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Great Ideas Dept.: Open Source Insurance
Posted by James Grimmelmann on Wednesday, March 17 @ 18:37:14 EST Copyright
A startup callled Open Source Risk Management has an interesting business idea: offer insurance to companies using open source against being sued, SCO-style. Adding to OSRM's street cred, it's hired Groklaw's Pamela Jones, one of the best-informed folks in the world on the convergence of UNIX, open source, and copyright infringement suits.

Though the idea has provoked some derision -- including a comparison with "alien abduction insurance" -- it's actually quite sensible. Insurance is one of the great miracle products of the modern world, once you learn to suppress your "gambling on disaster" gag reflex. Insuring against a risk doesn't mean you think it's likely or that you plan to bring it about -- I carry liability insurance on my car even though I have no intention of running people down. Same thing with newspapers that have libel insurance and open source-loving software companies that buy copyright infringement insurance: they're not in the business of doing these things, but carrying insurance means that they don't risk bankruptcy from a single mistake.

Similarly, carrying anti-SCO insurance doesn't mean you're treating SCO's claims with any merit. One of the great roles of insurance companies is to fight legal battles on behalf of their insured: if someone fakes being hit by your car and sues you, your insurance company, as the one on the hook for the cash, will fight the fraudster fiercely. Indeed, if enough companies buy OSRM's policies, they will have collectively established, in effect, a killer legal defense fund.

If you poke around OSRM's site a bit, you will also see that this insurance takes the form of indemnification, available to clients only after they comply with OSRM's "best practices." Again, another useful service of insurance companies: they do lots of research on the risks they might be exposed to, so they're in a position to push intelligently for safer ways of doing things. Those little "UL" marks on all sorts of consumer goods stand for Underwriters Laboratories -- an organization whose seal-of-approval for safety insurers insist upon before signing off on covering manufacturers for accidents resulting from use of the products.

The one issue still sticking out in my mind has to do with the nature of the legal risk facing the open source world at this particular moment in time -- one very big bully who is threatening absolutely everyone in town at once. If SCO starts winning big, pretty much everyone who'd be in the market for OSRM's indemnification may need payouts all at once. I doubt that OSRM itself would have enough capital to pay out: in order for their insurance to be anything more than just a piece of paper, they'd need some pretty serious reinsurance. (That is, insurance sold to insurance companies against all their ships failing to come in at once.)

Given how smart the OSRM idea and people seem to be from what I've seen, I'm guessing they've dealt with the issue already.

 
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Actually they often don't fight at all (Score: 0)
by Anonymous on Thursday, March 18 @ 13:43:37 EST
I know from personal experience that insurance companies usually settle rather than going to court so long as the person making the claim will settle for five figures or less.

This may be fine for me as a customer since I don't have to pay either way but it certainly doesn't discourage silly claims.


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Re: Great Ideas Dept.: Open Source Insurance (Score: 0)
by Anonymous on Thursday, March 18 @ 16:11:43 EST
It'd be nice if they could start putting together competitive performance bonds for open-source software. The performance bond ensures that the software actually gets written, or the bond issuer pays out (and may come after the obligee). Useful for facilitating contracts where there is a high risk of non-performance.


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Re: Great Ideas Dept.: Open Source Insurance (Score: 0)
by Anonymous on Thursday, March 18 @ 16:27:58 EST
You have to wonder whether there is even a market for "re-insurance" for OSRM. If not, then if SCO wins OSRM will file for bankruptcy and everyone buying the insurance would just be worse off that if they had bought it in the first place.



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Re: Great Ideas Dept.: Open Source Insurance (Score: 0)
by Anonymous on Friday, March 19 @ 09:37:36 EST
Its not clear if they're brokering insurance, acting as a business provider for another insurer or actually providing insurance themselves. Either way, the person providing insurance is going to be regulated by a state (or conceivably by the Bahamas or another off-shore insurance jurisdiction) and will have to comply with liquidity and reserve requirements. Insurers don't go into bankruptcy -- at worst, they get liquidated, but there are safeguards in any event.


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Background on Risk Management and Insurance (Score: 1)
by DougSimpson on Saturday, March 20 @ 13:03:29 EST
(User Info | Send a Message) http://dougsimpson.com
James, I took a look at OSRM's site, and thought about your comment that it would not be likely to have sufficient capital to respond if many SCO suits came in at once.

OSRM, from all I can see on their site, does not hold itself out as an insurer or even as an insurance broker. Rather, it is a provider of fee-based risk management, consulting and training. Such companies take a fee from the ultimate customer in order to independently evaluate and advise regarding the management of risk, but do not sell or provide insurance coverage. I know of no real capital requirements to operate as a risk manager.

A risk manager may advise their clients about available insurance and introduce them to licensed brokers representing companies that offer such. A risk manager may advise a client to self-insure, or join with others similarly situated to form a risk pool, perhaps set up an offshore captive insurer owned by the pool members to which the risk may be transferred. They might even administer such a pool, acting as a third party administrator or "TPA". State regulation of TPAs varies.

If actual insurance were to be available, it would have to come from an actual insurer, which would need to have capital and/or reinsurance. I did not find anything on the OSRM site that indicated that any particular insurer was offering this type of coverage. That does not surprise me, because coverage like this is quite unusual, and there are very few players in the market.

This sort of coverage is *not* likely to be offered by a standard, licensed insurer with offices and agents in the prospective insured's state. Its the sort of non-standard coverage that would typically come from a "surplus lines" insurer licensed out-of-state or outside of the U.S. Most folks are familiar with the unusual types of insurance written by Lloyds of London, whose underwriters are an example of a S/L carrier. There are many others less well known, some that are subsidiaries of famous companies.

S/L carriers are not licensed or regulated by states (other than the state where they may be domiciled) so that buyers need to do due diligence. Risk managers are useful in that due diligence, because they are (usually) not compensated by the insurers with which the risk may eventually get placed.

Purchase of S/L coverage is typically through a specially licensed surplus lines broker, an insurance intermediary that takes a commission from the insurance company for the service of arranging insurance coverage for particular insureds with an insurer not licensed in the insured's state.

You've put your finger on the main challenge for any underwriter thinking about putting out a line on this type of risk ... lack of distribution of the potential hazard. If SCO starts a suit campaign, and only one or two insurers cover the whole waterfront, they will be hit hard.

Such can be handled much like "retroactive" coverage ... which is sometimes purchased *after* a disaster. In essence, the insured, who has already been sued or expects to be sued because of some known event, pays a premium that the insurer figures will cover the costs of defense, indemnity, its administrative costs and a margin for profit. The transaction may be beneficial to both parties because the insured can take a business expense deduction in the year the premium is paid (rather than over the ensuing years of defense and ultimate payout).

Unlike the insured, the insurer *is* allowed to deduct its actuarially justifiable reserve for all that anticipated expense and indemnification, in the year the premium is paid. If the likely main pay-out is several years away, the insurer may also be able to generate investment income on the premium paid by the insured over the years of defense. So, there are tax advantages for the customer in placing the risk into an insurer.

Either way, the coverage is likely to be expensive, if available at all. The more likely the c

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