Insurer Alleges No Coverage for Double-Charges by McDonald’s Mobile App

By Mitchel D. Torrence

American Family Mutual Insurance Company (“American Family”) recently filed a declaratory judgment action in the Circuit Court of Cook County, IL, seeking a declaration that it owes no duty to defend its insured, a McDonald’s franchise owner, for an underlying suit claiming that the insured reaped the benefit of a flaw in McDonald’s mobile app that charged patrons twice. American Family Mutual Insurance Co., S.I. v. Karavites Management Inc., Carolyn Dodd, and Adyen Inc. (“American Family”).

Facts:

American Family seeks a declaration that it owes no duty to defend Karavites Management, Inc. (“KMI”) in an underlying suit brought by Carolyn Dodd against KMI and Adyen, Inc. The suit alleges that Dodd, and other similarly situated individuals, were charged twice for orders placed via the McDonald’s mobile app due to a design flaw in the app. It also alleges that KMI unjustly enriched itself through the double payment it received.

According to its complaint, American Family issued six general liability policies to KMI effective from 3/1/2017 until 3/1/2023. The policies define “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” “Bodily injury” is defined as “bodily injury, sickness, or disease sustained by a person including death resulting from any of these at any time.” The policy also provides coverage for personal and advertising injury. The policies include an Electronic Data endorsement which excludes coverage for “bodily injury,” “property damage,” or “personal and advertising injury” arising out of “actual or alleged failure[s], malfunction[s], or inadequacy[,] of certain computer operations.” The exact policy terms vary slightly but largely provide the same coverage and contain similar Electronic Data endorsements.

Analysis: Coverage Issues Presented

American Family alleges that its policies do not provide a duty to defend KMI against the Dodd suit.  American Family contends that Dodd does not allege an “occurrence,” nor does it seek damages because of bodily injury or property damage, since the Dodd plaintiffs allege solely economic injury.

American Family also relies on the Electronic Data exclusions to bar coverage because Dodd is predicated upon allegations of a design flaw within the McDonald’s app.  American Family contends that the alleged app design flaw constitutes a failure or malfunction of computer operations. It also alleges that the policies do not provide coverage for contractual liabilities, which Dodd alleges.

Given the proliferation of mobile apps for all manner of commerce, this suit bears monitoring, and we will be following and reporting on developments.

Learning Point: American Family provides an opportunity for an Illinois court to interpret the scope of coverage, or lack thereof, under the American Family policies where damages are alleged arising out of the use of a mobile application, including the app’s contractual terms of use, which result in financial loss. This case also serves as a good reminder to check your receipts when making purchases on a mobile app.

            Mitch Torrence is a member of Clausen’s Liability Coverage Practice Group.