Let’s Get Metaphysical -- Loss of Data Resulting From Operator Error is Not a Covered “Direct Physical Loss”

When a computer “crash” caused serious data loss, Ward General Insurance Services sought compensation from its insurer for the costs of restoring the lost data and for business income lost due to the unavailability of its computer system. The insurer denied most of the claim and litigation ensued. After the trial court ruled in favor of the insurer, Ward appealed; the court of appeal has affirmed the judgment, finding there is no coverage for the loss.

All of the relevant insurance agreements extended coverage only for “direct physical loss” to covered property. There was no evidence that the physical storage media or the computers themselves has sustained any harm, as the appellate court emphasized in a footnote:

From all the evidence submitted, and because plaintiff failed to provide evidence of any mechanical or electrical failure, we proceed on the assumption this ‘crash’ did not involve a mechanical or electrical failure. Plaintiff imprecisely described the ‘crash’ [in written briefs] to have resulted from ‘human error.’ At oral argument, plaintiff further advised that an operator inadvertently pressed the ‘delete’ key on the keyboard. Thus, it appears the ‘crash’ involved in this case resulted either fromm operator error or from a software program not sufficiently robust to recover form anticipated operator error.

Given those facts, the court concluded that what plaintiff had sustained was not a “direct physical loss”:

We fail to see how information, qua information, can be said to have a material existence, be formed out of tangible matter, or be perceptible to the sense of touch. To be sure, information is stored in a physical medium, such as a magnetic disd or tape, or evan as papers inn three-ring binders or a file cabinet, but the information itself remains intangible. Here, the loss suffered by plaintiff was a loss of information, i.e., the sequence of ones and zeros stored by aligning small domains of magnetic material on the computer’s hard drive in a machhine readable manner. Plaintiff did not lose the tangible material of the storage medium. Rather, plaintiff lost the stored information. The sequence of ones and zeros can be altered, rearranged, or erased, without losing or damaging the tangible material of the storage medium.

The decision in Ward General Insurance Services, Inc. v. The Employers Fire Ins. Co. (December 17, 2003) Case No. G031624, can be found at these links in PDF and Word formats.