The Hazards Are New and Data Is Scarce, but Brokers Are Clamoring
The advent of the Internet and the technologies supporting it has been a boon to professional services such as law firms, accountants, marketing and advertising firms, but it also has brought into the insurance industry a whole new segment of products. With technology firms and dot-com companies abounding, the demand for insurance protecting those types of companies has increased as well. Technology has its share of potential problems, from software bugs and viruses to employee theft, some of which can shut a company’s operations down. In addition, some large companies like Yahoo, Amazon, CNN and Buy.com also have been the targets of so-called denial-of-service attacks, a relatively new hazard unique to Internet-related firms. So, many top insurance firms have or are in the process of developing new products specifically for tech companies, protecting against perils such as cybercrime, hacking, copyright infringement in cyberspace, loss of service and other technology-related problems. “I expect this will be an ongoing phenomenon as cyberspace liability becomes more established and well known, “said Marc Maister, a partner who specializes in insurance in the Orange County office of law firm Irell & Manella. However, since the technology industry is relatively new compared to other areas of insurance, the calamities involved are harder to price. There is not a lot of historical data to provide the actuarial data that the underwriters ordinarily like to have when writing policies.
“It takes a while for them to accumulate this kind of data,” said Maister.
But insurance brokers have pushed the underwriters to develop products that they can sell to the technology companies. “It’s exciting to see that the insurance industry and large brokerages are acting at a fairly fast pace to address the new needs for coverage in cyberspace,” Maister said. Last year, Marsh Risk & Insurance Services unveiled a new product to address the Internet and technology issues. Its NetSecure package covers perils such as cybercrime, hacking, copyright infringement in cyberspace, loss of service and other technology-related problems. One insurance brokerage has been so involved with technology in Southern California that it opened an office in Newport Beach this year. Costello & Sons Insurance Brokers Inc., a family-run insurance brokerage out of San Rafael in Northern California, opened an office here to handle its growing list of technology clients in Southern California. “It made more sense to have a presence down here,” said Michael Grant, who right now is the office’s sole employee, pending more hiring as revenue increases. The 19-employee firm has a large client list of technology firms in Northern California but its Southern California client base has grown dramatically in the last year. The new economy also has spawned another insurance product for the brokers to pitch. Young companies hoping to go public may want to have insurance for the costs involved in preparing an IPO that never gets off the ground. The recent volatility in the equity markets has left some hopeful companies saddled with hundreds of thousands of dollars in expenditures for an IPO that was aborted. IPOs can get expensive in a hurry with the road show costs, attorney fees, accounting fees, printing costs and marketing budgets. And some companies have failed at it several times. The IPO insurance products reimburse the companies for some or all of these costs if the IPO turns into a no-go. But much like the tech-related insurance products, the products for IPOs do not have any legacy. The underwriters do not fully understand all of the factors involved with aborting an IPO. Marsh Risk has been working on an insurance program for companies that are trying to go public. n
