Is 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. …