INSURANCE: New Coverage on the Block

New business risks can create new insurance coverages, such as cyber insurance. Smaller companies increasingly have been demanding this coverage, whereas previously it was purchased only by large corporations and high-tech companies.

Cyber coverage offers protection from hackers, viruses, extortion, defamation, e-mail misuse, and copyright or trademark infringement. According to the Insurance Information Institute of New York, N.Y., electronic commerce insurance may become a $2.5 billion market during the next three to four years.

Although not all companies should rush to purchase this insurance, it is worth considering, as businesses grow more dependent on computer technology. Mild disruptions or computer technology abuse, such as viruses transported electronically, can result in substantial losses. Waste companies are not immune to cyber dangers.

Often, important client and confidential employee information are stored on computers systems. If company documents are tapped by an unauthorized source, consider the damage it could cause. In 1998, U.S. businesses spent $11.8 million related to data losses, according to David Smith, a researcher for Pepperdine University, Malibu, Calif.

In addition to how breaches in technology affect data, companies should consider:

  • Web site-related risks. Today, company Web sites provide valuable information and promote services. If Web information is lost or disabled by a computer-related incident, companies could lose thousands of dollars in potential sales.

  • Internal risks. If an employee misuses e-mail, even unintentionally, viruses quickly can spread. The Melissa virus initially was released unknowingly by an AOL subscriber who sued the Internet provider for its failed security.

  • Viruses. Typically, viruses are transmitted through e-mail and can seriously disrupt everyday business or destroy corporate data.

  • Proprietary information theft. A security breach by hackers can result in the theft of personal client or employee information.

Companies need to evaluate whether their businesses are prepared to handle the additional expenses or possible lawsuits that can arise from cyber mishaps. Currently, cyber-related premiums range from $5,000 to $60,000 per $1 million worth of coverage, depending on a company's size and exposure to online or electronic risk. If serious computer losses occur, cyber insurance can help to control the balance sheet.

Purchasing cyber coverage may be a proactive step in controlling future expenses, but businesses first need to quantify their firm's risks and examine ways to control them. For example, it may be useful to establish e-mail or Internet rules for employees, or implement stronger firewalls and virus protection.

The insurance industry prices premiums based on its experiences with a particular risk. Because cyber insurance is relatively new, calculating risks and prices can be difficult. However, insurers are working to acquire better information and loss control methods.