W. Meade Collinsworth CPCU, ARM, AIM, AAI
In our changing world... you may find that the use of the Internet is becoming more and more a part of our personal and business lives. You may have even developed or are developing a Website of your... personally and/or for business use.
The purpose of you Website may be multifaceted... such as advertising or you may actually conduct business over the Internet. In fact... you probably feel as though this is just another facet of your business. But... you should know from an insurance standpoint - your Website is considered "intangible property" (you can't feel, touch or hold it). As a result... current standard business insurance policies most likely do not address this type of exposure. Hence... it is probably not considered property or a business income loss or a liability exposure for this type of "owned" intangible property.
The following is an actual case involving the issue of coverage for "intangible property" as it relates to the operation of a Website for business conducted on the Internet.
In December of 1998, Ingram Micro, Inc., a wholesale microcomputer product distributor, headquartered in Santa Ana, California, lost power at its Tucson center. The power outage caused loss of program configurations that halted operations for about eight (8) hours. Ingram Micro's insurer denied Ingram's Claim for lost revenues.
The reason cited for the denial... was the definition of physical damage and/or property damage. However, according to the Arizona U.S. District Court, the insurer was wrong and ruled the loss was covered... but who wants to litigate each and every loss dealing with their Internet operations? In fact, since this case was tried, almost every insurance company that writes any type of property or liability coverage has filed an "Americus brief"... a friend of the court, siding with their fellow insurer to make sure that this decision is not upheld at the Appellate Court level!
This particular Arizona Court decided that this type of loss was covered even though the loss involved "intangible property". The Court reasoned (and this is a minority opinion) that physical or property damage is not restricted to physical destruction or harm of computer circuitry, but includes loss of access, along with loss of use and loss of functionality. As you might imagine, this minority opinion is being appealed. Now as a result of this claim... Ingram Micro is looking for $3,000,000 in reimbursement arising out of its eight- (8) hour power outage.
Also as a result of this coverage interpretation... the insurance industry is modifying its definition of property damage in all Commercial General Liability and Property policies to make sure that there is even less possibility of this interpretation of claim happening again. In fact, insurers are going to reaffirm (again) for the purposes of insurance... "electronic data is not "tangible property" and as such... is not covered". According to the insurance industry... electronic data means information, fax or programs stored or used or created or transmitted to and from computer software including systems and application software including hard or floppy disk, etc.
There are several insurance companies that have developed special policies to cover losses arising from Internet and Website operations both from a property and third party liability exposure. If you or your company operate a Website or conduct business on the Internet, you should discuss your exposures with your insurance agent or broker and determine if there is a need to implement special insurance to cover your potential losses. Failure to do so may result in your having to litigate every loss or claim of this nature with your own insurer.
It's virtually a given that all of the traditional insurance companies will be taking a "hard nosed" approach...taking the position you are not covered because of their interpretation of what constitutes "intangible property". There is a long history in the insurance business that whenever insurance companies are "surprised" by courts interpreting policy coverage unfavorably against them, that policy forms are amended to more clearly exclude unintended coverage. This many time results in new policy forms being created to respond to the need for special coverage and where the insurer can collect additional premiums to cover losses not previously anticipated.
W. Meade Collinsworth, CPCU, ARM, AIM, AAI, is President of Collinsworth Alter Nielson Fowler and Dowling, Inc., a Miami Lakes, Florida insurance agency specializing in insurance for architects, engineers, land surveyors and contractor construction related activities. Mr. Collinsworth is a regular contributor to the Guest Essay column of the a/e ProNet Website.
NOTE: This article is intended for general discussion of the subject, and should not be mistaken for legal advice. Readers are cautioned to consult appropriate advisors for advice applicable to their individual circumstances.
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