Commercial Property Policy- Computers and Data
Is damage to computers, software and electronic data covered under a standard commercial property policy? The answer to this question is important since many businesses depend on computers to carry out their day-to-day operations. If such businesses experience a loss that results in damage to their computers or data, their operations could come to a standstill.
Unfortunately, most commercial property policies do not provide adequate coverage for computers and related devices.
For one thing, the definition of "covered property" may exclude all or parts of a computer system. Secondly, electronic equipment and data are vulnerable to damage by perils (such as power surges) that are excluded by many property policies. Thirdly, many policies afford some "additional coverage" for electronic data, software, and (in some cases) computers. However, the amount of coverage provided is often quite limited.
This article will explain the extent to which computers and data are covered under the latest (2012) version of the ISO Building and Personal Property Coverage Form. Some insurers utilize this form "as is" when issuing property policies. Others have developed their own forms using the ISO form as a starting point. Most insurers' forms are as broad, or broader, than the ISO form.
Computers and peripheral devices like printers and monitors qualify as "covered property" under the ISO commercial property policy.
These items are "machinery and equipment" so they are considered business personal property.
Unlike computer hardware, however, software and electronic data are not covered property. Electronic data is included in the list of "property not covered" under Business Personal Property. Electronic data is defined broadly.
This term includes information, facts or computer programs stored as or on computer software, hard disks and other storage devices. Software includes both systems and applications software.
Also included in the list of "property not covered" is the cost to replace or restore lost information on valuable papers and records. The exclusion applies to both hard copy papers and records and those that exist as electronic data. The policy affords some "additional coverage" for the cost to restore damaged valuable papers. However, this coverage does not extend to electronic valuable papers.
Computers, software and data are subject to damage by the same types of perils (such as floods, earthquakes and windstorms) that can damage virtually any type of property. However, they are particularly vulnerable to damage by the perils listed below. These perils are excluded under the ISO form and many insurers' policies.
- Power Surge Excludes damage caused by a power surge, if the surge results from a power failure that originates away from your premises. Surges that originate on your premises are also excluded if they result from utility equipment located on your premises. However, if a power surge results in a covered peril (such as a fire), any ensuing loss by that peril is covered.
- Electrical Disturbance Excludes damage caused by electrical, magnetic or electromagnetic energy. This includes electrical arcing, short circuits, and static electricity. If any of these perils generate a fire, property damage caused by the fire is covered.
- Temperature Change Excludes damage caused by changes in temperature or humidity
- Mechanical Breakdown Excludes damage caused by mechanical breakdown, including damage caused by centrifugal force.
Electronic Data and Software
The ISO property policy provides some "additional coverage" for damage to electronic data. Remember that this term includes software stored on your computer system. Coverage is afforded for the cost to replace or restore electronic data that has been corrupted or destroyed by covered peril. Which perils are covered with regard to electronic data?
The answer depends on the "causes of loss" form attached to your policy. Most businesses purchase all-risk coverage (which ISO calls "special causes of loss") rather than named perils. Assuming your policy covers "special causes of loss," electronic data is covered for the following perils:
- Specified Causes of Loss This is a defined term that includes over a dozen separate perils such as fire, lightning, hailstones, windstorm and sinkhole collapse.
- Computer Virus Covers damage to electronic data caused by harmful codes or instructions. Excludes damage caused by manipulation of your computer system by an employee, including a temporary worker or leased worker.
The limit provided for damage to electronic data is only $2,500. This is an aggregate limit that applies to the entire policy term. If you do not replace your damaged data, the insurer will pay the cost to replace the media (such as an external hard drive) on which the data was stored.
Your property policy may provide more coverage for computers, data and software than the ISO form. Your agent or broker can help you determine if the coverage meets your needs. If it doesn't, you should consider purchasing electronic data processing coverage.