San Diego Business Journal

Why is E-commerce insurance important?

Recent studies suggest the amount of commerce conducted over the Web will skyrocket from $2.6 billion in 1996, to $200 billion in 2001. Companies all over the world are taking measures to allow for E-commerce solutions.

With the increase of such a booming area of business comes an increased need to insure and keep secure E-commerce.

While a traditional insurance policy may cover some areas of E-commerce, it may not be enough , especially in a new millennium where technology has given a new meaning to the term "worldwide."

The official definition of E-commerce pertains to any traffic that passes in digital form over wires from one computer system to another. Commerce or business over the Internet, corporate Internet or Extranet, and direct wire connection traffic are various forms of E-commerce.

It has become a globalized venue that allows companies to conduct business on a level playing field. With such freedom also comes a concern to keep that business secure.

- Global Insurance

Coverage Required

Most general liability insurance policies provide coverage within the United States, its territories, possessions, and Canada. The World Wide Web, however, as the name implies, is global, and liability can extend well beyond the boundaries of the policy territory.

Companies that engage in E-commerce face the risk of sustaining damage to their own property, namely their computer systems and electronic data.

Among other risks, confidential information can be stolen; hackers can damage or hijack Web sites; and computer system viruses can be spread, damaging a company's own product or that of others.

There are also specific areas of risk associated with E-commerce that need to be identified and treated.

First-party risks include traditional perils, such as fire or earthquake that involve loss or damage to physical assets; security risks, both internal and external, pertain to any unauthorized access or use of a company's computer system and data by an outsider or insider; and dependence and reliance risks; which apply to damage at a supplier, business partner, or service provider.

Third-party risks associated with E-commerce encompass intellectual property and privacy; advertising and publishing; consumer protection and unfair trade practices; as well as professional and service denial risks.

- A Need For

Separate Policies

Traditional insurance is not always enough. Many policies don't adequately cover E-commerce exposures.

Traditional insurance does account for property damage, which refers to physical damage to tangible property; personal and advertising injury, which encompasses a range of offenses in the business areas of advertising, broadcasting, publishing, or telecasting; and crime and fraud.

But what about intangible property damage? If, for example, a fraudulent violation is made against a company's Web page, it is debatable as to whether or not Web page publication constitutes a business that is protected by a traditional policy.

Thus the need for E-commerce insurance in the new millennium has become apparent. Even if a traditional policy will provide some coverage, it will not be as effective as a narrowly tailored E-commerce policy that provides coverage focused specifically on E-risks.

First and foremost, E-commerce policies provide insurance for any damage to computer systems, data and software. These all encompass first party E-coverages and involve damages to computer systems and intangible and intellectual property.

Policies generally cover loss caused by fraudulent and malicious acts committed either by employees or third parties against the insured's computer systems, electronic computer programs, and electronic information and records, plus computer virus attacks that hinder or even close down the operations of the insured.

- E-Data Damage

May Be Covered

Secondly, financial losses as a result of fraudulent input into computer systems may also be covered, as well as accidental alteration or destruction of electronic information and records.

Finally, loss of intellectual property when trade secrets are copied or recorded may be covered as well. Third-party E-coverages include multimedia and intellectual property coverage as well as professional liability coverages.

One unique type of this coverage involves the denial of service and similar events covering claims against the insured by a third party for losses resulting from the inability to use the insured's services.

Most E-commerce policies provide worldwide coverage. Additionally, many E-commerce insurance providers are offering risk management consulting services in addition to the insurance coverage.

Coverages can also be written on a "difference in conditions" basis. This type of provision makes the E-commerce policy the primary policy with respect to other insurance policies that may provide coverage, but which were not specifically designed to address E-commerce exposures.

- E-Commerce

Policies Offered

With computer crime a constant source of concern, a typical E-commerce policy will provide coverage for theft and extortion. Such coverage may apply to the elicit transfer of funds, securities, data, and tangible property using the insured's computer network.

Finally, E-commerce policies typically provide coverage for business interruption, service interruption, and extra expenses.

Policies generally provide coverage for business interruption or loss of income and extra expense caused by a computer virus or accidental or malicious destruction of the electronic information inside the computer system, intentional network disruptions, and interruption of services.

Since it remains uncertain whether traditional insurance policies cover certain E-commerce exposures, the probability is high that businesses may not have the security that they assume they do. The difference is that E-commerce insurance is designed specifically to cover these gray areas.

To avoid the downfalls of the growing world of E-business, the best bet for companies is to face the new millennium guarded with comprehensive coverage that keeps all elements of your business safe and secure.

Cavignac is the president and principal of Cavignac & Associates, a San Diego-based commercial insurance brokerage firm.