Yes this is a problem sometimes

Please do not mix things. There are two separate issues:
1. - the security of the server that your client is talking to.
2. - the security of the software running on your computer.

1. It is completely impossible for an Electrum server to steal your coins, because transactions are signed locally. The only way to steal your coins would be to compromise your own computer.
2. Someone gaining access to the server that distributes the software could insert malicious code in the software that is being distributed. (the tar.gz or .zip file, or the executable). Such an attack would only affect the users who downloaded and installed software between the time of the attack and the time where the attack is discovered. This kind of attack is possible for any type of bitcoin client (even the official one). It is mitigated by scrutiny from the community.

Please understand that the situation is very different if you use a web wallet such as blockchain.info. If you use a web wallet, points 1 and 2 are not distinct; an attacker who gains control of the server will modify the javascript code that is sent by the server. The danger is amplified by the fact that your web browser will update the javascript code running on your computer everytime you use the service, and not just when you decide to upgrade your client. Thus, if the server is compromised, then the attacker can quickly replace the javascript code running in the web browser of all clients, and do whatever they want.

Yes, Eligius' better than the traditional pool, on that point.

Hopefully, this doesn't encourage other VPS/service/host providers to decline service to any potential future bitcoin sites. If slush/bitcoinica successfully convice Linode to compensate them in some significant way, then the lesson for other hosts is that "bitcoin losses will hurt or kill us". In any event, I bet every major host is double checking their TOS and reminding their clientele that they don't cover "imaginary webzone dollar" losses.

If facebook's employee administrator panel was hacked into and someone stole facebook credits from users, would they say "fuck you it's imaginary money"?

I hope you're being sarcastic and not an uneducated twat who has never heard of digital commodities, intellectual properties and suing for damages.

Don't see how Linode can get out of compensating (at least in the form of 5 free years of hosting or something) without implying "we're just not a secure-enough service for you to put sensitive data on. Don't put data on our servers unless you're hosting non-interactive web-pages with cute little kittens, or protect your data like Fort Knox because there's no telling when it'll be compromised, either by our staff or our irresponsibility/incompetence."

You are trying to preach a libertarian ideal without accepting that the US legal system is not libertarian. Bring it back down to earth now.

In a court of law, what Linode did was actionable. That is the only point that needs be made.

P.S. I don't think you're a twat and I typically agree with you, but this point smells of agenda.

A court of law and physical reality don't always agree, I'll give you that. I'm hopeful that all parties involved will work together to determine what can be done to mitigate the losses, but this is an unfortunate collision between the purity of mathematical and physical reality and legal opinion, (assuming it even gets that far), and opinion will never trump reality.

You can sacrifice them to please internet gods.