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by Frederick J. Fisher, J.D.
It is no surprise the software and technology revolution often finds
support obsolete as quickly as the development of new technology. With
the explosion of Internet usage and services together with hardware
advances, it is equally no surprise that insurance mechanisms to
transfer risk of loss is also tardy in relation to need.
Traditionally, software developers and computer consultants could insure
their exposure to lawsuits by purchasing a 'consultants' professional
liability policy and/or a product liability insurance policy. Both of
these products have been readily available for quite some time. However,
in view of the fast paced development of new technologies and services,
these insurance products may no longer protect all of one's exposures.
New exposures exist due to increased use of BBS's and online services,
product distribution through that medium and Internet security issues.
In view of these rapidly developing medium, insurance products too will
have to adapt.
This article will explore some of these new exposures and provide a
recipe to review and enhance one's insurance portfolio. However, nothing
will replace sound risk management advice from one's insurance broker
and legal counsel.
EXPOSURES FACING THE TRADITIONAL COMPUTER CONSULTANTS
Traditional consultants provided software and hardware advice to a
client for fee. The software recommended may have been "off the shelf"
or customized provided by the consultants own programming staff.
Hardware too may have been recommended and installed. Insurance
mechanism to transfer risk of economic loss suffered by a client exists
for these types of services, and is readily available and affordable.
This comes in two forms, Consultants Professional liability and product
liability. The Consultants E & O form covers loss arising from an error
in rendering advice and service. If a wrong product is recommended or
does not work, the E & O policy is supposed to provide the means to
compensate the damaged party. As is usually the case, most insurers
providing this protection exclude from coverage claims that arise from
copyright, patent or other intellectual property right invasions.
However, this is not always the case, some insurers provide limited
Although the failure of hardware to perform as recommended by the
consultant is often excluded, this exclusion is limited only to the
failure of the hardware itself such as a hard disk failure, or
motherboard burnout. This is different from a situation where the
hardware operates properly but is not sufficient for the purpose
intended. In the former example, any resultant economic loss from
hardware failures may, however, be protected by a product liability
policy if the consultant is also the vendor and /or installer.
NEW EXPOSURES FACING THE CONSULTANT
Internet interest has spawned a new industry in the form of consultants
who do everything from assisting in the design of a World Wide Web Home
page to actually being the provider of the gateway. In other words, they
also operate the server that provides the Web's site. In view of these
added services, new liability exposures exist and were recently
heightened by the recent Prodigy Iitigation. When providing a Web page
for a clients, these new exposures may include libel slander,
advertising liability, media liability and security issues. Security
liability can arise from misuse of E-mail to credit card misuse. Further
complicating the issue is the fact that both the consultant and the
client face exposures from outsiders accessing the Web page. This is in
addition to the traditional liability facing the consultant for duties
owed the client.
Traditional insurance products do exist that can transfer these risks as
well, but not yet available in a single package. Theses include
traditional media liability insurance policies, advertising legal
liability, and products liability if goods are also being sold through
the client's web page. More importantly, is the exposure for libel and
slander as experienced in the Prodigy litigation. More alarming is the
fact that E-Mail services and messages may be available for downloading
for several years, thus increasing the likilihood of continued
Patent infringement, and copyright infringement coverage may also be
warranted. This becomes more important in view of the Netcom litigation.
Did the service provider "know that copyrighted material was available
for download, a question of fact for a jury. Although these stand alone
policies are not yet packaged into one, they soon will be in view of
what will be demanded by the market forces at play as consulting
THE TRADITIONAL SOFTWARE PUBLISHER
The product and property right exposures facing software publishers have
been well defined with insurance products available to cover known
hazards. Although there may be a dearth of legal precedent giving rise
to high profile cases, such as the Lotus-Borland litigation, liability
insurance products do exist that adequately address the common hazards.
These hazards include product liability, and intellectual property right
exposures such as copyright and patent exposures.
From the standpoint of traditional software publisher, little has
changed in their exposures, irrespective of appellate decisions that may
or may not impose liability. This is no different for the mass consumer
publisher of word processing applications or the specialized provider of
limited use vertical market applications.
However, Internet distribution of software or Internet "rental of
applications" via stripped down dumb terminals now in development may
alter the standard hazard ushering in an all new liability arena. For
instance, in the authorized distribution of software via Internet
stores, the wrong choice of a distributer may expose the publisher to
vicarious liability for Credit card misuse in view of the current
uncertainty of security. One way of dealing with this exposure it to
properly apply common risk management techniques such as indemnity
agreements with the vendor and to require a vendors additional insured
endorsement to the vendors liability policy.
More alarming however, is the rental issue. Some hardware manufacturer
are developing dumb terminals under the theory that many applications
can be run online eliminating the current requirement that the user have
a fully loaded system and have installed software to run it. This new
product may give rise to a whole new industry whereby software is
"rented by the minute/hour" or some other temporary licensing rental
mechanism. Not only is the security issue re-triggered, but software
"glitches, or bugs" may also give rise to new liability exposures.
Insurance products may not yet address the challenges that these new
INTERNET PROVIDERS AND SHELL COMPANIES
Traditional exposures face those engaged in providing Internet access
either through direct ISDN access, or with one's own .com or .org
address. The same might be said of those organizations that rent or
lease monthly access through shell accounts. The recent CompuServe and
Prodigy suits have certainly caused some alarm amongst sponsors of News
Groups, Discussion and List services. However, again, traditional
insurance products for advertising and Media Liability certainly provide
most of the protections that may be needed.
However, to a Corporate sponsor engaging the services of a consultant to
aid in the development and distribution of a client's World Wide Page,
the exposures facing the Client and Consultant changes dramatically with
the simple addition of this single opportunity.
For instance, a software consultant may be engaged by a client to
provide a database application for a client. Whether a simple mailing
list management program or a sophisticated inventory control program,
the liability of the consultant for a non-performing application is a
well know hazard protected by a standard EDP consultant's Professional
liability policy. However, if the consultant is also engaged to author
and provide a World wide Web page for the clients, and to add the page
to the Consultants own URL address as an additional service, this
singular service raises several new hazards not yet fully addressed by
the insurance industry. These include Media/Advertising Liability,
Professional Liability, and security issues. Producer Liability in the
form of traditional Broadcaster functions may also be involved.
It should be obvious to the reader that liabilities can be greatly
expanded by the simple addition of a new service in view of rapidly
expanding technology and service. In view of this, one's insurance
Broker or risk management department should be kept constantly in the
product and service development loop. By doing so, it may be possible to
have the appropriate coverages in place before you find you may need
Frederick J. Fisher is the principal of Frederick John Fisher Insurance
and Surplus Line Broker. [email protected]
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