Insuring Your Hosting Business
This story appeared in the March 2005 issue of Web Host Industry Review magazine. Click here to subscribe for free.
March 18, 2005 — (WEB HOST INDUSTRY REVIEW) — You’re just about to land that large account and everything looks rosy until the prospect starts asking about insurance and how they will be covered if something goes wrong. This is a valid concern, especially among customers that anticipate a lot of transactions or maintain sensitive data for others online.
Depending on the number of accounts and the markets in which a Web host specializes, the need for insurance coverage might not have immediately become an issue. Some customers provide their own insurance, especially if their servers are housed within a Web host’s facilities. Initially at least, smaller Web hosts and resellers typically address some of these concerns through their standard terms of service agreement and service level agreement.
A TSA’s wording will often include references designed to limit the possible liability on the part of a Web host. As with any agreement, be sure to have it reviewed by an attorney.
Here is an example of wording that might appear within a TSA:
XYZ Hosting will strive to keep its services running reliably but XYZ Hosting will not be held responsible for any losses you may incur through their use. If you are a business, you should ensure that you have adequate business insurance, and we recommend you contact an insurance agent or broker. As a customer of XYZ Hosting, you agree to indemnify, defend and hold harmless XYZ Hosting, its officers, directors, employees, affiliates, or resellers from any and all third party claims, liability, damages and/or costs (including, but not limited to, legal fees) that may arise from your use of our services. Unless specifically addressed and mutually agreed to within a service level agreement or security plan, XYZ Hosting will not cover you for any losses due to hacker attacks, denial of service attacks or other criminal activities. If your business relies on your Web site for commercial purposes, it is your responsibility to ensure that you have proper business insurance coverage. If server(s) owned by the customer are colocated within our data center, it is your responsibility to ensure that you have proper business insurance coverage for your server(s). As a customer of XYZ Hosting, you agree that you are responsible for any content you provide via your Web site, and it is your sole responsibility to ensure that it does not infringe upon any existing trademark or copyrighted material.
In a landmark 2000 case, John Doe v. Franco Productions, the US District Court ruled that Web hosts are not liable for the content of Web sites they host and are immune under provisions of the Communications Decency Act of 1996. The Court stated in the ruling that the CDA, “creates federal immunity against any state law cause of action that would hold computer service providers liable for information originating from a third party [including] those engaged in Web hosting activities.”
Service level agreements protect those customers for whom Web site availability is critically important. The agreement may outline specifics as to extra hardware or software put in place for redundancy of data, security and to ensure availability, with discounts or credits applied to the customers account for unscheduled periods of downtime that extend beyond a certain prescribed time.
One of the most powerful tools a host has for protecting its assets is the manner in which it is organized as an entity, whether it be sole proprietorship, limited partner, LLC or incorporation. Other important considerations include the state in which the host is formed, equipment owned by the Web host, the type of hosting services offered and any niche markets the Web host chooses to serve.
When considering insurance, shop around and contact several insurance agents and brokers. Consult with an accountant and attorney you trust for the best professional advice on the wording of any policy and how much coverage you may need for your situation. Of course, professionals carry malpractice insurance themselves, which covers them against giving you any wrong advice, so choose wisely.
Web hosts should consider several varieties of insurance that can protect against a range of liability concerns. The most common types include errors and omissions (also known as professional liability), general liability, employer’s liability and business insurance.
Errors and omissions has the most potential to impact a business. This type of insurance has long been used in the IT industry for technical and professional services to provide coverage for possible situations where mistakes or omissions could lead to lawsuits.
In one of the largest reported cases involving a technology company, the State of Mississippi went to court against American Management Systems Inc. for failure to properly design a new tax processing software as specified in a contract. A negotiated settlement was reached in which AMS agreed to pay $185 million over an extended period. AMS’s insurance companies would pay $161.5 million 78 percent of the total settlement through a comprehensive insurance policy that included E&O.
The amount of coverage a Web host needs depends largely on type and number of customer accounts maintained “$1,000,000 in coverage is the minimum carried by most companies,” says Jim Cochran, President of Techinsurance.com, an insurance provider for the IT industry. “The up limits go to $10,000,000 or more based on the types of applications hosted and size of the end client. If you are hosting Wal-Mart’s e-commerce site, you’d better have a lot of insurance.”
As Web hosts incorporate more services, such as site design, developing site tools or web services, having E&O insurance can provide coverage, up to the limits of the policy, if legal claims of mistakes are made by a customer. This type of insurance could also cover work done by a Web host’s employees or outsourced to an independent contractor, as well as equipment failures or security breaches that might occur.
“The Web hosting company may also have liability related to maintaining the security of client data, such as medical information or credit card numbers,” says Cochran.
General liability insurance covers physical property damage. Employers liability insurance is required for Web hosts that have employees, covering on-the-job safety and health issues. General and business insurance will include coverage for claims associated with a customer being injured at a host’s place of business, the Web host not using reasonable care in providing its service or an interruption in that service.
The best resource for finding out more about insurance, the prevailing rates, and how much coverage you might need is a local insurance agent or broker. Of course, some online research couldn’t hurt.
By reviewing its existing agreement terms closely, a Web host can determine whether added wording is needed to further clarify where the responsibilities lie when it comes to the customers site content and its business. For a Web host, insurance provides a way to manage the risks of doing business, enabling a host to grow safe in the knowledge that critical assets are covered in case of legal problems or the unforeseen.
