E-COMMERCE RISKS: RISK MANAGEMENT

IN PROFESSIONAL INDEMNITY

KIT BURDEN

PARTNER, BARLOW LYDE & GILBERT

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WELL, YOU WOULD SAY THAT WOULDN’T YOU…

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 ACTUAL CLAIMS AND LIABILITIES;

 Virgin

 Argos

 IBM

 Demon Internet

 British Gas

 Norwich Union

 YAHOO

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 CONTRACTUAL RISKS

 Impersonal nature of transactions

 Trade with unfamiliar/unknown parties

 Incorporation of contractual terms

RISK MITIGATION:

(1) Structure of the Website

(2) Incorporate appropriate terms

(3) Keep under regular review

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 JURISDICTIONAL RISKS
 Delivery Risks
 where is the customer located?
 what are the implications of delivery?
 Regulation
 attitude of the UK regulators
 foreign regulation
 Law and Venue
 “long arm” jurisdictions
 where are you trading?
RISK MITIGATION:
(1) Consider targeting specific markets
(2) Carry out local legal reviews for select markets
(3) Incorporate choice of law/jurisdiction clauses

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 DATA RISKS
 Key importance of data
 Data Protection Act 1998 – the new regime
 Key requirements:
 notify purposes for which data will be used
 keep data up to date and accurate
 maintain security
 restrictions on transborder data flows
RISK MITIGATION:
(1) Ensure proper notifications made
(2) Use data only for authorised purposes
(3) Inform data subjects of purposes for which data is gathered
(4) Prepare a data retention/update policy
(5) Maintain adequate levels of system security
(6) Ensure adequate contracted protection for transfers out of the E.U

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 CONTENT LIABILITY
 Acts by employees

 Liability to third parties, e.g

 defamation claims

 IPR infringements

 domain name claims

RISK MITIGATION:

(1) Company policy on internet usage and e-mail

(2) Disclaimers on e-mails

(3) Disclaimers on website and hypertext links

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 HOW DOES THIS IMPACT P.I. INSURERS?

E-commerce risks affect:

 E-commerce service providers (ISP’s, hosts, website designers)

 Management and IT consultants

 Professional advisors (lawyers, bankers, auditors)

 Directors and Officers

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 E-COMMERCE SERVICE PROVIDERS

 Failure to perform likely to impact directly upon customers

 Quantum of loss for customers potentially high (owing to reliance

upon technology)

 Emerging claims history, but still sketchy for new services such as
Trusted Third Parties

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 MANAGEMENT AND IT CONSULTANTS

 Heavily involved in E-commerce revolution

 Exposed to claims if projects fail/get delayed/are misconceived

Hypothetical example:
(1) Consultancy A engaged to implement IT systems underpinning
new dot.com by 1 July 2001;
(2) Delays in implementation mean work not finished until now;
(3) Downturn in market in the meantime means dot.com cannot do
IPO to raise cash.
(4) Consultancy A sued for “lost opportunity”

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 PROFESSIONAL ADVISORS

 All professional advisors need to be aware of the challenge which the

web poses in order to provide proper advice
 Lawyers – need to be aware of risks posed by multi-jurisdictional
nature of the internet and widening body of potential laws and
regulations
 Bankers – need to take care in way in which they provide advice to
dot.com and other e-commerce clients regarding their finance
requirements
 Auditors – at risk in relation to audits of dot.com and “new” valuation
techniques (e.g. Amazon, e-district)
 Brokers - need to be aware of what the risks are, so as to advice
insureds about the scope of cover offered by their current portfolio
and their potential future requirements

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 DIRECTORS AND OFFICERS

 Duties: both common law and fiduciary

 Must understand the risks in order to formulate a risk/asset

management strategy

 Particular risks posed by dot.com crash: wrongful trading under s.214

Insolvency Act 1986

 Position of internet incubators?

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 Impact on the Claims Process

 More likely to have foreign element

 More likely to be facing unfamiliar laws/regulations

 Expensive discovery process

 Cultural impacts:

(1) use of email internally

(2) use of the internet as a tool in the litigation

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THANK YOU

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