Source code loss excluded from insurance, says court

Run of bad luck plagues Tektrol

A company that lost critical software after it had the misfortune to be hit by both a computer virus and a burglary has been unable to recover its losses after the High Court ruled that exclusions in the firm's insurance policy applied to the claim.

The case concerned Tektrol Limited, a provider of energy saving control devices for industrial motors, and the source code for the software upon which these devices relied.

Tektrol had taken precautions to protect its code. It was held at its business premises on two computers and also as a hard copy that was stored in a pilot case; it was held at a remote site operated by an independent company, Compwise Systems; and it was also stored on the laptop of its Managing Director, Mr Shlaimoun.

But in December 2001, disaster struck. Mr Shlaimoun opened a Christmas ecard and triggered a mass-mailing computer virus. The virus wiped the source code from his laptop. Believing the remote site's computer to be secure, Shlaimoun loaded its backup source code onto his laptop.

A few weeks later, burglars entered Tektrol's business premises and stole the two computers and the hard copy of the source code. Only then was it discovered that the virus had also corrupted the remote site's computer - meaning all copies of the source code were lost.

Tektrol claimed on its insurance for the business interruption caused by the losses. However, the policy excluded, among other things, consequential losses resulting from the erasure, loss, distortion or corruption of information on computer systems. It also excluded consequential loss for theft. And the Honourable Mr Justice Langley found that the exclusions applied to Tektrol's claim.

"In my judgment," he wrote, "whether as a matter of 'instinct' or on the basis of an increased risk of loss, in the context of this policy both the virus and the burglary are properly to be described as causes of the consequential loss (business interruption) claimed by Tektrol."

Copyright © 2004, OUT-LAW.com

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