Best of the ISP-Lists

Where There's Smoke, There's Insurance

Members of the ISP-Colo list discuss how much insurance a webhosting company needs—and what would happen if the company were sued for more than its coverage. Does the tobacco industry have the answer?

[February 1, 2001]

On the ISP-Colo list in January, SO queried,

"Is it common for a carrier-neutral facility to have you insure your equipment for at least $1.5 million? It sounds like a lot to me."

SC responded that it sounds about right:

"$1.5 million is in the ballpark. I've seen requests for as high as $5 million. The average is about $2 million general aggregate, $1 million per occurrence, $1/2 million fire, and $1 million personal injury."

A number of respondents explained that such coverage isn't just for your own stuff:

[JN noted] "$1.5 million is usually for liability, in case your equipment catches on fire and damages other equipment. Your existing business insurance should be able to add that as an additional location for a reasonable cost."

[DV added] "The insurance is there for bodily injury more than equipment insurance. They are mostly worried that if one of your administrators is in the facility, and happens to trip over his/her own two feet and hurt themselves, that you have insurance to cover them."

[MP countered] "Your administrator is covered by Workman's Comp Insurance, and is excluded specifically from any coverage in your own policy. Employees can't sue employers for workplace injuries in most instances, except for willful acts by employers. Liability insurance is just that, it protects you from paying judgments against you for torts you are legally liable for, up to the limit of liability in the policy plus defense costs."

In light of these responses, SO followed up with a more dire concern:

"What happens if they happen to sue you for more than what you're covered for? I hope it's not what I think."

EG suggested that while it's not an ideal situation, there is a solution:

"If they get a judgment for $80 million and you have $5 million, you do what the tobacco companies did. You spin off the assets, declare bankruptcy, set aside a pool in the bankrupt company to pay the judgment, say $5 million—then resume your operations under a new name."

MP had a more pessimistic view:

"As far as playing like the tobacco companies, you can't do it unless you can show huge numbers of innocent stockholders who would be damaged by your bankruptcy. For a normal business like ours, you lose your business, your savings, and if you have a real nice home, you exceed the homestead exemption and you lose that too."

—End