E-Business Insurance Is AVirtual Reality: What To Do Now

Youve heard about it, read about it andmaybe even attended a seminar about it. It is safe to assume thatthe availability of e-business insurance is now generalknowledge.

This is a boon because clients and prospects will now approachyou about another line of revenue-generating coverage. And you willhave the opportunity to demonstrate your value with knowledgeregarding this emerging exposure to loss.

Now that e-business insurance has entered the general insurancelexicon, however, it also opens up the potential for agents errorsand omissions exposures. As an insurance agent, you regularlyindicate in summaries and proposals coverages not purchased, suchas higher directors and officers, employment practices liabilityinsurance, etc. Since e-business coverage is now readily available,it is imperative to bring these new exposures to the attention ofyour clients and prospects.

How can you prepare your clients and prospects today?

Become conversant in the exposures and coverages available.

Understand and communicate the distinctions betweencoverages.

Help your sales and protect your organization at the sametime.

Lets take a look at each one of these areas in more detail.

Becoming conversant in the coverages available meansunderstanding, first, that e-business insurance is designed tocover gaps and potential gaps in traditional insurance coverages,such as property, electronic data processing coverage, crime andgeneral liability due to the advent of networking and the Internet.It will become more prevalent when the Insurance Services Officeand standard carriers begin excluding or limiting coverage.

The restrictions and clarifications being put forth by standardcarriers revolve around the meaning of two elements: “directphysical damage to tangible property” in property policies, and “inthe business of advertising” in the general liability policies.

There has been a significant amount of discussion aboute-business insurance, which involves primarily two separate typesof exposures–multimedia and security.

Multimedia or electronic publishing exposure stems fromuncertainty about coverage in the “business of advertising” and“telecasting” insuring agreements of the general liability policyas they pertain to advertising via the Internet. Courts are in theprocess of interpreting these terms as they apply to the Internet.Most cyberliability policies cover this uncertainty.

Security exposures in the virtual world are much clearer.Insurers rating models did not contemplate the catastrophic loss todata that could occur in todays Internet driven economy. Also,there are questions about the tangibility of electronic data.Finally, there are instances where an insured can be financiallyharmed without any direct physical injury. A denial of serviceattack is one example. Therefore, insurers offering traditionalproperty and EDP policies may deny coverage under those standardforms.

From a security standpoint, e-business policies cover theexposures traditional policies miss such as:

? Unauthorized use of a covered business system.

? Virus and malicious code.

? Denial of service attacks.

? Network extortion

? E&O arising out of the alteration and manipulation of aninsureds network.

However, there are distinctions in policies that aresignificant.

As agents seek to understand and communicate distinctionsbetween coverages, the first important rule is: Dont miss the bigexposure.

What is the big exposure? It is the Network.

The term “e-business” easily summons up things like e-tailingand portals such as Amazon and Yahoo, but in actuality “e-business”is much more pervasive. B2B (business-to-business) exchanges,Internet Service Providers, Application Service Providers and datastorage warehousing are obviously involved in e-business.

Less obviously, a manufacturer ordering supplies via theInternet, a retailer that has only an informational site, and acommunity bank that outsources its online banking functions are allarguably conducting e-business.

Broadly defined, e-business is anyone with a network that has aconnection to the Internet.

By this definition nearly all companies are engaged in some formof e-business even if it is only sending and receiving e-mails, andsecondly, it has a direct impact on a companys exposure toloss.

Many carriers developed their forms with only the Web presencein mind. This is like insuring the outside of a building only.Although this would cover losses arising out of defacement, thereal exposures are inside.

Most companies are intimately dependent on their networks. Theyuse them to communicate internally and with their businesspartners, to collect and disseminate data, and store valuableintellectual property. If a “hacker,” virus or a denial of servicecompromises this network, tremendous financial harm can occur.

So when a client or prospect say that he or she is notinterested in e-business insurance coverage because the clientdoesnt sell much on the Internet, show that client or prospect thatits network is central to its business–and that it isvulnerable.

Many companies have learned this the hard way. A wise old sageonce said “experience is what you get, just right after you needit.” Dont be in that uncomfortable position with your clients andprospects.

Once the perils and exposures are understood, the question isthen “How much?”

In the “real” world, companies appraise property, amortizemachinery and value their inventory.

In the “virtual” world the asset is the value of the thoughts,ideas and concepts kept electronically. How do you value these?

All “cyber policies” attempt to place a value on this intangibleyet valuable digital information. An understanding of thecomputation of value is vital.

Business interruption claims in the real world are difficult toevaluate; in the world of the Internet and networks, this isexacerbated.

There are two reasons for this.

One is that insurance applies to a communications channel.Faxes, phone and mail still work to pass information if e-mail isdown or a buyer can not access the Web site.

The other reason deals primarily with e-tailers and highlightsthe advantages of branding. If, for instance, I was unable toaccess the site of my favorite online retailer to purchase a musicCD, chances are very good that I would quickly find an alternateonline source. If, however, it were a specific branded product thatI desired, chances are good that I would wait or use an alternateform of ordering.

The problems are apparent in adjusting a claim. This can bemitigated by the use of hourly business interruption limits–thenumber of hours “off line” times the hourly limit, less theretention. This method is much easier than reviewing historicalrecords and trends and forecasting the potential businessinterruption loss.

The last distinction in the world of e-business insurance ismost often overlooked, but may have the most impact. A policy isonly as good as the support behind itthe infrastructure andunderwriting process of the e-business insurance carrier.

There are a few established carriers writing this coverage andmore appear to be on the horizon. Evaluation of the underwritingprocess of each carrier, and the rigor with which it isaccomplished, are important considerations.

Admittedly, the existing underwriting processes are cumbersome,time consuming and involved. This is typical of any newcoverage.

Agents and brokers are having a difficult time gatheringadequate and appropriate information. Requesting things likeinformation security risk assessments, network diagrams etc. arenew and foreign to most agents.

Employment practices liability was an analogous situation.Initially, there were questionnaires to complete, employeehandbooks to submit, analyses of the precautions taken by aprospect with regard to discrimination to conduct, etc.

E-business coverage is in a similar situation. Differentcarriers are using differing underwriting and rating methodologies.At this point, understanding and working with each carriers uniquerequirements is half the battle–and picking a carrier with along-term commitment and dedicated staff, well versed in theexposures and jargon is essential.

While gaining an understanding of the exposures and coveragesout there, as well as the carriers processes, are critical steps todealing with the e-business insurance reality, to boost sales andprotect their organizations from E&O exposures, agents need toget the message out to their prospects. Including a generalstatement regarding e-coverages in marketing materials and salespitches will help sales and protect your E&O.

For example, “Due to the emerging Internet economy, there is agreat deal of uncertainty in the insurance community about the newexposures that may not be covered by existing traditional insurancecoverage. From e-mail to significant e-business platforms, thereare e-business management issues to consider. Insurers havedeveloped products to assist you in evaluating these new exposuresand offer affirmative coverage to address these uncertainties.”

This is an exciting new coverage and people, including yourclients, are talking about it. All insurance professionals shouldrealize that their clients need to be informed of their e-exposuresand that intelligent business decisions need to be made nowregarding how to address these emerging exposures.

Brian Brown is the regional manager of the E-Risk Solutionsgroup of Zurich North America in Atlanta, Ga. He can be reached [email protected]

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, September 10,2001. Copyright 2001 by The National Underwriter Company in theserial publication. All rights reserved.Copyright in this articleas an independent work may be held by the author.

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