Numerous businesses utilize computers and electronic data in their day-to-day operations. If their computers or data are damaged or destroyed by a power surge or other event, their operations could be severely impacted. Many businesses that own buildings and personal property insure these items under a commercial property policy. Unfortunately, a typical policy does not provide adequate coverage for damage to computers and related equipment.
Problems With Commercial Property Policies
There are two reasons why businesses shouldn't rely on a commercial property policy to cover computers, peripheral devices, and electronic data. First, these items are vulnerable to damage by perils like electrical disturbances and humidity changes that are excluded under many property policies, including the standard ISO policy. Secondly, many policies afford very little coverage for damage to electronic data or software.
Some insurers issue property policies on standard ISO forms while others use their own proprietary forms. Many proprietary forms are based on ISO forms but afford broader coverage.
Definition of Covered Property
The ISO commercial property policy contains two keys parts: the Building and Personal Property Coverage Form and a Causes of Loss Form. The Coverage Form describes the types of items that qualify as Covered Property as well as those that are considered Property Not Covered. Covered Property consists of two categories: Buildings and Business Personal Property.
Among other things, Business Personal Property includes machinery and equipment. Computers and peripheral devices like printers and monitors are machinery and equipment, so these items qualify as Covered Property. However, electronic data is not Covered Property because it appears 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.
The Causes of Loss Form explains which perils are covered perils and which are excluded. ISO offers three Causes of Loss forms but most policyholders choose the broadest one called the Causes of Loss - Special Form. It covers all perils that aren't specifically excluded.
While computers and data may be damaged by a wide range of perils, they are highly vulnerable to the types of perils listed below. These perils are excluded under the Special Causes of Loss Form.
- Power Surge. Excludes damage caused by a utility interruption, including any associated power surge, if the failure originates away from your premises. Failures (and associated surges) that originate on your premises are also excluded if they result from utility equipment located on your premises. However, if a power failure or 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.
- 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
Coverage for Damage to Data
While electronic data is not considered Covered Property under the ISO property Coverage Form, the form provides a small amount of coverage for of restoring damaged data. Assuming the Special Causes of Loss Form is attached to the policy, the policy covers the cost to replace or restore electronic data that has been corrupted or destroyed by any of the following perils:
- Specified Causes of Loss. This is a defined term that includes over a dozen separate perils such as fire, lightning, hailstones, riot or civil commotion, 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. Includes a virus, harmful code or instructions introduced into a computer system to damage or destroy any part of it or disrupt its operation. 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.
Computers and data are vulnerable to damage by perils that are excluded by the standard property policy.
The policy affords only a small amount of coverage for damage to electronic data.
You can protect your business from losses caused by damage to computers and data by purchasing electronic data processing coverage.