LEGAL BRIEF

Court Considers Extent of Computer Damage Cover

Frank Rees

l 'n a recent case (Switzerland Insurance Australia .v Dundean Distributors Pty Ltd), the Victorian

Court of Appeal had to decide precisely what kind of damage is likely to be covered where computer equipment is insured. A leading Australian law firm, Phillips Fox, says that the issue is whether damage to computer software and damage to the integrity of data on a hard disk fell under the policy, which insured Dundean ' s e lec tronic equipment against accidental loss or damage. Consequential loss was limited to specific and unrelated provisions.

Damage had occurred to the computer system and to stored accounting data by a 'brown out' i.e. when lower than normal power line voltage is supplied. The accounting information held on Dundean's hard disk was not destroyed, but it was scattered throughout the hard disk and not easily accessible. It could only be recovered by an expert at considerable cost.

Phillips Fox commented, "Dundean argued that as soon as the hard disk was corrupted by the 'brown out ' , there was physical change to the computer system which would fall under the cover of 'accidental damage'. It wanted to recover the cost of loading a new a c c o u n t i n g p r o g r a m and the cos t o f an exper t recovering the data from the hard disk so it could be re- loaded and accessed by the computer system.

"The Court found that term 'electronic equipment' in the policy included the hardware and the middle and top layers of the software system being the operating

system and the accounting program. This was because of the manner in which the cover had been negotiated and the invoices relied upon by the parties to assess the extent of the cover. But it held that the accounting data stored on the hard disk was beyond the scope of cover contemplated by the parties."

The Court dismissed the insurer's argument that no damage had been suffered by the computer as no part had been irreparably damaged, and because it was poss ib le to restore the sys tem by install ing new programs. As there had been a physical alteration to the in su red ' s e l ec t ron ic equ ipmen t , which had impaired both its value and usefulness, the Court found that damage had occurred under the policy. Damage did not have to be permanent or irreparable.

"The accounting information held on Dundean's hard disk was not destroyed, but it was scattered throughout the hard disk and not easily accessible."

The question of the scat tered data was a d i f f e ren t issue, as the data was found not to be insured . The Court accepted that the scat tered data did not fall within the customary use of the express ion 'consequential loss', s ince it was not suggested that the scattered data had

caused a loss of profits. But the Court did leave open the possibility arising in other cases, which raises the prospect that under a differently worded policy, a loss of this type may be interpreted as a consequential loss.

Phillips Fox concluded, "Although the Court was at pains to point out that the case turned on its own facts, there is a s imple lesson about the part ies understanding the negotiated ambit of cover. It would appear that data recorded and held on hard disk will not necessar i ly be covered by general wordings. Specific provision would need to be made if insurance is required for the actual data stored on a computer system."

Computer Fraud & Security July 1998 © 1998 Elsevier Science Ltd 19