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by John Roemer

An Arizona federal judge's little-noticed decision in an insurance

dispute redefines the word "property" to include computer programming.

The decision means that existing property and liability insurance

policies are now subject to payout when data is lost, say experts, and

this could change the way e-commerce protects itself against

information losses.

"It's a huge precedent," says Attorney Larry Eisenstein, an insurance

coverage expert at the Washington, D.C., law firm Swidler Berlin

Shereff Friedman, who is not involved in the dispute. "People in the

industry have been waiting on this decision to find out what property

means in the Internet era." He added, "There's no question the

industry will fight this tooth and nail." Insurance companies until

now have told customers they must buy a special e-commerce policy to

cover data loss.

The case arose on December 22, 1998, when a short-circuit cut power to

three mainframe computers at the Tucson, Ariz., data center handling

the global operations of Ingram Micro, a major distributor of

information technology products based in Santa Ana, Calif. The loss of

electricity caused all programming information to disappear from the

RAM, including custom configurations that took up to eight hours to be

reset. Ingram Micro says the outage cost it $3 million in business.

Ingram claimed the loss was covered by its standard business

interruption policy that insures against "direct physical loss or

damage from any cause." The insurer, American Guarantee & Liability, a

unit of Zurich U.S. Financial Services of Schaumburg, Ill., argued

that the computers' capability to perform their intended functions

remained intact, as demonstrated when the restored system successfully

went back on line. Thus, American Guarantee stated that there was no

physical damage and no insurance coverage.

Senior U.S. District Judge Alfredo Marquez disagreed. Though there was

no case to use as a direct precedent, the judge pointed out that the

federal computer fraud statute defines damage as "any impairment to

the integrity or availability of data, a program, a system, or

information." In this case, criminal law is relevant to the

insurance-coverage realm, he wrote. "At a time which computer

technology dominates our professional as well as personal lives, the

Court must side with Ingram's broader definition of 'physical

damage,'" he wrote. The insurance company's definition, he said, is

"archaic."

American Guarantee will appeal the case, which could make matters

worse for insurance companies. Ingram Micro Attorney Mark K. Slater,

an intellectual property and technology partner at the San Francisco

law firm Sonnenschein Nath & Rosenthal, admittedly not the most

objective voice, says that if the justices at the 9th U.S. Circuit

Court of Appeals uphold Judge Marquez's decision, it will become

official case law for the entire western part of the country, giving

it even more weight than it has now. "The next time there's a hacker

attack or a data loss from a virus," Slater says, "Web companies will

be looking to this case for precedent."