Misunderstood Property Ins. Issues (Part 2)

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Electronic data processing (EDP) versus property versus boiler & machinery

Concerning commercial property, what are the major shortcomings of the property forms as relates to computers and computer functions? We can call it the PEV factor:
P Property not covered
E Exclusions in the Cause of Loss form
V Valuation Clause

Property not covered
Covered property does not include the following:

Property that is covered under another coverage form of this or any other policy in which it is more specifically described, except for the excess of the amount due (whether you can collect on it or not) from that other insurance.

The cost to research, replace, or restore the information on valuable papers and records, including those which exist on electronic or magnetic media, except as provided in the Coverage Extensions.

Additional coverages are available for valuable papers and records, as well as research:
"You may extend the insurance that applies to Your Business Personal Property to apply to your costs to research, replace or restore the lost information on lost or damaged valuable papers and records, including those which exist on electronic or magnetic media, for which duplicates do not exist. The most we will pay under this Extension is $1,000 at each described premises."

Valuable Papers and Records, including those which exist on electronic or magnetic media (other than prepackaged software programs), can have additional coverage for the cost of blank materials for reproducing the records and labor to transcribe or copy the records if there is a duplicate.

Loss of information versus equipment loss
It is important to note that a Commercial Property Policy covers equipment (including blank tapes) rather than information. The computer equipment and related equipment could be covered under your Business Personal Property. The machinery and equipment is within the definition.

The issue is one of valuation and perils that give rise to EDP as a separate issue. If specific coverage is provided for EDP equipment, coverage should be specifically excluded with the Separation of Coverage form for clarity, penalties, over-insurance, giving causality to coinsurance, and avoiding the "Other Insurance Clause."

Keep the following in mind when writing a separate EDP coverage by endorsement or under separate cover:

Coverage of "media" is generally limited to data in a form usable in data processing operations.

The expense of reconstructing source material which has NOT been converted to a "usable" form is not covered.

The loss of these supportive program documents could create severe loss.

EDP coverage of media is NOT a substitute for Valuable Papers coverage. In addition, accounts receivables, bills, etc. are not covered in their original form, therefore, Accounts Receivables Insurance must also be considered.

Commercial Property Major Causes Of Loss Exclusions
The Special Form does not provide coverage for the many perils that EDP centers are highly susceptible to. Coverage usually excludes the E-TEAM areas (Electrical, Temperature, Erasures, Atmosphere, and Mechanical Breakdown). Earthquakes, floods, and off-premises utility interruptions can be added to that list. With the limited coverage, Extra Expense and Loss of Income coverage is limited, as well.

Boiler & Machinery coverage
Now let's turn our attention to Boiler & Machinery coverage and see how this relates to EDP.

A Covered Cause of Loss is an "accident" to an "object" shown in the Declarations. Many forms no longer refer to these terms specifically, but they still require an "incident" to "equipment/machinery as defined".

Sudden and Accidental breakdown of the "object" or a part of the "object" qualifies as an "accident". At the time the breakdown occurs, it must manifest itself by physical damage to the object that necessitates repair or replacement.

The definition of "object" includes the following:

Equipment shown in the schedule

Comprehensive With production equipment

Comprehensive Without production equipment

The Boiler & Machinery definition of "object" under "comprehensive" is as follows:
"B. "Object" does not mean any:
12. Electronic computer or electronic data processing equipment, unless used to operate one or more insured objects;
13. Media used with any electronic, computer or electronic data processing equipment

F. Definitions
1. "Accident" means a sudden and accidental breakdown of the "object" or part of the "object." At the time the breakdown occurs, it must manifest itself by physical damage to the "object" that necessitates repair or replacement. None of the following is an "accident:"
e. Breakdown of any electronic computer or electronic data processing equipment"

Business Income & Extra Expense CP 00 30
"We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your "operations" during the 'period of restoration.' The suspension must be caused by direct physical loss of or damage to property at the premises described in the Declarations, including personal property in the open (or in a vehicle) within 100 feet, caused by or resulting from any Covered Cause of Loss."

Note that the Business Income & Extra Expense form does not say "Covered Property". A concern is that some property policies limit Business Income & Extra Expense coverage to loss resulting from "covered property." ISO & ISO-based forms do not.

Under a property form that ties time element coverage to damage to "covered property", the insured could be without coverage for an EDP-related time element loss. That is because electronic data processing equipment and media that is insured under a separate EDP policy would be excluded under the property policy by virtue of being "more specifically insured elsewhere." (Source: International Risk Management)

According to Business Income & Extra Expense CP 00 30, "Electronic Media and Records" are:

Electronic data processing, recording, or storage media such as films, tapes, discs, drums, or cells;

Data stored on such media; or

Programming records used for electronic data processing or electronically controlled equipment.

This limitation does not apply to Extra Expense.

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Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.