Electronic data processing (EDP) insurance covers damage to computers, media, and data. This coverage is important if your business depends on computers to carry out its day-to-day operations. It fills many of the gaps that exist in standard commercial property policies with regard to electronic equipment.
No Standard Insurance Coverage
EDP coverage goes by several names. Examples are Computer Coverage and Data Processing Coverage. EDP insurance can be written by itself, or added to a property or package policy via a separate form or endorsement.
EDP policies vary widely. Some insurers utilize a preprinted EDP form published by AAIS (a rating organization similar to Insurance Services Office (ISO). Many others use forms they have developed themselves. Here are some questions to ask when shopping for an EPD coverage:
- What types of equipment and accessories are covered by the policy?
- What perils are covered? Which ones are excluded?
- Are the hardware, data, and software covered for damage caused by viruses and hacking?
- How is the value of the damaged property calculated?
- Does the policy cover loss of income and extra expense?
- What additional coverages are included?
Insurance Policy Covered Property
Most EDP policies cover damage to equipment, data, and other items described in a section entitled Covered Property. Policies typically cover three categories of property: computers and other hardware, electronic media, and data (including programs and software).
Computer hardware includes equipment such as mainframe computers, laptops, and workstations. Depending on the policy, it may also include copiers, scanners, telephone systems, and air conditioning equipment maintained exclusively for computers. When buying EDP coverage, be sure the definition of hardware includes the types of equipment you use in your business. Many EDP policies cover hardware you have leased from someone else. If your company leases computers, make sure that leased equipment qualifies as hardware under your EDP policy. You should also read your contract carefully. Many lease agreements hold the lessee liable for any damage the equipment sustains during the term of the lease. Your lease may hold you responsible for the damage caused by perils that aren't covered by your policy.
Software and Data
Computer programs, software, and data are also covered under EDP forms. Software generally includes systems software, applications software, and proprietary programs.
The term media means devices on which data are stored. Examples are discs, drums, and tapes. Some policies include "media" as a separate category of covered property. Others cover media as part of "software."
EDP policies contain many fewer exclusions than standard property policies. Most cover "all-risks," meaning all perils that are not specifically excluded. Many (but not all) EDP policies cover damage caused by flood and earthquake.
Like any property, electronic equipment may be damaged by fire, wind, and other common perils. It is particularly vulnerable to damage by the perils listed below.
- Electrical disturbances (including arcing and short circuits)
- Temperature and humidity changes
- Mechanical breakdown
- Power surges
Most EDP policies cover damage caused by electrical disturbances, mechanical breakdown, and temperature and humidity changes. However, many policies exclude damage caused by a utility service interruption, including resulting power surges. Coverage for power failures is usually available for an additional premium.
Other perils covered by many EDP policies include computer virus and computer hacking. "Hacking" may include acts committed by employees. Coverage for damage caused by viruses or hacking may be subject to a sub-limit.
Valuation of Damage
Depending on the policy, the value of damaged EDP property may be calculated based on its:
- Actual cash value
- Replacement cost; or
- Functional replacement cost
Functional replacement cost is the cost to replace an item with functionally equivalent property, although not necessarily identical, to the damaged property. This type of valuation is often used when property undergoes frequent technological changes.
For example, your five-year-old computer is damaged by a power surge and cannot be repaired. You are unable to replace the computer with an identical model because that model is no longer available. Thus, your insurer pays the cost of a new, different model that performs similar functions as your old one. If the new machine costs less than the limit shown on your policy for the damaged one, your insurer will not pay more than the cost of the new machine.
If data or software is damaged or destroyed, your policy may pay the cost to reinstall or reproduce it from duplicates. If no duplicates exist, your policy may cover the cost to reproduce the data or software, including the cost of research.
Income and Expense Losses
If your business depends on computers or electronic data to function, damage to that property could cause your business to shut down. A total or partial shutdown of your operations could cause your business to lose income or incur extra expenses. Fortunately, many EDP policies include business income and extra expense coverages. These may be included automatically or available by request.
Most EDP policies include various additional coverages. Some examples are listed below. These may be included automatically or provided for an additional premium. They are usually subject to a specified limit.
- Newly Acquired EDP Equipment
- EDP Equipment at Newly Acquired Premises
- EDP Equipment in Transit
- Utility Interruption
- EDP Equipment Offsite
Most EDP policies cover computer equipment situated at locations listed in your policy. However, many policies provide some coverage for equipment used offsite. This coverage is important if you or your employees utilize laptops or other portable devices away from your premises.