• Key point 10-16.7. A liability insurance policy provides a church with a legal defense to lawsuits claiming that the church is responsible for an injury, and it will pay any adverse settlement or judgment up to the limit specified in the policy. Liability insurance policies exclude a number of claims. For example, some policies exclude injuries based on criminal or intentional acts and claims for punitive damages. A church has an obligation to promptly notify its insurer of any potential claim, and to cooperate with the insurer in its investigation of claims.
Negligence as a Basis for Liability
* A California court ruled that an employer’s loss of vital information when its computer “crashed” was not a loss covered under its insurance policy. While a company was in the process of updating its computer database, human error caused the system to “crash,” resulting in the loss of vital electronically stored data. The company hired consultants to restore the database, and data was manually inputted so that it could resume its normal business operations. The company incurred extra expenses restoring its data, and also suffered the loss of business income because of the disruption. It calculated the loss to be $50,000 in extra expenses to restore the database, and $200,000 in lost revenue. The company submitted a claim to its insurance company, hoping to recover its losses. It argued that its losses were covered under the policy’s “Building and Personal Property Coverage Form,” and under certain policy endorsements. These endorsements are called “Valuable Papers and Records Coverage Form”; “Electronic Equipment and Software Coverage”; “Electronic Data Processing Coverage Form”; and “Business Income Coverage Form.” The insurance company asserted that coverage for the type of loss suffered by the company was not available under any of these coverage forms because each requires a “direct physical loss of or damage to” property, and none of the loss or damage suffered by the company was a “direct physical loss.”
The company sued its insurer for failing to cover the losses. A state appeals court ruled that the policy did not provide coverage for the company’s losses. It noted that the policy provisions relied upon by the company only applied to a “direct physical loss” to property. The court concluded that “the loss of electronically stored data, without loss or damage of the storage media” did not constitute a direct physical loss covered under the policy:
The loss of plaintiff’s database does not qualify as a “direct physical loss,” unless the database has a material existence, formed out of tangible matter, and is perceptible to the sense of touch. A “database” is a “large collection of data organized esp. for rapid search and retrieval (as by a computer).” “Data” is defined, quite simply, as factual or numerical “information.” Thus, the loss of a database is the loss of organized information, in this case, the loss of client names, addresses, policy renewal dates, etc. We fail to see how information can be said to have a material existence, be formed out of tangible matter, or be perceptible to the sense of touch. To be sure, information is stored in a physical medium, such as a magnetic disc or tape, or even as papers in three-ring binders or a file cabinet, but the information itself remains intangible. Here, the loss suffered by plaintiff was a loss of information, i.e., the sequence of ones and zeroes stored by aligning small domains of magnetic material on the computer’s hard drive in a machine-readable manner. Plaintiff did not lose the tangible material of the storage medium. Rather, plaintiff lost the stored information. The sequence of ones and zeros can be altered, rearranged, or erased, without losing or damaging the tangible material of the storage medium. We conclude the loss of the database, with its consequent economic loss, but with no loss of or damage to tangible property, was not a “direct physical loss of or damage to” covered property under the terms of the subject insurance policy, and, therefore, the loss is not covered.
Application. This case illustrates the important principle that loss of computer data may not be an insured loss since no “direct physical loss” occurs. Ward General Insurance Services v. Employers Fire Insurance Company, 114 Cal.App.4th 548 (Cal. App. 2003).
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