ISP Insurance Costs Rise

Since the end of 2001, insurance costs have risen steeply for ISPs. Insurers say rates are about costs; ISPs say rates are set by people who don't know the ISP business.

by Max Smetannikov [April 4, 2003]

If you have been an ISP owner for the last 10 years, have an impeccable business record, and nevertheless have seen your business insurance surge 300 percent over the last two years, you are not alone. Rates for ISP insurance have surged, an unforeseen side effect of the various factors effecting the economy today.

Most ISP owners are at a loss as to what went wrong, and why instead of paying $500 a month in aggregate insurance coverage as they did in the past, they now have to fork out upwards of $6,000 a month. Insurance is a cost that entrepreneurs can neglect to consider when planning to start a business, yet it is a serious problem the moment you move out of your own home—you can't lease office space if you don't have a policy.

The reasons for the insurance price hike appear to be multiple, affecting different areas of coverage. Insurance agents say one of the biggest problems—still—is the lack of standardized ISP coverage policies. Only a handful of agents understand the ISP business and know how to get good rates from major insurance carriers.

The second issue is that ISPs are lawsuit-prone, vulnerable on a growing number of issues—even rich and powerful Verizon is facing a long legal battle with the RIAA, who want Verizon to police its subscribers.

And last but not least, depreciation numbers insurance agents use are typically very aggressive because ISPs go through new technologies arguably faster than any other business of comparable size.

"I don't know what 9/11 had to do with it, but my insurance agent told me it was tough all over after 9/11 especially with ISPs and IT companies," said David Cates, a principal at I-Net of New Mexico, "Legal cases all over."

Joseph Annotti, vice president of public affairs for the National Association of Independent Insurers, an industry association, said, "premiums rise when insurers face increasing loss costs."

A declining stock market is not one of those costs. Annotti said that insurers are regulated, and that property and casualty insurers tend to make short term investments in bonds such as tax-free municipal bonds.

Annotti said that the reinsurance industry was affected by 9/11, but that the Terrorism Reinsurance Act of 2002 helped insurance companies by allowing them to predict the limit of their liability. Of course, terrorism insurance may remain expensive in areas that might be a target in the future.

However, Annotti said that the main costs for insurers are weather and lawsuits. Lawsuits concerning mold and asbestos are real problems for property and casualty insurers. "Asbestos has been an issue for a decade or more," he said. "Now that the manufacturers are bankrupt, we're seeing successful lawsuits against companies that had it or installed it."

Whatever the cause, anecdotal evidence suggests an average ISP now pays three times more for insurance coverage, which typically consists of bodily injury and property damage; as well as omissions and errors policy. Insurance brokers say that if an ISP tried to get a "regular" business insurance, it is bound to pay through the nose.

"A small ISP that goes through a custom errors and omissions interviewing process does an equivalent of an owner of a 10,000 sq. foot building going through the same appraisal process as the owner of the Empire State building," said Craig Poulton of Poulton Associates. "This process takes the same amount of time and costs the same."

Errors and omissions policy is the part of the insurance that quantifies an ISP's exposure to lawsuits. An insurance agent who doesn't understand exactly how an ISP business works, Poulton said, can easily over-assess these risks. On the other hand, if the agent underestimates the amount of coverage an ISP needs, it may be unable to collect on insurance if something happens, Poulton said.

Other agents say that it also matters what kinds of services ISPs sell. A "regular" ISP, somebody in dialup and leased line business, doesn't really need to have more insurance than a typical computer consultant. ISPs that sell colocation, webhosting, and e-commerce, on the other hand, have to expect to pay more.

"Insurance carriers like to see no more than 10 percent of an ISP's revenue to come from webhosting," said Jamie Nelson, an underwriter with ISPInsurance.com.

The reason? In a lawsuit, everybody involved with a website is named, from the company that owns the domains to the owner of the data center. If thousands of customers are hosted on five servers, a lawsuit related to one of them can be extremely expensive, according to Nelson.

Different agents agree, though, that all ISPs pay higher premiums for the first part of their coverage—bodily injury and property damage—because their investment into remodeling office space is higher in absolute dollars than that of a shoe store or a law firm. Once the price of fake floors, air conditioning, routers, and mantraps is added up, an average ISP could have easily spent $75,000 on modifications other businesses simply don't need.

But even with all these factors added in, most ISPs are baffled as to the extent of the increase in price of insurance—it is as if major carriers of ISP business insurance, such as AIG, Hartford, and Chubb—have decided ISPs are somehow a higher risk category than the rest of the telecom industry after the towers came down.

"Despite the fact that we're profitable and have had no claims in the seven years we've been in business, nobody wants our business any more," wrote one ISP owner who preferred to remain anonymous. "ISP is a dirty word in the insurance world, it seems."

— End