Trouble continues for one of the largest Internet providers in the United States, with a Lloyds underwriter now suing Cox Communications over an insurance dispute. The insurer is refusing to cover legal fees and potential piracy damages in Cox's case against BMG Rights Management and Round Hill Music.

Following a ruling from a Virginia federal court that Cox is not protected by the safe-harbor provisions of the DMCA, the Internet provider must now deal with another setback.

Beazley, a high risk insurance underwriter for Lloyds, is refusing to cover legal costs related to the “repeat infringer” case which goes to trial next week.

It’s a crucial case that could define how Internet providers must handle copyright infringement complaints. At the moment it’s rare for ISPs to disconnect pirating users but the case has the potential to alter the landscape.

The case also exposes Cox to dozens if not hundreds of millions in potential piracy damages plus substantial legal fees. The Internet provider hoped to cover some of the costs under an insurance policy at Lloyd’s but the insurer is refusing to cooperate.

In a request for a declaratory judgment (pdf) Lloyd’s underwriter asks the court to rule that it doesn’t have to cover the costs, which have already exceeded $1 million in legal fees alone.

In the complaint Beazley states that Cox was well aware of the potential liabilities. Rightscorp, the company that sends the copyright infringement notices, had already warned the ISP over its precarious position several years ago.

“By letter dated January 9, 2012, Cox was advised by an agent of copyright holders that if it did not forward those notices to its customers, it would be exposed to claims of contributory and vicarious copyright infringement,” the insurer writes.

Cox, however, refused to forward the millions of notices as they were bundled with settlement demands, which are seen by some as extortion. This refusal eventually lead to the lawsuit filed by music rights companies BMG and Round Hill.

“Cox continued to intentionally ignore the notices and did not forward them to its customers,” the complaint notes.

In light of the above, Beazley argues that the lawsuit is the result of an intentional business policy rather than the act of rendering Internet services, which is what the insurance policy covers.

“…the BMG Claim arose out of Cox’s policy and practice of ignoring and failing to forward infringement notices and refusing to terminate or block infringing customers’ accounts, not acts in rendering internet services.”

In addition Beazley point out that the piracy lawsuit was filed November last year, several days before the December 1, 2014 date the insurance policy began.

If the court grants Beazley’s request for declaratory judgment then Lloyd’s policy will not cover any of the costs related to the lawsuit. This will be a costly setback for the ISP if it loses the piracy lawsuit.