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- My firm is just starting up. What basic
coverages do I need at the beginning?
- I have a Commercial General Liability
insurance policy. I understand that it covers me for personal injury and advertising
injury liability. Why might I also need professional, multimedia and other specialty
types of insurance?
- What are my liability
exposures to loss on the internet?
- Should I talk to an
attorney regarding my exposures to loss?
- What off-the-shelf products
are available to me? What coverage features do they typically offer?
- What types of emerging tech operations
and companies can benefit from electronics errors and omissions coverage?
1. My firm is
just starting up. What basic coverages do I need at the beginning?
A. There are two ways to tackle
this question: (1) a product driven (standard policies) approach and (2) a risk management
approach. Initial insurance buying decisions are usually product driven and are
triggered by demands from landlords, banks and equipment leasing companies. As soon
as you gain familiarity with the basic insurance products, it is best to adopt the risk
management approach. This allows you to identify what your exposures to risk are and
to decide what role insurance and other mechanisms can play in: (1) retaining, (2)
eliminating or avoiding, (3) reducing or (4) transferring your risks.
Emerging Tech Insurance tries to foster
the development of a risk management function in your firm. This is not a separate
department, but instead it consists of risk management awareness and thinking in all key
executives with overall coordination by a CEO and/or CFO. We rarely work with just
one person at a firm; the norm is two to four.
Typically, you will begin with up to
four policies to deal with risks that are not economical or practical to retain:
1.
Property Insurance, with special attention to:
Property on your premises
Property off your premises (example: lap tops, projectors, trade show exhibits)
Property in transit (incoming or
outgoing)
Tangible Property (desks, hardware, phone systems)
"Intangible" property (especially software and products in digital form under
development)
Property losses that are not caused by
physical damage--extortion, theft of your trade secrets, infringement on your patents,
trademarks and copyrights.
2.
Commercial General Liability Insurance, with special attention to:
Products Liability/Completed Operations coverages
Personal Injury and Advertising Injury coverage
Employee Benefits Liability (not be
confused with Employment Practices Liability--see below)
Policy territory--preferably world-wide,
just like the internet.
Please also see FAQ #2.
3.
Automobile Liability
Whether or not you have a company
vehicle that requires familiar coverages such as liability, comprehensive and collision,
you need liability coverage for your firm for employees driving their own vehicles, and
for incidental short-term rental of vehicles. The cost is minimal and protects your
firm after the employees personal automobile limits are exhausted.
4.
Workers Compensation
Employees can be injured both in the
office and while out on company business. Workers Compensation provides the coverage
defined and required in Workers Compensation laws regarding medical payments and lost time
payments for injured employees. Employers with Workers Compensation can find
themselves in very difficult legal positions after an employee reports an on the job
injury, real or alleged.
Although not part of Workers
Compensation, you can purchase policies to provide Travel Accident insurance for employees
who travel extensively and Kidnap and Ransom insurance for employees who travel in
difficult areas.
You should also carefully consider the
following areas and make an informed decision to retain these risks or transfer them to an
insurance carrier.
5.
Employment Practices Liability ("EPL")
Many emerging technology workers are
well-educated, articulate and driven. Disagreements over remuneration plans,
promotions, job assignments, internal restructuring, etc. can easily lead to allegations
of discrimination, harassment and other defects in your human resources practices.
There are a variety of Employment Practices Liability forms available for your
consideration and purchase.
6.
Loss of Income
Generally considered a form of property
insurance, this coverage protects you for loss of income arising from damages to your
premises. Coverage is also available for contingent business interruption such as
loss of services from a telecommunications provider. In your early phases, if you
choose to transfer this risk, you will want to be sure that the policy will cover your
ongoing expenses without adjusting for a lack of actual revenue.
7.
Crime/Employee Dishonesty
Careful attention to the exact wording
of the various crime policies on the market is important. At a minimum, you will
want coverage for theft of money or services belonging to you or to your clients, by
employees , including use of a computer, including misuse of credit cards or other means,
whether they are on your premises or not.
If there is a significant danger of
theft of clients' credit card, customer and other proprietary information, you need to
consider purchase of specialty coverages described in FAQ #5.
8.
Professional Liability, Media Liability and Other Specialty Policies
Please see the remaining FAQ's on this
page.
9.
Directors and Officers Coverage
Directors and officers make decisions
and set, monitor and implement a wide variety of corporate policies that impact their
firm's stockholders, vendors, clients, employees and the public at large.
Consequently they are subject to a substantial risk of personal liability for the costs of
settlements, judgements and defense associated with lawsuits and other legal proceedings
brought against them. Directors and Officers policies can transfer a significant
portion of this risk to an insurance carrier.
The drivers behind purchasing this
coverage are usually outside investors, outside directors and imminent plans to IPO.
Even without these factors, you should still investigate purchase of this coverage.
Currently, about a dozen firms write this coverage for privately-held firms.
We market to them all, ask for appropriate additional coverages and provide you with a
detailed comparison of the resulting offers for evaluation.
You can include Employment Practices
Liability on a Directors and Officers policy. This should not be considered an
automatic decision because it can cause certain difficulties regarding adequacy of
limits. Under certain circumstances, especially under older forms, all
available limits could go to EPL actions leaving nothing for the directors and officers.
10.
Umbrella Coverage
An umbrella policy will provide higher
limits of liability over your Workers Compensation Employer's Liability, Commercial
General Liability, and Automobile Liability policies. Sometimes you can arrange to
have it cover over a professional liability policy also (otherwise, excess limits are
available separately for such policies). Umbrella coverage for emerging tech
companies is often very inexpensive.
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2.
I have a Commercial General Liability insurance policy. I understand that it covers me for
personal injury and advertising injury liability. Why do I also need professional
liability insurance?
A. Commercial general liability insurance was not designed for many
of the activities in which emerging tech companies find themselves engaged today.
First, standard
policy territories are generally restricted to the United States and Canada. They are not
worldwide like typical internet exposure. Given the current state of U.S. and
international law, it is often impossible to predict in which jurisdiction you might be
sued for alleged activities in another jurisdiction.
Second,
advertising liability in a Commercial General Liability insurance policy covers you only:
- when you are
actually in the course of advertising, and
- while you are
advertising your own goods and services.
Note that there
is no coverage for actions that occur while advertising goods and services of others.
For example, an internet access provider might become engaged in litigation because one of
its clients is alleged to have posted on the internet the copyrighted materials,
trademarks, etc. of a third party.
Third, commercial
general liability policies exclude advertising injury coverage for companies "in the
business of advertising, broadcasting, publishing or telecasting." An insurance
company could argue that certain of its policyholders’ internet activities are
tantamount being "in the business of advertising, broadcasting, publishing or
telecasting" and proceed to deny coverage. Internet access providers and web page
developers would be especially vulnerable to this type of action.
Leaving aside the
advertising injury and personal injury, coverage in a commercial general liability policy
must be triggered by bodily injury or actual damage to tangible
property.
For example, the
following actions by a software consultant would not be covered by a standard Commercial
General Liability policy:
- Accidental
destruction of customer’s data;
- Failure to design
a system that performed adequately;
- Disclosure of
confidential information;
- Copyright and
trademark violations, defamation and invasion of privacy;
- Theft, misuse and
misappropriation of proprietary information, credit card numbers, medical records, etc.
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3.
What are my liability exposures to loss on the internet?
A. Your principal exposure
arises from the fact that you can be sued by anyone for any purpose. In a time of
uncertain and developing law, suits against you can be motivated by valid commercial
disputes, strategic commercial advantage or delay, mistaken executive judgement, mistaken
legal advice or simple ill will. Undoubtedly, the uncertain state of the law is viewed as
a profit opportunity by some. Mass torts are particularly attractive to attorneys today,
and a decision in a mass tort case could affect you in unforeseen ways. In such an
unpredictable environment, it is important to note that your commercial general liability
carrier has the right and duty to defend (or settle) all covered suits seeking damages whether they are meritorious or false
and groundless.
It is not
possible to list or even predict all of a firm’s exposures arising from its internet
activities. The law in all jurisdictions is struggling to keep up with the types of
disputes generated by rapidly changing technological and commercial environments.
Some major
concerns are:
Copyright infringement. In the U.S., courts are struggling to
utilize traditional doctrines of direct and contributory infringement to settle a wave of
new cases. Direct infringement can involve the intentional or unintentional
violation of a copyright. In partial contrast, contributory infringement must involve
knowledge of the activity and the possibility of gain from the activity. Internet access
providers subject to a suit would therefore be intent on arguing that their activities in
distributing a client’s copyright infringement constituted only contributory
infringement, of which they were unaware. Thus, liability could be avoided. Nevertheless,
opposing parties could also argue that the internet access provider was vicariously
liable. Other, more exotic legal doctrines are also being employed in such cases.
Decisions to date are conflicting and have not delineated key issues sufficiently to
provide much comfort to business owners.
Trademark violations. The distinctions in the current law in the
U.S. are similar to those for copyright infringement, including concepts of direct and
contributory infringement. Trademark and copyright issues can involve disputes over such
vague concepts as "look and feel" of a piece of software or a web site.
Negligent misstatement in online information. Again, there can be
arguments on both sides of cases regarding the negligence of the originator of the
information and the negligence of the string of purveyors of the information.
Patent infringement. Business processes are increasingly becoming
patentable. An early prominent example is the patenting of a cash management account by a
well-known brokerage (Merrill’s CMA). Recent efforts by Amazon.com to block
Barnesandnoble.com’s use of its one click ordering feature may well signal the start
of many such cases.
Libel, slander and defamation. The law is still struggling to
decide if internet access providers are responsible for the statements of any or all of
their clients.
In summary,
although you may believe you have no exposure or that your legal position is secure and
unassailable, that does not prevent an adversary from initiating a suit of whatever merit
for whatever purpose and generating large legal bills for you.
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4. Should I talk to an attorney regarding my exposures to loss?
A. Absolutely. An attorney
should help you identify your exposures to loss and their relative importance and
likelihood. We will bring you a variety of coverage forms to evaluate along with their
pricing. Your attorney should review the forms and pricing along with you and help you in
deciding which one is most appropriate for your needs.
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5. What off-the-shelf products are available to me? What coverage features
do they typically offer?
A. AIG,
Chubb, CNA, St. Paul/Ttravelers and a number of other insurance companies offer
professional liability policies for software and hardware manufacturers, distributors and
consultants. Some policies combine errors and omissions with intellectual property and
multimedia liability coverages. Some offer separate policies or policy parts for each type
of coverage. Once you are familiar with the features of the available
products, we can adopt a risk management approach and assemble a coverage package that
makes sense for your firm and have it reviewed by your attorney.
Here are some
coverage features to evaluate:
- Definition
of operations. Be sure the form you choose covers your actual activities. Typically,
this is a difficult but important choice between specifying your own activities or
accepting that your activities fall within a canned description provided by the policy. It
is important to allow for changes in your activity with notification to the carrier if
necessary, while still preserving continuity of coverage.
- Named
insured.
Read the form to see how specific you must be in naming the appropriate entities.
- Limits and
deductibles. These are variable and negotiable with respect to premium.
- Coverage Territory. Worldwide is normally
preferred, but often must be specifically requested.
- Is the premium auditable--for
example, on the basis of sales? If it is, be sure to set up an internal accrual method to
avoid a shock at audit time.
- Are defense costs and expenses
included within the carrier’s limit or liability?
It is more advantageous
to have them in addition to the carrier’s limit, although this
feature is not often available.
- Claims
made policy vs. occurrence policy. The great majority of
policies will be claims made. Review the entire claims made apparatus with your attorney.
Claims you know about and most situations that might lead to a claim that you know about
before buying your first coverage will not be covered. Be careful regarding your
retroactive date, especially if anyone proposes "advancing" it. Does any new coverage you
are contemplating cover at least what prior policies have covered? Will your application
become a part of the policy? What length of extended reporting period is included at what
price?
- Will you have choice of attorney? Will the carrier have the power to settle a claim without your consent?
- What is
covered? All forms available today are using a list approach, rather than a
blanket grant of coverage. The listing of what is covered and not covered can be included
as part of the insuring agreement, list of exclusions, and
definitions. Examine these listings for what they include and exclude.
Some important features are:
- Products
recall expense—this is usually excluded but may be available on request for an
additional premium.
- Damage to
your own product (product physical injury). This can be important to hardware manufacturers
and is available on some forms.
- Failure to perform. Generally available.
- Consequential
losses,
including business interruption.
- Punitive damages. These should be included but are
sometimes excluded in the definition of "damages."
- Coverage for viruses, worms and other destructive code. This can
usually be covered on request if not already present on the form.
- Unauthorized access by hackers, etc. due to defects in
your code (again this can generally be added).
- Liability assumed
under a contract.
- Cost overruns, delays in implementation
- Dishonesty,
fraud.
(Your will need to re-examine and amend your crime coverage if the policy does
not cover these activities adequately).
- Pollution exclusion is standard; may be negotiable is some
cases.
- Does installation, testing or final acceptance have to
occur before there can be coverage? This is disadvantageous.
- Many companies,
including those with publishing exposures (web site development, internet access
providers), should consider intellectual property and multi-media forms of coverage. Are the following covered by the proposed policy?
- defamation,
libel, slander
- emotional
distress, outrage
- invasion,
infringement, interference with rights of privacy
- commercial
appropriation of name or likeness
-
Infringement of intangible property protected under copyright,
service name, trade mark
- plagiarism,
piracy and misappropriation of intellectual property
- unfair
competition
- misappropriation
of trade secrets
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6. What types of high tech operations and companies can benefit from
electronics errors and omissions coverage?
A. Hardware manufacturers
Software
manufacturers
Internet access
and service providers
Computer
Consultants
Web site
developers
Data processors
and service providers
And others…
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