Hacker Attack: Data Loss Considered Covered Property Under First-Party Policy

The insured, a software development company selling computer programs to the telemarketing industry, suffered considerable damage to vital computer files and databases necessary for the operation of its manufacturing, sales, and administrative systems as a result of the hacker attack, which had been perpetrated by a former technical systems administrator for the insured (who had been fired 21 days earlier). It was later determined that, while still an employee, the perpetrator had surreptitiously installed two hacking programs on the network that permitted him to gain access to the system and carry out the attack after his termination.

After reviewing the policy ' which provided basic property coverage under a 'Special Property Form' and also provided optional computer coverage under a 'Computer and Media Endorsement,' the court found that the attack was a 'Covered Cause of Loss' and also held that the erasure of data from the computer system constituted 'direct physical loss or damage' to the insured's property. See, 2003 WL 1904413 at *3 (Widener, J. concurring). Accordingly, the court found there to be coverage for the insured's lost income (under the 'Business Income' coverage provision), expenses incurred by the insured as a result of the attack (under the 'Extra Expense' coverage provision), and the cost of restoring the erased files and data (under the 'valuable papers and records' coverage extension).