Insuring Legal Exposures facing the Software Industry
by
Frederick J. Fisher, J.D.
310/320-8291,
Compuserve 71342,3137,
fjfisher at ix.netcom.com
It is no surprise the software and technology revolution often finds
support obsolete as quickly as the development of new technology. With
the explosion of Internet usage and services together with hardware
advances, it is equally no surprise that insurance mechanisms to
transfer
risk of loss is also tardy in relation to need.
Traditionally, software developers and computer consultants could
insure
their exposure to lawsuits by purchasing a "consultants' professional
liability policy and/or a product liability insurance policy. Both of
these products have been readily available for quite some time.
However,
in view of the fast paced development of new technologies and services,
these insurance products may no longer protect all of one's exposures.
New exposures exist due to increased use of BBS's and online services,
product distribution through that medium and Internet security issues.
In
view of these rapidly developing medium, insurance products too will
have
to adapt.
This article will explore some of these new exposures and provide a
recipe to review and enhance one's insurance portfolio. However,
nothing
will replace sound risk management advice from one's insurance broker
and
legal counsel.
Exposures Facing the Traditional Computer Consultants
Traditional consultants provided software and hardware advice to a
client
for fee. The software recommended may have been "off the shelf" or
customized provided by the consultants own programming staff. Hardware
too may have been recommended and installed. Insurance mechanism to
transfer risk of economic loss suffered by a client exists for these
types of services, and is readily available and affordable. This comes
in two forms, Consultants Professional liability and product liability.
The Consultants E & O form covers loss arising from an error in
rendering
advice and service. If a wrong product is recommended or does not work,
the E & O policy is supposed to provide the means to compensate the
damaged party. As is usually the case, most insurers providing this
protection exclude from coverage claims that arise from copyright,
patent
or other intellectual property right invasions. However, this is not
always the case, some insurers provide limited copyright coverage.
Although the failure of hardware to perform as recommended by the
consultant is often excluded, this exclusion is limited only to the
failure of the hardware itself such as a hard disk failure, or
motherboard burnout. This is different from a situation where the
hardware operates properly but is not sufficient for the purpose
intended. In the former example, any resultant economic loss from
hardware failures may, however, be protected by a product liability
policy if the consultant is also the vendor and /or installer.
New Exposures facing the Consultant
Internet interest has spawned a new industry in the form of consultants
who do everything from assisting in the design of a World Wide Web Home
page to actually being the provider of the gateway. In other words,
they
also operate the server that provides the Web's site. In view of
these
added services, new liability exposures exist and were recently
heightened by the recent Prodigy Iitigation. When providing a Web page
for a clients, these new exposures may include libel slander,
advertising
liability, media liability and security issues. Security liability can
arise from misuse of E-mail to credit card misuse. Further
complicating
the issue is the fact that both the consultant and the client face
exposures from outsiders accessing the Web page. This is in addition
to
the traditional liability facing the consultant for duties owed the
client.
Traditional insurance products do exist that can transfer these risks
as
well, but not yet available in a single package. Theses include
traditional media liability insurance policies, advertising legal
liability, and products liability if goods are also being sold through
the client's web page.
Patent infringement, and copyright infringement coverage may also be
warranted. Although these stand alone policies are not yet packaged
into
one, they soon will be in view of what will be demanded by the market
forces at play as consulting services expand.
The Traditional Software Publisher
The product and property right exposures facing software publishers
have
been well defined with insurance products available to cover known
hazards. Although there may be a dearth of legal precedent giving rise
to
high profile cases, such as the Lotus-Borland litigation, liability
insurance products do exist that adequately address the common hazards.
These hazards include product liability, and intellectual property
right
exposures such as copyright and patent exposures.
