Liability Insurance Coverage Gap
By Scott Simmonds, CPCU, ARM, CMC

The general liability policy used by most businesses in America has a major coverage gap caused by the increased use of technology.

Under common law if someone damages your property through negligence they must repair or replace the property they damaged. If a contractor working in your office does something that causes a fire they are responsible for the repair of your property. If your employee damages a customer's property you are responsible for the repair of that property.

General liability insurance policies provide coverage for bodily injury as well as property damage to tangible property owned by others. No problem when the property damaged is furniture, a building or inventory. All of these are considered "tangible" property. Liability insurance policies even provide coverage for the loss of use of tangible property.

What if the property destroyed is someone's electronic data? What if you are the contractor that burns the building down and part of what is lost was the business records stored on the computer? What if it is your electronic records that a contractor destroyed?

There is a growing trend in insurance to exclude electronic data from the definition of "tangible property". There is even a proposed revision to the commercial liability policy used by most businesses that specifically states that electronic data is not tangible property.

This has dramatic implications to almost all businesses.

If you depend on any form of electronic data for your business the service providers you use have no insurance (if they use standard insurance policies) for damage they cause to your data. Damage includes loss and loss of use of the data.

Sure you and your customers should have a backup copy of your data. Many businesses don't. Further, many businesses have ineffective of faulty backup systems. That is beside the point. The party that destroys property is responsible for the restoration of the property. The most common insurance policy used to protect business doesn't.

If your work could affect the electronic data of your customers a "standard" general liability insurance does not provide you with the coverage you need to protect you from a lawsuit. Just because you don't have insurance does not mean that you are not liable - if you cause a loss of data that results in the shut down of a business you better believe that your customer will visit upon you suit papers - you just have no insurance to protect you!

The solution is a specially designed insurance policy that recognize electronic data as tangible property. If you are a service provider amend your insurance program to include such. If you hire service providers you need to make sure that their insurance will step in to help you if they cause a problem. Thousands of businesses require that contractors show proof of insurance. Here is a major limitation in the effectiveness of the policies businesses are accepting.

There are several excellent insurance policies that solve the problems outlined above - most are called "E-Commerce Liability Policies" or something similar. The E-Commerce policies can also solve other issues such as web copyright infringement, professional liability and the like. Every insurance company does not offer these policies. Some insurers will endorse their policies to address the coverage issues raised here. The insured or the agent will have to ask for it though. Many insurers will not want to provide the "extra" coverage.