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Policyholders of all kinds should immediately think "insurance" to offset losses or liabilities that arise from their activities on the Internet. (1) Whether the policyholder is a for-profit firm, government agency, municipality, or charitable organization, insurance coverage can prove a welcome safety net for cyberspace-related perils. Although not every risk presented by the Internet is novel, the potential magnitude of losses and damages in cyberspace is unparalleled. Accordingly, smart risk management in the technology realm is becoming essential for policyholders of all kinds.
As specialized insurance products for online risks are still limited in number and untested, policyholders should be mindful of the scope of insurance coverage under the insurance policies that they currently have. Several types of insurance commonly purchased by businesses may respond to a variety of risks posed by conducting business and communicating in cyberspace. Once an inventory of existing insurance coverage is undertaken, most policyholders are better positioned to evaluate the need, if any, for the specialty computer-risk insurance products currently available in the insurance marketplace.
Cyberspace Insurance Coverage Issues
Despite insurance industry contentions to the contrary, many insurance policies already sold to policyholders protect against certain losses stemming from activities and communication in cyberspace. The following discussion concerns insurance coverage under a variety of different insurance policies frequently purchased by businesses and other entities.
Insurance to Cover Liabilities and Losses
Currently there are limited options in terms of insurance products specifically designed to protect against cyberspace liabilities. Insurance policies already purchased, however, may provide extremely valuable protection for liabilities stemming from Internet activities.
For example, insurance coverage should be available for a host of liabilities arising from activities of the policyholder over the Internet. Insurance coverage under standard form commercial general liability (CGL) or umbrella liability insurance policies may be available for claims stemming from activities on the Internet. (2)
In 1976, the insurance industry began marketing the advertising injury coverage provision as part of the "broadest package of coverage available to the average insured." (3) Today, the advertising injury provisions remain a valuable component of the CGL policy. (4) This coverage includes payment for the policyholder's attorney fees and for judgments or settlements reached in the underlying case against the policyholder.
General Liability Coverage
Umbrella and CGL insurance policies often provide insurance coverage for claims stemming from the policyholder's advertising activities (5) that involve claims of libel, slander, defamation, violation of right of privacy, piracy, unfair competition, or infringement of copyright, title, or slogan.
For example, in Bensusan Restaurant Corp. v. King, (6) the policyholder, an owner of a small jazz club in Missouri, was sued for trademark infringement, trademark dilution, and unfair competition after he advertised his jazz club by creating a Web site. The claimant, a New York City jazz club, brought its lawsuit in federal court in New York. The policyholder's lawyers were successful in getting the claims against their client dismissed by the court. For policyholders, the most important aspect of this case was the fact that the policyholder's insurance company provided insurance coverage for the Internet related claim under a CGL policy it had sold to the jazz club owner. (7)
Allegations of Damage to Data and Loss of Use
General liability policies and umbrella policies often protect the policyholder against claims of "property damage." Common insurance policy definitions of property damage include "physical damage to tangible property of others, including all resulting loss of use of that property; or loss of use of tangible property of others that is not physically damaged...."
Many insurance companies argue that data, information stored on computer drives and other electronically captured material do not constitute tangible property under liability insurance policies. (8) The few cases reported addressing the issue of whether data or media constitute "tangible property" are divided with little meaningful analysis offered by the courts in those decisions.
One pro-coverage case was decided by the Minnesota Court of Appeals in Retail Systems, Inc. v. CNA Insurance Companies. (9) In Retail Systems, the court addressed the issue of whether "computer tapes and data are tangible property" under a general liability insurance policy. In finding for coverage, the court held that:
At best, the policy's requirement that only tangible property is covered is ambiguous. Thus this term must be construed in favor of the insured. Other considerations also support the conclusion that the computer tape and data are tangible property under this policy. The data on the tape was of permanent value and was integrated completely with the physical property of the tape. (10)
Other pro-policyholder cases on the issue of whether loss of data constitutes property damage include Centennial Insurance Co. v. Applied Health Care Systems, Inc., (11) in which the Seventh Circuit held that an insurance company must defend suit against a policyholder for allegations of data processing malfunction and random loss of computer data as a result of defective data processing system controllers. Similarly, in St. Paul Fire & Marine Insurance Co. v. National Computer Systems, Inc., (12) a Minnesota Appeals Court held that a complaint against a policyholder for misappropriation of confidential information did not allege property damage, but the court nevertheless held that the insurance company had a defense obligation to the policyholder.
The cases are split on this question, however. Decisions favoring the insurance companies …