Pretend you run a computer company and you've just designed a new computer system for the air-traffic control system, says Dan Brooks, a local attorney specializing in computer law. Suppose an undetected error in the software could lead to a collision of airliners, Brooks says.
Or, suppose your firm has just developed an information system for a hospital to record a patient's condition and his prescribed treatment. "Inadvertently, the software package changes information on the patient," says Boston insurance broker Stephen Thompson. "You could be responsible for an illness or a death."
Don Brayer, a vice president of the Evanston, Ill., insurance company Shand, Morahan & Co. paints another scenario. "Your company does processing for a credit-card company. Some of the information is misentered and a person who has been a bad credit risk becomes a good one--or vice versa." Although the results would not be as catastrophic as an air crash or death, "it's not hard to think of the lawsuits that could be caused by this mistake," Brayer says.
In fact, Brayer and a host of other insurance executives note, it doesn't take any imagination to see the scores of lawsuits being filed against computer companies for a variety of large and small foul-ups in equipment and processing. Many of these suits are those brought by first-time users who complain--often successfully--that their system failed to live up to all of the promises made by the computer salesman.
The sharp increase in suits and the expectation of many more are two of the chief reasons why the insurance industry has developed a whole new line of coverage for the computer industry--a professional liability insurance--that industry officials say is comparable to the malpractice insurance written for doctors and lawyers, to guard against innocent errors and omissions in hardware and software.
Additionally, to guard against the growing concern of computer tampering, Shand Morahan has developed what it calls a unique policy to insure companies against any mishaps or legal suits stemming from actions taken by unauthorized users. The company began offering the policy only a year ago last April and has written less than 50 so far, Brayer says. But as concerns mount about tampering, Brayer expects to write many more.
Generally our industry is slow to follow developments in the marketplace," says Roger Loftis, commercial lines manager of St. Paul Fire & Marine Insurance Co.'s branch office for the District. "With this product, however, we are developing it as the need arises."
What's more, Loftis points out, in a reversal of his company's usual marketing tactics, "we are out there, elbow to elbow, calling on clients. . . Our clientele and the public at large have not yet experienced the problems that can happen. They are not quite ready for the product . . . they are not quite sure it is worth the money," Loftis says, noting that only about 50 percent of the companies he visits buy the product.
"We're probably a little bit ahead" of the market, admits Raymond Wahl, vice president of National Union Fire Insurance Co. of Pittsburgh, a subsidiary of American International Group. But, Wahl explains, "we've seen this thing happen in other professions. There was a time when it was hard to sell malpractice coverage to doctors. The same thing was true with attorneys. But with the society we're in now, people will sue for just about everything--on just about every profession. All it will really take is one precedent-setting lawsuit," for computer companies to buy.
Traditionally, insurance policies have covered damage to tangible property, such as damage to or by the computer itself. However, it is unclear whether these policies also cover damage to the computer program, which is considered an intangible item.
As Jeff Isreeli, vice president of the insurance brokerage firm Marsh & McLennan Co. Inc. explains: If a program is improperly run, so that certain numbers are not posted into accounts receivable, a company may suffer financially from the error. But since there has been no damage to any property, that error is not covered under the general liability policy almost all companies have.
As a result, Isreeli says, "we are pushing our clients, warning them, to acknowledge this gray area" of insurance and buy the newly designed policies that cover damage to software as well as hardware in case any claims are filed against them.
Insurance officials say that failure to obtain this policy could be catastrophic, considering that more and more juries are handing down large verdicts against computer companies.
To press their case, the insurance industry cites the "Glovatorium" case in which NCR Corp. was ordered to pay a California dry-cleaning company $2.3 million in damages after a jury found that NCR intentionally misrepresented the abilities of the $60,000 mini-computer system it sold Glovatorium. According to one lawyer familiar with the case, the two companies almost settled the dispute out of court for $30,000. But after they failed to reach a settlement, the jury handed down the multi-million dollar award.
Such large jury awards are not surprising, says Joseph P. Zammit, a New York attorney who specializes in computer law. "With a lay jury, (a computer company will) always run the risk of an emotional reaction . . . Although the software product may have cost only $5,000, the plaintiff may argue that he suffered $1 million in damages because the software didn't do what it was supposed to. And the jury may conclude that the (computer company) has deep enough pockets" to pay substantial damages.
"Not only are recoveries getting larger, but the number of suits is mushrooming," Zammit recently wrote in an insurance magazine. "The avalanche of litigation will only grow larger in the foreseeable future as the number of installed computer systems spirals. Moreover, the trend is being fueled by a judicial attitude that appears to be increasingly pro-consumer."
Zammit and other computer experts are particularly concerned by the judge's decision in the Glovatorium case that set aside a clause in NCR's contract explicitly disclaiming any liability for NCR if anything went wrong.
Concluding that the computer and its software is much too complicated for consumers to understand, many attorneys have argued that these disclaimers are meaningless--and many judges agree.
As a result, Zammit argues, "professional liablity insurance coverage soon will become a virtual prerequisite to doing business in the data processing industry, just as it has in the legal and medical professions."
Some computer-processing companies readily agree with this assessment. "You must have a backstop" says a high-level executive of one national company. The executive declined to allow the company's name to be used on the ground that the company didn't want its customers to know it had a special errors and omission policy. The official said the company bought the policy a few years ago just as it began processing medical information for doctors. Shortly after that, the official said, the company decided to expand its coverage to include a minimum policy for the processing it does for banks, largely because of the "spread of news about judgments in favor of consumers."
Yet, insurance executives point out that not all companies agree. Thomas Cornwell, manager of the electronics insurance department at Chubb Corp. says that his company has talked with a large Massachasetts computer company--with $4 billion in sales--for the past several years, each year drawing up a new draft policy. Yet, every year, says Cornwell, "they never end up buying it," for one reason or another.
Nonetheless, the insurance industry is convinced that this new area is a lucrative one that has large potential--largely because of the computer industry's rapid growth.
"The tremendous growth in the data-processing field is going to make it a very large, very important product in the not too distant future," says AIG's Wahl. Noting that computer errors-and-omission policies have already grown into a $1-million business in just two years, Wahl projects that the business could grow into a "potential $5 million busienss in the next few years."
And, he adds, "if a court case receives a lot of publicity, then we'll have a stampede."