(December 2022)
The Internet has created business opportunities for small companies that were once available to only large corporations and multi-national companies. This is particularly true of agricultural operations that have often been isolated due to rural locations, but can now find customers around the world. These customers can only be maintained if the internet access is maintained.
AG 04 05–Electronic Commerce (E–Commerce) is an optional coverage endorsement that addresses the 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 it provides is similar to that offered in the coverage form, there are enough differences and specialization to make it beneficial for businesses that depend on electronic commerce to gain access to an expanded marketplace.
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 it conducts 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 contractors. 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 on their own. Similar to
the definition of employee, the broad definition of contractor works to the
insured's disadvantage.
When used within the endorsement these terms include not only those owned by the named insured but also those that are licensed, leased, or rented to the named insured.
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Example:
Lucretia is an avid honey
producer. She lives near several apple orchards, so all of her honey tastes
like apples. For many years she sold her honey at the local farmer’s markets
but, thanks to the internet, has gained
a national following. She has doubled her number of hives and has recruited
members of the local honey producers’ group to supplement her stock. Rural
Computing, Inc. is her computer contractor, and Janet is her fulltime IT employee. |
1. This section covers direct damage. 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 it must be used for e-commerce for the business that is described on the endorsement schedule.
Insured data does not include the named insured's data that is licensed, leased, or rented to others. For example, if the named insured develops information, it subsequently licenses to others that become corrupted. Only data the named insured owns is covered. Other users do not have coverage.
2. The insurance company pays to replace or restore damaged, corrupted or lost data when the damage, corruption, or loss of data resulting from a covered cause of loss defined in this endorsement.
3. Valuation of a loss is based on the cost to restore or replace the data. Data entry, re-programming, and any necessary computer consultation work are some of the covered costs. The insurance company does not pay for the cost to produce duplicate research or for any intellectual property.
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 reduces the amount it pays by the amount the licensor or lessor paid. The named insured may not collect from more than one party for the same loss.
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Example: Janet notifies Lucretia that
the PleasedBees website will not open. Paul from Rural Computing is called in
to aid Janet in getting the site back up. Paul discovers that a virus has
corrupted the program. The website had anti-virus software installed, so this
loss is covered. Janet backed the site up daily, and all programs were
readily available for uploading. The cost to restore and replace the
corrupted data was $17,500 and covered by this endorsement. Unfortunately,
the system was down for a week, and some of the data could not be restored. |
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 to only this coverage and are not changed by any other endorsement that applies to business income coverage.
3. Business Income
The definition of
Business Income is almost the same as in the coverage form. The difference
comes from the possibility of switching some revenue sources. The named insured
may find a way to keep revenue flowing when e-commerce is not available, and
business income can be increased using other sources to offset the e-commerce
loss settlement.
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Example: The sales for the seven-day time period were only a drop of 10% thanks to the efforts Janet and the crew made in contacting customers. Janet will be compensated for that drop because of all of the efforts she made to reduce the loss. |
The amount of a business income loss is determined based on considering:
o The net e-commerce income before the loss that interrupted the service
o The probable e-commerce income if there was no loss
o Operating expenses necessary to resume e-commerce operations
o Other related information that applies to e-commerce
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 service being interrupted. It
includes expenses the named insured incurs to avoid or reduce a period of
operational suspension. These are expenses that exceed those incurred during
normal operations, reduced by any salvage value of property purchased for temporary use during the down time after
normal activities resume. It also includes expenses that reduce the overall
business income loss.
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Example: Lucretia was busy as a bee, making sure that her sales did not disappear due to the internet outage. She obtained a hard copy of her customer listing and asked her friends to help her reach out to all existing customers. These efforts were very popular and resulted in her sales for the week only dropping by 10%. The expenses Lucretia incurred to keep going are covered as extra expense. |
5. Resumption of
E-Commerce Activity
Any business income and
extra expense loss paid is based on the named insured resuming operations as
quickly as possible. If the named insured does not take all reasonable steps to
do so, the insurance company reduces payments and pays only the lost income and
extra expense necessary up to the point when normal operations could have
resumed.
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.
The same causes of loss that apply to the coverage form also apply to this endorsement, subject to the following modifications that apply only to this endorsement:
o Viruses, malicious codes, or similar instructions that are introduced into a system or network with the intention that data will be corrupted, or operations will be disrupted.
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.
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 the total failure and shutdown of the entire Internet, regardless of the cause
Coverage applies when someone other than an employee, contractor, or volunteer completely removes electronic data from the computer. The removal must be an act of theft and not just its viewing, copying, or use. Removal does not include transfer of funds, securities, and similar property.
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 to the policy, this means those causes of loss also apply to this coverage.
1.
General
This endorsement's coverage is limited and does not do anything other than what its language intends. It does not extend to change or alter other insurance that AG 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 cost to establish the claims rests with the insured, not the insurance company.
3.
Coinsurance
Any coinsurance condition that applies to any other direct damage or time element coverage does not apply to the coverage this endorsement provides.
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 it up, nothing remains for the rest of the policy period.
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Example: Lucretia’s policy term is 5/1 – 5/1 and electronic data limit is $50,000. The seven-day outage on 7/1 resulted in a total loss of $25,000. She has only $25,000 left for any loss that happens between 7/1 and the 5/1 expiration. |
5. Deductible
The deductible on the endorsement schedule applies to only direct damage losses. It must be satisfied before the insurance company pays anything.
Note: The 24-hour waiting period in the time element coverage is also a deductible. The amount of loss it represents can be significant.
6.
Coverage Territory
This endorsement's coverage territory is the same as the one on the coverage form. However, in recognition of the Internet being worldwide in scope and nature, it expands the territory slightly. If a virus or other malicious code is launched from or introduced to the system from outside the territory and 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. Communications are worldwide and the tendency is to shop
for the least expensive storage arrangement. There is no coverage if the named
insured decides to store data outside the coverage territory. There is also no
coverage 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. While
pricing of this arrangement may be attractive, this endorsement does not cover
damage to that data.