Expert Commentary

Stand-Alone E-business Insurance: Who's Buying It, Who's Selling It, and Why?

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.


Cyber and Privacy Risk and Insurance
September 2002

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.

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.


Insurer, Managing General Agent, or Insurance Broker Policy Name 3rd Pty. Crime Employee Dishonesty BI and EE Extor-
tion
Prof. Svcs. Liab. Media E&O Liab.
Policies Sold in the U.S.
AIG NetAdvantage Pro + Internet Professional Liability Policy No No No No Yes Yes
AIG NetAdvantage Security + Internet and Computer Network Security Policy Yes Yes Yes Yes No Yes
AIG Net Advantage Liability Internet and Professional Security Liability Insurance Partial: for liability arising therefrom Partial: for liability arising therefrom No Yes Yes Yes
AIG ProTech Technology Liability Insurance Policy No No No No Yes Yes
Chubb Cyber Security Yes Yes Yes Yes No No
Chubb Executive Risk Safety'Net Internet Liability Insurance No No No No No Yes
Hiscox Hacker Insurance Yes Yes Yes Yes Yes Yes
Legion Indemnity Company INSUREtrust Electronic Information E&O (EIE&O) Liability Policy Partial: for liability arising therefrom Partial: for liability arising therefrom No No Yes Yes
Lloyd's Computer Information and Data Security Insurance Yes Yes Yes Yes Yes Yes
Lloyd's
(WISP)
Website Crime & Intranet Insurance Yes Yes Yes Yes No No
Lloyd's
(Besso)
Technology, Media and Professional Liability Insurance No No No No Yes Yes
Lloyd's
(JLT Risk Solutions)
E-Comprehensive Yes Yes Yes Yes Yes Yes
Marsh NetSecure Yes Yes Yes Yes Yes Yes
Media/Professional Liability (Gulf) CyberLiability Plus Insurance Policy No No No No Yes Yes
Royal Surplus Lines Computer, Telecommunications and Internet Services Liability Coverage No No No No Yes Yes
St. Paul Technology Premier Computer Network Security Protection (Networker) Yes Yes Yes Yes No No
St. Paul Cybertech+ Liability No No No No Yes Yes
Tamarack
(Great American)
Dot.Com Errors and Omissions Liability Insurance Policy No No No No Yes Yes
Zurich North American Financial Enterprises E-Risk Protection Policy Yes Yes Yes Yes No Yes
Policies Sold in Europe
ACE Europe DataGuard Yes Yes Can be added Yes No No
Hiscox Hacker Insurance Yes Yes Yes Yes Yes Yes
Lloyd's
(JLT Risk Solutions)
E-Comprehensive Yes Yes Yes Yes Yes Yes
Marsh NetSecure Yes Yes Yes Yes Yes Yes
Park Insurance Services Internet Insurance No No No No Yes Yes
Zurich North American Financial Enterprises E-Risk Protection Policy Yes Yes Yes Yes No Yes
Policies Sold in Australia
Marsh NetSecure Yes Yes Yes Yes Yes Yes
St. Paul Technology Premier Computer Network Security Protection (Networker) Yes Yes Yes Yes No No
St. Paul Cybertech+ Liability No No No No Yes Yes

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. Expert Commentary articles and other IRMI Online content do 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.

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