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How to Shop for High-Tech Insurance Coverage

By Jay Hollander

Jay Hollander, Esq. is the principal of Hollander and Company LLC, www.hollanderco.com, a New York City law firm concentrating its efforts in the protection and development of property interests relating to real property, intellectual property and commercial interests, as well as related litigation.

The content of this article is intended to provide general information relating to its subject matter. Providing it does not establish any attorney-client relationship and does not constitute legal advice. Personal advice in the context of a mutually agreed attorney-client relationship should be sought about your specific circumstances.

Summary: Insurance is important for any business, but high-tech and Internet companies have nontraditional needs to cover claims for such things as intellectual property infringement. This article explains what technology companies should look for when reviewing their insurance needs and how the buy the right coverage.


Introduction

The market for technology companies of all kinds -- software developers, consultants, web designers, content and service providers, even hardware manufacturers -- has exploded over the last several years. As with any growing enterprise, as business explodes, so does potential liability.

Unfortunately, until recently, innovative high-tech companies, facing larger and more frequent intellectual-property related liability claims for intangible damage, have been dismayed when turning to their insurance carriers for coverage, finding that the policies they previously obtained to protect them were not suited to the types of claims increasingly being made against them.While the landscape is finally changing, many high-tech companies are unaware of the deficiencies in their existing policies and of alternatives that are now available to them.

Traditional Types of Coverage

So let's first understand the customary business insurance landscape, historically dominated by comprehensive general liability and advertising injury policies, and, to a lesser extent, by directors and officers' liability and professional errors and omissions policies.Comprehensive general liability, or CGL, policies have been around for years and traditionally protect against unforeseen bodily injury or property damage. The terms of such policies usually require there to be physical injury to or, sometimes, a loss of use of, tangible (as opposed to intellectual) property.Hence, more intangible losses, such as economic losses due to non-functioning software, are largely excluded from traditional coverage under such policies. Further, due to its requirement that calamities and losses be unforeseen, CGL coverage for intentional claims such as misappropriation, infringement, theft of trade secrets, etc., are foreign to such policies and have been largely excluded, by definition.Where intangible coverage was covered, it was usually under the "advertising injury" insurance provisions of liability policies. This type of coverage is, in some ways, more limited than standard coverage for injury and property damage, but better in other ways. Unlike the main portions of CGL coverage, which cover all unforeseen occurrences causing the requisite physical injury or damage, advertising injury coverage is more limited because it is "named perils based" and provides coverage only for enumerated "offenses."On the other hand, precisely because advertising injury coverage is based on named or listed offenses, there tend to be fewer exclusions from coverage. Traditionally, the main offenses protected by such coverage have included copyright infringement, privacy violations, libel or slander, idea or business-style misappropriation, and some trademark or trade dress infringement. Still, there has been a rub here as well. First, insureds have had to look clearly at the fine print of their policy language to see how their particular policy named or defined the enumerated offenses included in the advertising injury endorsement. Second, even if listed, such coverage required that the offense have a "nexus," or connection, with the insured's advertising. This second requirement has been particularly vexing for insureds since, while many types of listed offenses can and do occur in the process of advertising, many do not. For example, if a claim were made that an insured's advertising infringed copyrighted materials, advertising injury would likely come to the rescue. On the other hand, if there was a claim for trade secret misappropriation that lacked the required nexus to advertising, coverage has often been denied.One of the most troublesome examples of this latter non-qualifying type of intellectual property claim, traditionally excluded from advertising injury coverage, has been patent infringement claims. Why? Simply because, as courts have often ruled, patent infringement occurs by the use, manufacture or sale of patented inventions, not by advertising it. Other cases, perhaps less obvious, have continued to plague insureds who have been forced to try to squeeze or stretch intellectual property claims against them to provide the needed nexus to advertising to avoid being frozen out of coverage.Thus, defendants with insurance in patent infringement claims have argued, with limited success, that such claims came within advertising injury offenses dealing with theft of "style of doing business" or copyright infringement of "slogans," rather than theft of inventions.New

Types of Coverage

Slowly, but with mounting speed, the insurance industry has come forward with many products to address the lingering coverage gaps that left more and more claims unprotected.Let's briefly cover some of the more interesting ones.Some insurers have initiated patent infringement liability policies, directly addressing the problems of deliberate patent infringement.

Under one such policy, recently offered by Intellectual Property Risk Management (IPRM), coverage is provided:

    To pay on behalf of the insured Damages and Claims Expenses which the Insured shall become legally obligated to pay because of the Claim or Claims first made against any Insured and reported to the Underwriter during the Period, arising out of the patent infringement in respect of Covered Products by the Insured or any of its employees in the conduct of the Insured's business.

Notice that the policy is a claims-based policy, not an occurrence-based policy, covering only infringement claims made and reported during the insurance period.Even here however, insurance companies watch their backs and don't provide complete solutions. According to its web site, for example, IPRM's policy is only available for the pharmaceutical, biotechnology, medical device, vitamin and nutritional fields.For other areas of high technology, there are other developing insurance products.In the software arena, one available product is "Computer Software and Services Errors or Omissions" coverage. Here, coverage is provided for negligent acts or omissions causing software products to malfunction or fail in their intended purpose. Such coverage also protects against losses in computer services, such as design and consulting services and data processing as well as computer hardware transactions.In seeming response to the inherent deficiencies of advertising injury coverage to high technology situations, "Multimedia Liability Insurance" products have also come on the market. This type of product directly benefits content providers and distributors, protecting them against damages from expansively defined "multimedia activities" including "creating, producing, distributing, exhibiting, broadcasting, advertising or publicizing matter" The protected "matter" is, itself, broadly defined to encompass "printed, verbal, numerical, audio or visual expression, fixed in software or any other medium."Like its advertising injury ancestor, Multimedia Liability Insurance is based on specific named perils covering the same types of intentional conduct that was the subject of advertising injury coverage, but with one important difference -- the nexus to advertising requirement has been eliminated.

How to Shop for Coverage

No matter what coverage you explore getting, there are certain caveats that are basic to your evaluation of their adequacy.First and foremost, the devil is in the details. Make certain that your insurance representative carefully combines the definitions of both the type of activity for which coverage is available, as well as the definitions of any specifically named offenses in policies based on named perils.Second, pay special attention to the enumerated exclusions that can seriously weaken the coverage you think you may be getting.The changing nature of perils faced by high-technology companies, combined with the growing availability of more suitable insurance products, is creating a more generous climate for coverage than traditionally has been available to high-tech companies to protect them for the types of potential losses they are increasingly facing.

Such companies owe it to themselves to both investigate their options and obtain the appropriate types and amounts of coverage they require to insure their continued success and growth.

Copyright © Jay Hollander, 2007. All Rights Reserved.

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