Insurance Ramifications of Cyber-Risk
The "Online Business Model, as illustrated, places the Internet service provider, or "pipeline service provider," at the hub of an emerging communications medium. Certainly, a great deal is at stake - as new and old players engage in an ongoing battle to control telecommunications market share.
In keeping pace, insurance agents and brokers, together with insurers and risk managers, are identifying how these developments will affect the varied commercial insurance needs of emerging high tech industries.
Internet access and service providers are at the center of the new information distribution model. They include:
- Fast Line Communication Network Facilitators
- (ISDN, Frame Relay, T1, T3)
- Network Connection Providers
- Internet Access Providers (Cable telephone, local and long distance telephone and utility companies anxious to get into the service provider/content provider business)
A variety of content providers known as "publishers" are likewise adapting to the new medium. These include:
- Entertainment Industry companies such as film companies, television companies, video game companies, CD ROM developers and software firms
- Trade Publishers
- Bulletin Board Services
- World Wide Web Sites
These content providers, in turn, rely on programmers, web hosts and web designers to disseminate their content to the online world (end users) accurately, securely, legally, and on a 24 hour per day basis.
Insurance becomes a critical issue for all participants in the "communications food chain" as more and more businesses establish an online presence. The risks associated with these businesses are slowly emerging.
Providing Electronic Bulletin Board Service
A noteworthy decision was handed down by a New York State Court in the Prodigy case.
The New York State Court held that Prodigy, a proprietary online network, could be held liable for statements posted to one of its electronic bulletin boards. In ruling that Prodigy was a "Publisher" of the libelous material as opposed to a mere "distributor", the court deemed Prodigy exercised sufficient control over its online content to support a finding of liability.
Contrast this case to the recent Silicon Valley company, a fastline Internet access provider, disseminating pornographic material through its bulletin board services. In that particular case, the company argued it was a mere "conduit" for other people's content without the ability to control, monitor or moderate the content being provided.
Prodigy argued it was merely providing a platform for the content and not producing the content itself.
The Court concluded, however, liability is a function of how much control is being exercised over the communication. The key differences in finding liability exposure to Internet access and service providers is whether the company is acting to:
- merely store information
- create content, or
- publish content from other entities and the extent to which they exercise "editorial control" over the content.
The main point to keep in mind is to know which role you are playing. As a proprietary online service which offers proprietary content and also provides Internet access, you will be held responsible for both content and connection services. If, on the other hand, you're in business solely to provide Internet access and only incidentally provide a bulletin board service, without ability to control that content, your liability will be limited.
Creating World Wide Web Sites
As a content provider on the Web you are deemed to be a publisher in one form or another. Programmers and Web Hosts responsible for developing a Web Site will be vicariously liable for such content infringements as copyright and trademark violations of the content provider. For these companies, well crafted hold harmless agreements and indemnity agreements are being utilized to contractually transfer these exposures to the original content provider.
In addition, the Errors and Omissions exposure for Web Site programmers and developers can be concerning. One of the biggest benefits of computerized searching stems from the use of the "hypertext link, " the ability to jump quickly and easily from place to place on the World Wide Web. While empowering, it can lead to potential problems. The failure to catch a misdirected hypertext link which links to an embarrassing and/or demeaning site can result in damages for libel. Consider a prominent church having a Web Site that contains a hypertext link. But instead of leading to information about the Vatican mistakenly leads to pornographic content resulting in damages or defamation.
The issue is whether the standard, as a Web Site publisher, will be the same as it is for any other publisher. This standard will have to be developed over time on a case-by-case basis.
If the Web Site is intended to go beyond providing mere information and actually attempts to market a product and/or transact electronic commerce via the Web Site, all the law and all the risk and regulatory issues relating to advertising will apply to content providers in a manner similar to print and television media.
The other aspects of secure transactions, cyberpayment systems and product fulfillment create real time monetary exposure to financial loss. Until an infrastructure can be built to support electronic commerce, similar to traditional transactions, this will continue to be an area of exposure.
The challenge for any Insurance Agent or Broker in an evolving industry like this comes in:
The principal Exposures may be categorized as follows:
- identifying the exposure, and
- minimizing the risks.
- Intellectual Property Infringements. This coverage can be triggered by content providers who use content of others without permission.
- Errors and Omissions Liability. Triggered typically by programmers, web hosts, web designers who, through negligence in their work product, cause injury/damage to a third party.
- Personal Injury and Advertising Liability. As electronic commerce grows, this coverage can be triggered by World Wide Web sites, bulletin board services and trade publishers who publish illegal content or who publish legal content overzealously.
- Property and General Liability. This coverage cuts across all aspects of the communications spectrum. It can be triggered by the usual perils associated with conducting any commercial venture.
This brief summary of the risks of Cyberspace is contributed by Bolton/RGV Insurance Brokers, a leading property and casualty insurance broker located in South Pasadena, California. In 1994 the firm took steps to position itself as a leader in the emerging field of the Internet and other online services. Bolton/RGV was the third insurance brokerage in North America to establish a World Wide Web site on the Internet. Bolton/RGV's background in the communications and information industry enables us to provide a broad range of services to companies entering the field of electronic commerce.
For further information please access Bolton's World Wide Web site at www.boltonrgv.com or call (818) 799-7000.
By: Robert L. Davidson, JD
Executive Vice President
Bolton/RGV Insurance Brokers
EXHIBIT 1: ONLINE MODELContent Providers: Developers & Publishers (Producers)
Pipeline Service Provider (Distributors)
Online Users (Consumers)
TRADITIONAL BROADCAST MODEL
TV Programmers: Producers
Network Distributors: NBC, CNN, CBS
End Users: Viewing TV Audience