Cyber Insurance – The New Way to Manage Digital Risk

Cyber Insurance – The New Way to Manage Digital Risk

Computer hackers stealing customers’ credit card information are no longer just a threat to traditional technology and Internet companies. ChoicePoint, Polo Ralph Lauren and LexisNexis have captured headlines recent ly as victims of credit card theft. They’re among the thousands of companies at risk from hackers breaking into their computer systems to take and abuse customers’ personal information.

These days, every company doing business over the Internet is at risk, whether the company is a huge software maker, a bricks-and-mortar retailer with a dot-com presence or a tiny retailer selling specialty crafts online.

All businesses have private, critical information that’s at risk. It could be anything from patents on intellectual property to customer social security numbers.

Unfortunately for these companies – and their customers – many digital losses are not covered under traditional corporate insurance policies. Commercial general liability policies – in particular the personal injury and advertising injury coverages – now offer very limited coverage for many of the risks emerging from the widespread use of the Internet for commerce. In addition, policies covering damage to your own property, vandalism, business interruption, and dishonesty focus on tangible property but offer little protection for malicious programming (viruses) and for intellectual property – significant exposures for many companies. These policies typically offer very limited coverage for loss of computer data, regardless of how catastrophic or debilitating the loss.

This leaves companies victimized by computer losses open to substantial financial damages – and the exposures are growing every day. Realizing this, a number of companies are seeking protection through a type of coverage loosely referred to as “cyber insurance.” This insurance line has emerged over the past several years as a way for companies to hedge against lawsuits from customers whose personal information is stolen – or other lawsuits from customers alleging financial harm from misuse of digital information.

Let’s look at two examples:

1. Fictional web site design firm “Web Design,” which has 100 employees and $40 million in annual sales. Fictional client “Widget World” hires Web Design to design a Web site to sell products. In addition, Web Design creates a customized order package for Widget World to take orders online. The ordering software assesses tax on orders. Unfortunately, Widget World later learns it is not authorized to collect the tax and must refund the money to customers. The cost to Widget World is $250,000, which they decide to recover by suing Web Design. If that weren’t enough, a Widget World competitor sues Widget World, claiming its website looks too similar to the competitor’s Web site. Widget World then sues Web Design for trademark infringement. This used to be covered under Web Design’s general liability policy but now excludes it. Cyber insurance typically provides this coverage.

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