One of our producers called recently because his client was confused by the property damage exclusion in our HyperDrive technology policy. The same exclusion appears in our internet and media liability policies. It says:
We will not pay claim expenses and/or damages or defend any of you for any glitch or claim arising out of or in any way related to any actual or alleged:
— physical damage to, loss or destruction of tangible property including any resulting loss of use. However, this exclusion does not apply to data, information or software if the tangible property on which it resides is not physically damaged, lost or destroyed;
The source of the confusion was the exception language that begins with “However, this exclusion does not apply…”
E&O liability policies typically don’t respond to claims arising out of property damage, which are viewed as more in the realm of property, GL, auto and other types of coverages. Hence the first part of the exclusion. The exception language at the end is intended to clarify that loss or damage to data alone (without damage to the medium that contains the data) is not considered property damage and is therefore covered if no other policy provision affects coverage.
In a case construing coverage under a property damage policy the court ruled that when a computer system lost the data in its memory and was unable to function because of that loss, it was a physical damage to the computer system. That decision, American Guarantee & Liability Insurance Company vs. Ingram Micro, Inc., allowed the insured to recover for its loss over the objections of the carrier, which argued that data being erased from the computers did not cause injury to any tangible property.
The court wrote:
“In this case, Ingram does allege property damage-that as a result of the power outage, Ingram’s computer system and world-wide computer network physically lost the programming information and custom configurations necessary for them to function. Ingram’s mainframes were “physically damaged” for one and one half hours. It wasn’t until Ingram employees manually reloaded the lost programming information that the mainframes were ?repaired.’”
What it Means to the Insured
The court’s decision was favorable to the insured under the property policy in that case because the court said pure loss of data was property damage and it was covered. A similar decision involving one of our policies would be unfavorable to an insured. We usually don’t cover property damage on technology and internet policies, so saying that mere loss of data was property damage would result in the property damage precluding coverage.
So the exception language is meant to eliminate that kind of interpretation by a court and ensure that the E&O policy will respond to a claim involving only a loss of data.
A couple of examples:
- An insured inadvertently erases a client’s hard drive without damaging the hard drive, and the client makes a claim against the insured. Assuming no other policy terms came into play to affect or prevent coverage, the claim would be covered because the exception language says the property damage exclusion does not apply to data if the tangible property on which it resides was not physically damaged, lost or destroyed. The hard drive itself is fine, so the exclusion doesn’t apply.
- An insured drops a client’s hard drive, damaging or destroying it. The data residing on the hard drive is lost, and the client makes a claim against the insured. No claim arising from this incident would be covered by our policy because the claim would arise from the damage to tangible property (the damaged or destroyed hard drive). The exception language would not apply because the property on which the data resided was in fact physically damaged or destroyed; so there would be no coverage for the damaged hard drive, for the data loss or for any other damages stemming from the incident.
Bear in mind the E&O policy would not cover data loss when it was only the insured that suffered a loss. This is a third-party liability policy, not a first-party policy. But suppose it was the insured’s hard drive that held the client’s data, and the insured inadvertently erased the data without damaging the hard drive. If the client brought a claim against the insured due to the erasure, the property damage exclusion would not prevent coverage because there was no damage to the hard drive. And although it was the insured’s hard drive that contained the data, the loss of data generated a third-party liability claim instead of a first-party loss.
If interested, here is link to more information about the Ingram Micro case.
Footnote: The cause of the data loss in the Ingram Micro case was a power interruption. Our policies contain an exclusion for claims arising from power loss or disruption. Discussion of the Ingram Micro case to illustrate the property damages issues is not meant to suggest our policy would apply to a case where power disruption was the cause of the problem.