Insurer wins over exclusions

Tektrol v International Insurance Company of Hanover and another (Queen's Bench Division - 3 November 2004)

Tektrol took many precautions to protect its energy-saving computer source code, including back-ups on two computers; a separate hard copy; an additional copy at a remote site operated by an independent company; and storage on the managing director's laptop.

The managing director received an e-mail with a Christmas e-card attachment that, once opened, triggered a computer virus. It erased the source code on his laptop and subsequently from the remote site after a back-up upload was attempted. Tektrol's offices were later raided by burglars, who stole both of the computers and the remaining hard copy of the source code.

Tektrol claimed on its insurance for business interruption caused by the losses. However, the policy excluded i) consequential losses resulting from the erasure, loss, distortion or corruption of information on computer systems caused "deliberately by ... malicious persons" and ii) other such losses unless resulting from a 'defined peril'. The definition of defined peril included malicious persons.

The issue was that there were two independent causes of the 'loss' of the source code, neither of which would alone have caused an interruption of business. If the virus had hit and there had been no burglary the company would have been able to restore the code; had the burglary occurred and no virus destroyed the remaining copies, again the code would have been available.

In the circumstances, the court found against Tektrol, reasoning that either incident on its own would not have caused business interruption and if either incident was excluded from coverage Tektrol could not recover damages.

As it turned out, the court decided that the erasure of the code from the laptop and at the remote site were excluded because they were caused deliberately by those malicious persons who had sent the virus and, therefore, this fell within exclusion i).

It also determined that the loss of the hard copy of the code and the two computers in the burglary fell within exclusion ii) because the burglary did not result from a defined peril as burglars were not malicious persons; therefore, both incidents were excluded from coverage.

COMMENT: Where two separate events cause loss and one is excluded from cover, insurers may be exempted from liability to indemnify. - Alexander Traill, BLM London.

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