270.6-17

CLASSIFYING RISK–SELLING IN CYBERSPACE

(April 2019)

INTRODUCTION

Buying and selling in cyberspace seems effortless but there are many insurance exposures and risks to contemplate and each one must be classified correctly for the premium to match the exposure.

ELECTRONIC DEVICE MANUFACTURERS

An order cannot be placed in cyberspace without an electronic device. This can be a computer, a smartphone, or a tablet. The computer manufacturers’ code is Class Code 51941: Computer Manufacturing. This code requires attaching CG 22 75–Professional Liability Exclusion–Computer Software. This means that an agent should consider recommending professional coverage for computer software development to such a customer.

Telephone and cell phone manufacturers are classified under Class Code 59695: Telecommunication Equipment Manufacturing. This classification description does not provide any information with respect to software. This suggests that a smart phone manufacturer should be classified as a computer manufacturer instead of a telephone manufacturer because of the very important software components.

However, these may not be the only codes to use. General Liability Rule 27.A.3 explains that a separate classification is required if a manufacturer also has retail operations. There are two retail codes to consider and each is explained in the Internet Sales section below.

INTERNET SERVICE PROVIDERS (ISPs)

Shopping online requires an internet connection. An Internet Access Provider or an Internet Service Provider must be used. Class Code 47600: Internet Access Providers is used when a business provides only internet access to its customers. However, Class Code 47610: Internet Service Providers is the classification used if internet access plus other services are provided to subscribers.

CG 22 98–Exclusion–Internet Service Providers and Internet Access Providers Errors and Omissions must be attached when either code is used because of the potential exposure to errors and omissions. Coverage for those exposures must be purchased separately.

INTERNET SALES

Two different codes are available for online retail businesses. Class Code 16750: Internet Retailers is the logical first choice. This classification note explains that this code applies when the only sales at a particular location are from the internet. That location may be the only location of the retailer or it may be a location that processes only internet orders and does not permit in-store sales.

When both internet sales and in-store sales take place at the same location, the classification that applies to the brick and mortar store also applies to the internet sales operation.

Example:

Scenario 1: Draperies R Us sells all its draperies over the internet. Class Code 16750 applies.

Scenario 2: Draperies for Your House sells all its draperies from a single brick and mortar location. Class Code 18437: Stores –no food or drink – other than not for profit applies.

Scenario 3: Draperies R Us and Draperies for Your House merge. Neither existing location is closed but an option to order over the internet is added at the Draperies for Your House brick and mortar location. Class Code 16750 continues to apply to the Draperies R Us location. Class Code 18437 continues to apply to the Draperies for Your House location, but the receipts will now include the internet sales made from that location.

GETTING THE MERCHANDISE TO THE CUSTOMER

Delivering the merchandise to the customer comes next. Most retailers do not use their own delivery fleet. Instead they employ the services of a separate shipping business. The United States Postal Service (USPS) is one of several delivery options but this section considers others because USPS does not require insurance. Two different classifications should be considered. Class Code 94099: Express Companies is used for companies that specialize in delivering parcels and letters. Class Code 99793: Truckers is used for all other trucking operations.

Related Article: Classifying Risk–Truckers

PROCESSING PAYMENT

The last step in the order process is payment. While some businesses still operate based on Cash on Delivery (COD), most require a credit card number before processing the order. Class Code 61223: Building or Premises–Banks and Other Financial Institutions applies to the financial institution that issues a credit card.

SUMMARY

Be aware of all the methods your customers use to buy and sell products because an internet gap in coverage may have to be filled. ISO coverage forms and classifications change regularly to keep up with changes on the Internet and some may result in a gap in coverage developing. Asking the question, "Do you sell or place orders over the Internet?" should be a part of every new and renewal process.