Beyond Traditional Risks.

Businesses using the Internet should not assume that traditional coverage will be adequate for new risks.

Conducting business on the Web generates many concerns beyond traditional risks. These exposures vary with the function of the Internet presence. Some important questions are: Does the site provide content only? Is the content provided by third parties? Does the site provide advice? Do other businesses rely on the site for their own revenue? Does the site gather personal information about visitors? Some of the more prominent risks are system damage and security threats, intellectual property claims and liability arising from Internet publication.

So, will standard-form policies carried by most businesses respond to these Internet-related claims? Firms attempting to transfer their e-commerce risks into the commercial insurance marketplace often will have to submit to a risk assessment by the carrier's staff or consultants to answer this and other questions. A standard package of business insurance today includes, among other things, both first- and third-party coverages. Typically, first-party coverage covers "direct physical loss of or damage to property" or "loss of or loss from damage to...tangible property."

Courts are conflicted over whether harm to data, information or the electronic functioning of a Web site falls within these coverages. Recently, a federal court in Arizona held that "'physical damage' is not restricted to the physical destruction or harm of computer circuitry but includes loss of access, loss of use, and loss of functionality." But other courts have held that cell-phone authorization codes and proprietary technical information are not covered as "tangible property."

Many carriers will provide electronic data-processing endorsements that explicitly relate to computer systems. There is no standard language for these endorsements, however, and coverage disputes may arise regarding what information or systems are covered.

Coverage for liability to third parties typically defines covered "property damage" to include "physical injury to tangible property including all resulting loss of use of that property" and "loss of use of tangible property that is not physically injured."

The scope of the terms "tangible property," "physical injury" and "loss of use" in the e-commerce world are uncertain, and insurers are likely to contest large property-damage claims. As in the first-party context, many carriers will challenge claims under standard general liability policies, arguing that purely economic loss that is not related to physical harm is not covered.

Many of the content-based intellectual property, media and privacy exposures discussed above might be presented not as property damage claims but as "personal injury" or "advertising injury" claims under existing liability coverages.

Coverage questions are certain to arise regarding whether the policyholder's actions constitute covered "publication." For example, many businesses gather and package information for targeted marketing, but the business objective is not to disseminate the information in the traditional sense. Is this publication?

Also, there are standard policy exclusions that may be asserted as defenses, including the exclusion of all "advertising injury" coverage if the company's "business is advertising, broadcasting, publishing or telecasting." Insurers may argue that business on the Web is equivalent to advertising, broadcasting, publishing or telecasting and that any coverage would be afforded by separate media coverage, if it was purchased.

Given the difficulties in pursuing these claims, businesses using the Internet should not assume that traditional coverage will be adequate for new risks. Nor, of course, should they assume that significant claims are not covered without a thorough analysis of the potentially applicable coverage and the manner in which courts have interpreted it.

For future placements, insurers are molding the coverages they offer to address Internet-related risks. Some are excluding such risks from liability coverage and offering new policies ostensibly designed to cover them. Some risk managers view this as equivalent to difference-in-conditions coverage. Other insurers are leaving the liability policies alone and instead are writing additional media coverage.

Either way, lack of actuarial data, including the frequency and severity of claims, makes pricing difficult. Nevertheless, the potential exposure may exceed by multiples that of brick-and-mortar operations. Insurers are approaching these risks on a customized, case-by-case basis, much as they do professional liability coverage.

Businesses that have Internet exposures should assess the particular risks posed by their business and evaluate whether their existing coverage is adequate. If not, a broker experienced with the new coverages offered, including a knowledge of which carriers will customize coverage, should be consulted.

Bernard P.Bell a partner of Swidler Berlin Shereff Friedman, LLP, Washington, D.C., represents policyholders in insurance coverage matters.