Insurance Issues Online.

Many liabilities rising from trade activities over the Internet may fall between the cracks of traditional coverage.

The business world has been shaken by a series of computer problems unrelated to Y2K. These problems are leading to liability issues and, inevitably, liability issues lead to insurance issues.

The non-Y2K problems have been varied, and many of them have arisen from the Internet:

* "Cybersquatters" have registered the names of large corporations, such as Citicorp and Office Max. When these companies have sought to use their own names in the Web addresses, the unrelated parties that had registered the names have demanded compensation.

* Trademarks have been boldly violated. Protected trade names, such as See's Candies, have been misappropriated by individuals operating anonymously on the Internet.

* Scams, privacy violations and improper trade practices have been reported.

The Internet also has spawned a range of commercial disputes, including those arising from software failures:

* Hershey Foods said it was unable to meet its pre-Halloween candy deliveries because of a computer software problem.

* Whirlpool Corp. reportedly suffered computer problems that disrupted its shipments to major distributors, such as Home Depot.

* The makers of Gore-Tex, claiming that a software installation failed, sued the software maker and manufacturer. The company reportedly sought a refund of more than $3 million in fees and compensatory damages, and triple that amount in punitive damages.

From a liability standpoint, many Internet disputes create unique legal problems. Many people on the Internet operate anonymously or "pseudononymously." For example, when you have been injured by ANONYMOUSI on some distant Internet service provider, before you can bring suit, you need to identify and locate ANONYMOUSI. That may not be possible because of the disclosure policies of service providers. And when the acts take place in cyberspace, where do you file the suit? In your own district or six states away where the message originated? Courts are only beginning to address these and other Internet dispute issues.

The second dimension to the new issues involves insurance because policyholders will seek coverage in resolving these disputes. But how do policies apply to claims stemming from software programming errors, Web site errors, computer viruses and damage from hackers?

Many computer injuries are not tangible. Some policies cover intangible injuries, but this coverage often is limited to specific circumstances that may not include cyberspace disputes. Traditional insurance policies do not cover intangible injuries.

Ultimately, coverage depends upon the specific facts and policy language. You cannot make broad statements about a group of claims being covered or excluded. There is a real concern that many liabilities arising from trade activities over the Internet and e-commerce fall between the cracks of traditional coverage. Policyholders want to fill these gaps and insurers are responding with new computer-related insurance coverages:

* At least one insurer offers a network liability policy to protect policyholders from lawsuits that may arise from network failures.

* First-party policies are available that indemnify corporations for many forms of data loss and loss of income.

* Computer crime policies provide protection against hackers and viruses.

These new policies will raise other issues, the first being underwriting. How will carriers rate these risks? Carriers must examine the strength of firewalls, Web servers, password use and whether information is encrypted. They also must examine the number of Web pages belonging to a policyholder, the number of site visitors and the number of e-mails the company typically sends.

Most companies doing business on the Web have not done any risk analysis to determine the potential liability they may have to customers or business partners that may result from a misuse of their own systems. E-commerce claims also will raise odd coverage questions, such as triggers. At least one insurer has dealt with this issue by limiting coverage to losses discovered during the policy period.

We also will see questions on the allocation of coverage and self-insured retentions. The Internet opens up the possibility of a $10 injury happening to a million different people. A small problem, but one that affects many people, can be a big liability issue.

Alan S. Rutkin, a Best's Review columnist, is a partner in Rivkin, Radler & Kremer, Uniondale, N.Y.