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How Lost Data Can Equal $$
by John Roemer
An Arizona federal judge's little-noticed decision in an insurance
dispute redefines the word "property" to include computer programming.
The decision means that existing property and liability insurance
policies are now subject to payout when data is lost, say experts, and
this could change the way e-commerce protects itself against
information losses.
"It's a huge precedent," says Attorney Larry Eisenstein, an insurance
coverage expert at the Washington, D.C., law firm Swidler Berlin
Shereff Friedman, who is not involved in the dispute. "People in the
industry have been waiting on this decision to find out what property
means in the Internet era." He added, "There's no question the
industry will fight this tooth and nail." Insurance companies until
now have told customers they must buy a special e-commerce policy to
cover data loss.
The case arose on December 22, 1998, when a short-circuit cut power to
three mainframe computers at the Tucson, Ariz., data center handling
the global operations of Ingram Micro, a major distributor of
information technology products based in Santa Ana, Calif. The loss of
electricity caused all programming information to disappear from the
RAM, including custom configurations that took up to eight hours to be
reset. Ingram Micro says the outage cost it $3 million in business.
Ingram claimed the loss was covered by its standard business
interruption policy that insures against "direct physical loss or
damage from any cause." The insurer, American Guarantee & Liability, a
unit of Zurich U.S. Financial Services of Schaumburg, Ill., argued
that the computers' capability to perform their intended functions
remained intact, as demonstrated when the restored system successfully
went back on line. Thus, American Guarantee stated that there was no
physical damage and no insurance coverage.
Senior U.S. District Judge Alfredo Marquez disagreed. Though there was
no case to use as a direct precedent, the judge pointed out that the
federal computer fraud statute defines damage as "any impairment to
the integrity or availability of data, a program, a system, or
information." In this case, criminal law is relevant to the
insurance-coverage realm, he wrote. "At a time which computer
technology dominates our professional as well as personal lives, the
Court must side with Ingram's broader definition of 'physical
damage,'" he wrote. The insurance company's definition, he said, is
"archaic."
American Guarantee will appeal the case, which could make matters
worse for insurance companies. Ingram Micro Attorney Mark K. Slater,
an intellectual property and technology partner at the San Francisco
law firm Sonnenschein Nath & Rosenthal, admittedly not the most
objective voice, says that if the justices at the 9th U.S. Circuit
Court of Appeals uphold Judge Marquez's decision, it will become
official case law for the entire western part of the country, giving
it even more weight than it has now. "The next time there's a hacker
attack or a data loss from a virus," Slater says, "Web companies will
be looking to this case for precedent."