United States District Court, S.D. Texas, Houston Division
MEMORANDUM OPINION AND ORDER
H. Miller Senior United States District Judge
before the court is plaintiff Spec's Family Partners,
Ltd.'s (“Spec's”) motion for partial
summary judgment (Dkt. 63) and defendant Hanover Insurance
Company's (“Hanover”) cross-motion for
partial summary judgment (Dkt. 65). Also pending before the
court is: (1) Hanover's request for judicial notice (Dkt.
68) and Spec's responsive motion to strike (Dkt. 71); and
(2) Hanover's motion for leave to submit supplemental
authority (Dkt. 77). Having considered the motions,
responses, replies, and applicable law, the court is of the
opinion that Spec's motion for partial summary judgment
(Dkt. 63) should be GRANTED IN PART and DENIED IN PART.
Hanover's motion for partial summary judgment (Dkt. 65)
should be DENIED. Hanover's request for judicial notice
(Dkt. 68), Spec's motion to strike (Dkt. 71), and
Hanover's motion for leave to file supplemental authority
(Dkt. 77) should all be DENIED AS MOOT.
an insurance dispute concerning Spec's claim for coverage
following two data breaches of Spec's credit card payment
system. Dkt. 6 at 2.
The Breach and Underlying Claim
central facts of this case are not in dispute. Spec's is
a family-owned retail chain. Id. Spec's accepts
payments from customers using Visa or MasterCard through a
third-party transaction service provided by First Data
Merchant Services, LLC (“First Data”).
Id. In 2001, Spec's entered into a contract with
EFS National Bank for credit card transaction services (the
“Merchant Agreement”). Id. First Data is
the successor to EFS National Bank in the Merchant Agreement.
Dkt. 6 at 2.
October 2012 and February 2014, Spec's credit card
payment system suffered from two data breaches, resulting in
the loss of customer information and credit card numbers.
Dkt. 6 at 2. Visa and MasterCard demanded that First Data pay
“liability assessments” to cover the resultant
damages. Dkt. 63 at 11. In December 2013, to cover these
liability assessments, First Data sent a demand letter to
Spec's for about $7.6 million. Dkt. 64-3 at 21-22. The
letter also alleged that Spec's was “non compliant
with the Payment Card Industry Data Security (PCIDSS)
requirements” and demanded that Spec's upgrade its
security. Id. In March 2015, First Data sent a
second demand letter for an additional $1.9 million. Dkt.
64-3 at 24-25. Altogether, between December 2013 and March
2015, First Data demanded that Spec's pay over $9.5
million, make significant changes to Spec's security
systems, and provide First Data with extensive documentation
(collectively, the “Underlying Claim”). Dkt. 64-3
at 21-25. Further, to satisfy its demands, First Data
incrementally withheld an alleged $4.2 million from
Spec's daily payment card settlements and placed the
funds in a “Reserve Account.” Dkt. 63 at 12.
Spec's did not consent to this withholding and First Data
did not file suit or otherwise establish its right to the
withheld funds. Id.
issued an insurance policy to Spec's for the period
between October 28, 2013 to October 28, 2014 (the
“Policy”). Dkts. 64-2, 64-3. The Policy provides
that Hanover has a duty to defend against
“Claims” made against Spec's. The relevant
1. Defense of Claims:
We have the right and duty to defend “Claims, ”
even if the allegations in such “Claims” are
groundless, false or fraudulent. We have no duty to defend
“Claims” or pay related “Defense
Expenses” for “Claims to which this insurance
does not apply.” Dkt. 64-2 at 15.
2. Definition of Claim [A] “Claim” means: (1) Any
written demand presented for monetary “Damages”
or non-monetary relief for a “Wrongful Act”; or
(2) Any complaint or similar pleading initiating a judicial,
civil, administrative, regulatory, alternative dispute, or
arbitration proceeding, including any appeal resulting from
it, to which an “Insured” is provided notice and
which subjects an “Insured” to a binding
adjudication of liability for monetary or non-monetary relief
for a “Wrongful Act . . . .”
Dkt. 64-2 at 26-27. The Policy also contains the following
exclusion which precludes coverage for claims based upon a
N. ‘Loss' on account of any ‘Claim' made
against any ‘Insured' directly or indirectly based
upon, arising out of, or attributable to any actual or
alleged liability under a written or oral contract or
agreement. However, this exclusion does not apply to your
liability that would have attached in the absence of such
contract or agreement.
Dkt. 64-2 at 30 (“Exclusion N”).
The Parties' Defense Funding Agreement and the Tennessee
April 8, 2014, Spec's notified Hanover of First
Data's December 2013 demand letter. Dkt. 6 at 2-3; Dkt.
19 at 15. Hanover and Spec's engaged in a series of
exchanges regarding Hanover's duty to defend. Dkt. 6 at
2-3. Ultimately, on November 2014, Hanover and Spec's
entered into a Defense Funding Agreement (“DFA”)
in which Hanover consented to the retention of Haynes and
Boone, LLP as defense counsel in litigation regarding the
Underlying Claim. Dkt. 64-1 at 4.
December 2014, Spec's initiated a lawsuit in United
States District Court for the Western District of Tennessee
against First Data (the “Tennessee Litigation”).
Dkt. 64-1 at 4. Hanover eventually refused to pay the
litigation expenses for the Tennessee Litigation.
Id. Following the March 2015 demand letter,
Spec's again notified Hanover of First Data's claims.
Dkt. 63 at 12. However, Hanover continued to refuse to cover
expenses for the Tennessee Litigation. Dkt. 64-1 at 5.
The Current Suit
then filed suit against Hanover in this court, asserting
causes of action for breach of the Policy and breach of the
DFA. Dkt. 6 at 5-6. Spec's also sought declaratory
judgment on Hanover's duty to defend, damages under
Chapter 542 of the Texas Insurance Code, and attorneys'
fees. Id. at 6-7. Hanover subsequently moved for
judgment on the pleadings. Dkt. 19. The court granted
Hanover's motion, holding that First Data's claim
against Spec's arose out of the contract between
Spec's and First Data and therefore fell within Exclusion
N of the Policy. Dkt. 42. ...