CP 04 30–ELECTRONIC COMMERCE (E-COMMERCE)

(June 2022)

BACKGROUND

CP 04 30–Electronic Commerce (E-Commerce) fills the gap created because electronic data is considered property not covered in the property coverage forms. This endorsement applies to both direct and indirect loss.

SCHEDULE

The description and location of the business, the annual aggregate limit of insurance, and the direct damage deductible must be entered on the endorsement schedule. A check must be entered on the endorsement schedule if the anti-virus waiver applies. It is important to note that there is only one limit of insurance even though coverage applies to both direct damage and time element. The limit is also an annual aggregate limit, not an occurrence limit.

A. INTRODUCTION

This endorsement opens by explaining how it defines Internet transactions in terms of including retail and business-to-business transactions. It defines what the term electronic data means in this endorsement. The definition is the same as the one in the electronic data exclusion in the coverage form and the electronic data coverage extension.

The terms loss or damage with respect to e-commerce must be clarified. Loss or damage to electronic data involves loss of use or usefulness. The data might still exist but is so corrupt that it is not usable. In other cases, business data may be erased. For these reasons, this endorsement means both destruction and corruption of data when it uses the term loss or damage.

This endorsement’s coverage option defines employees more broadly than most other coverage forms or policies. It includes temporary and leased workers as well as regular employees.

Outside contractors are often used in e-commerce because many businesses find that outsourcing is efficient and economical. The employees of these businesses usually have full access to all of the outside contractor's electronic data. As a result, the term contractor refers to the contracted firm as well as its employees.

It is important to define the term computer because electronic data is created and stored on computers. In this endorsement, the term “your computer” is any computer or computer system the insured owns, leases, or rents.

B. SECTION I–ELECTRONIC DATA COVERAGE

This is the direct damage coverage section of this endorsement. Coverage applies only to data the named insured owns, leases, licenses, or rents. The data must both originate and reside in a computer located in the coverage territory and be used for e-commerce in the business described on the endorsement schedule. Insured data does not include data licensed, leased, or rented to others. Damage to information that the insured develops that later becomes corrupted while licensed to others is excluded.

Coverage Territory also has a limitation. The territory is the standard United States of America, its territories and possessions, Canada, and Puerto Rico. It has become increasingly popular to store electronic data off-site and to shop globally for the most economical storage arrangement. Data stored on a computer outside the coverage territory is not covered. In addition, coverage does not apply if the electronic data is developed and originates in a location that is not in the coverage territory. Many businesses save money by using overseas developers. They may not be aware that this endorsement does not cover any data with those overseas developers.

The insurance company pays to replace or restore damaged, corrupted, or lost data. The loss is valued at the cost to restore or replace the data. The cost of data entry, re-programming, and any necessary computer consultation work is covered, but the cost to reproduce research needed to create the proprietary software or other intellectual property is not. If the insured decides not to repair or replace the data, the loss is valued at only the cost of blank media.

The insured should not be able to collect twice for the same loss. If a licensor or lessor pays part of the cost to replace data, the insurance company reduces its payments by that amount.

C. SECTION II–TIME ELEMENT COVERAGE

The business income and extra expense portions of an e-commerce loss are often worse than the direct damage loss. This coverage applies to any suspension of business due to a loss covered as outlined in item B. above. A location within the coverage territory must generate the lost income. As a result, there is no coverage if the insured sustains loss of orders from France, Japan, or other places outside the coverage territory.

Coverage begins 24 hours after the loss occurs and ends at the earliest date of when activity resumes, the data is restored, or 90 days after the date of the interruption. This option also provides another coverage that recognizes that everyone depends on servers. Coverage in this section applies if an interruption of service due to a covered cause of loss occurs at the insured’s Internet provider. However, the period of coverage is different. While coverage still begins 24 hours after the loss occurs, it ends when the insured resumes activity, when service is restored, or two weeks after the loss. This acknowledges the logical assumption that the insured will not tolerate a server being out and so will search to find a new server instead.

This endorsement's definition of business income changes slightly because some revenue sources can be switched. The insured may find a way to keep revenue flowing even when the e-commerce part goes down. In such cases, increases in other business income are used to offset the e-commerce loss settlement.

Example: Frank and Sense Corporation generate 50% of its sales from e-commerce, 40% from brick and mortar stores, and 10% from telephone orders. A major glitch in the computer system stops all of its e-commerce business, but its telephone and store operations are not affected. The downtime lasts three weeks. During that time, sales at the other operations increase significantly. When the downtime results are evaluated at the end of the three weeks, Frank and Sense’s total sales dropped only 20% instead of the anticipated 50%. As a result, the loss of income settlement was reduced significantly.

Extra expense includes all expenses the insured incurs to resume e-commerce operations or to minimize the lost revenue due to the loss.

Example: Frank and Sense Corporation is acutely aware that time is money and takes action to notify its customers of the computer problem. It does so through the electronic media, by sending media advertisements to targeted customers, by highlighting the telephone number for orders, and by clearly describing its physical locations. The insurance company pays for these expenses.

Any business income and extra expense loss paid is based on the insured resuming operations as quickly as possible. If it does not take all reasonable steps to do so, the insurance company reduces any payment to cover only the lost income and extra expense that should have been necessary before normal operations could resume.

D. SECTION III–CAUSES OF LOSS

1. When *IL 09 35–Exclusion of Certain Computer-Related Loss is attached to the policy that endorsement's provisions continue to apply.

2. The CP 10 30–Causes of Loss–Special Form apply to coverages this endorsement provides with the following modifications:

a. The Utility Services Exclusion does not apply to an interruption of power or communications service but only when the interruption is caused by a specified cause of loss.

b. The artificially generated energy exclusion does not apply.

c. The mechanical breakdown exclusion does not apply to the breakdown of the insured’s computers and their equipment. This exception applies only to damaged or lost electronic data.

d. The following are additional exclusions that apply to only the coverage the Electronic Commerce endorsement provides. Loss or damage from any of the following is excluded:

• Viruses, malicious codes, or other similar devices that are introduced into a system or network to intentionally corrupt data or attempt to disrupt operations.

This exclusion is waived if anti-virus software is provided or if the Anti-Virus waiver is checked on the endorsement schedule. When the exclusion is waived, coverage extends to include shutdowns caused by the anti-virus software activating.

• Unauthorized viewing, copying, etc., of electronic data regardless of who is taking the action. This exclusion applies even when the activity is classified as theft
• Programming or processing errors or omissions of the data
• Any computer system or network design error or deficiency
• Employee, volunteer worker, or contractor manipulation of electronic data when the manipulation is for the purpose of illegally diverting funds or transferring property
• Overload of the computer system because it has insufficient capacity. There is an exception if the overload is due to virus or malicious codes. However, the exception does not apply if it is in conflict with the provisions of *IL 09 35–Exclusion of Certain Computer-Related Loss.
• Failure, malfunction, or slowdown of the computer system for reasons that cannot be explained or determined
• Total failure and shutdown of the Internet, regardless of the cause

*IL 09 35 is the multi-state form, but some states required ISO to file alternatives. In those states, replace the IL 09 35 with the state specific version when reading this analysis.

3. Total elimination or removal of electronic data from the computer is covered only if someone other than an employee, contractor or volunteer worker does it. This must be an act of theft and not just viewing, copying, etc. Coverage does not apply to the transfer of funds, securities, and similar property considered not covered in the coverage form, even if the property was subject to an exception by endorsement.

4. Any endorsement to the coverage form that adds or deletes coverage or a cause of loss also applies to this endorsement unless otherwise stated.

E. SECTION IV–OTHER PROVISIONS

1. General

This endorsement is not intended to do anything other than as stated. It does not alter the coverage provided elsewhere in the coverage form or policy.

2. Claim-Related Fees

Expenses the insured incurs to determine the value of a loss are its responsibility. The insurance company does not reimburse those expenses.

3. Coinsurance

The coinsurance condition is not applicable to the coverage provided by this endorsement.

4. Limit of Insurance–Annual Aggregate

The limit of insurance is an annual aggregate and applies to both direct damage and time element coverages. Once loss payments exhaust the limit, there is nothing to apply to any other losses that occur during the balance of the policy year.

Example: Frank and Sense Corporation purchased this coverage with a limit of $1,000,000 on 01/01/2022. It sustains a covered loss in the amount of $750,000 on 03/01/2022. This means only $250,000 remains available for any loss that occurs during the remainder of the year.

Note: At this point, the Frank and Sense’s risk manager begins to discuss increasing the limit, but the insurance company is not interested in doing so.

5. Deductible

The deductible on the endorsement schedule applies to only direct damage loss. There is no loss payment until the deductible is satisfied.

Note: No mention is made of the time element deductible. Instead in the Time Element section, a statement is made that coverage (business income and extra expense) begins 24 hours after the loss occurs. This is a 24-hour waiting period that can be fairly expensive and should be considered a “deductible” because it reduces the amount of money the insured will receive in a settlement.

6. Coverage Territory

This endorsement's coverage territory is the same as the one in CP 00 10–Building and Personal Property Coverage Form. This endorsement recognizes that the Internet is worldwide in scope and nature, but it still limits coverage to the defined territory. However, if a virus or other code launched or introduced outside the territory causes damage inside the territory, the ensuing loss is covered.