C L A I M D E N I E D November 2003 A publication of the - PDF document

C L A I M D E N I E D November 2003 A publication of the Lowenstein Sandler Insurance Law Practice Group Inability to Store or Retrieve Data Held Insufficient to Establish Property Damage By Lynda A. Bennett, Esq., and David Malekan, Esq. Minnesota appellate court under a general liability coverage umbrella policies. Nevertheless, A recently weighed in on the grant. See Compaq Computer Corp. Compaq pursued coverage for on-going debate over whether com- v. St. Paul Fire & Marine Ins. Co ., asserted breach of warranty claims puter data constitutes “tangible 2003 Minn. App. LEXIS 1087. on the theory that computer data property” such that claims for dam- After being sued in two class constitutes “tangible property” and ages associated with computer data actions alleging that “Compaq plaintiffs were, in part, seeking will trigger a coverage obligation intentionally sold computers that damages for damage, corruption, contained defective floppy-diskette and destruction of their computer Inside controllers (FDCs) and FDC data. As such, Compaq argued, microcodes, [which] in turn caused coverage should be available under CORPORATE the loss of use, corruption, and the general liability policy. GOVERNANCE: FAILURE destruction of data without any TO PROCURE OR The court rejected Compaq’s argu- prior warning to the user”, Compaq MAINTAIN “ADEQUATE ment on the grounds that plaintiffs’ sought coverage under its technolo- INSURANCE” MAY claims were based on the FDCs gy errors and omissions liability pol- PRECLUDE D&O inability to retain or retrieve comput- icy, technology commercial general COVERAGE er data from the disk. Plaintiffs were liability policy, and technology — not claiming damage to pre-existing umbrella excess liability policy. SEVERABILITY FOR data. Rather, they were claiming Coverage was found to be unavail- INNOCENT INSUREDS: damages because they could not suc- able under the E&O policy because THE PUBLIC POLICY CASE cessfully store data on a disk or the nature of the plaintiffs’ claims FOR COVERAGE obtain access to stored data. The — involved intentional conduct. A court noted that, under applicable www.insurance-lowenstein.com similar argument was advanced to governing Texas law, information bar coverage under the CGL and This document is published by Lowenstein Sandler PC to keep clients informed about current issues. It is intended to provide general information only. A L D

alone is not “tangible”, even if it may coverage will exist if computer data (“D&O”) liability remains a serious be communicated by a fax machine, may be reproduced in printable form concern. One change to the stan- telephone, telegram or computer. but that no coverage will apply to a dard D&O policy sought by insurers Information only becomes “tangible” situation like Compaq where the over the past 12-18 months is the when it merges with physical proper- plaintiff is alleging the inability to addition of a ‘Failure to Maintain ty, such as when it is put on paper or retrieve data, which may then be when, as was the case in Retail Sys., reproduced in printable form. Most companies do not Inc. v. CNA Ins. Cos. , 469 N.W .2d Perhaps the most disturbing aspect of have the coverage that 735, 737 (Minn. App. 1991), a com- the Compaq decision is that Compaq they need for loss of data. puter tape and the data stored on the had procured an insurance program Identification of exposures tape were “of permanent value and that purportedly was designed specif- should be a priority for were integrated completely with the ically to cover “technology” risks and every policyholder. physical property of the tape.” the insurer was able to successfully block coverage under all of the poli- Insurance’ (“FMI”) exclusion, which In this case, the court found that cies for a relatively plain vanilla, is designed to preclude coverage for “the dispute centers on the alleged though potentially costly, third-party claims against directors and officers inability of Compaq FDCs to retrieve liability. alleging that they failed to purchase or store data property onto a floppy or maintain insurance sufficient to disk. Moreover, the class action Most companies do not have the protect the company’s assets. A plaintiffs made no claim for damages coverage that they need for loss of recent version of the exclusion reads: for loss or destruction of data.” data, under either first party or third Indeed, plaintiffs’ complaint specifi- party policies. Identification of expo- The Insurer shall not be liable cally stated that the class was not sures in this area and purchase of to make any payment for Loss in seeking consequential damages as a necessary coverage should be a prior- connection with any Claim made result of the actual loss or corruption ity for every policyholder. against an Insured alleging, aris- of data. Plaintiffs were seeking a ing out of, based upon or attrib- CORPORATE refund of the purchase price, repair utable to any failure or omission GOVERNANCE: or replacement of the defective com- on the part of any Insured to FAILURE TO PROCURE puter or component parts, and attor- effect or maintain adequate OR MAINTAIN insurance. 1 neys fees. As such, the court held “ADEQUATE that no coverage was available under INSURANCE” MAY The FMI exclusion was commonly the GL policy. PRECLUDE D&O used during the 1980s insurance cri- COVERAGE Compaq is a troubling decision sis when it was difficult to obtain because it appears to set a precedent broad coverage, particularly in the By Adam S. Cantor, Esq. that policyholders are at the mercy of excess market. The exclusion was the plaintiffs’ bar to use the “right In the current hard insurance mar- almost universally eliminated from words” in their Complaints seeking ket, the insurance industry’s scaling 1 AIG “D&O First” Policy form, March relief for damage to computer data. back of coverage previously available 2003 It is hard to reconcile the notion that under directors’ and officers’