Coverage For Computers and Data Under a Commercial Property Policy
Numerous businesses depend on computers and electronic data to carry out their day-to-day operations. If such businesses sustain a fire or other event that damages or destroys their electronic devices or data, their operations could be severely impacted. Most businesses that own buildings, equipment or other property purchase commercial property insurance. Unfortunately, a standard commercial property policy provides very limited coverage for damage to computers, software, and electronic data.
Problems With Commercial Property Policies
There are a number of reasons why businesses shouldn't rely on a commercial property policy to cover computers and related devices. For one thing, the policy may define "covered property" so that all or parts of a computer system are excluded. 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.
Many insurers issue property policies using current (2012) ISO forms, including the Building and Personal Property Coverage Form and the Special Causes of Loss Form. Some insurers utilize these forms "as is." Others have developed their own forms using the ISO form as a starting point. Most insurers' forms provide coverage that is equivalent to, or broader than, the coverage afforded by the ISO forms.
Definition of "Covered Property"
In the ISO commercial property policy, Business Personal Property is one of two categories of "covered property." (The other is Buildings). Business Personal Property includes "machinery and equipment." Computers and peripheral devices like printers and monitors are machinery and equipment, so these items are "covered property."
Unlike computer hardware, software and electronic data are not covered property. Electronic data is listed under the heading "property not covered." 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 listed under "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. While some "additional coverage" is provided for the cost to restore damaged valuable papers, this coverage does not apply to electronic valuable papers.
Computers, software, and data may be damaged by fires, floods, windstorms, and other perils that can affect virtually any property. They are also vulnerable to damage by perils that may not affect other types of property. These are listed below. Such perils are excluded under many property policies, including the ISO policy.
- 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.
"Additional Coverage" Is Limited
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 a covered peril. The perils that are covered with regard to electronic data depend on which "causes of loss" form is 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.
- Collapse. This term has a specific meaning. It includes an abrupt falling down, loss of structural integrity, or cracking, bulging, sagging etc.
- 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.