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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.

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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.


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 copyright coverage.

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.


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 occurrences.

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 services expand.


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 services suggest.


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 them.
Frederick J. Fisher is the principal of Frederick John Fisher Insurance and Surplus Line Broker. fjfisher@ix.netcom.com

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