Analysis of NMA2914, NMA2915, NMA2914A and NMA2915A

About

NMA2914, NMA2915, NMA2914A and NMA2915A are Electronic Data Endorsements that have been widely applied to Property policies. Since these endorsements can significantly reduce cover, it is important that their effects are understood. While NMA2914 and NMA2915 were published by the Non-Marine Association (NMA) on 25/01/01, NMA2914A and NMA2915A were released on 11/3/2015.

While NMA2914, NMA2915, NMA2914A and NMA2915A have been used by insurers (and reinsurers) to avoid exposure to cyber risks, these endorsements only address cyber risk indirectly by including ‘Computer Virus’ as a possible cause of loss of, or damage to, Electronic Data. Instead, these endorsements exclude damage and loss that results from damage to or loss of Electronic Data.

Summary: reductions in cover

1) NMA2914, NMA2915, NMA2914A and NMA2915A exclude loss of or damage to Electronic Data. However, NMA 2914 and NMA 2915, do provide cover for property damage if loss of, or damage to, Electronic Data causes a Fire or Explosion; NMA2914A and NMA2915A do not.

2) NMA2914, NMA2915, NMA2914A and NMA2915A all exclude business interruption loss that results from loss of or Damage to Electronic Data.

3) If a) an insured peril causes loss of or damage to Electronic Data, and b) that loss of or damage to Electronic Data results in subsequent property damage and business interruption, then such subsequent losses are excluded. This outcome demonstrates why insureds should resist the application of NMA2914, NMA2915, NMA2914A and NMA2915A.

For further analysis, please continue reading.

The Exclusions: NMA2914, NMA2915, NMA2914A and NMA2915A

Sub-paragraphs a) of NMA2914 and NMA2915, and Clauses 1.1.1 of NMA2914A and NMA2915A, effectively contain two exclusions:

1) An exclusion on loss of or damage to Electronic Data; and,

2) An exclusion on loss resulting from 1), above (i.e. an exclusion on loss resulting from loss of or damage to Electronic Data).

To the extent that Electronic Data may be considered property, the first exclusion may be regarded as a property exclusion; the second exclusion may then be considered a business interruption exclusion.

Definition of Electronic Data

The definitions of Electronic Data in NMA2914, NMA2915, NMA2914A and NMA2915A are identical and similar to those in many Property policies. If the underlying policy already has such a definition, however, then the definition of Electronic Data in NMA2914, NMA2915, NMA2914A and NMA2915A could be deleted.

Definition of Computer Virus

Since ‘computer virus’ is included as a cause of loss of or damage to Electronic Data, its definition is not material. Nonetheless, the definition of ‘Computer Virus’ in NMA2914, NMA2915, NMA2914A and NMA2915A poses interpretive difficulties –

1) if a computer virus is an unauthorised instruction or code, how is ‘authorisation’ determined? Practically, the vast majority of computer instructions and code will not have been ‘authorised’ by users or system administrators;

2) ‘propagate’ is typically used in the context of organisms being reproduced from parent stock. Here, the term is applied to instructions/code that ‘propagates’ through a computer system or network. But what of instructions/code on a single computer system that carries out a malicious operation but does not ‘propagate’? And what of malicious instructions/code that is transmitted by e-mail between computers that are not networked? Potentially, such instructions/code may not fit the definition of ‘computer virus’ in 1.1.3.

The above items are not exhaustive, though further analysis is beyond the scope of this analysis.

Listed Perils writeback: NMA2914 and NMA2915 only

Unlike NMA2914A and NMA2915A, NMA2914 and NMA2915 do provide cover in sub-clause 1(b) for property damage if:

1) loss of or damage to Electronic Data

causes

2) a Fire or Explosion.

On this basis, NMA2914A and NMA2915A may be regarded as inferior to NMA2914 and NMA2915. However, this sub-clause 1(b) in NMA2914 and NMA2915 only writes back cover for property damage such that business interruption losses remain excluded by sub-clause 1(a). This appears to be an unfair result for insureds – where the intention of the underlying policy is to pay business interruption loss that results from covered damage to property – since this intention is overridden by the endorsement.

What if the peril comes first? Exclusion prevails

While the listed perils writeback in NMA2914 and NMA2915 is beneficial, consider:

1) a peril insured by the policy (including but not limited to Fire or Explosion)

which causes

2) loss of or damage to Electronic Data

which, in turn, causes

3) further damage and business interruption.

The effect of NMA2914, NMA2915, NMA2914A and NMA2915A is that the loss of or damage to Electronic Data, the resultant property damage and the resultant business interruption are all excluded (i.e. 2) and 3), above). This outcome may justifiably be considered unfair for the Insured where the proximate cause of damage and business interruption is an insured peril. Nonetheless, the words ‘regardless of any other cause or event contributing concurrently or in any other sequence to the loss’ in sub-clauses 1(a) of NMA2914 and NMA2915, and sub-clauses 1.1.1 in NMA2914A and NMA2915A, are clearly intended to have this effect.

Basis of Valuation/Settlement: Electronic Data Processing Media Valuation

While NMA2914, NMA2915, NMA2914A and NMA2915A exclude loss of or damage to Electronic Data, the ‘Electronic Data Processing Media Valuation’ clause does provide for the reinstatement of Electronic Data, but this is conditional on covered damage to ‘electronic data processing media’.

For NMA2914, the basis of valuation (or basis of settlement) for ‘electronic data processing media’ is the cost to:

1) repair, replace or restore such media to its prior condition; and,

2) ‘reproduce’ any electronic data contained thereon.

NMA2914A provides the same basis of valuation if a sub-limit is specified in sub-clause 2.1.1.

However, for

1) NMA2914A where a sub-limit is not specified in sub-clause 2.1.1,

2) NMA2915, and

3) NMA2915A,

the basis of valuation for electronic data processing media is:

1) the cost of blank media; and

2) the costs of copying the electronic data from back-ups or originals.

These bases of valuation are inferior to that in NMA2914 because it does not include costs to ‘reproduce’ electronic data. In practice, there may not be any practical difference if the insured has back-ups of the electronic data. But if the insured does not have back-ups, then the term ‘reproduce’ may include activities to re-create, gather or assemble electronic data, because such activities are explicitly excluded in NMA2914A, NMA2915 and NMA2915A.

Sub-Limits

To summarise,

1) NMA2914 requires the sub-limit to be specified in the Risk Details;

2) NMA2915 and NMA2915A do not have sub-limits; and,

NMA2914A provides for a sub-limit to be entered in sub-clause 2.1.1, but sub-clause 2.1.2 addresses cases where no sub-limit is entered.

For NMA2914A, the absence of a sub-limit from sub-clause 2.1.1 is beneficial from an insured’s perspective for the reinstatement of the electronic data processing media, but this benefit may be outweighed by the detriment of the inferior basis of valuation.

Value of Electronic Data: none

Finally, NMA2914, NMA2915, NMA2914A and NMA2915A clarify that the policy does not insure the value of Electronic Data. While Electronic Data may be property for the purposes of the underlying policy, the value of such Electronic Data is an intangible asset and represents intellectual property. Intangible assets and intellectual property are not typically covered by property policies.