April/May 1999

Insurance Coverage
and Internet Transactions

by Jonathan M. Redgrave

Like many other aspects of the law that interact with the Internet, there is much uncertainty with respect to how insurance policies will apply to disputes and claims that may arise out of Internet or other electronic transactions. New insurance policies are being created to address some of the perceived risks, and many existing policies will no doubt cover some or many of the anticipated claims. Practitioners need to pay close attention to risks posed in cyberspace, newly developed insurance products, and the ways in which clients can protect themselves.1

This article outlines some of the issues that will confront lawyers who represent insureds as well as insurers who are presented with Internet-related risks and claims. In particular, it will focus on: (1) learning about the new risks, (2) knowing whether insurance coverage exists to cover the risks, and (3) prognosticating with respect to some of the potential grounds for future coverage disputes.

Clients need solid advice regarding the potential risks attendant to their activities in cyberspace and lawyers should educate themselves regarding these risks and the insurance-related issues.2 In addition, the potential risks should not be underestimated. A simple, one-page Web site can be viewed by millions, if not billions, of people around the world. Improper or inadequate control of site content can lead, for example, to claims of copyright infringement, trademark infringement, trade dress infringement, unfair competition, as well as violations of hosts of consumer protection laws. In addition, for the purposes of insurance, your client's "business" arguably may change from a "machine tool product manufacturer" or "health care provider" into a "publisher" or "broadcaster" with the simple hit of a keystroke launching a Web site.3

The following is a quick, non-exhaustive checklist of some questions you may want to start asking your clients:

• Do you know what your client does on the Internet?
• Does your client solicit business over the Internet or through some other electronic means?
• Does your client use the Internet at all?
• Does your client provide content for other Internet Web sites? If so, does it have sufficient insurance to cover risks involving issues of licensing and defamation?
• Who designs and/or maintains your client's Web site? Does this person have adequate insurance? Does your client know the source of all materials that appear on the Web site?
• What types of "links" are provided on your client's Web site?
• What kind of information is being tracked on the Web site? Is this tracking disclosed? Does the Web site provide or accept "cookies"? Does your client's Web site have a privacy policy or statement?
• Is your client an Internet Service Provider (ISP)? If so, is it covered for defamation based either on the content of sites that the service makes available on-line or on the messages posted by its users? Also, does it have coverage for the possible invasion of privacy risks (recently recognized in Minnesota) or does it have sufficient insurance coverage for risks involving issues of licensing?
• Does your client post advertising or conduct commerce via the Internet? If so, does it have insurance to cover risks posed by the Web site? Also, does it have insurance to cover the distinct attendant security risks?
• Does your client accept and post advertising or other content for others on its Web site? If so, does it have insurance and/or indemnification agreements to cover risks posed by the advertisements? Also, does it have insurance to cover the distinct attendant security risks?
• Does your client maintain a "chat room" or bulletin board where others can post materials at their will and discretion?

Insureds need to assess the risks and then assess the current and available insurance coverage. At the same time, insurers should be cognizant of the risks and seek to either provide the necessary coverage or add unambiguous exclusionary language to the policy to avoid coverage for risks that the carrier does not wish to insure.

Jonathan Redgrave is a principal with the law firm of Gray, Plant, Mooty, Mooty & Bennett, P.A. in Minneapolis. His practice includes advising clients regarding insurance and Internet issues.

"the potential risks should not be underestimated"

To date, few cases involving insurance issues and the Internet have been litigated and reported. In addition, there are many new products that are being developed in the marketplace to address Internet and other electronic commerce risks.

Insurance options that may provide some coverage for Internet/cyberspace transactions include:

1. Commercial General Liability ("CGL") Policies:

a. Property damage coverage.4

b. Advertising injury coverage.5

2.Errors and Omission (E & O) Policies.6

3. Professional Liability Policies.

4. Media Liability Policies.7

5. Directors & Officers (D & O) Policies.

6. Intellectual Property Defense Policies.

7. Excess and Umbrella Policies.

Insurers, insureds and risk management professionals need to examine the existing coverage as well as potential coverage available for the risks presented.

There is little established ground upon which to provide a definitive list of issues, especially in light of newly developed insurance policies that are just making their way to the market. Nevertheless, the following areas may become litigated topics in the coming years.

1. "Coverage territory" as a problem.
Practically every insurance policy includes a definition of "coverage territory." The typical 1996 Commercial General Liability ("CGL") policy now defines the coverage territory, in pertinent part, as "The United States of America (including its territories and possessions), Puerto Rico and Canada." Unfortunately, cyberspace knows no boundaries and your client's Web site, and its content, that can be accessed in Mankato can also be accessed at the very same time in Moscow.

This global reality of the Internet has prompted some observers to state that in the context of Internet activity, "an insurance policy covering only the United States is inadequate. If a business is planning to disseminate intellectual property on the Internet, the coverage territory of the insurance policy must be worldwide."8 Clients need to understand and address their global risks.

2. Defining "advertising injury."
At first glance, most practitioners might think that anything placed on the Web by a business has an "advertising" component. In theory, this would help insureds find coverage under the "advertising injury" coverage of typical CGL policies. Unfortunately, the law is not crystal clear on the point and cases will probably turn on the particular facts presented.9 This may become one of the more contested insurance issues arising in connection with Internet activities.

3. The intentional acts exclusion.
One area yet to be litigated significantly regarding the Internet and insurance is the application of intentional acts exclusions. On the surface, there should be little difference between, for example, the application of this exclusion in the context of distributed brochures versus a home page available on the Internet. However, practitioners should not assume that the results would be the same in a courtroom, since a finder of fact may perceive acts on the Internet as more deliberate or conscious than person-to-person transactions. While this possibility is not altogether rational, people with little or no contact with the electronic world often harbor misconceptions regarding the Internet, what appears on the Internet, and how it got there. As such, practitioners must be sure to know if the audience is technologically adept or not when presenting Internet insurance issues.

4. Breach of contract.
A critical inquiry in many cases involving electronic commerce will focus on exclusions for "breach of contract." If the dispute arises from a breach of contract (e.g., which party would cover a particular risk, the failure to provide the proper content on a Web site, the failure to provide adequate security and access to Web site content, etc.), the exclusion may apply to preclude coverage even if the claim centers on an issue addressed by the policy.10

5.The "professional services" exclusion.
Many policies have an endorsement that excludes coverage for professional liability or professional services. Clients should review the definition of the "professional service" that is excluded and determine if the exclusion extends to the client's activities on the Internet.

6. Timing of the "triggering" event.
Most CGL advertising injury coverage provisions will contain two focus points regarding the trigger of coverage (the timing of the alleged injury). The first is in the grant of coverage, which is qualified by limiting the coverage to advertising injury "during the policy period." The second is the policy exclusion for "materials whose first publication took place before the policy period." The Internet may provide unique problems in this regard because of the extent to which older materials are republished on new Web sites.

7. Exclusions for acts of "publishers."
Advertising injury coverage in CGL policies excludes coverage for "[a]n offense committed by an insured whose business is advertising, broadcasting, publishing or telecasting." With respect to the Internet, serious questions can arise with respect to who is a "publisher," when that person became a publisher, and whether publishing is that person's "business."11 Because coverage under the CGL "advertising injury" provision will likely become a lightning rod for Internet-related claims, it is also likely that this exclusion quickly will become subject to increasing scrutiny and litigation.

The risks of conducting Internet and electronic commerce are real and businesses must account for the risks. Similarly, insurers must perceive these risks and take adequate steps to understand the ramifications of the Internet for existing policies and, if desirable, develop new products to address gaps in coverage. Counsel for both must be attentive to the changing landscape and the role of existing and new insurance to cover the risks of the Internet and electronic commerce.

1. See Myra Lobel, "Insurance for Online Transactions," 2 Wallstreetlawyer.com; Securities in the Electronic Age. (Dec.1998). (Back to text)

2. See Jonathan I. Ezor, "Representing The New Media Company: Advertising On The Web," Computer Lawyer (May, 1998). (Back)

3. See Melvin Simensky and Eric C. Osterberg, "Insurance And Management Of Intellectual Property Risks," Entertainment and Sports Lawyer (Summer, 1998); Ezor, "Representing The New Media Company: Advertising On The Web," supra n. 2; see also Rodd Zolkos, "Liability Grows With Technology," Bus. Ins. (Jan. 26, 1998) at 3. (Back)

4. There may be some limited coverage under the property damage coverage in the CGL policy for certain cyberspace injures. Compare Retail Systems v. CNA Ins. Cos., 469 N.W.2d 735 (Minn. App. 1991) with Magnetic Data, Inc. v. St. Paul Fire & Marine Ins. Co., 442 N.W.2d 1095 (Minn. 1989). See also St. Paul Fire & Marine Ins. Co. v. National Computer Systems, Inc, 490 N.W.2d 626 (Minn. App. 1992) (distinguishing Retail Systems and discussing Magnetic Data), pet. for rev. denied (Minn. Nov. 17, 1992). (Back)

5. The 1996 CGL policy form issued by Insurance Services Office, Inc. provides the following definition of "advertising injury":

1. "Advertising injury" means injury arising out of one or more of the following offenses:

a. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;

b. Oral or written publication of material that violates a person's right of privacy;

c. Misappropriation of advertising ideas or style of doing business; or

d. Infringement of copyright, title or slogan.

Many of these claims are among the claims that are likely to arise in disputes connected with the Internet and electronic commerce. (Back)

6. Regarding the need for E&O insurance to cover the risks of using others' materials on the Web, see Melvin Simensky and Eric C. Osterberg, "Insurance And Management Of Intellectual Property Risks," Entertainment and Sports Lawyer (Summer, 1998) (American Bar Association); see also David Halbreich, et al., "Intellectual Property On the Internet: Surfing Through Liability and Coverage Issues," 1 Mealey's Emerging Ins. Disp. 21 (Nov. 14, 1996). (Back)

7. See Chad E. Milton, Insurance For Internet Content And Services (Second Annual Internet Law Institute, New York City June 8-9, 1998 San Francisco, July 20-21, 1998). (Practicing Law Institute Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series). (Back)

8. Simensky and Osterberg, supra, n. 6. (Back)

9. Compare John Deere Ins. Co. v. Shamrock Indus., Inc., 696 F. Supp. 434, 437 (D. Minn. 1988), aff'd, 929 F.2d 413 (8th Cir. 1991), with Bruce Telles, "Insurance Coverage For Online Torts" in Insurance Law: What Every Lawyer and Businessperson Needs to Know. (Practicing Law Institute Litigation and Administrative Practice Course Handbook Series, May 1998. (Back)

10. See Ross v. Briggs & Morgan, 540 N.W.2d 843 (Minn. 1995), reversing Ross v. Briggs & Morgan, 520 N.W.2d 432 (Minn. App. 1994). (Back)

11 Mark Sableman, "Business Liabilities on the Internet," Communications Lawyer (Spring 1998). (Back)