|Chaim Yudkowsky , CPA, is the director of management consulting services at Grabush, Newman & Co., PA, in Baltimore. His e-mail address is firstname.lastname@example.org .|
I s your computer system adequately insured? Your knee-jerk response probably is, "Of course. We're fully insured." But don't be so sure. If your organization has the kind of coverage that most CPA firms and businesses have, there's a good chance small, but significant, gaps exist in your coverage, and the point of this article is to help you identify those gaps and close them.
When shopping for insurance, most people depend on the advice of insurance professionals on what and how much to buy. However, in many cases we rarely know how much coverage we really need until we suffer a loss and file a claim. Further complicating an assessment of coverage needs is the fact that we are dealing with such a new technology and its applications are still evolving.
For example, one of my associates once left his personal laptop computer in his car while visiting a client. His car was stolen from the parking lot with the computer inside. To make matters worse, the computer carrying case contained all the data backups. The thieves totaled the car and the police never recovered the laptop. After much bickering with the insurer of his homeowner's policy, he collected less than $.30 on the dollar of the replacement cost of the computer.
The real cost of computer systems—whether desktops in the office or mobile laptops—and the business risks associated with them generally exceed or are not addressed in conventional business insurance policies. Some of the risks not covered by conventional insurance include:
- Viruses. This menace can inflict very severe financial damage.
- Electrical surges. The electric utilities that provide power to the office sometimes experience fluctuations on their power lines that can cripple equipment and corrupt data.
- Lightning. Electrical power lines provide a natural ground for lightning strikes; if a power line is struck, both equipment and data it contains can be destroyed.
- Sewer backup and flooding. One evening, shortly after my firm moved into its present building, the sprinkler system unexpectedly went off. Although we were fortunate that most of the damage was to the carpeting, and no computers were damaged, we learned an important lesson. Water—from natural disaster flooding or from sprinkler breakdown—can knock out electrical equipment.
- Auxiliary equipment. Today's computer systems integrate with auxiliary equipment that standard policies usually don't cover. This includes telephone and fax systems that interface with the computer and industry-specific gear, such as dictation systems in a medical organization, intraoral cameras in a dental office and cash registers in a retail outlet.
In each of the above cases, insurance can be extended to cover such risks.
How much coverage is adequate? The best way to answer that question is with another question: What would it cost to replace your computer system—both temporarily and permanently?
When assessing the amount of coverage, the cost of replacing technology or data is frequently undervalued. I know of a restaurant that had developed a proprietary point-of-sale computer system to take and transmit orders to the kitchen; it integrated with a backoffice accounting program. The restaurant had a computer policy with $50,000 in coverage. A catastrophe occurred, destroying the system; the replacement cost was $125,000 because the system was proprietary with only one vendor for the hardware.
Standard homeowners' policies generally do not offer adequate protection for business and sometimes even for home computers. A client had a fire in his home that destroyed $12,000 worth of hardware and $3,500 of software. The homeowners' policy, with a rider, was limited to $3,000 coverage for damage to all perils—including fire. These policies, without special riders, generally do not cover business computers and the related possible business interruptions.
Because computer hardware and software are upgraded frequently, be sure that your policies cover all the new systems. Equally important: Be sure you're not paying for coverage of systems that have been replaced or retired. And remember, equipment replacement value rapidly changes.
In businesses where equipment is moved from one plant or division to another because of closings or other circumstances, managers often forget to adjust the insurance accordingly. Remember, it's the insured's responsibility to keep the coverage schedule up-to-date—not the insurance agent's.
Here are some specific coverages to consider. To help you communicate your needs to your insurance agent, the words in italics are insurance policy terminology.
- Extra expense: Pays for expenses in excess of ordinary business expenses that are needed to continue operations after and as a result of covered loss to covered property . This would include temporarily obtaining space and equipment while replacing or repairing the damaged systems.
- Mysterious disappearance/theft: Essential for portable computer equipment. In the event of a loss, it should be supported by a police report. An example of such a loss: accidentally leaving a laptop in a taxi and being unable to retrieve it.
- Loss of income: This is the business interruption as a result of computer system failure or destruction component of computer insurance policies. While you and your insurance professional determine the amount of this coverage, policies present another variable—time. Policies may limit the length of time this type of coverage will apply as a result of physical loss of or damage to electronic media and records .
- Valuable papers and records—cost of research: Unless specified otherwise in a policy, coverage for magnetic media is limited to the value of replacement of the physical media, not the value of the stored data. However, you can add coverage to include research and replacement cost of lost information when no duplicates exist.
- Utility interruption: This is the coverage for electrical surges and usually includes lightning that enters through electrical lines and subsequently damages computer equipment. Currently, policies limit coverage for surges due to power fluctuations within a specified distance from the premises. Lightning, however, is generally still covered with no distance limitation. Be aware, however, that to confirm a lightening strike claim, insurers generally check with a national registry of lightning strikes and/or with the electric utility.
- Programming errors exclusion: Most policies exclude computer programming errors. Thus, you should consider asking program vendors for a certificate of insurance to confirm they have an error-and-omissions policy.
- Mobile equipment: The typical computer policy specifically excludes data processing equipment installed in motor vehicles licensed for highway use . With the expanded use of wireless terminal technologies used in delivery trucks and other motor vehicles, this coverage may be appropriate.
- Temporary location: Policies do typically cover property in transit or off premises at a temporary location . The coverage is sometimes subject to interpretation with portables and company-owned desktop computers permanently located in an employee's home office. These items may be described as permanently temporary . Also, floater coverage may be advisable in that case.
What You Should Do
Steps you should take for your business coverage:
- Review your policies periodically to be sure that they cover your changing needs.
- Ask—and confirm understandings of—what your policies will and will not cover.
- Periodically update the equipment schedule, the location schedule and the coverages to reflect the changing risks that may arise.
- Develop a disaster preparedness and recovery plan.
Additional steps you should take for a client:
- Recommend any changes to the policy to meet the client's risk needs.
- Periodically check that the client is updating the equipment schedule, the location schedule and the coverages to reflect the changing risks that may arise.
- Address computer insurance issues in the management letter prepared at the end of an accounting engagement.
Despite the inherent value of adequate computer coverage, insurance should not substitute for prudent business procedures. Offsite backup of all of your data and programs is one such business procedure. This will reduce the likelihood of a problem and, if a problem occurs, will limit its damage. And make sure you use surge protectors on all your computer equipment.
Even the smallest businesses today are relying more and more on their technology systems. As such, they need to be protected and adequately insured.