Insuring Electronic Data Losses — Time Limit to Start Suit

Googling for a discussion of dependence on electronic data, I found this in, of all places, Popular Mechanics. “Vehicles are increasingly behaving like computers with wheels…In the past we would have called it the electrical system, but its mission has evolved way beyond simply moving dumb electrons. Collectively, these electronics are known as the Controller Area Network…(CAN),…the system of wires and software protocols acting as the connective tissue between a vehicle’s computers and sensors…. CAN allows cars to be smarter, cheaper, and capable of doing some slick stuff that wouldn’t otherwise be possible.

“…The design of CAN is similar to that of a freeway system. Data move like vehicles from high-traffic highways to local roads via on and off ramps. Thousands of data points traverse this freeway at any time along any given stretch and can get off at any exit. Throughout the car are various computers called electronic control units, or ECUs…. Each ECU has several jobs: controlling the engine or transmission, rolling up windows, unlocking doors, and the like. These computers have sensors and switches wired in to detect variables such as temperature, pressure, voltage, acceleration at different angles, braking, yaw and roll of the vehicle, steering angle, and many other signals. When an ECU needs a signal from a sensor connected to an ECU elsewhere in the car, that’s where CAN comes in.

“Take, for instance, power sliding doors, a common feature on modern minivans (and on many NYC taxis). These doors are operated by an ECU… Sensors constantly report whether the door is open or closed, and when the driver pushes a button to close the door, the signal from that switch is broadcast across the network. When the ECU gets that signal, however, it doesn’t simply close the door. First, it checks the data stream to make sure the car is in park and not moving. If all is well, it then gives a command to a power circuit that energizes the motors used to close the door. It goes even further, though—the ECU then monitors the voltage consumed by the motors. If it detects a voltage spike, which happens when a door is hindered by an errant handbag or a wayward body part, the ECU immediately reverses the direction of the door to prevent potential injury. If the door closes properly, the latch electrically locks the door shut. In the old days, this would have been an engineering feat. Just electrically powering the doors would have required dedicated wires running between the shifter, the door switch, and the motor.”1

What’s this got to do with insurance? Every one of our clients are just as integrally a part of the World Wide Web. Disruption of electronic service is now a serious exposure. Unfortunately, there’s no simple insurance solution. Coverage for loss of electronic data is particularly problematic. Many insurers offer electronic data coverage as part of their Electronic Data Processing forms, but it’s limited by exclusions and the need to demonstrate physical damage.

The response of standard market insurers using ISO and similar basic, broad, and special forms to claims based on loss of electronic data was that there’s no coverage because the loss definition required “physical damage” and there was no physical damage. In 2000, court decisions began to shake the foundation of that position.

A leading case involved Ingram Micro, a distributor of computer and technology products. Ingram had had computer problems due to a power outage. Although power was restored within half an hour, and Ingram’s computers were up and running in another hour and a half, its networking system lost its custom configurations, which took eight more hours to reprogram. Ingram filed a claim under its business interruption coverage due to its inability to conduct business during this period. Its insurer, American Guaranty & Liability (a Zurich company), denied coverage citing lack of physical damage. Ingram sued for coverage.

The court held that the circumstances constituted “physical damage,” ruling that “physical damage is not restricted to the physical destruction or harm of computer circuitry, but includes loss of access, loss of use, and loss of functionality (emphasis added).”2 Not all courts followed suit, but some did and the insurance industry took notice. Feeling that this was an exposure not contemplated when the policies were originally priced and that it would be difficult for most insurers handling such losses, ISO added electronic data to the list of “property not covered.” Electronic data is broadly defined as follows:

Electronic data means information, facts or computer programs stored as or on, created or used on, or transmitted to or from computer software (including systems and applications software), on hard or floppy disks, CD-ROMs, tapes, drives, cells, data processing devices or any other repositories of computer software which are used with electronically controlled equipment. The term computer programs, referred to in the foregoing description of electronic data, means a set of related electronic instructions which direct the operations and functions of a computer or device connected to it, which enable the computer or device to receive, process, store, retrieve or send data.

The exclusion is reinforced by an “additional coverage” that provides $2,500 coverage. (The insurer can increase that limit, but few insurance companies are going that route.) So if the insured makes it past the exclusion, coverage is limited to $2,500. Obviously, that provides insufficient coverage for electronic data losses. Specialized coverage is available from numerous markets, but none of them are all-encompassing. Until now, all required the insured to show physical damage. Hartford Steam Boiler (HSB) has jumped into this market with a new form, HSB TechAdvantage.3 As its name implies, Tech Advantage is pointed at cyber exposures; it’s coverage for the bits and bytes that surround us in our everyday work lives.

TechAdvantage is regular equipment breakdown coverage with a new covered cause of loss added: Electronic Circuitry Impairment. Most interestingly, it eliminates a feature that has been a bedrock of coverage definitions of all-risk coverage. Much has changed in the nomenclature of all-risk insurance. In 1986 the word “all” was dropped and the name of the form was changed to Special Form. Then the word “risk” was clipped out. The term “open-perils” was floated as a substitute, but never really caught on. But through it all, the requirement that there be physical loss has remained constant. For example, the current Special Form insuring agreement starts out:

When Special is shown in the Declarations, Covered Causes of Loss means direct physical (emphasis added) loss unless the loss is excluded or limited in this policy.

But in a major break with the past, HSB’s4 TechAdvantage coverage form eliminates the requirement to show physical damage before coverage is triggered for certain types of loss.

It means there’s potential coverage for losses (most likely business interruption and extra expense) when systems crash or otherwise malfunction, resulting in the loss of needed data with no sign of physical damage. The new covered cause of loss, entitled “Electronic Circuitry Impairment” reads as follows:

Electronic circuitry impairment means a fortuitous event involving electronic circuitry within covered equipment that causes the covered equipment to suddenly lose its ability to function as it had been functioning immediately before such event. This definition is subject to the conditions specified…below…. (“Electronic circuitry” means microelectronic components, including but not limited to circuit boards, integrated circuits, computer chips and disk drives.)

The coverage might apply to a variety of situations, such as:

• A building’s heating or cooling system fails and must be repaired.
• A law firm’s computer server fails and must be replaced.
• A manufacturer’s production line fails – causing a loss of business as well as repair costs.

These are occurrences that might trigger standard equipment breakdown coverage. What’s new is that if the failure is connected to electronic component failure, the event may be covered without the need to show that there has been physical damage to the replaced component.

That’s good, as far as it goes, but it’s made clear in the wording that follows that it doesn’t go that far.5 Some of the restrictions include:

• The insurance company will determine that the reasonable and appropriate remedy to restore such covered equipment’s ability to function is the replacement of one or more electronic circuitry components of the covered equipment (but it does not require an evidence of physical damage).
• The following are not covered causes of loss:
  • Conditions that can be remedied by normal maintenance; rebooting, reloading or updating software or firmware or by providing necessary power supply
  • Conditions caused by
    • Incompatibility of the “covered equipment” with any software or equipment installed, introduced or networked within the prior 30 days; or
    • Insufficient size, capability or capacity of the covered equipment.
  • Exposure to adverse environmental conditions, including but not limited to change in temperature or humidity, unless such conditions result in an observable loss of functionality. Loss of warranty shall not be considered an observable loss of functionality.

A loss like the one that plagued Ingram Micro, discussed above, apparently wouldn’t be covered. All that was needed to restore functioning was reprogramming. So while this is a worthwhile improvement, it’s not the complete solution. Nevertheless, it closes a current gap in protection.

PRACTICE POINTER: HSB is a major writer of equipment breakdown insurance (still frequently referred to as “boiler & machinery”). For insureds currently insured with HSB, give them quotes to convert to the broader form now. For other insureds, provide an HSB quote now or at renewal, depending on how you evaluate the exposures.

A Time Limit is a Time Limit

In New York, if you’re late for dinner, you don’t get fed?–at least when it comes to insurance claims. Anthony D’Angelo and his son, also with the first name of Anthony, sued Allstate to collect their auto physical damage claim. They started suit 13 months after the date of loss. Allstate countered that they had missed the deadline to start suit by one month. The lower court granted Allstate summary judgment and the appellate court agreed.6

Wait a moment, doesn’t NY insurance law require a time limit to start suit of not less than two years? Yes it does, but that applies only to what were once referred to as fire and allied lines (now called property insurance), not to auto physical damage claims. (In the sometimes weird world of insurance nomenclature, autos, although clearly property, are not included in the term property insurance.)

And even though they missed the deadline by one month, which doesn’t seem like too much, New York courts strictly enforce time limits. Some states are more lenient, but it’s not a good idea to throw yourself on the mercy of the court in any event.

PRACTICE POINT: There are two things to take away from this case: First, the time limit to start suit is strictly enforced. Review open claims to spot those that are nearing the time limit and notify the insureds. Producers don’t have a legal duty to do that, but it is a great way to demonstrate value-added to your clients. Second, the time limit to start suit can be less than two years for many types of claims. Watch out for them.