ELECTRONIC DATA EXCLUSION

Sometimes, when the wording of a policy is revised, either to restrict or (maybe) expand coverage, unintended side effects can occur. The 2004 edition of ISO’s Commercial General Liability policy contained a new exclusion, the Electronic Data Exclusion, which reads as follows:

p. Electronic Data

Damages arising out of the loss of, loss of use of, damage to, corruption of, inability to access, or inability to manipulate electronic data.

As used in this exclusion, electronic data means information, facts or programs stored as or on, created or used on, or transmitted to or from computer software, including systems and applications software, hard or floppy disks, CD-ROMS, tapes, drives, cells, data processing devices or any other media which are used with electronically controlled equipment.

Much has been written about this exclusion and the available ISO “fixes,” but a concern of ours has not received much attention.

When introduced, Exclusion p. was said to be a clarification of the definition of “Property Damage” contained in the 2001 edition of the CGL.  That definition of “Property Damage” stated electronic data is not tangible property, but it appears to us that Exclusion p. goes a step further and potentially excludes bodily injury claims that result from damage to electronic data.  Exclusion p. excludes “damages” arising out of the loss of, loss of use of, damage to, etc., and “damages” is an undefined term in the CGL policy.  It can clearly include both bodily injury and property damage.

While there are probably not a large number of business risks that could be liable for bodily injury claims arising from damage to electronic data, we suspect there are some.  A contractor working in a health care facility could damage electronic data that controls a life support system, with potentially deadly consequences.  Heavy equipment could short circuit on a customer’s site, damaging electronic data that controls production machinery safety devices thereby causing an injury to a worker.  Why haven’t we heard more about these potential problems?

The Electronic Data Liability Endorsement, CG 04 37, introduced in 2002 (and revised in 2004 to coincide with the new Exclusion p.) partially fixes one problem created by Exclusion p., by bringing coverage back in for damages (including bodily injury and property damage) arising out of damage to electronic data that results from physical injury to tangible property.  Damages (including bodily injury) arising out of damage to electronic data that does not result from physical injury to tangible property is still excluded (which was not the case before the introduction of Exclusion p.).

On the downside, the endorsement is subject to a sublimit.  We suspect that many insurers will only afford a minimal sublimit, certainly one that is significantly less than the CGL’s basic policy limit.  We can only suspect this, however, because we have yet to find an insurer willing to even add the endorsement, much less set the sublimit at a reasonable level.  One insurer recently told us that since there was no ISO rule for pricing Endorsement CG 04 37 12 04, they couldn’t use it!

On a slightly more positive note, if the endorsement can be added, the sublimit will only apply to property damage due to all loss of electronic data arising out of any one occurrence.  Any covered bodily injury losses would be subject to the policy’s per occurrence limit.

The new Electronic Data Liability Coverage form (CG 00 65 12 04), written on a claims-made basis, provides coverage for loss of electronic data caused by an “electronic incident” and coverage applies to both physical damage and loss of use of tangible property not physically damaged.  Although the form does fill some coverage gaps, there are a few inherent problems with it.  First, it defines “electronic incident” to mean an accident or a negligent act, error or omission . . . which results in loss of use of “electronic data.”  This is a narrower scope of coverage than is afforded by the CGL policy, which covers any act (intentional or otherwise) as long as the injury or damage was not intentional.

Second, this coverage form specifically excludes bodily injury, so the form will certainly not overcome our concern over the lack of coverage for bodily injury claims arising out of the loss of, loss of use of, damage to, corruption of, inability to access, or inability to manipulate electronic data.

Third, and perhaps most important, the form’s coverage is limited to loss of electronic data (exactly what is excluded by the CGL policy’s Exclusion p.).  No coverage is afforded for damages other than to electronic data arising out of an electronic incident.

By the way, we have yet to have any success finding an insurer willing to offer Coverage Form CG 00 65 12 04, either.

Should you be concerned about the removal of coverage for bodily injury claims arising from damage to electronic data?  That depends on the nature of your operations, your products or the work performed for others.

Until dependable sources for insurance coverage can be found for the loss exposures created by the CGL’s Electronic Data exclusion, business owners will need to be aware of their insurance coverage’s potential shortcomings and keep an eye on the inevitable court cases that may further define the effect of the exclusion.

-- Charles H. Cox

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