A McKool Smith lawyer recently helped convince a Delaware Court that a $10 million insurance policy his hotel chain client purchased from National Union Fire Insurance Co. should cover his defense costs of a trade secrets case—even though the policy excluded trade secrets claims.

According to the court, the case involved Woodspring Hotels, a Kansas-based company that owns 250 extended-stay hotels across the country. Woodspring was sued by Extended Stay America, a competitor that alleged that Woodspring hired two of its former employees who appropriated ESA's electronic information, including a customer database, and gave it to Woodspring.

ESA asserted 11 separate causes of action against Woodspring that ranged from violations of the Federal Trade Secrets Act to a violation of the Federal Computer Fraud and Abuse Act.

Woodspring demanded that National Union undertake its duty to defend it in the civil suit under a directors & officers insurance policy they had with the company. However the insurer refused to cover any costs associated with the litigation, citing exceptions for claims involving trade secrets. National Union did cover some litigation expenses for the case subject to a reservation of rights. The ESA litigation later settled for slightly more than $1 million.

Woodspring later filed a declaratory judgment action against Nation Union in Delaware Superiour Court, alleging the insurer had a duty to pay defense costs associated with the case.

And in a May 2 decision, Judge Eric M. Davis agreed with Woodspring's argument that their claims should be covered by the policy because at least one of the claims—count V, which alleged violations of the Federal Computer Fraud and Abuse act—did not involve trade secrets.

“The court is aware that the gravamen of the ESA litigation is misappropriation of ESA's trade secrets. However, ESA's claim under Count V is broader than a misappropriation of a trade secret,” Davis wrote. “Count V relates to unlawful access of ESA's protected computer system with the damage related to copying and communicating ESA information.”

“National Union could have undertaken an investigation to determine exactly what information that entailed but, with the record before the Court, it appears neither AIG [an affiliated insurer which investigated the claim] or National Union did that. As such, the court finds that there was a potential of liability, even if remote, under the policy,” Davis wrote. “For these reasons, the court finds that National Union should have satisfied its duty to defend Woodspring under the policy.”

Kenneth Frenchman, a principal in the New York office of McKool Smith who represents Woodspring in the insurance coverage dispute, was pleased with the decision.

“We believe Judge Davis got it exactly right,'' said Frenchman, who declined to comment further about the case because it's still pending before the trial court.

Joseph E. Collins, a Chicago attorney who represents National Union in the case, did not return a call for comment.