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Loss of use of computer server is not tangible physical loss (US)


The insured claimed that the cost it incurred in migrating its customer data to other servers when its cloud service provider went insolvent entitled it to claim damages under a property insurance policy.  A court rejected the claim on the grounds that the losses incurred were not damages resulting from “tangible, physical loss” but were economic losses which were not covered.

The policy covered “direct physical loss of or physical damage to property”, it excluded “loss of use” but an endorsement extended the cover to “direct physical loss of or physical damage to computer equipment and the costs to research, replace or restore physically lost or physically damaged electronic data and software”.  The endorsement extended “direct physical loss or physical damage”, to include “electromagnetic injury caused by … power failure”.

No physical process damaged the servers.  The precipitating event was written notice that the servers would be essentially unplugged in several weeks’ time.  The claimant never lost any data.  The data was successfully transferred to alternative servers before there was any interruption in service.  “Direct physical loss” means “an immediate tangible deprivation of property”.  The servers suffered no tangible, material, physical alteration.  In its conclusion, the court said that the insured contracted with a service provider that eventually went out of business and was now attempting to turn that failed contract into an insurance claim.  The court said: “Sometimes a business deal goes bad.  The insurance coverage at issue was not intended as a substitute for a breach of contract.

Computer Programming Unlimited, Inc. v Hartford Casualty Insurance Company Case No. 3:21-cv-2350 in the US District Court for the Northern District of Ohio


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