challenges of the Internet for professional liability underwriters, The
The Internet has opened up a host of opportunities for entrepreneurs of both the scrupulous and less-than-scrupulous persuasion. And with those opportunities come risks, some of which are insurable. Professional liability underwriters face some extremely interesting problems in attempting to underwrite the risks since, in many instances, the case law has not been established that determines the extent of liability for certain actions-or if there even will be any liability.
We talked to Mark Hutchins, senior vice president of underwriting at Media/Professional Insurance, Kansas City, Missouri, an MGA that specializes in providing coverage for the media, about some of the areas of concern.
Court decisions don’t lend much guidance
The principal areas of concern include:
Intellectual property rights of the content being disseminated in cyberspace. Is the material proprietary? How is it protected? If alleged infringement occurs, what’s the scope? What are the laws that apply to cyberspace content? Thus far, not many of the answers to these questions are around yet.
Protection of privacy and/or exploitation of publicity. Hutchins says that, although there have been some decisions in this area, they’ve done little to define things on a broadbrush basis. There are cases of litigation where protections were defined, only to be stripped away in another decision. And there have been attempts at legislation that have not clarified the situation either. (The Communications Decency Act has already been overturned by the Supreme Court.)
Electronic commerce. As business is actually transacted on the Internet, it opens up the potential for E&O exposures.
Security. This is an area of great concern that pretty much transcends the other areas and has to be clarified before real progress can be made in other areas. “We can anticipate that there will be progress in the security area,” Hutchins notes, adding that this “is being and continues to be addressed.”
Media/Professional already is “insuring a wide variety of participants,” according to Hutchins. These include independent content providers; Web site developers and Web site managers; Internet service providers; software developers; commercial on-line services which “combine all aspects of providing access including their own content, dissemination of others’ content and electronic commerce”; system providers that develop browser software and games; and businesses that are transacting commerce.
Individual underwriting called for
Because of the wide variety of participants and the different ways in which they conduct their operations, individual underwriting appears to be the best way to handle Internet risks. “We put a lot of time and effort into individual account analysis,” Hutchins points out. “There’s so little homogeneity among risks. We try to evaluate the individual conditions to determine the potential risk.”
Among the factors considered are:
Who the prospect is.
What the prospect says it is going to do.
How the prospect plans to do what it says it’ll do.
Who the clients will be if the prospect is transacting business.
What the scope of the activity will be (whether global or reaching a smaller segment of the Internet society).
What are the potential ramifications of the service and the information provided?
If there is a potential for E&O or libel exposure or intellectual property concerns, what is the nature and scope? And what laws might apply? “Since there is no body of law, we often resort to the closest historical basis,” Hutchins notes. This could include laws that currently apply to other disseminators of information such as publishers, advertisers or software developers.
Hutchins goes on to report that the first claims arising out of Internet exposures were tied to privacy/publicity exposures. “We’re now starting to see more and more activity involving E&O exposures arising out of electronic commerce. We’re also seeing an increase in claims involving intellectual property rights. We anticipate that all of those areas will see an increase in claims as Internet usage increases. This is particularly true until a body of law is established. Even then, there will be challenges. There still will be mistakes and libel.”
Internet in its infancy
Hutchins goes on to point out that, thus far, “we’re only seeing the tip of the iceberg in terms of what will be on the Internet, so we’ve barely seen what can happen in the claims area.” He predicts that, in terms of privacy issues, there will be “somewhat of an awakening by society that we really don’t have much privacy now. There will be efforts to protect private information, but that will be pretty limited, particularly for those who choose to use electronic communication. Fortunately,” he adds, “much of what occurs in this area does not create much liability and some of those liabilities are being taken care of Some of the major credit card companies have already announced that they are going to assume the risk of theft via electronic commerce.”
Hutchins concludes that the Internet is a “whole new medium to exploit. There will be a lot of evolution in private and public lives and evolution from the standpoint of insuring it. There are so many unanswered questions that arise out of the fact that the Internet involves a whole different universe. Publishers of the written word can anticipate a certain audience and, in some cases, can exercise a certain level of control over who the audience is. That isn’t true on the Internet, although there are attempts being made to control the audience. It’s certainly exciting and makes the life of an underwriter very interesting. And the evolution is occurring at such a rapid rate. The future certainly offers some interesting challenges and opportunities.”
As a final word of caution, those players who might be tempted to enter this growing market should be aware that this is not a long-tail exposure. Cash-flow underwriting, which is always suspect, clearly does not make sense for Internet coverages. Hutchins explains that “the nature of the beast is immediacy. In cases involving infringement of intellectual property, for example, if the infringement is clear, it has to be stopped right away.”
He continues that other cases also require immediate attention and have often gotten it from the courts. “Damage can be very rapid on the Internet. Oftentimes, the emanation is obvious so there’s no question of liability. The only question is how do we stop it and what’s the tab.”
The Internet offers a plethora of insurance opportunities. But with these opportunities comes an equal increase in risk exposure. Companies that enter this market should be aware that claims can come quickly and that this is not a long-tail business. At best, it’s a medium-tail line and often is short-tail in nature.
Mark Hutchins, senior vice president of underwriting at Media/Professional Insurance
Copyright Rough Notes Co., Inc. Oct 1997
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