PROTECTION AGAINST TECHNOLOGY RISKS: IS TRADITIONAL INSURANCE ADEQUATE?

William R. DennyPotter Anderson & Corroon LLP

September 20, 2006

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Agenda

What is Covered by Traditional Insurance?Additional Insured StatusSpecialty CoveragesChecklist for Insurance ClausesLawyers’ Duty to Advise Clients

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Traditional Types of Insurance

Commercial General Liability (CGL)Errors & Omissions (E&O)Comprehensive Property and CasualtyAutomobileWorkers CompensationEmployee Fidelity

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Insurance Principles

First Party or Third PartyOccurrence v. Claims Made TriggerCoverage for Indemnity and Defense

Defense applies at outsetDefense broader than indemnityDefense may be on top of policy limits

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Coverage Provided: CGL

Third Party Liability Arising Out Of:Bodily InjuryProperty DamagePersonal and Advertising Injury

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Property Damage

Property damage includes:Physical injury to tangible property, andLoss of use of tangible property that is not physically injured

Software or data generally deemed to be intangible property

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Personal and Advertising InjuryCGL Policy (ISO 2001 Form) Covers:

InjuryCaused by an “Offence”, Including

• Slander or Libel• Violation of a Person’s Right of Privacy• Infringement of Copyright, Trade Dress or Slogan in

your AdvertisementCommitted in the Course of Advertising your Goods, Products or Services.

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Three Steps to Coverage

Is there advertising activity?Is there an advertising injury offense?Is there a causal nexus between the advertising activity and the offense?

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Exclusions: Advertising InjuryKnowing Violation of Rights of AnotherMaterial Published with Knowledge of FalsityMaterial Published Prior to Policy PeriodLiability Assumed in a ContractLiability Arising out of Breach of ContractInfringement of Copyright, Patent, Trademark or Trade SecretInsureds in Media and Internet Type BusinessElectronic Chatrooms or Bulletin BoardsUnauthorized Use of Another’s Name or Product

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Other Problems of Coverage Must be the insured’s advertising activityTrademark infringement not specifically listed, but may fall within:

Misappropriation of style of doing businessInfringement of title or slogan

Coverage trigger for “Invasion of Privacy”typically dissemination, not gatheringPatent infringement typically not covered

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CGL Exclusions By EndorsementProgramming errorsContract performance disputesProfessional services liability

Computer SoftwareElectronic Data Processing

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Coverage Provided: E&O

Third party liability arising out of a negligent act, error or omission in the performance of the insured’s professional services

Examples:Failure of product to perform its functionFailure to perform services per contract

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Defenses to E&O Coverage

Non-negligent errorMeaning of “professional services”

Liability must arise out of special risks inherent in the practice of the professionInterpreting relationship as “sale of goods”would bar coverage (dominant purpose test)

Often applies only to consequential damages (i.e., loss of income due to failure)

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Defenses to E&O Coverage

Economic loss doctrineApplies to “tort” malpractice claimsRequires third party damage to person or property

Exclusion for damage to tangible propertyExpress warranty exclusion

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Common Endorsements to E&O

Intellectual property infringementInfringement of patent, copyright, trademark, trade name, trade dress, trade secret, and any other intellectual property

Computer virusUnauthorized access to electronic systemsDamage caused by computer viruses and worms

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Checklist for Insurance ClausesVendor Maintains Insurance for:

General LiabilityProfessional Errors and OmissionsIntellectual Property InfringementDefamation and PrivacyOther Traditional Insurance

Licensee Maintains Insurance for:General Liability, PropertyBusiness Interruption

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Checklist for Insurance ClausesContractual IndemnificationSpell out Types of RisksPrimary and noncontributoryName Licensee as Additional Insured

Licensee to Approve Amount and Companies30-Day Notice of Cancellation or Change

Provide Evidence of InsuranceRight to Obtain Insurance, Charge VendorProvide Replacement or Renewal Coverage

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Lawyers’ Duty to Advise Clients

Possibility of Insurance CoveragePlace Insurers on Notice of Claims

Darby & Darby v. VSI International (N.Y. Ct. App. 2000)Jordache Enterprises v. Brobeck Phleger & Harrison (Cal. Supr. 1998)

Questions?

William R. DennyPotter Anderson & Corroon LLP

Wilmington, Delaware

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