Internet Business - Essay Example

Running Head: Internet Business Internet Business of the of the Internet Business Everyone is rushing to the Internet. Consumers spend hours "surfing" the Net each day. The Internet has become the "research tool" 'f choice for many people. Information on any subject can be found on the Internet. Have a cold' Search the Net for a remedy. Need some medication' Order it over the Internet. Need a doctor' Use the resources 'f the Internet to find a local doctor, check his or her credentials, or see if there are any formal complaints with the American Medical Association or the local Better Business Bureau--all from the comfort 'f your own home. Once you've chosen a doctor, you may even be able to make an appointment over the Internet. The Internet has given consumers the ability to secure much 'f what they need for work, recreation, education, etc. from the comfort 'f their homes. This instant connectivity has not been lost on business. As quickly as consumers are buying personal computers and accessing the Internet through modems or cable boxes, businesses are building and implementing web sites on the Internet, sensing the great potential in sales, advertising, and customer service. For some businesses, using the Internet is not just an extension 'f their normal business, it is a matter 'f survival. Without a web site, many businesses would not able to compete within their marketplace. Hence, most businesses will have a web site in the near future. However, in the frenzy to secure a "presence" on the Net, many businesses have not properly evaluated the risks they face when expanding activities to the Internet. Some businesses simply have not considered whether this new sales and advertising "tool" creates new exposures for them. Others have regarded their activity on the Internet to be merely an extension 'f their normal functions, creating no new risks for them. Unfortunately, this mindset could lead to major uncovered losses for businesses. Somewhat in the same manner, insurance professionals have not thoroughly examined the exposures created by doing business on the Internet. There has been little review 'f existing policies to determine if they provide adequate coverage for Internet sales or advertising, and not much has been done to identify any "new" or "unique" risks that have originated with e-commerce. Explosion 'f the Internet This truly is the information age, and one 'f the easiest sources 'f information to access is the Internet. Everyone seems to be headed for the Internet in one way or another. It has become a primary vehicle for communication, replacing the telephone, regular mail service, voice mail, and the facsimile machine, as the way to communicate effectively in business and personal life. Business has flocked to the Internet for several reasons. Some 'f these are the same reasons that have driven the general public to the Internet--ease 'f communication and the ability to get information and conduct research quickly and efficiently from the comfort 'f one's office or home. But business also recognizes the huge potential the Internet provides for advertising, sales, and cost reduction--driving more dollars to the bottom line. The objective 'f this article is to evaluate the risks businesses face by using the Internet in sales, advertising, and other online activities. These risks will then be analyzed in view 'f several standard commercial insurance policies: ISO's Building and Personal Property Coverage Form (CP 00 10 06 95(*)), the Business Income (and Extra Expense) Coverage Form (CP 00 30 06 95*), and the Commercial General Liability Policy (CG 00 01 01 96(*)). The analysis will review the perceived exposures 'f a business with a web site to determine whether these standard coverage forms protect the business from anticipated losses. The analysis will identify exposures that do not appear to be covered under these forms. In particular, the analysis will attempt to identify risks unique to the Internet. This article will hopefully provide food for thought regarding the appropriate coverage for those conducting business on the Internet, and the potential need for the insurance industry to provide new or adapted products to address any "new" exposures created by the Internet. Growth 'f Internet Activity Growth 'f the Internet has been exponential in the last couple 'f years. Estimates now place the number 'f worldwide users 'f the Internet at 152 million.(1) In the United States and Canada, there are 79 million users 'f the Internet over the age 'f 16. This is a 36 percent increase in users in just the last year.(2) The growth is expected to become more dramatic in the near future. Projections indicate there will soon be one billion personal computer users on the planet, and many 'f those will be plugging into the Internet.(3) Like many new technologies, the growth 'f Internet usage is not unexpected. However, the rate at which people are integrating the Internet into their everyday lives far outpaces the growth 'f any previous technology. Table 1 illustrates how quickly various technologies have been assimilated into the American lifestyle.(4) Growth 'f the Internet has not been driven by individual interest alone. Business as well has embraced the Internet. 'f the 79 million users 'f the Internet in the United States and Canada, 32 million 'f them are business users. This number will grow to 49 million this year. It is estimated that there are more than 300,000 business web sites on the Internet, and 95 percent 'f the Fortune 500 companies have a presence on the Web.(5) The potential for selling products through the Internet provides a major motivation for business. Dell Computer sells more than $3 million a day in computer components through its web site. This translates to more than $1 billion in Internet sales on an annual basis.(6) Charles Schwab, a major discount stockbroker, is now processing more sales transactions on the Internet than through traditional methods.(7) Sales on the Internet in the United States in 1998 amounted to $50.9 billion dollars. According to projections, by the year 2003, Internet sales will be $1.4 trillion.(8) It's no wonder that many businesses are rushing to get a presence on the World Wide Web and the Internet. The insurance industry is not unaffected by this tremendous interest. Estimates are that, by the end 'f the year 2000, as much as 10 percent 'f personal lines insurance sales--such as life, auto, and home--will be completed on the Internet.(9) The potential for significant sales on the Internet, however, is just one reason for business to be interested in this new technology. There are several other reasons for securing a place on the Net. Businesses can advertise, provide product information, and deliver real-time customer service capability to their clients through the Net. Since the Internet operates 24 hours a day, information is available whenever the customer wants it. The customer is not restricted by traditional work hours. The biggest impact the Internet may have on businesses is that it can help them to save money. 'f the $1.4 trillion in Internet sales projected by the year 2003, 92 percent 'f it will be between businesses. Internet business saves money because it saves time communicating between companies. In addition, it saves personnel costs because it reduces the need for sales staff. The Internet allows the customer to input the information directly into the supplier's computer, reducing the potential errors. Target Marketing, an Internet consulting firm, indicates that most businesses are looking at e-commerce from the wrong angle. Instead 'f focusing on how much money it can make them by increasing sales, they should be asking how much money it can save them. "You can use the Internet to lower your costs, which is much more achievable than increasing sales."(10) All 'f these factors motivate many companies to rush to develop web sites. The increased sales potential, the customer service capabilities, and the ability to reduce costs and errors are all valid reasons for doing business through the Internet. Many believe that failure to utilize the Internet may result in a competitive disadvantage. But in utilizing this new medium, have businesses also increased their potential for loss' Has the Internet created new exposures not previously encountered in business' Are these exposures covered under standard commercial insurance policies' Do they require new policies or endorsements' Or are the exposures presented by doing business on the Internet just new variations 'f current exposures that are covered by existing policies and coverage' General Observations Regarding Internet Business Most businesses seem to have assumed that their activities on the Internet are covered by their existing policies. The belief seems to be that the Internet is merely an extension 'f normal sales or advertising functions. The insurance industry has not really evaluated the risks presented by the Internet to determine if there are new exposures presented by it or if there are limitations that should be imposed on policies because 'f the activity occurring on the Net. Most 'f the insurance community seems to have accepted the Internet as "another form 'f distribution akin to cable broadcasting or newspaper publishing."(11) Few additional premiums are being charged for the additional exposure. Even if one assumes that business advertising, sales, or customer service on the Internet do not generate any new or unique exposures, one must be aware that the worldwide reach 'f the Internet does present a heightened risk not present in localized business activities. Since web sites are accessible from anywhere in the world, the possible consequences are greatly magnified compared to any advertising or sales effort through local television, radio, or print media. Even national programming or print media does not have the capability 'f reaching an international audience. Another factor to keep in mind when reviewing the coverage for e-commerce is that this electronic medium is relatively new and that there are very few related court cases addressing Internet issues. There are even fewer related to Internet losses and insurance coverage. However, inferences can be made from court decisions regarding television, radio, and print advertising. Internet issues are also being evaluated in light 'f court cases regarding jurisdiction, copyright, and other areas. Since there are very few cases that actually involve the Internet, it remains for the state and federal courts 'f the United States, as well as those 'f other countries, to determine how coverage under different policies will be interpreted. The challenge for insurance professionals, risk managers, and business owners will be to anticipate the needs 'f their entities as a result 'f their Internet presence. They must then take the appropriate steps to properly protect their clients and businesses from potential losses that might arise from e-commerce. Most businesses have significant property exposures. Does a standard business property policy provide coverage for Internet exposures' Building and Personal Property Coverage Form--CP O0 10 06 95 This form is used to provide coverage for loss to buildings and personal property for many types 'f businesses. The questions that need to be answered are (1) What types 'f property exposures does this form normally provide coverage for' (2) What property risk exposures does Internet business generate' (3) Does this coverage form provide protection to the business for those exposures' Property coverage provided by this form is provided under three major categories: a. Building; b. Your Business Personal Property; and c. Personal Property 'f Others. Each 'f these categories covers distinct types 'f business property. a. building, meaning the building or structure described in the Declarations, including: (1) Completed additions; (2) Fixtures, including outdoor fixtures; (3) Permanently installed: (a) Machinery and (b) Equipment; (4) Personal property owned by you that is used to maintain or service the building or structure or its premises including: (a) Fire extinguishing equipment; (b) Outdoor furniture; (c) Floor coverings; and (d) Appliances used for refrigerating, ventilating, cooking, dishwashing, or laundering; This section defines the building coverage to be provided as the physical structure listed on the declarations page, the physical fixtures related to the structure, and the equipment or machinery used to service the structure or that are an inherent part 'f the structure such as stoves, refrigerators, etc. b. "Your Business Personal Property located in or on the building described or in the open (or in a vehicle) within 100 feet if the described premises. . ." It goes on to define this property more specifically as: (1) Furniture and fixtures; (2) Machinery and equipment; (3) "Stock"; (4) All other personal property owned by you and used in your business; (5) Labor, materials, or services furnished or arranged by you on personal property 'f others; (6) Your use interest as tenant in improvements and betterments. . . . (7) Leased personal property for which you have a contractual responsibility to insure. . . . c. Personal Property 'f others that is: (1) In your care, custody, or control; and (2) Located in or on the building described in the Declarations or in the open (or in a vehicle) within 100 feet 'f the described premises. These are the types 'f property covered under the CP 00 10 form. Does Internet activity involve property covered under this form' Internet Property In order to do business on the Internet, a business must have sophisticated computer hardware and software. Are these items covered under this coverage form' Hardware Certainly, the physical equipment--the computers, modems, and phone equipment--would fall under either the building coverage or the business personal property coverage definitions. In these aspects, the requirements for doing business on the Internet have not created any new or unique exposure, nor does it require the business to purchase any "specialized" coverage in order to properly cover its exposures. The CP 00 10 form would appear to provide sufficient coverage for these business exposures. However, a business expanding its operations to the Internet would probably be adding more hardware to do so. It may be appropriate that higher limits 'f coverage be purchased in order to guarantee that the business avoids an uninsured loss due to less than adequate limits for its equipment. Software The software and computer programs needed to operate the web site for the business also create an exposure 'f which the business must be cognizant. In fact, in order to do business on the Internet, a business probably either distributes or gathers data. This data could be information regarding its products or services. The product itself could be the information it distributes. Many businesses are now providing their services over the Internet rather than providing it in paper form. For example, A.M. Best will distribute rating reports on insurance companies over the Internet. Many inspection companies will also deliver information over the Net. Furthermore, many companies will gather information from their customers over the Internet, including their name, address, order and billing information, delivery details, etc. All 'f this information is stored on programs and equipment maintained by the company. If these programs were to be destroyed or erased, it would be impossible to do business on the Internet. Software and computer programs are not defined as covered property under sections a, b, or c. They can't be considered to be part 'f the building, the equipment or machinery to service it, or even the "contents" 'f the structure. In fact, Section 2 'f the CP 00 10 form identifies property that is not covered. In this section, there are two pertinent subsections: Property Not Covered Covered Property does not include: a. Accounts, bills, currency, deeds, food stamps, or other evidences 'f debt, money, notes, or securities. Lottery tickets held for sale are not securities. n. The cost to research, replace, or restore the information on valuable papers and records, including those which exist on electronic or magnetic media, except as provided in the Coverage Extensions. In reviewing these restrictions, it becomes clear that software programs and records stored on electronic media such as tape drives, magnetic disk, or computer drives are not considered covered property. The Coverage Extension, section 5, subsection c, does provide for some limited coverage for these exposures: 5) Coverage Extensions Except as otherwise provided, the following Extensions apply to property located in or on the building described in the Declarations or in the open (or in a vehicle) within 100 feet 'f the described premises. c. Valuable Papers and Records--Cost 'f Research You may extend the insurance that applies to Your Business Personal Property to apply to your costs to research, replace, or restore the lost information on lost or damaged valuable papers and records, including those that exist on electronic or magnetic media, for which duplicates do not exist. The most we will pay under this Extension is $2,500 at each described premises, unless a higher limit is shown in the Declarations. From this extension, there is coverage for up to $2,500 to restore lost information, but this would probably not provide enough coverage to restore an Internet operation's software or data. The coverage is also limited to the described premises. If the business utilized the services 'f an outside vendor to operate its web site, and the software was maintained at the vendor's location, this extended coverage would not apply. Therefore, at least some 'f the property associated with doing business on the Internet is covered by the terms 'f the CP 00 10, but there are limitations on software and property. The business should be aware that the equipment and software used to operate on the Internet might require higher limits 'f coverage. Are the perils covered, or does activity on the Internet face perils not covered under a standard property and contents policy' Property Perils--Basic and Broad Form Causes 'f Loss The Building and Personal Property Coverage Form can be written under the named perils or special form policy type. The named perils form provides coverage for the perils listed on the Causes 'f Loss Form used with the policy. If a peril occurs that is not listed, there is no coverage. If the policy uses a named peril form, there is no "new" peril in using the Internet since only the perils listed on the Causes 'f Loss form are covered. If using the Basic or Broad Causes 'f Loss Forms, the business must note that there is no theft coverage on these named perils forms. Vandalism coverage is provided, but not for "loss or damage: b. Caused by or resulting from theft, except for building damage caused by the breaking in or exiting 'f burglars." Businesses and insurance carriers should be concerned about the potential damage to equipment and software caused by computer hackers, either by outright sabotage or attempted theft. Damage under this situation does not appear to be covered under these coverage forms. Another consideration is that the Building and Personal Property Coverage Form will cover "direct physical loss or damage to Covered Property. . ." This may also limit coverage under the above situation, as theft or destruction from computer hackers may not be considered "direct physical loss or damage," or it may be difficult to prove that any damage really occurred. Caution must be used when evaluating the types 'f perils and property to be covered under the Basic and Broad Form Causes 'f Loss. Peril 'f Theft The peril 'f theft creates a unique exposure for businesses on the Internet. Since many businesses hope to increase product sales through their web site, they will be capturing data from their customers on the web site. This data is valuable property to the business. As we have seen previously, the typical property policy provides $2,500 for restoration 'f the data, but this is probably not sufficient to rebuild this information or to restore the programs needed to capture this data. Theft 'f this private data would not only create a financial loss to the business in terms 'f loss 'f sales and restoration costs, but it also creates a liability exposure for misuse 'f the stolen data. This issue is addressed later in the liability section. There is another exposure to theft, even more serious than the loss 'f data. Many people have easy access to the systems 'f the business through its web site. For most people, this simply makes it convenient and easy to deal with that business online. However, for computer hackers, the Web site is a "door" into the systems 'f the business. Once the hacker has invaded the system, theft 'f data or even money is relatively easy. The first real theft loss through online activities occurred in 1994 when Russian computer hackers stole $10 million from Citicorp.(12) Every organization on the Internet has the potential for similar losses. In a 1996 survey, 80 percent 'f the entities indicated they had lost data or hardware, and 50 percent 'f those losses were to external sources.(13) In another survey, 58 percent 'f the companies reported that they experienced unauthorized outside incursions into their computer systems.(14) Hence, it is extremely important that the potential for theft be considered when evaluating Internet exposures. Since there is no theft coverage under the Basic and Broad Form Causes 'f Loss, the business owner should look for other forms to provide the theft peril coverage. Endnotes (1.) Debra Smith, "Future Effects 'f E-Commerce for Consumers," CPCU News, Volume 47, No. 2, March 1999, p. 2. (2.) "Number 'f Interact Users and Shoppers in U.S. and Canada," Commerce Net, www.commerce.net, August 24, 1998. (3.) A. Leconte Moore, "New Dimensions 'f Risk in the Electronic Age," www.marshmac.com/view/archive97; p. 4. (4.) Victoria Pasher, "Insurers Falling Behind in Internet Race," National Underwriter, March 10, 1997. (5.) Iconoclast, "Profile 'f a U.S. User; Business Use 'f the Internet," www.headcount.com/globalsource/profile, 1998. (6.) Scott Thurm, "Leading the PC Pack," Wall Street Journal, December 7, 1998, p. R4. (7.) George Anders, "Click and Buy," Wall Street Journal, December 7, 1998, p. R4. (8.) Jan Norman, "Businesses Connect Online," Orange County Register, Business Monday, February 22, 1999, p. 12. (9.) Jeanne Wojcik, "What the Interact Has in Store," Business Insurance, March 11, 1996. (10.) Jan Norman, op. cit., p. 13. (11.) A. Leconte Moore, op. cit., p. 6. (12.) Ibid., p. 3. (13.) Internet Marketing Report, "Heads Up: Watch Out for Brand Misuse on Net," April 21, 1999, p. 8. (14.) Michael Prince, "Risk Management Systems and Strategies," Business Insurance, December 2, 1996. Read More