(December 2022)
The Internet has created business opportunities for small companies once available to only large corporations and multi-national companies. Thanks to the Internet, a business can be located in a small community and still operate globally. However, it presents both advantages and disadvantages and the opportunity for loss as well as gain. The more a business depends on the Internet, the more it needs to have its insurance program protect that mode of access.
OP 04 08–Electronic Commerce (E–Commerce) is an optional coverage endorsement that can be used with the Insurance Services Office (ISO) OP 00 01–Capital Assets Program Coverage Form (Output Policy). It addresses loss exposures presented by and related to Internet transactions. It covers both direct damage and consequential losses. It introduces new causes of loss and policy conditions. While the coverage provided is similar to that in OP 00 01, there are enough differences and specialization to make it beneficial for businesses that depend on electronic commerce for their livelihood to at least some extent.
Note: This endorsement has an edition date of 10 10.
The Endorsement Schedule has spaces for the following entries:
This endorsement begins with a number of definitions that it doesn’t call
definitions. They apply to only this endorsement.
Any commerce that is conducted in any type of interactive communication that is computer based. It includes commerce that takes place on the internet. This is not limited to only business-to-consumer activities but includes business-to-business commerce.
The loss or damage to the electronic data can be through either destruction or corruption.
Note:
Loss or damage to electronic data usually involves it losing its
usefulness. The data might still exist but is so corrupted that it cannot be used.
In other cases, the data might be completely erased.
The term employee is expanded to include both leased employees and temporary employees.
Note: It is very important to understand that this term expansion does not benefit the named insured. When coverage for employee actions is excluded because of this expansion, the actions of temporary and leased employees are also excluded.
When the term contractor is used it refers to an entity contracted by the named insured to work on the named insured’s computer system and electronic data. The definition of contractor includes both the contractor's employees and its agents. Employees and agents of the contractor are all considered contractor. This term applies only when a written agreement exists between the named insured and the contractor.
Note:
Outside contractors are used to an increasing extent in e-commerce because
many businesses find contracting with a firm to provide services is more
efficient and economical than their trying to do it. Similar to the definition
of employee, the broad definition of contractor works to the insured's
disadvantage.
When used within the endorsement theses terms include not only those owned by the named insured but only those that are licensed, leased, or rented to the named insured.
1. This is the direct damage coverage section. Coverage applies to only data the named insured owns or that is licensed or leased to it. The data must both originate and reside in a computer located in the coverage territory and be used for e-commerce for the business described on the endorsement schedule.
Insured data does not include the named insured's data licensed, leased, or rented to others. For example, if the named insured develops information subsequently licensed to others that become corrupted, the only data covered is data the named insured owns. Other users are not covered.
|
Example: Perry Publishing develops content that is used on subscribers’ web pages. That content becomes corrupted, but nobody noticed the damage until it was released to its subscribers. The damage to Perry’s owned data on Perry’s computers is covered. There is no coverage for the corrupted data provided to subscribers and on the subscribers’ computer. |
2. The insurance company pays to replace or restore damaged, corrupted or lost data only when caused by or that results from a covered cause of loss that is defined in Section D. below.
3. Valuation of a loss is based on the cost to restore or replace data. Data entry, re-programming, and any necessary computer consultation work are some of the covered costs. However, the insurance company does not pay for the cost to produce duplicate research or for any intellectual property.
If the electronic data is not repaired or replaced, the loss is valued at the cost of similar or identical blank media if the electronic data is not repaired or replaced.
If a licensor or lessor pays all or part of the cost to replace data, the insurance company's payment is reduced by the amount that licensor or lessor paid. The named insured may not collect from more than one party for the same loss.
|
Example: Perry Publishing receives corrupt content from one of its vendors, Website Design. Perry notifies its insurance company and also Website Design. Website Design replaces all data it had supplied. This reduces the claim by $5,000. As a result, Perry’s insurance company reduces the amount it pays to Perry by the $5,000 settlement from Website. |
1. Coverage
The business income and extra expense portion of an e-commerce loss may be worse than the direct damage loss. This coverage applies to loss of income and extra expense that result because business must be suspended from either of the following:
The lost income must be generated within the coverage territory. Coverage does not apply to losses the named insured sustains from loss of orders from places outside the coverage territory.
2.
Period of Coverage
When the suspension is due to Section I, the coverage begins 24 hours after the direct damage loss. Coverage ends at the earliest of:
When suspension is due to the covered cause of loss in Item III, coverage still begins 24 hours after the interruption begins but ends at the earliest of:
These time periods apply only to this coverage and are not changed by any other endorsement that applies to business income coverage.
3. Business Income
The basic definition of Business Income is the same as in OP 00 01 except that is covers only e-commerce business income. However, it also recognizes that when e-commerce revenue is interrupted, the named insured may have options to increase non-e-commerce revenue. The e-commerce loss is the difference between the e-commerce revenue loss and the increased non-e-commerce revenue.
|
Example: Handy Corporation generates 50% of its sales from e-commerce, 40% from brick and mortar stores, and 10% from telephone orders. A major glitch in the computer system stopped all its e-commerce business, but its telephone and store operations were not affected. The computer system was down for three weeks. During that period, sales increased significantly at the other two order-taking arrangements. When the sales results for the time the computers were down were analyzed at the end of the three weeks, Handy’s total sales decreased only 20% instead of the expected 50%. As a result, the business income loss settlement was reduced substantially. |
The amount of an e-commerce business income loss is determined based on considering the following:
4.
Extra Expense
Extra Expense includes only necessary expenses the named insured incurs during the period of coverage that it would not have incurred without damage or interruption of service. It is also the expenses that the named insured incurs to avoid or reduce a period of suspension of operations. These are expenses that exceed those incurred during normal operations, reduced by any salvage value of the property purchased for temporary use during the down time after normal activities resume. It also includes expenses that reduce the overall business income loss.
|
Example: Handy Corporation didn’t just sit back after the loss. It knew there would be down time and notified its customers of the computer problem through the electronic media. Handy also placed media advertisements to targeted customers and highlighted its telephone numbers and addresses of its physical facilities so orders could continue to be placed. The insurance company paid for these expenses. |
5. Resumption of
E-Commerce Activity
Any business income and extra expense loss is paid based on the named insured resuming operations as quickly as possible. When reasonable steps are not taken, the insurance company reduces payments to cover only the lost income and extra expense necessary up to the point when normal operations could have resumed.
1. This section starts with a declaration that nothing in the endorsement impacts in any way the Certain Computer-related Losses exclusion. This exclusion deals with a computer's inability to handle date and time changes that is commonly called the Y2K exclusion
2. The causes of loss in the coverage form also apply to this endorsement, but the following modifications apply to only this endorsement:
o Viruses, malicious codes, or similar instructions are introduced into a system or network is not covered when done with the intention to corrupt data or disrupt operations
An exception is that this exclusion does not apply if the computer is equipped with anti-virus software or if the Anti-Virus waiver on the endorsement schedule applies. Any disruption of the system because the anti-virus software is responding to an attack is also covered.
o Unauthorized viewing, copying, and similar activities of electronic data even when such actions could be classified as theft
o Any error or omission in the programming or the processing of electronic data
o A computer system or network error or deficiency in design
o Employees, volunteer worker, or contractor who manipulate electronic data to divert funds or transfer property illegally
o A computer system that is overloaded because of insufficient capacity that results in an interruption of normal function
If the virus waiver is checked in the
schedule or if there is anti-virus software on the computer, this exclusion
does not apply if a computer virus or malicious code causes the overload.
o The failure, malfunction, or slowdown of a computer system when it occurs without a cause or reason or that cannot be explained
o Any significant or total failure and shutdown of the entire Internet, regardless of the cause
3. The theft of electronic data from the computer is covered. However, it applies only if the theft is NOT committed by an employee, contractor, or volunteer worker.
The theft must involve the actual removal of the electronic data and not just viewing, copying, or using the data. The transfer of funds, securities, and similar property are not included.
4. Any endorsement that adds or deletes a cause of loss also applies to this endorsement, unless stated otherwise or if other provisions apply.
Note: As an example, if flood or earthquake coverage is added, this means those causes of loss also apply to this coverage.
1. General
This endorsement's coverage is limited and does not do anything more than its language intends. It does not extend to, change, or alter other insurance that OP 00 01 provides.
Note: This is an interesting disclaimer that seems more like a legal maneuver. Will more endorsements include such wording?
2.
Claim-Related Fees
The named insured is responsible for paying all costs associated with establishing the amount of a claim.
3.
Coinsurance
Even if coinsurance applies to other coverages, it does not apply to the coverage in this endorsement.
4.
Limit of Insurance–Annual Aggregate
The limit of insurance is an annual aggregate. It applies to the sum of both Section I–Electronic Data Coverage and Section II–Time Element Coverage. Once loss payments use up this limit, nothing remains to apply for the rest of the policy period.
|
Example: Handy Corporation purchased this coverage on 01/01/2022 and sustained a significant loss on 03/01/2022. The annual aggregate limit for this coverage was $1,000,000. The 03/01/2022 loss amounted to $750,000. Only $250,000 remains for any other loss or losses that occur for the rest of the policy period. |
5. Deductible
The deductible on the endorsement schedule applies to only direct damage losses. It must be satisfied before any payment is made.
Note: The 24-hour waiting period in the Time Element coverage is actually a deductible. The amount of loss it represents can be significant.
6.
Coverage Territory
This coverage form’s coverage territory applies to this endorsement. However, this endorsement also recognizes that the Internet is worldwide in scope. If a virus or other malicious code launched from or introduced to the system from outside the territory causes damage in the coverage territory, the resulting loss is covered.
Note: With respect to the limitation on coverage territory, the standard territory is the United States of America, its territories and possessions, Puerto Rico, and Canada. Storing electronic data off-site is becoming increasingly popular. Because communication is worldwide, the tendency is to shop for the least expensive storage arrangement. If the named insured decides to store data outside the coverage territory, it is excluded. In addition, coverage does not apply if the electronic data is developed and originates at a location outside the standard coverage territory. Many businesses save money by using developers located overseas or outside the policy coverage territory. Although the pricing of this arrangement may be attractive, this endorsement does not cover damage to that data.