Let us say, speaking hypothetically, that a grossly negligent individual (who, since we are speaking hypothetically, is named…”Mr. X”) has accidentally uninstalled my favorite computer game, “Sid Meyers Civilization IV” (for which, by the way, I paid good money and patiently waited three whole hypothetical hours to legally download onto my computer).

 Let us further hypothesize that I was twelve hours into a very successful game which has now gone the way of the passenger pigeon. Is the loss of my computer software considered “damage to property” for the purpose of a negligence action, or is it just a form of pure economic loss? “Of course it’s property damage!” I thought to myself, “and a most egregious form at that!”

Yet, in law, as in life, few things are certain. I was compelled to learn more, and so I conducted a brief review of the case law from Canada, the United States and Australia to satisfy my curiosity. What I have learned is that, notwithstanding that we live in the age of the internet, it is far from clear whether we can sue for the loss of electronic data in a negligence action.

a) Canada

I admit, I’m biased – since I live in Canada, I looked here first and was disappointed to see that the issue appears to have received very little judicial attention. In fact, the only case that I was able to locate on point is a decision of the British Columbia Supreme Court from 1995.

In Seaboard Life Insurance Company v. Babich, a defendant truck driver was delivering a load of gravel to a construction site when he accidentally bumped into a wooden hydro pole. The pole suffered only a minor dent, but the impact caused a power outage that affected about 1,500 people and lasted for 90 minutes. One of the companies that lost power was the plaintiff insurance company. Without power, its employees were left idle because they could not access their computer systems. Several insurance policies that were “in process” on the computers when the power went out lost data. The policies had to be checked for discrepancies and remedied the next day.  After the power was restored, several hours of testing and system analysis were required to make the computer systems fully operational.

The insurance company brought an action against the truck driver, seeking to recover the expenses incurred as a result of its employees’ inability to access their computers and do their work. The insurance company argued that the loss of computer data was a kind of property damage rather than just a form of pure economic loss. This is because, generally speaking, pure economic loss cannot be recovered in a tort action unless a plaintiff has also sustained some kind of damage to its property.

I’ll digress for a minute here to illustrate this point. In the case of Seaway Hotels Ltd. v. Consumer Gas Co., (1959), 17 D.L.R. (2d) 292, a defendant caused a power outage when it accidentally severed the electrical cables to the plaintiff’s hotel. The plaintiff suffered economic loss; it lost customer business for room rentals and bar and dining room operations. Fortunately for the plaintiff, food in its refrigerators spoiled as a result of the power outage. Although the spoiled food was only a very tiny portion of the overall loss, the plaintiff was able to recover its economic losses as a result. Had the food in the refrigerators not spoiled, the plaintiff would not have been able to recover any of its losses. This is why, in Seaboard v. Babich, it was essential for the plaintiff insurance company to convince the Court that a loss of computer data was a form of property damage. Yet ultimately the Court was not convinced:

[T]here was no physical injury to any asset of the plaintiff nor was there anything which could be described as direct damage to its property.  Counsel for the plaintiff submits that computer data, being something of value to the plaintiff, can properly be characterized as “property”.  There may be contexts in which computer data will be held, in law, to constitute property.  But for the purposes of distinguishing between pure economic loss and damage to property in the law of damages, I consider that it would simply be productive of confusion to treat the loss of the data as anything other than economic loss.  In this case, the loss was purely economic.  Some employees had to stand by until the computers were operational.  Others had to spend some time checking them and “re-inputting” data.  All, essentially, a matter of increasing the cost of doing business.

This decision is still good law in Canada. Although the Court recognized that damage to property requires some “physical injury”, I was disappointed to see that it did not make any attempt to define these terms. It seemed to me that there should be perhaps be a distinction between lost profits due to system crashes, and the actual corruption or loss of data. With this thought in mind, I turned next to the case law of the United States.

b) United States

In the United States, there appear to be a number of conflicting decisions in both the liability and insurance coverage contexts regarding the issue of whether the loss of computer data or software can be considered “damage to property.”

Rockport Pharmacy Inc. v. Digital Simplistics Inc. 53 F.3d 195 (8th Cir. 1995) is a liability case that was decided the same year as Babich. In Rockport, a plaintiff pharmacy bought a computer system from the defendant. The system malfunctioned, causing the plaintiff to lose data that it had installed on the system. Missouri law, like the Canadian law applied in Babich, prohibited claims in tort for pure economic loss. Notwithstanding, the plaintiff argued that the loss of data was a form of damage to property. The United States Court of Appeals for the Eighth Circuit rejected this argument, concluding that the loss of data represented nothing more than “commercial loss for inadequate value and consequential loss of profits”.

The issue also has come up in the insurance coverage context. For example, in America Online Inc. v. St. Paul Mercury Insurance Co. 207 F.Supp.2d 459 (4th Cir. 2003), AOL sought coverage under a St. Paul CGL policy for claims brought by customers who alleged that Version 5.0 of AOL’s internet browser damaged their computers by causing them to freeze and destroying their functionality. St. Paul denied AOL’s coverage request on the basis that loss of use of customers’ tangible property in the form of computers, computer data, software and systems could not be considered “damage to property” within the meaning of the policy.

The District Court agreed with St. Paul, holding that, while computers themselves are tangible property that can be perceived, identified or valued, this is not true of their data, software and systems. Referring to Black’s Law Dictionary, the Court noted that the common use of the term “physical” means “relating or pertaining to the body, as distinguished from the mind, soul or the emotions….” Similarly, the definition of “physical injury” means “bodily harm or hurt, excluding mental distress, fright, or emotional disturbance.” Although AOL customers alleged that the 5.0 browser damaged their computer data and systems, the Court found that the allegations of injury to the computers were more properly characterized as a loss of use of the computers. Viewed in this light, there was no “physical” damage alleged to the plaintiffs’ computers in the common understanding of the word. There is nothing physical about the loss of use or access to a computer. The customers did not allege physical injury to the body or substance of their computers.

Converse to the court’s decision in AOL, an Arizona federal district judge found property damage to have occurred and insurance coverage to exist in American Guarantee & Liability Insurance Co. v. Ingram Micro Inc., 2000 U.S. Dist. Lexis 7299. There, the policyholder had been sued for damages arising from the destruction of information that had been stored in a computers’ memory. The Court found that the computers had suffered “physical damage” within the meaning of an insurance policy. In so doing, the Court emphasized the increased importance of computers in our lives and the reflection of this level of importance in various state and federal statutes which characterize loss of computer data as physical damage.

I admit that none of these cases were very satisfying to me; it seemed overly simplistic to regard computer data, files and software as intangible information, lacking any physical element in the tort law context. Why should the destruction of a paperback book or a CD be more worthy of compensation in tort than the deletion of that same book or song contained in electronic format? If the negligent destruction of my computer game on a CD can be compensable, why can I not also recover compensation in tort for the negligent destruction of that same game in electronic format? Hypothetically speaking, of course.

c) Australia  

Finally, I came across a very interesting 1998 decision from the Supreme Court of Victoria Court of Appeal. In Switzerland Insurance Australia Ltd. v. Dundean Distributors Pty Ltd., the plaintiffs’ insurance policy covered “accidental damage” to their computer hardware and software. As a result of a power outage, the operating and accounting software became corrupted and accounting information stored on the hard disk was lost. The issue was whether these costs of reloading the software and recovering the accounting information could be considered “damage” under a CGL policy.

The Court defined “damage” as “a physical alteration or change, not necessarily permanent or irreparable, which impairs the value or usefulness of the thing said to have been damaged“, and concluded that there had been a physical alteration in computer system which impaired both its value and usefulness:

The physical alteration was the change in the alignment of the magnetic particles on the hard disk of the computer . . . which had the effect of rendering the system useless in a practical sense until the particles had been realigned.

Thus, according to this Australian Court, the loss or corruption of computer data and software can be considered physical damage since, in a strictly technical sense, it is caused by the physical reconfiguration of magnetic particles within the computer storage medium concerned.

Conclusion

To the extent that a plaintiff is able to bring a claim based on breach of contract or warranties, fraud, intentional misrepresentation, negligent misrepresentation, or violations of consumer-protection acts, a defendant can be held liable with respect to electronic data or software. Yet, as the law currently stands, electronic data may not be protected in the same manner as “tangible” physical assets for the purpose of a negligence action.

One of the main reasons that courts are reluctant to allow recovery for pure economic loss in negligence is because of a concern about exposing a defendant to “liability in an indeterminate amount for an indeterminate time to an indeterminate class”. So who has adopted the best approach? In Babich, for example, the power supply likely affected a large number of computers – what if everyone who had lost computer data had brought an action? But is it really accurate or fair to characterize software as just information and nothing more? At the same time, it seems overly technical and somewhat artificial to base a plaintiff’s right to recover damages on an assessment whether there has been ‘a provable alteration in the configuration of the particles within a computer storage medium.’

To be fair, we are not without options for preventing these accidental data losses. Any individual or business who relies on a computer system for day-to-day operations (and who doesn’t these days!) should: (1) ensure the continued operation of their systems, including the use of an uninterruptible power supply and procedures for backing up all data; and (2) insure their computer systems against loss or damage to intangible electronic data and software programs.

Perhaps the Canadian court was right to regard the accidental loss of computer data as a simple fact of life – something that we must put up with. After all, our society would hardly be well served if people run to their lawyers ever time the power goes out or a computer crashes. Unless, of course, the accidental loss of data pertains to Sid Meyers Civilization IV, in which case, the careless defendant should be held strictly liable to the unfortunate plaintiff for full indemnity.