Insurance Concerns for the E-commerce Era
Everything is finally set up. You've hired the right people. Office space is leased.The lights are turned on. Leased state of the art computer hardware is fresh out of the box. Your business is ready to become a player on the Net (did somebody say "IPO"?) However, there is one component of setting up the business still on the bottom of the pile, and unless it's addressed correctly, you could be out of business quickly.
Effective insurance can make the difference between success and failure. Says Neal Batra, President/COO of Dormnow.com, a Web site utilized by college students to purchase roomfurnishings and decorations: "Proper insurance is definitely a concern. It was something we had not considered until we were a month before launching. Reliance on an insurance company and broker who is knowledgeable about our specific needs is important."
With such heavy reliance on computer systems and other technology simply to operate on a day-to-day basis, as well as specialized staff, high-tech businesses have more specialized insurance needs than the standard retail store.
For example, "Extra Expense" coverage is likely more important to a high-tech client than Business Interruption coverage--if a fire destroys the firm's office, there may not be much actual interruption in the revenue stream, as business is conducted electronically or over the Web site. However there could be substantial additional expenses in leasing another office, leasing new computers, etc.--the Extra Expense sublimit should be properly evaluated.
There are two areas of specialized coverage that high-tech firms should pay close attention to: Professional Errors & Omissions (E&O) coverage, and Directors & Officers (D&O) Liability.
E&O pays on behalf of an insured money they become legally obligated to pay because of a negligent act, error or omission in the insured's professional services. If a firm is simply selling retail over a Web site, there may not be much of an exposure. However, any additional services provided could open a firm to additional exposure.
"We have a Professional E&O product for high-tech firms that provides trademark and copyright coverages," says Mark Vella, Underwriting Specialist at GE Westport Insurance Corp. "However the customer should be knowledgeable of the coverage they are buying and how their policy will respond. There is a significant difference in insurance exposure if a Web site firm is selling products, versus services or non tangible products. Laws such as the Digital Millennium Copyright Act are still being addressed; insurance coverage is still evolving as we speak."
D&O Liability insurance is an important risk management tool for both privately and publicly-traded Internet companies. Most claims against directors and officers are made by a company's shareholders (in connection with stock issuances and with merger activity) or by its employees, but claims by competitors, customers and government regulators are also common. Over the past three years, D&O products available to private companies have become more affordable, with broader coverages available such as employment-related practices liability.
For public companies, the purchase of D&O insurance should be a prime risk management activity, says Alex Jezerski Jr., a partner at Carpenter Moore Insurance Services, whose specialty is D&O insurance. "Shareholder class actions continue to be filed at a record pace. Given the stock volatility and rapidly evolving competitive landscape associated with internet companies, this trend should continue with higher settlements. An appropriately structured D&O program, coupled with strong internal controls on key matters such as insider stock sales, revenue recognition and analyst and shareholder communications will help protect the directors and officers, and the company itself, from the severe financial drain that such litigation invariably involves."
Insurance Concerns to Think About
Just don't look for coverage for the Y2K bug--aside from limited specialized products, most if not all insurance companies exclude this exposure. Most other exposures are insurable--check with your agent or broker for more information.
Copyright 1999 Triad Commerce Group, LLC. All rights reserved. This material may not be published, broadcast, rewritten or redistributed in any form without written permission.
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