By Lon Berk, Partner, Hunton & Williams
In his article, "CBI for the Cloud," appearing in the Nov./Dec. 2011 issue of Coverage, Lon Berk of Hunton & Williams observes that the frequency of business cloud computing is expected to increase. The article describes cloud computing and its many advantages to businesses as well as its potential disadvantages. A significant risk is business interruption in the cloud. Examples of such business interruptions are described demonstrating the importance that companies understand whether the risk of such interruptions is covered under their insurance programs. The article then identifies the most promising coverage for losses caused by business interruption in the cloud-contingent business interruption ("CBI") insurance coverage. The article describes the nature and scope of CBI coverage, including the range of "dependent locations" to an insured company. CBI coverage is only triggered when a dependent location sustains "physical loss or damage."
The article discusses some courts' findings that damage to software or data does not constitute "direct physical loss." Accordingly, insurers have maintained that CBI coverage does not extend to interruptions in cloud computing. The basis for this contention is that data or software is not tangible or physical and thus cannot cause direct physical loss. The article argues that this contention is incorrect. To establish this, the article first provides a general description of what a computer is and does and points out that corrections made to restore computer data or functionality constitute physical repairs. Court decisions that do not distinguish between physical loss and data loss are analyzed.
The article notes that perhaps in response to the force of such arguments, insurers have both added policy exclusions purporting to restrict the coverage available for data loss and have offered separate policies to cover losses due to data and software corruption. The article contends that the exclusion should not apply to the vast majority of incidents that might result in interruption of computational services provided by cloud vendors. The article concludes that insured's facing such losses should look to their legacy CBI policies as well as any new specialized policies they may have for coverage.
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