• Introduction
• What The Traditional CGL Insurance Policy Covers and Does Not Cover
• What Is and Is Not Covered By Traditional E&O Insurance
• New Technology-Related Insurance Policies
• Conclusion
  

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Introduction

The growth of the Internet and the computer technology industry has resulted in an array of new claims asserted against software and hardware developers, computer consultants, Web designers and publishers, and other content and internet service providers. Today, a company's internet presence is quickly becoming an increasingly valuable assets, as is online revenue generation. So what's the problem? Well, unfortunately many high tech companies do not realize that the traditional comprehensive general liability policy ("CGL") and the tradition errors and omissions policy ("E&O") rarely cover internet-related loses nor many of the claims asserted by or against Internet-related and technology related companies.

This article seeks to highlight some of the shortcomings of the traditional CGL and E&O policies and to present the reader with the names of some new insurance products underwritten specifically for software and hardware designers, computer consultants, and content/service providers who face exposure from publication of content or services on the Net or through other media. If your company engages in such businesses and does not have an appropriate insurance policy, you should seriously consider purchasing technology related insurance.

What The Traditional CGL Insurance Policy Covers and Does Not Cover.

CGL policies are written to indemnify the policyholder for liability for bodily injury or property damage. So what is "property damage?" The CGL policy often states that for "property damage" to be covered, there must be physical injury to tangible property or a loss of use of tangible property. So, why wouldn't the computer be covered or your web pages? Some courts have held that the destruction or loss of computer stored data or software is not "property damage" because it involves only intangible economic loss, not "tangible property". As a result, intangible economic losses resulting from the failure of computer hardware or software to perform its intended function may not be covered by the traditional CGL policy. The traditional CGL policies also exclude coverage for the cost to repair and/or replacement of defective hardware and software that is designed or distributed by the insured and intangible, economic losses suffered by a customer of the insured as a result of a defect or malfunction in the hardware or software sold by the insured.

While the traditional CGL policy does provide advertising injury liability coverage, often this does not protect the technology related company from the risks it most often faces. Under the traditional CGL policy "advertising injury" is generally defined to include "misappropriation of advertising ideas or a style of doing business" or "infringement of copyright, title or slogan." While some courts have held that this language may cover claims for copyright infringement, trademark infringement, trade name infringement, trade dress infringement, and certain related common law claims of unfair competition, for there to be coverage, any "advertising injury" must be caused by an offense committed in the course of advertising the insured's goods, products or services. So why is this inadequate? First, the courts have repeatedly held that patent infringement is not covered because it cannot occur in the course of an insured's advertising activities; a patent is infringed by making, using, or selling a patented invention, not by advertising it. Second, the courts have held that the mere misappropriation of a trade secret is not covered because the harm is caused by the misappropriation of the trade secret, not by the advertising itself. It should be noted however, that the courts have found coverage for the misappropriation of trade secret claims where the liability arose from the misappropriation of customer lists and marketing techniques that the insured used to solicit the plaintiff's customers to buy competing products. Thus, the traditional CGL policy fails to provide coverage for the most common copyright and trademark infringement claims, such as those where a software company is sued for copyright infringement by a competitor who claims the insured copied and used its copyrighted source code in a new product, or a claim for trademark infringement by the owner of a trademark that was improperly used in a software developer's video game.

What Is and Is Not Covered By Traditional E&O Insurance

Generally, the traditional E&O policy is written to indemnify "professionals" for sums they "become legally obligated to pay as damages that result from claims made against the insured during the policy period for any act, error or omission in professional services rendered . . . ." Frequently, the E&O policy does not define covered professional services to include liability arising from the insured's products. In addition, the traditional E&O policy also typically excludes coverage for any claim that results from the products manufactured, distributed, or repaired by the insured as well as any claim of property damage to the products manufactured, sold, or distributed by the insured or claim of property damage to work performed by or on behalf of the insured. In sum, the traditional E&O policy may not cover product liability claims or claims to repair or replace defective work by the insured.

Today, a major issue arising in cases against software designers is whether the software at issue constitutes a "good" that is subject to the terms of Article 2 of the Uniform Commercial Code ("UCC") or a "service." While most courts should have little difficulty concluding that the sale or license of "off-the-shelf" or shrink-wrapped software is the sale of a "good" subject to the UCC, the result may be less clear when the transaction involves custom-designed software or hardware or a hybrid transaction involving the sale of software and related support services. In California, the Federal courts have generally found that transactions involving custom-designed software packages and "turn-key" systems involving integrated custom-designed hardware and software delivered ready to run constitute a "good", even where consulting advice, repair services, system upgrading or employee training are also included in the package. Why is this important? Because, if the transaction in question is found to be a "good" subject to Article 2 of the UCC, a software designer's E&O policy most likely does not provide coverage for certain types of claims asserted by a customer relating to defects in a computer system supplied by the software designer.

New Technology-Related Insurance Policies

To fill the gaps existing in the traditional CGL and E&O insurance policies, the insurance industry now provides specialized technology-related liability insurance policies.

1. Electronic Errors or Omissions Policy ("Electronic E&O"). This policy typically covers "damages the insured becomes legally obligated to pay for any claim arising out of a negligent act, error or omission, by or on behalf of the insured resulting in the failure of your electronic products to perform the function or serve the purpose intended after installation and testing." The definition of "your electronic products" includes "electronic goods, products or services, manufactured, sold, handled, distributed or disposed by" the insured, including any warranties or representations made at any time with respect to the fitness, quality or performance of the insured's products. Unlike the traditional CGL policy, an Electronic E&O policy covers certain economic damages and intangible losses other than property damage that are caused by computer software or hardware products. This includes loss of data, business interruption, and loss of revenue claims asserted by customers. Covered professional services under an Electronic E&O policy is also broadened to include the insured's product, thereby eliminating the potential gap in coverage under a traditional E&O policy arising from the "good" vs. "service" distinction.

2. Computer Software and Services Errors or Omissions Policy. Like the Electronic E&O policy, this policy provides coverage for "damages the insured becomes legally obligated to pay for any claim arising out of a negligent act, error or omission . . . by or on behalf of the insured . . . in the performance of or failure to perform electronic data processing . . . other computer services . . . or in the failure of software products to perform the function or serve the purpose intended." The term "other computer services" is defined broadly to include hardware and software consulting, analysis or design, computer hardware maintenance for others, and the distribution or sale of computer hardware.

3. Damage to Your Electronic Products Policy. This policy covers "any claim arising out of damage to your electronic products," defined as "the lesser of the cost of . . . repair . . . alteration . . . or replacement (its selling price less your profits), of your electronic products arising out of the sudden and accidental physical injury to such products or any part thereof, after installation, testing and acceptance by the user." The policy is generally intended to cover claims relating to the cost to repair or replace a custom "turn-key" computer system, designed by the insured, caused by a "sudden and accidental" failure of the system.

4. Multimedia Liability Insurance" Policy. This policy is generally written on a specific peril basis to cover claims arising out of specified offenses "committed in the course of multi-media activity by or on behalf of insured . . . ." "Multi-media activity" is broadly defined in the policy as "creating, producing, distributing, exhibiting, broadcasting, advertising or publicizing matter," defined as "printed, verbal, numerical, audio or visual expression, or any other form of expression, fixed in software or any other medium." The covered offenses include copyright and trademark infringement, plagiarism or unauthorized use of titles, formats, ideas, characters, plots, performances of artists, or other program material, invasion of privacy, libel, slander, and "other forms of defamation." The policy eliminates the advertising nexus requirement under a CGL policy, thereby providing broader protection than is presently available under a standard CGL policy affording advertising injury liability protection. The policy appears particularly well suited for software developers, web designers and publishers, CD designers, and other businesses that face exposure from publication of content or services on the Internet or through other media.

5. Media Liability Policies. These policies are offered by a large number of insurers. These policies often provide coverage for defamation, invasion of privacy, misappropriation of name or likeness and violation of intellectual property rights arising from the insured's dissemination of information in covered media. The covered media specified in the policy may include web-sites, if you so specify. Although media liability policies generally do not cover errors and omissions in providing services, some insurers will offer endorsement to provide such coverage.

6. Hacker - Virus Policies. A number of insurers, including CIGNA, CNA, AIG, and various Lloyds of London underwriters offer hacker - virus policies. These policies provide both first and third party coverage. The first party coverage addresses damage to the insured's own equipment or data while the third party coverage addresses claims by third parties asserting that the policyholder is responsible for hacker or virus damage to its computers or electronic data. Hacker - virus products generally contain a criminal acts exclusions for acts of the insured's employees and most only provide coverage for claims made in the coverage period.

7. Broad e-commerce coverage. Broad e-commerce coverage is offered by AIG, Chubb, Zurich and various Lloyds of London underwriters. The policies that fall within this category generally include elements of first and third party coverage for risks arising from hacking, theft of data, intellectual property and credit card information, as well as business interruption coverage for web site disruptions. Products developed by Marsh U.S.A. and underwritten by a number of insurers also incorporate E&O and media liability features.

It should be noted, however, that many of these new Internet-related policies often require as a condition precedent to receiving coverage, that the company seeking coverage undergo, and pay for, a risk assessment of their web practices. Underwriters use the information gathered during the risk-assessment to determine whether to grant coverage, and the type of coverage needed. This risk-assessment survey may be performed by the underwriter, an e-commerce consultant, a law firm, or some combination of the above.

Conclusion

Businesses in the technology industry simply cannot afford to be unsophisticated when it comes to purchasing insurance coverage for their potential liabilities. An uninsured loss could be devastating to the financial well being of your business. Consult your insurance broker or one of the companies mentioned above to determine whether any additional insurance coverage is warranted.

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