Using insurance to reduce website-related risks

When should a business seek to insure the risks that may arise out of the ownership and operation of a website? There is no simple answer, but in general terms a good insurance policy is a good way of managing the risks of any business venture.

Creating a website is relatively simple; however the legal exposures that come with a website are anything but simple. The fundamental issue is this: both the content and the functionality of a website can expose a business to legal claims by third parties, and the list of potential exposures is emerging, developing and potentially complex.

For instance, an error in the information on a website could lead to claim in negligence, copied text or images could lead to a copyright infringement claim, and ecommerce functionality could lead to liability under sale of goods or consumer protection legislation.

One way that businesses protect themselves against legal claims is using professional indemnity insurance (PII). Indeed, in some industries PII is mandatory. Of course, having a PII policy doesn’t mean a business lacks confidence in the quality of its services! Any business can be vulnerable to a claim of negligence when professional advice or services fail to meet a client’s expectations.

Insurance policies exist that are marketed as ‘cyber liability’ or ‘internet liability’ insurance and that specifically cover the risks associated with website and internet selling. In many cases these are, in fact, simply specialised PII policies. They will not usually cover the offline side of the business, and if you are considering such a policy, you should check that you are not paying an excessive premium given the narrower cover.

Notwithstanding the existence of specialised cyber-liability policies, most standard PII policies will cover some of the risks associated with running a website. There are a wide variety of PII policies available that may be suitable for a web entrepreneurs or SME venturing into cyberspace. So, if you have a PII policy, you may already benefit from some cyber-coverage.

When taking out a PII policy, the two main questions you have to ask yourself are these: what risks do you want to protect against? and what level of financial coverage is required? To answer the first question, you will need to catalogue and assess all the legal risks associated with your particular website. For example, a business that provides advice will want to make sure that its insurance policy protects it against negligent misstatement. A website owner whose users are allowed to publish content on the website should ensure that his or her policy covers, in an appropriate way, claims in defamation and for the infringement of intellectual property rights.

Generally, a more complex website will give rise to more risks, and the coverage of more risks will increase the cost of the policy. Premiums may be higher for websites publishing user content. Another factor affecting policy cost is the age of the technology or business model: coverage for newer technologies and business models may entail higher premiums because risks may be harder to assess. There are some other types of cover that a company may consider in obtaining in addition to professional indemnity cover:

• Legal expenses – This would cover the legal costs for any claim that arises against the insured. This may include the costs of defending any claims brought by dissatisfied customers or by regulatory authorities (e.g. claims by HMRC for discrepancies in the insured’s tax returns).

• E-risks – This would specifically protect the insured against any damage caused by hackers or viruses. This kind of policy might provide coverage where an email list is stolen and used by another person, or where a virus affects the insured’s website and stops the insured providing the services that are normally available on the website.

One of the good things about the insurance industry is that there is no shortage of providers. Consequently, good deals are available for those willing to invest the time and effort in finding the right policy. A web search for “professional indemnity insurance” will find dozens of providers in moments.

A good insurance provider will be able to advise how you can lower your exposure – and potentially lower your premium. For instance, using professionally-drafted legal documents or having lawyers review your website systems may help.

Standard policies can be purchased over the internet without the need to use a broker. Where you need non-standard cover, however, you should speak directly to a broker.