Legal Exposure Article

Fred Fisher fjfisher at ix.netcom.com
Sun Jan 7 17:34:56 EST 1996


          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.





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