Legal Liability Dictates E-Commerce Insurance

Emerging e-commerce legal liabilities rather than business difficulties are driving the e-commerce insurance-selection process. As new business risks are created with the evolution of the Internet, businesses must decide whether to buy separate e-commerce policies or to integrate e-commerce coverage into their general liability policies. Traditional and dot-com businesses use the Internet to advertise goods and services and communicate with customers, vendors and employees. Both types of business have used the Internet to deliver some goods, such as music and software, and services, such as banking and entertainment. The Internet technology that provides these opportunities also exposes its users to liabilities in the form of infringement, malfunctions and viruses, to name a few. E-commerce businesses face novel business difficulties, such as properly identifying e-customers and getting them to pay for goods and services. Some of these e-business risks are not insurable because they fail to give rise to an insurable interest. Businesses must seek legal advice to properly determine which e-risks are insurable. An insurable interest arises when the loss of property will result in pecuniary damage to the insured. The insurable-interest doctrine, which applies to all forms of insurance in every state, historically has been understood to serve two functions. First, an insurable interest discourages the use of insurance contracts as a form of gambling. Second, an insurable interest reduces the incentive of policyholders to cause the event that is insured against. E-businesses and traditional businesses that participate in e-commerce face numerous novel legal risks, most of which are insurable. For instance, e-commerce businesses face potential legal liability for facilitating the transmission of copyrighted material without the copyright holder’s permission, for posting copyrighted material on its Web site without permission or for infringing on another entity’s trademark. The risks posed by e-commerce are novel because of the speed and extent of damage that the use of the Internet can cause. E-commerce legal risks are nearly all based on traditional causes of action, such as intellectual property infringements (copyright, patent and trademark), defamation and invasion of privacy. It is the Internet’s technological capacity to inflict damage, rather than new theories of liability, which result in special e-commerce insurance concerns. LIABILITIES RISING From an insurance provider’s prospective, e-commerce diverges from traditional commerce in three significant ways. First, due to the wide use of the Internet, the number of suits involving an e-commerce transaction can be expected to be many times greater than a similar traditional transaction. Second, novel issues of international law and multijurisdictional claims will drive up the costs of defending and indemnifying the insured. Third, the activities giving rise to e-commerce-related claims challenge existing concepts of what falls within policy coverage. In the past, new legal liabilities were adequately covered by traditional insurance policies, such as comprehensive general liability, errors and omissions, and first-party business interruption coverage. However, past novel legal liabilities arose gradually, unlike those that have arisen as a result of the Internet. Consequently, standard liability insurance policies, which covered legal liability in the past, do not normally afford adequate protection for innumerable e-commerce transactions. OLD VS. NEW The standard commercial general liability policy (SCGLP) that is currently in use was drafted before the Internet was created. It has not been sufficiently revised to meet the needs of most companies engaged in e-commerce. The SCGLP has long provided insurance protection from most general business risks. The nature of e-commerce results in many novel intellectual property risks, and the SCGLP is less than adequate when it comes to e-commerce intellectual property risks. In light of this fact, insurance companies supplement SCGLP with new e-commerce policies. These policies provide broader intellectual property coverage, as well as coverage for defamation, invasion of privacy, hacking and viruses. Since every e-commerce business has one or more physical points of presence, an SCGLP is prudent. A new e-commerce policy will not provide protection when an accident occurs at an e-commerce business’s point of presence. Thus, an integrated SCGLP/e-commerce risk management is necessary. Cases such as In Religious Technology Center v. Netcom On-Line Communication Services, Inc., 857 F.Supp. 679 (1994), and In Sega Enterprises Ltd. v. Maphia, 174 F.3d. 1036 (1999), suggest that intellectual property issues have posed liability risk to e-businesses for some time. In those matters, copyright holders sued a computer bulletin board service and an Internet access provider for copyright infringement, and a manufacturer and distributor of video games sued a computer bulletin board company, and the individual who controlled it for copyright infringement, trademark infringement and unfair competition. Businesses sued in intellectual property disputes have typically looked to their SCGLP for defense and indemnity. In particular, the advertising-injury clause is normally invoked to deal with intellectual property suits. Typically, the SCGLP insuring agreement provides that the insurer will pay those sums that the insured becomes legally obligated to pay as damages because of “personal and advertising injury” to which this insurance applies. In such cases the insurer will normally have the right and duty to defend the insured against any suit seeking those damages. However, the insurer usually will have no duty to defend the insured against any suit seeking damages for personal and advertising injury to which this insurance does not apply. Consequently, the insurer will typically reserve the right to settle any claim or suit that may result. The insurer will traditionally pay for damages, but duty to defend ends when they have used up the applicable limit of insurance in the payment of judgments or settlements. TERRITORIAL CONSIDERATIONS The SCGLP applies to personal and advertising injury caused by an offense arising out of the insured’s business, but only if the offense was committed in the “coverage territory” during the policy period. The coverage-territory term typically causes some difficulties for e-commerce insurance coverage matters. In particular, the coverage-territory matter presents a unique issue for firms that use the Internet. By its very nature, the Internet is global. Thus, an insurance policy covering only the United States may not be adequate. It is usually recommended that if a business is planning to disseminate intellectual property on the Internet, the coverage territory of the insurance policy should be worldwide. In addition, many businesses that traditionally have not been intellectual property users now maintain Internet sites that incorporate intellectual property. Due to lack of experience, they seldom consider the legal implications of using intellectual property. Such businesses should obtain licenses for the use of others’ software, music and visual materials on their Web sites, along with insurance that covers any associated negligence. An SCGLP defines advertising injury along with personal injury. Universally the term “personal and advertising injury” means injury, including consequential bodily injury. Such injury arises out of one or more of the following misbehaviors: oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services; oral or written publication of material that violates a person’s right of privacy; the use of another’s advertising idea in the insured’s advertisement; or, infringing on another’s copyright, trade dress or slogan in the insured’s advertisement. Advertisement is usually defined in an SCGLP to mean a notice that is broadcast or published to the general public about the insured’s goods, products or services for the purpose of attracting customers or supporters. The Internet is widely considered a form of broadcasting for purposes of advertising. Advertising injury coverage requires a nexus between the offense complained of and the insured’s advertising activities. Coverage also requires causation. Thus, for an insurer to have a duty to defend or indemnify its insured in connection with a suit alleging intellectual property violations, the promotion of the product or service at issue must fall within the policy’s definition of advertising, and the insured’s advertising activities must have caused the alleged advertising injury. If the insured infringes a plaintiff’s copyright, trade dress or slogan, but does not do so in an advertisement as that term is defined in its SCGLP, it will face any related claim or suit without the benefit of insurance. Customarily, an SCGLP only insures against the infringement of another’s “copyright, trade dress or slogan.” This language does not afford a defense or indemnity for trademark-infringement claims. It should be noted that trademark infringement is a frequent allegation in e-commerce litigation. INSURERS RESPOND When it comes to liability coverage for e-commerce, there are problems with the SCGLP that extend beyond its intellectual property shortcomings. Chief among these is its lack of universal marketability. Many Internet entrepreneurs do not carry commercial insurance, or they have not fully addressed risk management, so they are often unconcerned when it comes to anticipating insurance needs. However, traditional companies have risk managers that maintain close relationships with insurance brokers. The obvious intellectual property coverage gaps in SCGLPs have spawned interest in new insurance products designed to address Internet risks. Insurers are responding to the shortcomings of the SCGLP by providing additional policies designed to cover e-commerce risks. For example, an Intellectual Property Infringement Defense Cost Reimbursement Policy provides reimburse for litigation expenses and damages for which the insured is liable and has paid to a third party arising out of covered litigation. “Covered litigation,” as customarily used in an Intellectual Property Infringement Defense Cost Reimbursement Policy, is defined as the defense of a civil proceeding brought during the term of the policy that alleges infringement by the insured. Ordinarily the policy defines “infringement” broadly. For example, infringement for the purposes of this sort of policy might mean the unauthorized use, sale or offer for sale by the insured of any intellectual property arising from the grant by the United States Patent & Trademark Office and/or the U.S. Registrar of Copyrights of any unexpired patent, trademark or copyright, excluding rights arising under or enforceable by virtue of a Treaty with one or more foreign governments. In addition, it is common for infringement to include in its meaning contributory infringement and inducement to infringe. Multimedia Liability Insurance Policies are also marketed to e-commerce companies and traditional companies that use the Internet for commercial purposes. These policies insure against liability arising out of the insured’s “media activities.” These policies are typically called media-liability policies, errors-and-omissions policies, or simply “E & O” policies. It is common for these policies to define media activities broadly. For example, media activities might mean, in connection with the covered media, any actual or alleged act, error or omission committed in the course of, or arising out of: the gathering, recording or collection of matter for inclusion in the covered media, including but not limited to any actual or alleged invasion or infringement of the right of privacy or publicity, including the torts of intrusion upon seclusion, publication of private facts, false light, or misappropriation of name or likeness; or outrage, infliction of emotional distress or prima facie tort; or trespass, wrongful entry or eviction, eavesdropping, or some other invasion of the right of private occupancy. Some policies may also include copyright infringement, plagiarism or misappropriation of property rights, information or ideas. With respect to e-commerce insurance policies, the term covered media usually refers to “publications, programs, broadcast or cable stations, or other communications” listed in the policy’s declarations, including any “online versions of such media.” The term “matter” usually means the content of any communication of any kind whatsoever, regardless of the nature or form of such matter or the medium by which such matter is communicated. In the course of litigation, matter has been found to include data, facts, fiction, computer coding, music, photographs, images, advertisements, artistic expression, or visual or graphical materials. Policies such as these offer e-commerce businesses greater protection against intellectual property risks than do SCGLPs. Media-liability policies also provide coverage for defamation and invasion of privacy claims, both of which are significant e-commerce risks. Another type of special insurance policy is known as Internet and Computer Network Security Policy (ICNSP). This policy is designed to protect e-commerce concerns that facilitate access to the Internet or store data online. Four types of ICNSPs are generally available. The first insures against a breach, act, error or omission involving the insured’s computer system where an unauthorized use or unauthorized access to the computer system leads to the disclosure of confidential information, the transmission of a computer virus or the inability to gain access to a computer system. The second covers content-based liability arising from a third party acting on e-content. The third provides reimbursement for money paid to avoid a threatened attack on an e-commerce site. The fourth provides insurance for damage to information assets such as customer lists. ICNSPs are the only type of e-commerce insurance that are designed to address business liabilities rather than legal difficulties. The author is of counsel to Brach, Eichler, Rosenberg, Silver, Bernstein, Hammer & Gladstone, www.bracheichler.com, of Roseland, N.J., and is an adjunct professor of Internet law at Pace Law School and Rutgers Law School. He is also the author of “101 Things You Need To Know About Internet Law” (Random House 2000).