Clark Wilson LLP Insurance Bulletin
Case Law Review Archive
Database Crash is Not Direct Physical Loss of or Damage to
Property
On December 17, 2003, the California Court of
Appeal became the first U.S. State Appellate Court to rule that loss
of electronic data following a computer crash was not covered
under a first party property policy because it was not a form of
"direct physical loss".
In November 1999 the plaintiff was updating its
Oracle computer database when human error caused the system to crash
and resulted in loss of electronically stored data used by the
plaintiff to service its clients’ insurance policies. The plaintiff
hired consultants to restore the database and the plaintiff claimed
coverage under its property policies for the extra expense incurred
in restoring data as well as the loss of business income resulting
from the disruption. The insurer denied coverage on the ground that
this type of loss was not covered by the policy. The California
Court of Appeal agreed.
There were various endorsements to the property
policy which the plaintiff sought to invoke. However, all coverages
were limited to "direct physical loss of or damage to Covered
Property". In that regard, the California Court of Appeal ruled:
the words "direct physical" modified both "loss of" and "damage to" i.e. in
order for there to be coverage there had to be either "direct
physical loss of" or "direct physical damage to" the insured
property; and
the loss of electronically-stored data, without any
accompanying physical loss or physical damage to the storage media
(i.e. the computer system components itself), did not constitute any form of "direct
physical loss".
The Court reasoned:
"The loss of a database is the loss of organized information... ... ... [information cannot]
be said to have a material existence, to
be formed out of tangible matter, or to be perceptible to the
sense of touch. To be sure, information is stored in a physical medium,
such as a magnetic disc or tape, or even as papers in 3-ring
binders or a file cabinet, but the information itself remains intangible.
Here, the loss suffered by the plaintiff was a loss of
information i.e. the sequence of one’s and zero’s stored by aligning small
domains of magnetic material on the computer’s hard drive in
a machine-readable manner. The plaintiff did not lose the tangible material
of the storage medium. Rather, the plaintiff lost the stored
information. The sequence of one’s and zero’s can be altered, rearranged,
or erased, without losing or damaging the tangible material
of the storage medium ... [Hence], the loss of the
data base, with its consequent economic loss, but with no loss of or
damage to tangible property, was not a "direct physical loss of or
damage to" covered property under the terms of the subject insurance
policy and, therefore, the loss is not covered."
In reaching its conclusion, the California Court of
Appeal reviewed a number of cases addressing insurance coverage for
losses involving electronic data. However, it completely ignored the
one earlier decision from the Arizona District Court, American
Guaranty & Liability Insurance Co. v. Ingram, which had
reached the diametrically opposite conclusion. The stated reason for
ignoring this earlier decision was that it was "unpublished" and
therefore could not be cited as authority under the California
Rules of Court.
Readers who are interested in obtaining a copy of the decision in
Ward General Insurance Services v. The Employer’s Fire Insurance
Co. are welcome to contact Nigel Kent by
phone at 604-643-3135 or by email at npk@cwilson.com.
And now for something completely different.............check out
the unbelievably outrageous comments of Texas judge Samuel Kent (no
relation) in a case of some renown and accessible @
http://www.nationalreview.com/
document/documentprint073001.html
