drawings, which are tangible items. Even if that’s the case, the court did not address the physical injury to, destruction of, or loss of use requirements.

It seems like a curious decision. While designs and drawings may be tangible items, that’s only because they exist on tangible items, such as paper or a computer screen. But their value is in the ideas that they represent. And that’s not tangible.

[Despite this conclusion, the court went on to hold, not surprisingly, that no coverage was owed on the basis of a business pursuits exclusion.


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