USM purchased a "turnkey" computer system from Arthur D. Little Systems, Inc. (ADLS) and ADLS warranted that the computer system would be free of defects in design and would be in substantial accordance with certain specifications. The system's response time never achieved the level of performance which had been promised.
USM secured a judgment against ADLS and then brought this action to recover under an errors and omissions policy which had been issued by First State Insurance Company, and another, to ADLS.
The companies denied liability on the ground the policy did not cover liability without fault, such as breach of warranty. They argued that the policy was designed to protect the named insured against special risks inherent in its profession.
Furthermore, they denied that an insured could expand the coverage of the policy by creating a contractual obligation greater than those obligations customary in the profession.
The policy in this case indemnified the insured against certain losses incurred by the insured "in the conduct of its business as consultants, and in the rendering of professional services incidental thereto."
The lower court found that the E&O policy covered the loss.
On appeal, the higher court stated that it seemed clear that ADLS's losses were incurred "in the conduct of its business as consultants and in the rendering of related professional services."
The insurance companies relied upon an exclusion of any claim "arising out of errors or omissions in the design of any tangible product." The higher court noted that ADLS's basic error was a nonnegligent one and consisted of its reliance upon Data General's assurance that its computer hardware would perform the functions specified by the customer. This caused ADLS to warrant the performance of the system. The fact that Data General could not redesign its system did not make the exclusion applicable.
The policy also excluded coverage "for liability assumed by the Insured under any contract" with certain exceptions. The court did not believe ADLS assumed any liability of Data General when its computer was unable to perform the functions promised.
In conclusion, the court held that the policy covered the loss, but the action was remanded for a determination whether ADLS knew, or should have known, of a potential claim before securing the policy.
The judgment of the Superior Court was affirmed, and the case remanded.
USM Corporation v. First State Insurance Company, and Granite State Insurance Company--Supreme Judicial Court of Massachusetts, Suffolk--July 26, 1995--652 North Eastern Reporter 2d 613.