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
