New Stand-Alone E-Commerce Insurance for Third-Party Liability Claims (Part
2)
December 2000
This article provides general observations
regarding the stand-alone e-commerce liability market and what issues you should
consider when reviewing or placing insurance coverage. Several insurer policy
provisions are compared, such as what constitutes professional services, coverage
for patent infringement, mandatory binding arbitration provisions, contractual
liability coverage, blanket additional insured endorsements, and many others.
by Michael
A. Rossi
Insurance Law
Group, Inc.
This is Part 2 of this article. To view the first part, click on Part 1. Also, refer to the Stand Alone E-Commerce Market Survey for a chart listing the different stand-alone e-commerce insurance policies
currently known to the author. This chart will be updated on a regular basis.
General Observations Regarding the Market
The market for stand-alone e-commerce liability insurance policies that provide
only third-party liability coverage (as opposed to the combined forms providing
coverage for both first-party and third-party risks) appears to be developing
along the following lines. AIG is attacking all ends of the market-small start-ups,
middle market, and large companies-with its policies. In contrast, the insurers
discussed above appear to be focusing on smaller companies-the small start-ups
and middle market.
This conclusion is based on the limits being offered and certain features
in the fundamental structures of the policy forms. AIG's policies are structured
much more like standard policies for large companies, with a lot of the "bells
and whistles" that one looks for or tries to negotiate in "off-the-shelf" coverage.
The following are examples.
- Omnibus named insured wording
- Automatic subsidiary coverage
- Some blanket additional insured coverage
- Some contractual liability coverage
- Some separation of insureds language
- An exception to the insured versus insured exclusion for claims by additional
insureds
In contrast, the other policies appear structured much more like policies
for small companies. Few, if any, of the above provisions are contained in these
forms, and insurers really are not very interested in amending their forms on
these issues to match the wording provided by AIG's policies.
This is not an endorsement of AIG's products. The statements made here are
just to make a particular point. Insureds are encouraged to seek advice with
respect to the full list of "pros" and "cons" of each of the forms when compared
to each other. In other words, each form, when compared to other forms, has
some "above market" wording and some "below market" wording. The best form for
a particular company will depend on a number of variables, including to what
extent, if any, coverage enhancements are able to be obtained to one or more
of the available "off-the-shelf" forms.
Issues To Consider When Reviewing/Placing Insurance
As with any insurance product line, there are many issues to consider and
enhancements to seek with respect to stand-alone e-commerce liability insurance.
Space limitations prohibit a discussion of all such issues, however, some of
the more important considerations are set out below. The policies being compared
were discussed in Part 1 of this article. The sole
exception is Chubb's NetSecure, which was dropped from the comparison because
it only offers media errors and omissions coverage.
Is Prior Acts Coverage Offered? Believe it
or not, some insurers are not willing to offer "prior acts" coverage on this
line of insurance. So do not assume that the quote is offering prior acts coverage.
If you want this coverage, make sure to specifically confirm—in writing—that
it is provided. Because most of these policies are "claims-made" policies, prior
acts coverage can be very important.
How Is the Term "Professional Services" Defined? A common issue for professional liability policies is determining the breadth
of "professional services" covered by the policy. There are several different
ways to address this issue. Some forms require the insured to list with specificity
in the declarations or by endorsement the services that are intended to be covered.
Other forms use defined terms to describe what services are covered. In both
cases, if the insured gets hit with a claim arising from services not described,
then coverage likely will be denied.
However, some forms simply state that the "professional services" are "all
services performed by or on behalf of the insured." That appears to be a "blanket
professional services" provision. Obviously, such a provision is preferable
over the other two options.
Does the Insuring Agreement Refer to "Negligent Act,
Error, or Omission" or "Any Act, Error, or Omission"? Professional liability
coverage, and to a lesser extend media errors and omissions coverage, can come
in one of two forms. The first version covers claims for any "negligent act,
error, or omission." The second version covers claims for "any act, error, or
omission" (other versions include coverage for "any error or omission or negligent
act"). The key difference is the absence of the word "negligent" in front of
the word "act." Many courts interpret the insuring language of "any act, error,
omission" to provide broader coverage than that afforded by the language "negligent
act, error, or omission." Accordingly, the word "negligent" should be stricken
from the insuring language.
Is Patent Infringement Covered? All of the
policy forms expressly exclude coverage for patent infringement. Companies involved
in e-commerce, some argue, have a great likelihood of risk for contributing
to patent infringement and/or inducing patent infringement. The insured typically
does not manufacture the infringing product, but rather is using, selling, marketing,
or allowing to be sold the infringing product. Some insurers will amend their
policy forms to cover claims for such "contributing to" and "inducing" patent
infringement.
Does the Insurer Have a Duty To Defend Any "Claim"
or a Duty To Defend Only a "Suit" and the Right To Investigate Any "Claim"? Standard Insurance Services Office, Inc. (ISO), wording in a commercial general
liability (CGL) policy says that the insurer has a duty to defend any "suit"
and may investigate any "claim." There has been much litigation over the issue
of whether a "demand letter" constitutes a "suit" for purposes of triggering
the insurer's duty to defend under such policies. Most courts say "No." The
majority of the stand-alone e-commerce policies address this issue by stating
in the policy that the insurer has a duty to defend any "claim." AIG's policies,
notably, do not contain such language, and rather use the standard ISO wording
differentiating between the duty to defend a "suit" and a "claim." That is one
dramatic "below market" provision in AIG's offerings.
Is the Policy Subject to Mandatory Binding Arbitration
Provisions? No one likes coverage litigation. However, requiring mandatory
binding arbitration for coverage disputes is unacceptable in the author's opinion
(and is illegal to have in an insurance contract for some U.S. jurisdictions).
Accordingly, any such policy provisions should be deleted.
AIG's offerings are subject to such a mandatory binding arbitration provision.
This is interesting, given that, in its directors and officers liability insurance
policies, AIG offers the option to litigate, if the insured first goes through
nonbinding mediation, or to arbitrate coverage disputes. Those same provisions
should be used for AIG e-commerce policies.
Is There Express Language for Liability Assumed under
Contract (i.e., "Contractual Liability" Coverage)? A common coverage
to have in CGL insurance is "contractual liability" coverage. This coverage
expressly addresses the issue of whether, and how, the named insured's indemnity
obligations to another person or organization are covered by the policy. The
same provisions should be in the stand-alone e-commerce liability insurance
policies. But they are not, except for AIG, which offers such language for media
errors and omissions risk but not professional services risks.
Many brokers disagree with this view, pointing out that it is virtually impossible
to get express contractual liability language in a professional liability policy.
It would take numerous pages to fully address this issue. Suffice it to say
that for the same reasons why you want express contractual liability coverage
in a CGL policy, you want it in your e-commerce liability insurance policy,
for all coverages.
Is There Omnibus Named Insured Wording? Some
forms require that each entity to be insured under the policy must be specifically
listed by name as a named insured under the policy, including an entity's subsidiaries
and affiliates. In other words, if only a parent company is listed as a named
insured, the parent company's subsidiaries are not also covered unless they
are named on the policy as additional named insureds. In contrast, AIG's policies
offer traditional omnibus wording, so that a company's subsidiaries that exist
as of policy inception are automatically covered as named insureds without having
to be listed by name. Obviously, this language is more favorable than the other
insurers' language on this issue.
Is There Automatic Coverage for Subsidiaries Created
or Acquired During the Policy Period? As a corollary to the omnibus named
insured wording, there is a question of whether subsidiaries of a named insured
entity, which are acquired or created during the policy period, are automatically
insured. Under AIG's policies, such new subsidiaries are automatically covered,
subject to an asset ceiling. On the other policy forms, such new subsidiaries
are not automatically covered, as the insurer wants to underwrite each new subsidiary,
list the subsidiary by name on the policy before it is a named insured, and
reserve the right to charge extra premium or amend terms and conditions of coverage
for that new subsidiary. Again, AIG's provisions are more favorable on this
issue than the other forms.
How Is the Fraud/Dishonesty Exclusion Worded? It is standard in most "wrongful act" type policies to include some sort of
exclusion for claims arising from the fraud or dishonesty of an insured. Such
an exclusion can be worded any number of ways. The more favorable wording expressly
provides that the insurer owes a defense until such time as the excluded activity
is actually adjudicated in the underlying claim. Other policy forms, however,
provide that a defense is not provided for a claim if it alleges fraud or dishonesty
by any insured. And only if there is an adjudication in the underlying claim
of no fraud or dishonesty will the insurer reimburse the insured for the costs
of the defense. This latter type of wording is extremely "below market" and
out of step with virtually all recent forms of wrongful act type policies. Insureds
should insist on market provisions for this exclusion.
In addition to the issue discussed above, there also is the issue of whether
there is severability as between insureds on this exclusion. The AIG policies
provide severability, so that if one insured commits fraud or dishonesty, coverage
is not automatically barred for all other insureds. The other policies do not
provide such severability, and the insurers are resistant to making a change
to the policy to address this issue.
Is There Severability between Insureds for All Exclusions
and the Application for Insurance? In addition to the severability issue
discussed above—that is, for the fraud/dishonesty exclusion—there also is the
issue of severability for all exclusions and for the application for insurance.
To address this issue, some insureds request that a standard ISO form of the
"severability of interests" or "separation of insureds" clause be added to the
policy form. The intent in doing so is to provide severability as to the entire
policy, for all terms, conditions, exclusions, and the application for insurance.
Does the Insured versus Insured Exclusion Expressly
Except Claims by Additional Insureds? Most professional liability policies
contain some form of an "insured versus insured" exclusion. So it is with the
stand-alone e-commerce liability insurance policies. However, what AIG understands
that the other insurers apparently do not is the reality of business. For many
businesses that will need this insurance, they will need to add their customers
and clients as "additional insureds" on the policy. But claims by such additional
insureds against the named insured is one of the very risks for which insurance
is being purchased.
Some insurers have denied coverage for a claim by such an additional insured
against a named insured by reason of the insured versus insured exclusion. This
makes no sense. To preclude an insurer from even making such an argument, as
a matter of clarification, the insured should consider amending this exclusion
to expressly except claims by additional insureds. AIG's policies do this to
a certain extent, but the other policies do not, and the insurers selling those
other policies are very resistant to amending this exclusion when asked. Obviously,
if the named insureds are going to be entering into contracts where they are
required not only to maintain this type of insurance but also to add the other
parties to such contracts as additional insureds on the policy, this issue must
be addressed.
Is There a Blanket Additional Insured Endorsement? As a corollary to the issue discussed above, when a named insured knows that
it will be required in its contracts with other parties to name them as an "additional
insured" on its e-commerce liability insurance policy, it is very beneficial
to add a blanket additional insured endorsement on the policy. In this way,
once the named insured signs a contract requiring it to add the other party
as an additional insured on the policy, the other party is automatically added
as an additional insured. There is no need for the named insured to submit a
request in writing to the insurer to issue a specific additional insured endorsement
naming the other party as an additional insured. This avoids things from "falling
through the cracks" where sometimes an organization or person that is supposed
to be added to the policy is not added.
Beware, however, of this issue. If the policy being reviewed contains an
insured versus insured exclusion that does not expressly except claims by additional
insureds, or can otherwise be interpreted to exclude claims by an additional
insured against a named insured, then the named insured likely does not want
to be adding any party to the policy as an additional insured. Otherwise, the
named insured might be backing itself into a position of no coverage for one
of the very claims it wants to insure—claims against it by its customers and
clients for either professional services errors and omissions or media errors
and omissions.
Concluding Thoughts
In the final analysis, professionals in the insurance industry, whether they
be risk managers, insurance brokers, underwriters, lawyers, or consultants,
should know and understand the coverage issues being addressed by the new stand-alone
e-commerce insurance policies (both the combined forms and the liability-only
coverage forms). Such knowledge is needed for a number of reasons, including
knowing what issues to look for when (1) placing one of the new policies, and
(2) auditing an insurance program to determine what, if any, "tweaking" should
be done to it so that it more fully responds to e-commerce risks along the lines
of the new stand-alone e-commerce insurance policies. It was intended that this
article address some of the issues relevant to the first point.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.