Low, Ball & Lynch's
WEEKLY LAW RESUME
Coverage - First Party
Coverage - Loss of Computer Data
Ward
General Insurance Services, Inc. v. The Employers Fire Insurance Company Court of
Appeal, Fourth District (
With a new year come new
advances in electronic technology. This
case considers whether the loss of stored computer data not accompanied by the
loss or destruction of other storage media is covered by a first party property
policy.
Ward General Insurance
Services, Inc. (Ward), purchased a commercial
insurance policy from The Employers Fire Insurance Company (Employers). While
Ward was in the process of updating its Oracle computer database, the system
crashed, resulting in the loss of Ward's electronically stored data used to
service its clients' insurance policies.
Consultants were hired to restore the database. Ward incurred extra expenses for restoring its
data and suffered loss of business due to the disruption. Ward made claim on its insurance policy. Employers denied the claim.
Ward then sued Employers for
breach of contract, breach of implied covenant of good faith and fair dealing,
and related relief. On cross-motions for
summary judgment, the trial court granted summary judgment in favor of
Employers. Ward appealed.
The Court of Appeal
affirmed. The Court noted that the claim
involved a loss of the database. The
damage items were for the extra expense to restore the database and the loss of
income from loss of the database. There was no claim for replacement or repair
of any item of hardware or storage medium.
Ward had a policy of first
party coverage for building and personal property, including valuable papers,
electronic equipment and software, electronic data processing, and business
income coverage. Each of these coverages required "direct physical loss" to
property covered by the policy. The Court stated there was no coverage unless
there was a physical loss of property.
Interpreting the words
"direct physical loss," the Court stated these words meant tangible
matter that is directly injured. The
Court stated the loss of information is intangible. There was no loss of any tangible material of
the stored medium. Rather, Ward lost
stored information. The Court stated the
loss of this information was not a "direct physical loss" of or
damage to covered property as defined by the insurance policy.
The Court concluded that
their decision was consistent with cases which have decided this issue in the
third party context. These cases have
held that the loss of data itself is not considered physical damage to tangible
property. The Court therefore concluded that summary judgment was properly
granted to Employers. The judgment of
the trial court was affirmed.
COMMENT
This case is consistent with
cases across the country holding that loss of electronic data alone does not
constitute direct physical damage to property.
However, this may be the first case in
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