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

Youve heard about it, read about it and maybe even attended a seminar about it. It is safe to assume that the availability of e-business insurance is now general knowledge.

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

Now that e-business insurance has entered the general insurance lexicon, however, it also opens up the potential for agents errors and omissions exposures. As an insurance agent, you regularly indicate in summaries and proposals coverages not purchased, such as higher directors and officers, employment practices liability insurance, etc. Since e-business coverage is now readily available, it is imperative to bring these new exposures to the attention of your 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 between coverages.

Help your sales and protect your organization at the same time.

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

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

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

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

Multimedia or electronic publishing exposure stems from uncertainty about coverage in the “business of advertising” and “telecasting” insuring agreements of the general liability policy as they pertain to advertising via the Internet. Courts are in the process 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 to data 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 financially harmed without any direct physical injury. A denial of service attack is one example. Therefore, insurers offering traditional property and EDP policies may deny coverage under those standard forms.

From a security standpoint, e-business policies cover the exposures 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 an insureds network.

However, there are distinctions in policies that are significant.

As agents seek to understand and communicate distinctions between coverages, the first important rule is: Dont miss the big exposure.

What is the big exposure? It is the Network.

The term “e-business” easily summons up things like e-tailing and 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 data storage warehousing are obviously involved in e-business.

Less obviously, a manufacturer ordering supplies via the Internet, a retailer that has only an informational site, and a community bank that outsources its online banking functions are all arguably conducting e-business.

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

By this definition nearly all companies are engaged in some form of e-business even if it is only sending and receiving e-mails, and secondly, it has a direct impact on a companys exposure to loss.

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

Most companies are intimately dependent on their networks. They use them to communicate internally and with their business partners, to collect and disseminate data, and store valuable intellectual property. If a “hacker,” virus or a denial of service compromises this network, tremendous financial harm can occur.

So when a client or prospect say that he or she is not interested in e-business insurance coverage because the client doesnt sell much on the Internet, show that client or prospect that its network is central to its business–and that it is vulnerable.

Many companies have learned this the hard way. A wise old sage once said “experience is what you get, just right after you need it.” Dont be in that uncomfortable position with your clients and prospects.

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

In the “real” world, companies appraise property, amortize machinery 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 intangible yet valuable digital information. An understanding of the computation of value is vital.

Business interruption claims in the real world are difficult to evaluate; in the world of the Internet and networks, this is exacerbated.

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 is down or a buyer can not access the Web site.

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

The problems are apparent in adjusting a claim. This can be mitigated by the use of hourly business interruption limits–the number of hours “off line” times the hourly limit, less the retention. This method is much easier than reviewing historical records and trends and forecasting the potential business interruption loss.

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

There are a few established carriers writing this coverage and more appear to be on the horizon. Evaluation of the underwriting process of each carrier, and the rigor with which it is accomplished, are important considerations.

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

Agents and brokers are having a difficult time gathering adequate and appropriate information. Requesting things like information security risk assessments, network diagrams etc. are new and foreign to most agents.

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

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

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

For example, “Due to the emerging Internet economy, there is a great deal of uncertainty in the insurance community about the new exposures that may not be covered by existing traditional insurance coverage. From e-mail to significant e-business platforms, there are e-business management issues to consider. Insurers have developed products to assist you in evaluating these new exposures and offer affirmative coverage to address these uncertainties.”

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

Brian Brown is the regional manager of the E-Risk Solutions group of Zurich North America in Atlanta, Ga. He can be reached at brian.brown@zurichna.com

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

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E-Business Insurance Is A Virtual Reality: What To Do Now

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