Policies offer coverage for technology-related losses

by Paul Schreiber

SBJ Contributing Writer

Businesses using computers in their operations can insure themselves against loss in a variety of ways.

Standard business property insurance contracts cover both hardware and software to a limited degree. Under these plans, all associated hardware such as the central processing unit, monitor, keyboard, cable, modem and jacks are covered as ordinary contents.

These items are protected against such claims as fire and water damage and theft. Software or media protection is typically restricted to a set dollar amount as defined by the policy.

Under these plans, hardware is covered "almost adequately" for most common problems, said Patrick Griffin, commercial insurance specialist for Man-Morris Insurors. For software, he said the protection is enough only if the company has a "very minimal investment in software. Most forms (policies) limit it to $1,000 to $2,000 and for reproduction only."

Standard property insurance policies usually contain three exceptions as to "peril" for claim reimbursement on hardware, according to Randy Hulett, sales team leader for Sentry Insurance. These are an "off-premises power failure," an "artificially generated electrical current" and "mechanical breakdown."

The first two exceptions could occur if unforeseen electrical energy enters the place of business and damages the hardware. Catalysts for this might be a lightning strike to a nearby transformer or electrical arcing caused by a swinging or moving power pole. The last exception occurs when there's a sudden and accidental breakdown of the equipment itself.

One way around the obstacles to more inclusive computer insurance protection is to tailor an electronic data processing (EDP) policy, said Jack Munsey, account executive for Ollis & Company. These plans cover the three perils and extend to equipment such as "telephone systems, voice-mail and all that is computerized," Munsey said.

Coverage can also include transit coverage, where an off-premises item like a laptop computer can be insured also. "Most property policies only cover the property while it's at the insured location," he added.

EDP policies offer increased-limit protection for software. This is particularly helpful to businesses that use specific proprietary software for their operations. In these cases, the typical $2,000 cap limit may prove insufficient if a programmer is required to rebuild or modify a program.

Under these policies, the business selects "whatever limit it would need to recreate that particular software program," Hulett said.

Loss of income becuase of computer problems can also be insured against with an EDP policy. Business interruption coverage provides reimbursement to a company when a computer mishap reduces or elimiates revenue.

A set of calculations establishes gross profit, and from this, various expenses are deducted, such as cost of goods sold, operating expenses, payroll and note payments. The business then receives a dollar amount specific to its own needs in the event of computer-related income loss. It's like disability insurance for a business, Munsey said.

Many businesses are concerned with potential loss resulting from the year 2000 issue.

"We're seeing more companies put specific Y2K exclusions on policies," Griffin said.

This type of insurance is "very expensive to buy" and is "usually handled by some sort of Lloyds company," Hulett added. High premiums for this insurance occur because two key concepts that trigger coverage fortuitous loss and direct physical loss aren't affected by the year 2000 rollover, Munsey said. Accidental loss doesn't apply because the event is foreseen, and physical loss simply won't occur.

"Not all risk can be transferred to an insurance company," Griffin said. [[In-content Ad]]