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Hacker Attack: Data Loss Considered Covered Property Under First-Party Policy

By Robert E. Johnston

The U.S. Court of Appeals for the 4th Circuit has recently weighed in on the applicability of standard-form, first-party property policies to the loss of computer data, finding such data loss resulting from a hacker attack by a former employee of the insured to be covered property damage. NMS Services, Inc. v. The Hartford, No. 01-2491, 2003 WL 1904413 (4th Cir., April 21, 2003)

The insured, a software development company selling computer programs to the telemarketing industry, suffered considerable damage to vital computer files and databases necessary for the operation of its manufacturing, sales, and administrative systems as a result of the hacker attack, which had been perpetrated by a former technical systems administrator for the insured (who had been fired 21 days earlier). It was later determined that, while still an employee, the perpetrator had surreptitiously installed two hacking programs on the network that permitted him to gain access to the system and carry out the attack after his termination.

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