Risky e-Busness

Risky e-business
by Jonathan Bick
Updated 03:43 PM EST, Sep-17-2002
The Deal

Emerging e-commerce legal liabilities are increasingly affecting companies' insurance-selection process. As new business risks are created with the evolution of the Internet, companies face the decision of whether to buy separate e-commerce policies or to integrate e-commerce coverage into their general liability policies.

Traditional and dot-com businesses both use the Internet to advertise goods and services and communicate with customers, vendors and employees. Both types of business have used the Internet to deliver some goods, such as music and software, and services, such as banking and entertainment.

But the Internet technology that provides these opportunities also exposes its users to liabilities in the form of infringement, malfunctions and viruses, to name a few. E-commerce faces novel business difficulties, such as properly identifying e-customers and getting them to pay for goods and services.

Some of these risks are not insurable because they fail to give rise to an insurable interest. This interest is present when the loss of property will result in pecuniary damage to the insured.

Most e-commerce legal risks, however, are insurable. That includes, for instance, the potential legal liability e-commerce businesses face for facilitating the transmission of copyrighted material without the copyright holder's permission or for infringing on another entity's trademark.

E-commerce legal risks are novel because of the speed and potential extent of damage involved in using the Internet. It is not new theories of liability but the Internet's technological capacity to inflict injury that generates special e-commerce insurance concerns. The risks are nearly all based on traditional causes of action, such as intellectual property infringements, defamation and invasion of privacy.

From an insurance provider's perspective, e-commerce diverges from traditional business in three significant ways. First, due to the wide use of the Internet, the number of suits involving an e-commerce transaction can be expected to be many times greater than a similar traditional transaction.

Second, novel issues of international law and multijurisdictional claims will drive up the costs of defending and indemnifying the insured. Third, the activities giving rise to these claims challenge existing concepts of what falls within policy coverage.

In the past, new legal liabilities that arose were adequately covered by traditional insurance policies, such as comprehensive general liability, errors and omissions, and first-party business interruption coverage. However, the novel legal liabilities of the past developed gradually, unlike those brought on by the Internet.

The standard commercial general-liability policy, or SCGLP, currently in use was drafted before the Internet was created. It has not been sufficiently revised to meet the needs of most companies engaged in e-commerce.

The SCGLP has long provided insurance protection from most general business risks. But it is less than adequate when it comes to e-commerce intellectual property risks. In light of this, insurance companies supplement SCGLP with new e-commerce policies. These policies provide broader IP coverage, as well as coverage for defamation, invasion of privacy, hacking and viruses.

Since every e-commerce business has one or more physical points of presence, an SCGLP is prudent. A new e-commerce policy alone will not provide protection when an accident occurs at an e-commerce business's point of presence. Thus, integrated SCGLP/e-commerce risk management is necessary.

The intellectual-property coverage gaps in SCGLPs, among other shortcomings, have spawned interest in new insurance products designed to address Internet risks.

For example, an Intellectual Property Infringement Defense Cost Reimbursement Policy provides recompense for litigation expenses and damages for which the insured is liable and has paid to a third-party arising out of covered litigation.

"Covered litigation," as customarily used in an IP Infringement Defense Cost Reimbursement Policy, is defined as the defense of a civil proceeding brought during the term of the policy that alleges infringement by the insured. Ordinarily the policy defines "infringement" broadly.

Multimedia Liability Insurance Policies are also marketed to e-commerce companies and traditional companies that use the Internet for commercial purposes. These insure against liability arising out of the insured's "media activities." These policies are typically called media-liability policies, errors-and-omissions policies, or simply "E&O" policies. It is common for them to define media activities broadly.

Another type of special insurance policy is known as Internet and Computer Network Security Policy. This is designed to protect e-commerce concerns that facilitate access to the Internet or store data online. Four types of ICNSPs are generally available.

ICNSPs are the only type of e-commerce insurance that are designed to address business liabilities rather than legal difficulties.

Jonathan Bick is of counsel to Brach, Eichler, Rosenberg, Silver, Bernstein, Hammer & Gladstone of Roseland, N.J., and the author of "101 Things You Need To Know About Internet Law" (Random House, 2000). A longer version of this article appeared in New Jersey Law Journal, an American Lawyer Media publication.