White SW Computer Law
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In March 1998, the Supreme Court of Victoria handed down its decision in the appeal case Switzerland Insurance Australia Ltd ("SIA") v Dundean Distributors Pty Ltd (“Dundean”) allowing an appeal from the County Court.
Dundean held an insurance policy with SIA, which included coverage for electronic equipment. As a result of a “brown-out” (a drop in voltage), which caused Dundean's computers to shut down and then restart when the brown-out ceased, the hard disk in Dundean's insured computer equipment was corrupted. Corruption does not involve any physical damage to the disk however it may cause the loss of programs and data due to a change in the magnetic alignment of particles on the hard disk. In this case as a result of the corruption, important accountancy data was lost together with some computer programs, which were originally purchased from a software vendor. Unfortunately, Dundean's computer backup procedures had not been in use on the evening in question.
Dundean submitted a claim under its insurance policy for accidental damage, which included a large sum for the cost of retrieving and restoring data that had been lost. SIA maintained that the only relevant loss and damage was damage to the electronic equipment itself (which included the computer programs but not damage to the data stored by the equipment). The relevant clause of the policy stated “We will insure your electronic equipment against Accidental Loss or damage at the situation.” It further stated that “We will at our option repair, replace or pay you the cost of repairs and replacement including..”
The County Court had earlier found that the physical change to the magnetic alignment of particles on the hard disk that had affected the operating system, accountancy program and stored data constituted damage to the whole system and so the cost of the repair and replacement of the software and accounting data was properly recoverable under the policy.
On appeal, the Supreme Court found that the insurance policy did not cover the data which was stored on the hard disks, but did allow Dundean's claim of $1,440.00 for the installation of a new operating system and a new accountancy program which would repair the equipment to its pre-damaged state, but not the stored data. Dundean had claimed over $13,000.00 for the costs incurred in restoring most of the lost data but the Supreme Court found that the stored data could not be considered to be part of the insured equipment. In particular it found that the restoration of information on a hard disk does not easily fall within the concept of either repairing or replacing electrical equipment even if it includes computer programs in accordance with the policy.
[The nature of software and associated stored data being intangible has lead to many legal arguments regarding whether is should be considered a “good” or a “service”, in addition to the points raised in this case. Insurance policies for office contents and for professional indemnity insurance should be carefully examined if any claims in relation to software or stored data are likely to be made. Of course, as would have been the case in this matter, nothing beats a regular and reliable data backup system.]
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