Defending the Digital Frontier
Digital technology continues to transform the global publishing arena, from changes in copyright law to ways in which media and technology are insured.
Kevin P. Kalinich, Chicago-based global practice leader for cyber/network risk at Aon Risk Solutions, emphasized just how dramatic the transformation in global publishing has been in recent years.
“If you take a look at the top four or five publishers like Pearson, Reuters, Thomson, Reed Elsevier and Wolters Kluwer … in just the last five years they’ve converted from being 75 percent hard copy to being 80 percent electronic.
“It’s amazing, and here’s why it’s so important,” Kalinich added. “In the old world when hard copy ruled, the end user — the consumer — would not be liable because the publisher was liable for publishing it.”
Now, however, there are few limits to how an end user can use digitally published content. And it’s not always clear where the line is between fair use and infringement.
Kalinich and others said that publishers walk the tightrope of trying to protect the original content owner while protecting the end user from unintentional intellectual property infringement.
“End users need the appropriate legal rights to use copyrighted materials or they could potentially commit copyright or trademark infringement,” said Kalinich. “Typically, the IP rights are granted through a licensing agreement or ‘fair use exception’ to copyright violations. Fair use is a limitation and exception to the exclusive right granted by copyright law to the author of a creative work.”
The Role of Intent
In the past year, there have been two landmark copyright decisions in the online publishing realm that have media/technology experts buzzing.
One is Authors Guild Inc., et al. vs. Google Inc., a decision rendered in mid-November. The other is the Associated Press vs. Meltwater U.S. Holdings Inc., a decision reached last March.
In the Google case, book authors and several major book author associations challenged Google’s reproductions of books and “snippets” of millions of books on its website. The book authors claimed this did not constitute “fair use” and violated their copyright protection.
The decision by U.S. Circuit Court Judge Denny Chin in Manhattan — if it survives an announced appeal of the ruling — lets Google continue expanding the online library. Chin ruled that Google’s product helps readers find books they might not otherwise locate.
The institutions that have provided works for scanning of snippets include Harvard University, Oxford University, Stanford University and the New York Public Library.
A key element in Chin’s “fair use” decision was that Google does not receive any monetary gain from posting whole volumes or snippets of some 20 million books in its electronic library.
In the Meltwater case, New York District Court Judge Denise Cote ruled that online aggregator Meltwater infringed upon AP’s copyright protection by using original content that AP had “labored to create.”
Not long after Cote’s ruling, AP and Meltwater entered into an agreement for AP to produce and Meltwater to electronically distribute content in a joint venture.
“It’s encouraging to see collaborations like the one between the Associated Press and Meltwater aggregating service as they try to work together, because clearly this is what the future looks like,” said Joanne Richardson, New York-based practice leader, U.S. media and entertainment, E&O at Hiscox USA.
“Companies that find ways to bring content and distribution together are really going to be the winners at the end of the day,” Richardson added. “I think it’s the way things are going to have to go. They need each other. It’s a win/win for everybody.”
Eric Seyfried, New York-based senior vice president at Marsh & McLennan Cos.’ FINPRO group, makes a distinction between online aggregators that are in business for monetary gain, like Meltwater, and online aggregators like Google Books, which exist to serve research and other scholarly purposes.
“In Judge Chin’s decision, he talks about Google providing significant public benefit,” said Seyfried. “Are they making available information that has been buried in the bowels of libraries, for example? In the Google case you have to look at the purpose and character of the use. Are they bringing potentially long-lost volumes to light for scholarship and research?”
Seyfried believed that Chin was “growing the pie” of books available.
Aon Risk Solutions’ Kalinich noted that Chin said he believed the authors involved would get more sales because Google was cataloguing their work, and that Google wasn’t making any money off the arrangement.
In the Meltwater case, Marsh’s Seyfried said, Meltwater used its proprietary technology to “scrape” the Internet for news stories and then processed the information into some sort of news digest for their subscribers.
“Is Google trying to further some level of scholarship and research, whereas Meltwater is looking to monetize content for its own benefit through selling subscriptions?” asked Seyfried. “It’s not some sort of academic or intellectual exercise, while Google is about building the brand rather than a subscription base.”
Louis Scimecca, Kansas City, Mo.-based senior vice president for AXIS PRO, which provides media and entertainment coverage, among other solutions, noted: “With the Internet and electronic communications flourishing and expanding, in a lot of cases the law hasn’t caught up with new technology. The technology comes and then the law follows.”
Scimecca said that the issue isn’t restricted to content aggregators. Any individual can find themselves in a legal tangle for using another party’s copyrighted material or trademarked digital matter without permission. “Generally right now, if a person or an entity is taking somebody’s else’s copyright material without permission or consent, that is a problem,” he said.
As in the Google case, Scimecca said, “fair use” might be a defense if material is used for educational, scholarly or teaching purposes.
Protecting the Business
In the realm of insuring risks at media/technology companies, Chad Milton, a partner at Kansas City, Mo.-based Media Risk Consultants LLC, said that as technology at media companies with innovative strategies change, these businesses threaten somebody else’s old business model.
“And the result more often than not leads to a copyright infringement claim,” said Milton. “The history of this kind of litigation is that it’s really about business practices rather than about individual bits of content. We’re not really talking about infringements in a writer’s product or work, we’re really talking about infringements in the way media companies do business.”
It wasn’t often that anybody cared about copyright infringement when content was free, Milton added. “But now that so many online publishers are trying to find ways to monetize their content, it now conflicts with the business models of the online aggregators who want to use other people’s content without paying for it.”
This environment creates interesting risks for insurers because formerly the insurers were asked to insure individual bits of media content: individual songs, individual films, individual stories and individual broadcasts, Milton said.
“They’re now being put in the position of insuring business models, and it’s harder for insurers to be able to insure the innovators,” Milton said. “And I think they need to find a way to convince underwriters that this is a manageable risk. I know there’s some resistance on the carriers’ part about this.”
But Hiscox USA is not one of those underwriters. As long as a decade ago Hiscox was creating product to address the merger of media and technology.
“We were able to put a form together that addressed both, so there was no gap in coverage because media companies now had technology exposure and technology companies had media exposures,” said Hiscox’s Richardson. “Today, there’s a lot more combined forms of media, technology and data privacy.”
Richardson said Hiscox tends to look at things on an individual risk basis, which means they want to understand how these new technologies work and function and be able to sort out exactly what some of the hiccups for them might be along the way.
“We will need a lot more case law to develop in some of these areas before we’re able to ultimately and completely understand all the exposures,” she added.
Observed Marsh’s Seyfried: “The key to insuring a media company is to try to come up with a comprehensive professional liability program. The foundation of that program is based on media liability insurance and making sure that a robust program covers a variety of media perils.”
The next step is finding a market that has the appetite to take on the risk. The other piece of the coverage is some sort of technology offering.
“I can say I do not have one significant media client in the whole risk management space that does not buy some combination of network privacy coverage and/or technology products and services coverage,” Seyfried said.
Coping with Cancellations
Airlines typically can offset revenue losses for cancellations due to bad weather either by saving on fuel and salary costs or rerouting passengers on other flights, but this year’s revenue losses from the worst winter storm season in years might be too much for traditional measures.
At least one broker said the time may be right for airlines to consider crafting custom insurance programs to account for such devastating seasons.
For a good part of the country, including many parts of the Southeast, snow and ice storms have wreaked havoc on flight cancellations, with a mid-February storm being the worst of all. On Feb. 13, a snowstorm from Virginia to Maine caused airlines to scrub 7,561 U.S. flights, more than the 7,400 cancelled flights due to Hurricane Sandy, according to MasFlight, industry data tracker based in Bethesda, Md.
Roughly 100,000 flights have been canceled since Dec. 1, MasFlight said.
Just United, alone, the world’s second-largest airline, reported that it had cancelled 22,500 flights in January and February, 2014, according to Bloomberg. The airline’s completed regional flights was 87.1 percent, which was “an extraordinarily low level,” and almost 9 percentage points below its mainline operations, it reported.
And another potentially heavy snowfall was forecast for last weekend, from California to New England.
The sheer amount of cancellations this winter are likely straining airlines’ bottom lines, said Katie Connell, a spokeswoman for Airlines for America, a trade group for major U.S. airline companies.
“The airline industry’s fixed costs are high, therefore the majority of operating costs will still be incurred by airlines, even for canceled flights,” Connell wrote in an email. “If a flight is canceled due to weather, the only significant cost that the airline avoids is fuel; otherwise, it must still pay ownership costs for aircraft and ground equipment, maintenance costs and overhead and most crew costs. Extended storms and other sources of irregular operations are clear reminders of the industry’s operational and financial vulnerability to factors outside its control.”
Bob Mann, an independent airline analyst and consultant who is principal of R.W. Mann & Co. Inc. in Port Washington, N.Y., said that two-thirds of costs — fuel and labor — are short-term variable costs, but that fixed charges are “unfortunately incurred.” Airlines just typically absorb those costs.
“I am not aware of any airline that has considered taking out business interruption insurance for weather-related disruptions; it is simply a part of the business,” Mann said.
Chuck Cederroth, managing director at Aon Risk Solutions’ aviation practice, said carriers would probably not want to insure airlines against cancellations because airlines have control over whether a flight will be canceled, particularly if they don’t want to risk being fined up to $27,500 for each passenger by the Federal Aviation Administration when passengers are stuck on a tarmac for hours.
“How could an insurance product work when the insured is the one who controls the trigger?” Cederroth asked. “I think it would be a product that insurance companies would probably have a hard time providing.”
But Brad Meinhardt, U.S. aviation practice leader, for Arthur J. Gallagher & Co., said now may be the best time for airlines — and insurance carriers — to think about crafting a specialized insurance program to cover fluke years like this one.
“I would be stunned if this subject hasn’t made its way up into the C-suites of major and mid-sized airlines,” Meinhardt said. “When these events happen, people tend to look over their shoulder and ask if there is a solution for such events.”
Airlines often hedge losses from unknown variables such as varying fuel costs or interest rate fluctuations using derivatives, but those tools may not be enough for severe winters such as this year’s, he said. While products like business interruption insurance may not be used for airlines, they could look at weather-related insurance products that have very specific triggers.
For example, airlines could designate a period of time for such a “tough winter policy,” say from the period of November to March, in which they can manage cancellations due to 10 days of heavy snowfall, Meinhardt said. That amount could be designated their retention in such a policy, and anything in excess of the designated snowfall days could be a defined benefit that a carrier could pay if the policy is triggered. Possibly, the trigger would be inches of snowfall. “Custom solutions are the idea,” he said.
“Airlines are not likely buying any of these types of products now, but I think there’s probably some thinking along those lines right now as many might have to take losses as write-downs on their quarterly earnings and hope this doesn’t happen again,” he said. “There probably needs to be one airline making a trailblazing action on an insurance or derivative product — something that gets people talking about how to hedge against those losses in the future.”
Construction’s New World
Get off a plane at Logan Airport and cross the harbor toward Boston and you will see construction cranes, a lot of them.
Grab an Amtrak train from Philadelphia into New York and pulling into Penn Station, you will see more construction cranes, many more of them. The same scene repeats in Denver, Los Angeles, San Francisco and Chicago.
All that steel and cable in the skyline signifies a construction industry that is growing again, after having the rug pulled out from under it in the Great Recession of 2008-2010.
The cranes these days look the same as cranes looked in 2008, but the risk management and insurance environment in construction is anything but the same now.
A variety of factors are now in play that have drastically changed construction risk underwriting, according to Doug Cauti, a senior vice president and chief underwriting officer with Boston-based Liberty Mutual’s construction practice.
Doug Cauti characterizes the current construction market.
Talent and Margins
For one thing, according to Cauti, the available talent pool in construction is nowhere near what it was pre-recession.
“When the economy went into its downturn, a lot of talent left the business and hasn’t returned,” Cauti said.
Cauti said recent conversations with large contractors in Ohio and Pennsylvania confirmed once again that contractors are facing a workforce that is either aging or very inexperienced. That leads to safety management and project quality concerns at just the moment in time that construction is rebounding.
Doug identifies one of the top risk management issues facing construction firms today.
Workers compensation risks in construction, already a problematic area, are seeing an impact from that dynamic.
Contractors are also facing much more competition. In the past, contractors might have bid on 10 jobs to get one, now they have to bid on 50 or 60 jobs to get one. That’s putting pressure on margins.
“There are a lot of contractors out there competing for business,” Cauti said.
“Margins are going up but not at the same rate as the industry’s recovery,” he added.
Financing and Risk Transfer
Another factor impacting the way construction risk is being underwritten is the size of projects and the way they are being financed. Construction’s recovery from the recession might be slow and steady, but the size of projects requiring risk management and insurance has increased substantially.
In 2010, there were 85 projects under contract nationally that were worth $1 billion or more, according to Cauti. One year later, the percentage of projects of that value or higher had grown by 30 percent, and the trend continues.
A lot of those projects are design-build, a relatively new approach to construction that Liberty Mutual has grown comfortable underwriting over the years. But design-build is still an additional complication, blurring the traditional lines of responsibility.
“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery.”
– Doug Cauti, Chief Underwriting Officer, Liberty Mutual National Insurance Specialty Construction
Given the funding demands of these much larger and more valuable projects — many of them badly needed public sector infrastructure improvements — public-private partnerships, otherwise known as P3s, are now coming into vogue as a financing option.
But deciding how risk should be allocated, underwritten and transferred in this new arrangement between contractors, the state, and private partners is a relatively new and untested science.
As a thought leader in the underwriting of the design-build approach – and the more traditional design-bid-build – Cauti said construction experts within Liberty Mutual are growing their knowledge to stay in step.
“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery,” he said.
That means attending relevant industry conferences like the annual IRMI Construction Risk Conference where Liberty Mutual has maintained a significant presence, and engaging in dialogues with contractors and government officials, and maintaining clear and active lines of communications with brokers.
Doug discusses emerging approaches to construction.
Legal and Regulatory
Another change that is creating challenges for construction risk underwriting, according to Cauti, stems from what’s happening in United States courtrooms.
Across the country, how a court interprets coverage can vary widely, especially in the area of construction defect.
“In the past, many jurisdictions viewed construction defect simply as shoddy workmanship and they had to go back and redo it,” Cauti said.
But now, on a state by state basis, courts are ruling that a construction defect is an accident under certain circumstances that may be covered by a contractor’s general liability policy.
In 2014 alone, according to Cauti, Supreme Courts in West Virginia, Connecticut and North Dakota ruled that construction defects can sometimes be considered accidents.
Cauti said doing business with a carrier that pursues contract clarity whenever possible – and that possesses an experienced claims team that can navigate the wide variety of state interpretations – is absolutely essential to the buyer.
Having claim teams not only dedicated to construction but also to construction defect, adds a lot of value to a carrier’s offering.
Doug outlines another top risk management issue facing construction firms in today’s booming market.
Now, as never before, contractors are relying on experienced construction insurance teams to help them address these complexities.
Insurers need to have the engineering expertise to analyze a project, to make sure the right contracting team is in place and to insure that risk exposures are being properly assessed. Another key in a construction insurance team, according to Cauti, is the claims department.
A Strategic Approach
The legal and financing changes that are taking place in the construction market, from a risk transfer standpoint, aren’t going to get ironed out overnight.
Cauti said it could be 10 years until the construction and insurance industries fully understand the complications of public-private partnerships and integrated project delivery, these approaches gain traction, and the state-by-state legal decisions that are causing so much uncertainty can be digested.
In the meantime, an engaged, collaborative approach between carriers, brokers, contractors, and their financing partners will be necessary.
Doug discusses how his area can provide value to project owners and contractors.
For more information on how Liberty Mutual Insurance can help assess your construction risk exposure, contact your broker or Doug Cauti at firstname.lastname@example.org.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.