New Stand-Alone E-Commerce Insurance for Third-Party Liability Claims (Part 2)

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 in Part 1 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 these issues, 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 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? 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.