E-Commerce Insurance: Does Bricks and Mortar Insurance Work for Dot Coms?

How are you doing business differently today than you were last year? Do your insurance policies protect you for those new methods of running your business?

Whether you are a Dot Com company or merely doing business in the Internet age, you should be asking questions about your insurance program. The following comments will provide some basic issues to think about.

It is readily apparent to anyone paying attention that business is conducted differently today that it was ten years ago, five years ago or even one year ago. The Internet has transformed the processes radically, opening new channels of distribution and causing some of the operators of the old channels to feel like buggy whip distributors must have felt like after the Model T became popular.

Virtually all companies utilize the Internet to some degree. The most common usage is:

Having a Website as an access point to the business. Actively conducting e-commerce. Functioning as an ISP, ASP, or portal.

Insurance policy wording has traditionally been slow to change, many times only changing due to the even slower legal system. It is not surprising that the language in policies has not kept up with the Internet explosion. The things we fear (and therefore insure) are changing, and it is important that the insurance coverage respond appropriately.

There have been some new and useful insurance and risk management products, which have been introduced recently which should be considered. They respond to:

First party claims – damage or injury to your property

• One fairly simple, but frequently overlooked exposure is coverage for goods that you ship overseas. Most policies will only cover domestic or US shipments, unless the policy is modified to include international shipments, or a specific policy is taken out.
• Computer fraud coverage is also available generally from the same insurers providing your employee dishonesty coverage. This insurance provides protection against theft by transfer of property or money/securities by a third party generally outside of your premises to somewhere else (generally their account!).

Third party claims – damage or injury to someone else or their property

• One of the least noticeable, but possibly most important is the definition of the covered territory. The Internet allows easy access to the global market. Virtually all of the policies define the coverage to apply only to claims brought in the US. This becomes a much bigger issue if your company is selling products all over the world. Either the definition must be amended to allow suits to be filed outside the US, or a separate foreign liability policy should be purchased.

Many companies have substantial databases on their networks, which include sensitive or private data of others. Examples of firms that should consider this exposure most seriously are:

• Legal, banking and accounting firms - ISPs - Healthcare Providers - Anyone else who does business over the Internet

Should an outside party gain access to the network, serious consequences could result. Several world class insurers now offer insurance coverages to protect against such unauthorized access, breach of security and other consequences. For example, Network Risk Management Services, based in Atlanta, GA, distributes a policy which includes both risk assessment and insurance in this critical area. Your insurance broker can access the quotations from them on your behalf.

One of the problems with the insurance needs of new business model companies whom a short of bricks and mortar is that the existing policies do not specifically refer to the principal exposures. Coverage is typically found by lack of exclusions While on the surface this may be of comfort, most business owners would rather see a specific grant of coverage.

AIG has done just that – developed policies for three levels of Internet users and provided affirmative grants of coverage applicable to each of them:

• -Companies “doing business” on the Internet by virtue of Having a Website
• Companies with significant “etailing” operations (click and mortar companies) - ISPs, portals, hosts, and browsers.

The base coverages are the same, but as the operations of the firms expand, so do the companies. For example, for the click and mortar companies, the coverage can include claims arising out of unauthorized access to customers’ credit card information.

AIG will also provide suggested procedures and disclaimers for those firms operating chat rooms. “Open” chatrooms and digital certificate issuance firms still present substantial risk to the insurers and coverage forms are still being developed.

The insurance industry is adapting to the new age, but until case law and/or competition require it coverage forms will lag behind the needs of the buyer. The best recommendation to be made is to have a clear idea of what outcomes are of the most concern to the operation of your business and then to make sure that your insurance professional is providing the coverage you need.

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Last Modified October 11, 2005