Stand-Alone E-business Insurance: Who's Buying It, Who's Selling It, and
Why?
September 2002
Mike Rossi provides an update on the e-business
marketplace and what e-commerce insurance solutions are being offered for businesses
of all sizes and industry types.
by Michael
A. Rossi
Insurance Law
Group, Inc.
In our last article, we intimated that there might
be some new developments in the area of insuring first-party computer virus
risk. Those developments did not come to pass in the time that we anticipated,
so this article will update our views on the stand-alone e-business insurance
market.
Last year we created an e-commerce
insurance market survey, to highlight some of the stand-alone e-business
insurance products we knew of and to briefly describe the types of coverages
they provided. We hope to update that chart in the next couple of months. In
the meantime, this article will summarize the results of our market updating
efforts.
Market Division
We still see the stand-alone e-business insurance market as being divided
up at least the following ways. There are policy forms that provide only third-party
liability coverage, and there are policy forms that provide both first-party property coverage (including
business interruption and extra expense) and third-party liability coverage.
There is one substantial "evolutionary" aspect of these policy forms that has
taken place in the last year—the clarification being made in the liability coverages
between professional services to others, and business-to-business (B2B) e-business
activities, an issue on which we previously reported. (See "You Say Professional Services, I Say B2B Activities," January 2002.)
There are those insurers that appear eager to sell their policies to all
types of companies, both large and small, and in any variety of industries.
And there are those insurers that appear willing to sell their policies only
to smaller companies, staying away from Fortune 1000 types. There are also insurers
that appear to be interested only in the Fortune 1000 types. Finally, there
are those that appear interested in selling only to financial institutions,
those that do not want to sell at all to financial institutions and those that
will sell to both.
Market Predictions
We do, however, see some interesting developments that are either already
here or are on the horizon. We foresee that some insurers who already provide
traditional liability and first-party insurance (such as general liability,
commercial property, and commercial crime) will create their version of an e-commerce
insurance solution by offering a suite of policies. In some instances, the suite
will consist of traditional general liability, commercial property, and/or commercial
crime policies, with one or more amendments here or there to expressly recognize
coverage for certain first-party and third-party e-business risks. In other
instances, the suite will consist of traditional insurance policies along with
a stand-alone e-business insurance policy, which will be sold only as part of
the suite. Some insurers are already doing this, and we expect to see more doing
this in the months and years to come.
Global Fortune 500 Companies
We also foresee that the market for first-party e-business insurance will
not include many, if any, Global Fortune 500 companies. The reasons for this
forecast include the following. (The information gathered for these observations
comes not only from our personal experience but also from our discussions with
various insurance brokers who specialize in brokering stand-alone e-business
insurance.)
First, it is very difficult, although not impossible, to put together a stand-alone
first-party e-business insurance program with limits in excess of $25 million.
That is because most of the insurers that offer the coverage can only put up
$25 million in limits, and such insurers will only write excess of very few
of their brethren.
Second, many Global Fortune 500 companies, when considering insurance for
a particular risk, generally are looking to insure catastrophic losses. A loss
of $25 million hardly seems catastrophic to many of them. An e-business insurance
program with limits of $100 million or more might pique their interest, but
not a program with limits of $25 million. When the risk managers of such companies
are advised of the difficulty in putting together a program in excess of $25
million, many simply forgo the effort. Thus, if the insurers who sell first-party
e-business insurance really want to tap into the Global Fortune 500, they are
going to have to find a better way to work together so that they collectively
can offer limits on a particular risk in the $100 million or more range.
Smaller Companies
Even if a market for stand-alone first-party e-business insurance does not
develop among the Global Fortune 500, that does not spell doom for the stand-alone
e-business insurance market. Smaller Fortune 1000 companies (e.g., those with
under $10 billion in annual revenues) still appear to be interested in first-party
stand-alone e-business insurance, because insuring $25 million in computer virus
risk is meaningful to them.
In addition, the market for third-party liability e-business insurance, at
least among smaller companies (smaller than Fortune 1,000) appears to be growing
strong, helped by a number of factors.
First, more and more general liability insurers appear to be expressly excluding
certain e-business risks from their policies, especially for smaller companies.
Such companies have no alternative but to buy stand-alone e-business insurance
if they want such risks covered.
Second, the case law, at least in the United States, continues to develop
in uncertain ways on issues relevant to the question of whether standard policies
cover certain e-commerce risks. In perhaps the most recent case to address such
issues, AOL v St. Paul, a trial court ruled that
damage to computer data did not constitute "property damage" under a commercial
general liability (CGL) insurance policy, concluding that data is not "tangible
property." The same court also ruled that loss of use of a computer (indisputably
"tangible property") on which data resides, under the particular facts of AOL v St. Paul, was not covered because of the
"impaired property" exclusion. Faced with such uncertainties as to whether or
not their traditional policies will respond to e-business risks, some smaller
companies are buying, and will continue to buy, stand-alone e-business insurance
just for a greater peace of mind.
This market for smaller companies (i.e., smaller than Fortune 1000) is being
served two ways. There are any number of insurers selling stand-alone third-party
liability e-business insurance, and several who sell preferably to smaller companies
and who sell nothing but e-business insurance. However, as noted above, there
are several insurers who sell traditional insurance that either already have
created, or soon will be launching, a suite of insurance policies, either amended
or with a stand-alone policy included, to address e-business risks.
Third-Party Liability
Some might ask why we're not saying that the market for third-party liability
e-business insurance is thriving among the Fortune 1000. That's because the
picture is all too fuzzy to accurately comment on what is happening in that
market. Many such companies, if they want to expressly address third-party liability
e-business risks in their programs, can do so any number of ways that do not
include buying stand-alone e-business insurance per se.
Rather, such companies can add e-business risk endorsements onto more traditional
liability policies (e.g., general liability, media liability, or technology
liability), or buy e-business insurance and amend such insurance to pick up
more traditional technology errors and omissions (E&O) and/or media risk not
related to e-business activity. In such a setting, it is hard to say that a
market for stand-alone e-business insurance to cover liability risks is developing
among the Fortune 1000. Rather, it is more accurate to say that e-business risk-specific
provisions are being added to different types of liability insurance policies
purchased by the Fortune 1000.
Conclusion
In sum, the e-business insurance market appears to be here to stay. It is,
however, a difficult market to describe, and it is not a market for every type
of company. But the market will certainly continue to develop in important and
substantial ways as insurers continue to try to offer e-commerce insurance solutions
for businesses of all sizes and industry types.
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
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