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Insurance Basics

Insurance Basics

September 23, 2006
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" Assuming you can afford high-tech coverage, the solution is simple: Buy it. "

Adult website operators face a double whammy when trying to insure against high-tech risks such as copyright infringement, trademark claims, patent matters and other intellectual property and media-related exposures.

The fact is that high-tech coverage is notoriously expensive. Adding to this pricing problem is the issue of availability. Indeed, insurers have proven themselves too "shy" when it comes to writing coverage for porn-related businesses. The business category often is viewed with disdain as being incompatible with the neighborly images insurers prefer to project.

These two issues — price and perception — come together to create a hard market for those seeking to protect themselves against unanticipated risks. Yet hope exists.

Recently, marketplace realities have helped mainstream insurers come to terms with their moral objections. Potential premiums trump scruples. Incapable of donning a trench coat and dark glasses to cloak their corporate shame, the insurers' fix is decidedly more corporate.

They place coverage through lesser-known subsidiaries and obscure offshore insuring vehicles. As a result, the same well-known financial behemoths that write property insurance for Mom & Pop Grocery and the Neighborhood Church can preserve their wholesome images (and collect hefty premiums) while writing comprehensive coverage for SpankMyAss.com. After all, business is business.

The Problem of Price
Assuming you can afford high-tech coverage, the solution is simple: Buy it. Intellectual property claims are among the most expensive lawsuits to defend. By definition, an IP lawsuit — even a baseless one — is a six-figure proposition at a minimum.

A typical infringement case will require the skills of highly experienced attorneys and, with them, high-billing rates. Adding to the cost of defense will be a cadre of professional experts, consultants and other litigation support personnel whose combined cost may well exceed the price of surrender.

Yet that's the function of insurance: to pay for your attorney, to fund collateral expenses and to cap your downside in the event of a judgment or settlement.

Indeed, the mere knowledge that you are insured, and that you do have the resources to defend yourself, may be the single best weapon against an aggressive adversary. The result is such that, even if you are not well capitalized, the right policy will ensure you are well funded.

But what happens if you can't afford a high-tech policy. Game over? Not necessarily. Coverage for high-tech torts may actually be found in some rather unexpected places. The trick is knowing where to look.

One of the most common places to find high-tech coverage is in the very same comprehensive general liability (CGL) policy you bought to cover your business against such mundane risks as fires, slips and falls and, in all likelihood, the cars used for business.

That package policy — a common requirement of most lenders and lessors — actually contains third-party liability coverage, which protects insureds against claims for "advertising injury" and "personal injury."

Depending on the insurer, the form used and the year the policy was written, typical risks covered by such CGL policies include trademark claims, copyright infringement actions, defamation claims and invasion of privacy suits. Such policies also cover a (malleable) category of harms generally described as "misappropriation of a style of doing business."

The latter category has been deemed to cover, among other things, such torts as competitors' alleged trade secret violations.

Throughout the mid-1990s and into 2000, litigating these GCL policies was a hot practice area for coverage attorneys. Whereas insurers' preprinted policies were originally styled for a bricks-and-mortar world, creative lawyers argued that the Internet's dynamics stretched existing coverages into a new electronic frontier.

When courts began to rule in favor of policyholders, the insurers responded by changing their forms or adding specific exclusions that "took back" critical areas of coverage. While such a response worked well with respect to future policies, it failed to address the past. And therein lies an area of further inquiry.

Most CGL forms are written on an occurrence basis, meaning that no matter when you are sued or the name of your current carrier, the particular policy covering any given risk is the form in use at the time of the conduct causing injury.

As a consequence, and as is common in many complex IP cases, a lawsuit filed in 2006 may allege wrongful acts dating back multiple years.

Effective risk management necessitates that each of these prior-year policies be located and reviewed. Why? Because forms and language change over time. Even though a current CGL form may affirmatively exclude high-tech coverage, a prior year's advertising injury and personal injury form may not.

Moreover, such an investigation is not hard to conduct. Your broker should have easy access to a prior year's policies and forms. Alternatively, call your insurer's policyholder hotline. Insurers are required to provide you with copies of your prior year's contracts.

On the Hook
Finally, don't forget to consider coverage that may exist by reason of your relationship with others. If the source of your liability is derived from a vendor or other service provider, you probably have rights against them either by contract or common law.

Yet even if you are individually on the hook for the misconduct alleged, you may actually (and unwittingly) have direct rights against a third party's insurer depending on how the third party's carrier defines "an insured."

Typically, a policy's basic coverage grant extends to the contract's purchaser, its employees, representatives, partners, joint ventures or investors. In some instances, however, a third party's policy may cover clients/customers, etc. Such coverage can be effected either by way of general wording in the policy's insuring clause or alternatively by special endorsement, which specifically names you as an "additional insured."

Despite the route that gets you to coverage — be it a definition or an endorsement — once you trigger coverage, you stand on equal footing with all other insureds and have direct rights against the third party's insurer to insist on a defense, indemnity and all other policy protections.

It doesn't matter that you didn't pay for the policy. What matters is that you satisfy the policy's definition of an insured.

This scenario highlights an important tip for purposes of effective risk management. Next time you negotiate an agreement with a third party, ask about their coverage situation. Try to get a copy of their policy to review and see if you have any rights.

If you don't, consider a deal term that requires your vendor to name you in their coverage program and, of course, insist that the vendor provide you with proof of such coverage.

Also bargain to receive copies of any cancellation notices. Approaching coverage in this manner may result in substantial savings. Not only will someone else pay for the insurance, but the availability/market may be much easier if your latest site — touting the fetish du jour — isn't on the insurer's radar when the placement being considered.

Michael Bruce Abelson is a partner in Los Angeles California's Abelson / Herron LLP, and specializes in policyholder coverage litigation for online and entertainment clients. Although this article does not provide legal advice regarding any particular claim or circumstance, questions regarding actual claims, coverages, and rights may be addressed directly to mabelson@abelsonherron.com or through the firm's website: www.abelsonherron.com.


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