DISASTER RECOVERY
JOURNAL

Return to the Winter 2001
Index

P. O. Box 510110
St. Louis, MO 63151
(314) 894-0276
Fax: (314) 894-7474
Internet www.drj.com
E-mail drj@drj.com

PUBLISHER &
EDITOR-IN-CHIEF
Richard L. Arnold, CBCP
richard@drj.com

SENIOR EDITOR
Janette Ballman
janette@drj.com

EDITOR
Michelle Saab
michelle@drj.com

COPY EDITORS
Edward H. Pearce, CBCP
drj@drj.com
Richard Sandhofer
richards@drj.com

INTERNET /
ADVERTISING
Robert Arnold
bob@drj.com

_____________

Corporate

President/CEO
Richard L. Arnold, CBCP
richard@drj.com

Vice President
Robert Arnold
bob@drj.com

CONFERENCE COORDINATOR
Patti Fitzgerald, CBCP
patti@drj.com

CONFERENCE REGISTRAR
Merce Knese
mercedes@drj.com

CIRCULATION
Laura Baugh
laurab@drj.com

INTERNATIONAL
CONTACTS
England: Thom Hetherington
Business Continuity
Phone: 0161-237-1007
thomh@tempus.demon.co.uk

Australia: Anthony J. Harvey
Journal of Business Continuity
Phone: 0011-613-953-0055-8
fax: 0011-613-953-0528
sector@notability.com.au

Japan: Shinji Hosotsubo
Quake Japan Co., Ltd.
Phone: 03-3215-2880
fax: 03-3215-2881

Brazil: Jose Carlos Ferreira
Disaster Recovery Mercosul
Phone: 55 11 3666-9506
conc2000@uol.com.br
ww.drms.com.br

Click Here for a Printable Version

Insurance Coverage for Lost Electronic Data: Are You Covered When You CRASH?

- by Cary Ichter

This is the “Information Age,” meaning that today, access to and the use of information is critical to virtually every aspect of our lives. Nowhere is this more true than in business. Indeed, electronically stored data is perhaps corporate America’s single most valuable asset. Many companies simply could not operate without access to store electronic data.
Electronic data is subject to being lost in a number of ways. Rogue hackers and evil cyber-geniuses can unleash fierce virulent viruses that can corrupt and wipe out enormous volumes of data. Data can be lost when malfunctions in systems, software or support infrastructure, such as power surges and power outages, result in the corruption of data. When a business’ physical plant is damaged, such as in a fire, it may also lose essential electronic data. Sometimes, data can be lost simply because some of us do not entirely understand how to operate the magic boxes that reside on our desktops.
So is the loss of electronic data an event that is covered by insurance, and where does one go to find out if it is? If a business has suffered an economic loss as a consequence of the loss of electronic data, it should first look to its insurance policy to learn what casualties are covered. Many all-risk property insurance policies specifically cover such things as electronic data loss and business interruption losses occasioned by the loss of critical electronic data.
All-risk policies of this sort often contain language that says in words or substance that the policy covers against “all risks of direct physical loss or damage, except as excluded, to covered property.” Not surprisingly, insurance companies have resisted efforts by policyholders to make claims that arise out of the loss of electronic data. But the law is coming of age.
In American Guarantee & Liability Insurance Company v. Ingram Micro, Inc., the United States District Court for the District of Arizona recently held that “’physical damage’ is not restricted to the physical destruction or harm of computer circuitry but includes a loss of access, loss of use and loss of functionality.”
The plaintiff in the case, Ingram, was a distributor of wholesale microcomputer products. The company used a worldwide computer network, known as “Impulse,” to track customers, products and daily transactions. Ingram had purchased a policy of insurance that insured it against “All Risks of all physical loss or damage from any cause….” The policy clearly covered Ingram’s computers and the Impulse system.
When a power outage occurred in December 1998, all telephones and computers stopped working. Power was restored within approximately 30 minutes, but three mainframe computers lost all of the programming information that had been stored in their random access memory and certain custom configurations that resided in its matrix switch. In addition, connections between Ingram and a number of its international locations were interrupted, rendering Ingram incapable of conducting business.
Ingram made a claim to recover its losses occasioned by the power outage, and American Guarantee denied the claim arguing that the power outage had not damaged Ingram’s computer equipment. According to the insurance company, the equipment retained its “inherent ability to accept and process data….”
The court rejected American Guarantee’s narrow reading of its All-Risk policy. Quoting from a variety of state and federal statutes, the court explained that the law recognizes that “when a computer’s data is unavailable, there is damage; when a computer’s services are interrupted, there is damage; and when a computer network or software is altered, there is damage.” The court criticized American Guarantee’s position as being “archaic.”
Businesses that rely heavily upon electronic data should review their policies to ensure that they are covered for the risks associated with the loss of electronic data. Businesses that have experienced economic losses as a consequence of electronic data loss, whether through hackers, viruses, power outages or other disasters-should closely review their insurance policies to learn if their loss is covered. If it is possible that your loss is covered, make your claim with your insurer as soon as you can. If you need advice on the subject, talk to your agent or your lawyer.

Cary Ichter is a partner at the Atlanta-based law firm of Meadows, Ichter & Trigg. He may be reached at ci@mitlaw.com. Meadows, Ichter & Trigg handles an extensive range of litigation and corporate-business matters. The litigation practice includes, among other things, products liability, breach of contract, tortious interference with business, piracy of employees, defamation, intellectual property, real estate, employment discrimination, wrongful death, medical malpractice claims, and alternative dispute resolution.