New Stand-Alone E-Commerce Insurance for Third-Party Liability Claims (Part 1)

This is the fourth installment in a series of articles for this column which discusses insurance issues for e-commerce risks. The first three installments, listed below with appropriate links, provided a broad, general overview of e-commerce insurance issues.

• Bringing Order to Chaos: Insurance Issues for E-Commerce Activities
• First-Party E-Commerce Risks
• Third-Party Liability E-Commerce Risks and Traditional Insurance Programs

This installment focuses on stand-alone e-commerce liability insurance policies. More specifically, if you're thinking of buying one of the new stand-alone e-commerce policies, what issues should be considered when negotiating coverage, or even just comparing one off-the-shelf form to another?

As noted in the previous articles, different sectors of the policyholder community appear to respond to e-commerce insurance issues in different ways. Most large companies are not buying any of the new stand-alone e-commerce policies. This is because their current insurance programs contain most, if not all, of the different types of policies needed to cover much of the risks posed by e-commerce activities. They need only "tweak" such policies here and there to more fully respond to the panoply of e-commerce risks.

In contrast, most small companies involved in e-commerce are buying the new stand-alone e-commerce policies, at least with respect to the liability coverages provided by such policies. This phenomenon is occurring for a number of reasons. First, by and large, such companies are just now building their insurance programs and deem it viable to include such a policy in their program on a primary basis and build around it. This is opposed to buying such a policy on a difference-in-conditions/difference-in-limits (DIC/DIL) basis, which is what is being offered, for the most part, to large companies with sophisticated insurance programs that already respond to a lot of e-commerce risks.

Second, many smaller companies do not have the size, premium volume, or risk management expertise necessary to make "tweaking" traditional policies viable. Insurers just are not willing to make any changes to off-the-shelf policies in regard to e-commerce risks for such companies-a concession often rendered to large customers.

Accordingly, this installment is really for those companies (large and small) that are buying one of these new stand-alone e-commerce policies. The article does not list all of the issues that should be considered, but does highlight some very important considerations.

Stand Alone E-Commerce Market Survey

This chart lists examples of stand-alone e-commerce insurance policies. Some of the listed forms cover both first-party losses and third-party liability claims. Some of the forms cover only one or the other of these two types of risks. And with regard to first-party risks, some of the forms cover only the insured's direct loss, while some also cover the insured's liability to others for loss (e.g., employee theft, third-party theft). Accordingly, the description of coverages is for general information only, and the actual coverage provided by each listed policy is subject to the terms and conditions of that policy.

With respect to the contact information provided, in most cases it directs you to a general home page of a website. Since it can be frustrating to try to obtain information about products from websites, often the quickest way to get information and/or policy wording is by contacting an insurance broker (who works in this area) and/or the insurer itself to ask for a copy of the policy (preferably an electronic copy).

Any insurer listed below that believes that its product has been characterized incorrectly, please direct comments to Michael Rossi. Any such incorrect characterization is not intentional and will be corrected if we are advised of the error. Any insurer who is not listed below that sells stand-alone e-commerce insurance and who wants to be listed in the chart, please send contact information and a copy of your policy form to Michael Rossi, whose address and other biographical information can be accessed by clicking on his name above. Also see the Insurance Law Group website at www.inslawgroup.com.

Below are the policies that the author has seen being quoted with the greatest frequency when it comes to insuring e-commerce liability risks. The list set forth is not intended to be exhaustive, but rather illustrative.

When buying a stand-alone e-commerce liability policy, it is important to understand the state of the market. What different policy forms are available? What do they do? What capacity (i.e., limits of liability available) does the insurer selling the cover have? These are important issues to consider when reviewing quotes that the broker brings back from the market.

Insurers, Forms, and Capacity

There are at least two different ways to buy stand-alone e-commerce insurance for liability risks. You can purchase one of the new combined forms that provide both first-party coverage (commercial property, crime, employee dishonesty, kidnap and ransom, business interruption, extra expense, etc.) and third-party liability coverage. However, buy only the third-party liability coverages of that combined form. The other way is to buy one of the policies that provides only third-party liability coverage.

AIG is selling stand-alone e-commerce liability insurance at least a couple of different ways. For example, AIG offers several different versions of a policy called the "netAdvantage Internet Professional Liability Policy," providing different levels of coverage. Insureds should consider asking for the policy that contains the greatest levels of coverage (most likely the "pro +" form), and start working from there (i.e., asking for coverage enhancements to that form).

Interestingly, AIG can also offer e-commerce coverage another way, by using its Pro Tech form. The Pro Tech form insurance program uses "modules." You buy the basic "platform" policy (a lot of terms and conditions, but no insuring agreements), and then attach different modules as endorsements (each module is a different insuring agreement, with any additional definitions, terms, conditions, and exclusions needed to address a particular activity). The modules include, but are not limited to, the following:

• Technology Professional Liability
• Media Errors and Omissions
• Telecommunications Professional Liability
• netAdvantage
• Miscellaneous Professional Liability

It is AIG's intention that the netAdvantage module provide the insured using the Pro Tech form the same liability coverage afforded by the netAdvantage Professional Liability Policy (beware, though, because wordings do indeed differ between the two programs).

It appears that the way AIG intends these different offerings to work is as follows. If the insured just wants e-commerce activities covered, it should buy the netAdvantage policy. If the insured wants to insure e-commerce activities and other activities, it should by the Pro Tech policy and add all of the modules it wants to add. The netAdvantage module is a two-page endorsement to the Pro Tech form, and addresses e-commerce activities. The other modules pick up non-e-commerce related activities. The Miscellaneous Professional Liability module can be used to address any professional services that the insured is doing that are not otherwise addressed by the other modules—the insured just lists the different services in the endorsement module.

AIG's capacity on these different forms appears to be substantial, and AIG stands out in the market regarding capacity when compared to the other insurers' offering of stand-alone e-commerce liability insurance. (The other insurers referenced above that sell combined first-party and third-party forms also offer substantial capacity.) AIG has the ability to offer up to at least $25 million in limits on these lines of coverage. The capacity on the other forms seen quoted is much more limited, ranging anywhere from $2 million to $5 million, depending on the prospective insurer at issue.

Chubb also offers different products. For small companies, it sells the "Safety'Net Internet Liability Policy." This policy addresses only media errors and omissions risks related to e-commerce activities. It does not address professional services liability. Chubb has a variety of other policies for professional services liability and appears to be telling the small-company market to buy two different policies from Chubb, rather than a combined form from Chubb.

Royal (through one of its surplus lines subsidiaries) is one of the insurers that apparently is offering only one form to the market, but the form provides several coverages. The "Computer, Telecommunications and Internet Services Liability Coverage" policy, as its name suggests, includes, but is not limited to, liability insurance coverage for e-commerce activities.

Gulf (through Media/Professional Liability) is another insurer apparently selling only one form to the market, using a form that provides several coverages. Like the Royal offering, Gulf's "CyberLiability Plus Insurance Policy" includes, but is not limited to, liability insurance coverage for e-commerce activities.

Great American (through Tamarack) is yet another insurer apparently with a single policy form offering. Its "Dot.Com Errors and Omissions Liability Insurance Policy," like the Royal and Media/Pro offerings, includes, but is not limited to, insurance coverage for e-commerce activities.

Several different Lloyd's facilities are also selling stand-alone e-commerce insurance. One facility seen with substantial frequency offers what it is calling the "Computer Information and Data Security Insurance (CIDS)" policy. It provides coverage for professional services liability and media errors and omissions liability for all services provided by the insured, whether e-commerce related or not.

The policies offered by Royal, Media/Pro, Tamarack, and Lloyd's all look much more like what AIG offers with its Pro Tech program. That is, the policy forms provide several different coverages which, depending on the form at issue, includes professional liability, media errors and omissions, telecommunications liability, and miscellaneous professional liability for both e-commerce and non-e-commerce activities. As noted, however, the capacity these insurers are able to offer appears to be much lower than what AIG can and is offering on its netAdvantage and Pro Tech programs (from $2 million to $5 million depending on a number of variables).

It may be that these insurers can offer higher limits on these forms, but they have yet to be seen by the author. And perhaps these insurers can issue a "primary" policy, and the insured can build capacity by buying excess "follow form" coverage from other insurers. The insured should consult its insurance broker for more information in this regard.

Read more in Part 2 of this article.