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If you lose your data will you be compensated?

02 Sep 2010

For a business to lose all its data 40 years ago, it would have required an office to burn down and all of the paper records to go up in smoke. Nowadays most businesses rely on electronic storage of data, which means that it is a lot easier to lose it; a fire is not required. Instead, viruses, electrical failure, or a negligent IT contractor can do the job for you.

So when it happens, where do you turn? If it is the fault of your IT contractor or the electricity provider, then it is easy to think that you will hold them responsible in a court of law. However, that may not be possible, even if one of them is negligent. That’s because they may well have terms of trade which exclude liability for consequential or indirect loss. Let me explain what that means.

If your office burns down, your direct loss is the damage to your office and its equipment. Indirect loss would include things like the cost to you of business interruption, loss of clients whilst you stop trading, etc. Consequential loss often exceeds direct loss, which is why terms of trade normally exclude it.

So where does that leave you?

The short answer is: out of pocket unless you have insurance to cover it. Many businesses will have material damage policies (ie: the type which covers you if your office goes up in smoke). However, electrical failure (ie: something IT-related) will not necessarily be covered by that policy unless you have included it as a specific add-on. The cover will include the cost of data reconstruction, if that is possible. The additional premium is minimal, but you need to check that you have it.

Even if your IT contractor or electricity provider doesn’t exclude liability for consequential loss, insurance is still advisable because your insurer will still pay you out and then take on the burden of recovering the loss from the other party or their insurer. It is better for your insurer to get involved in litigation, so you can get on with business.

Two main priorities

First, check your business insurance to make sure you are adequately covered for data loss. Second, check your IT contractor’s terms of business to see whether they exclude liability for consequential loss. It may also be worth asking them whether they are insured for negligent actions on their part which cause you data loss. Reputable IT contractors will have this insurance.

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