Larry Harb is the President and CEO of IT Risk Managers, Inc., who specialize in providing insurance for auctioneers and other businesses that face special risks through their usage of current technology. Larry is a familiar face at many state auctioneer associations’ conventions around the country, and his decades of experience around the auction industry make him uniquely suited to help auctioneers protect themselves from the specific risks facing them in their business operations.
I recently sat down with Larry to discuss the importance of insuring your business, as well as the specific types of risks auctioneers are exposed to when conducting online auctions, and how to proactively avoid them.
Larry Harb, President and CEO of IT Risk Managers, Inc.
So to start off broadly, why the specific concern for online auctions? Is there a difference in the types of insurance that cover online auctions versus traditional?
The first thing auctioneers need to understand is that traditional insurance does not cover online auctions. That’s first and foremost. Most traditional insurance policies today have all begun to make exclusions for anything in the electronic media world. When auctioneers buy insurance, the first type of coverage they tend to get is the general liability policy. This has advertising and personal injury built into it. But now there’s a caveat. The personal injury portion covers things like libel, slander, and things of that nature, but only as long as it doesn’t take place in the electronic media format.
If you think about the logic of it, it makes sense. In the print world, which is what the general liability traditionally covered, you had limited exposure. If I print a handbill or brochure as an auctioneer, I might print a hundred or a thousand of them. But once you go online, suddenly your audience is tens of thousands, if not millions. So once you go online, your exposure is that much greater, just because of the sheer number of people who have access to it.
Our own company had an electronic media claim because of a photo we’d been using on our website. Long story short, I got a phone call from an attorney one day saying that photo was his client’s intellectual property. The thing is, they weren’t even aware of it until I had happened to use the picture in a post on Facebook. We’d been using it for years on our website without issue, but once it got put into the world of Facebook, within days I had someone calling and asking for thousands of dollars for infringement. So that’s a great example of a potential claim that could come out of conducting online auctions. Any usage of a photograph or anything that you don’t have explicit permission to use, maybe things you’re not even thinking about in those terms, could potentially be used against you. And in the online world they’re quite likely to find you. Your exposure is just so much greater online, and your traditional insurance won’t cover you for it.
What are some examples of specific risks auctioneers need to be aware of when selling items online? Where do these legal exposures tend to come from?
In the world of traditional auctioneering, the people who showed up to your auctions tended to be people you knew, or had some kind of personal connection to. They were your neighbors, people you could work things out with, for the most part. With online auctions, there’s a good chance that the majority of your bidders will be people from a different state, or even a different country. You often don’t have a relationship with most of these people, so they’re more likely to seek legal recourse than they otherwise would be. With people you have a real relationship with, you’re more likely to be able to just work things out.
Another aspect of online auctions that aren’t as much of an issue in person, are questions of purported false advertising. With traditional auctions, the bidder is there, they see what they’re bidding on, it’s right in front of them. It’s much easier for them to claim that an item was misrepresented online. This is why we recommend that every auctioneer offers an inspection time, and preferably more than one. Of course, most of the time no one is going to show up, but it’s important that you offer it, to cover yourself against claims of misrepresentation. If you never offered a viewing time, you as an auctioneer don’t have a leg to stand on. If you had a viewing time but the person chose not to show up, then that was their prerogative
Does your company only cover online transactions, or traditional auctions too?
Both. We can cover just about any type of exposure that an auctioneer might face, whether they’re operating online, in-person; whether they’re doing personal property or real estate, we can cover it. What we look at is what you’re selling, and what method you’re selling it by. We customize it to the auctioneers specific needs.
The good news about us is that we really understand the specific risks that auctioneers face. I have an auctioneer license in the state of Indiana, and went to auctioneer school just to be able to understand the industry better. I don’t do auctions myself, but I wanted to know the ins and outs so that I could better serve the needs of auctioneers. We are able to identify risks that the auctioneer may not even be aware of, and help mitigate that risk. That’s all insurance really is – a risk transfer vehicle. The risk and exposure itself doesn’t go away if you get insurance, it just shifts the responsibility of who pays if things go wrong. The auctioneer who doesn’t buy insurance is just self-insuring. They’re putting their own money on the line.
Is there usually any shared legal blame when something goes wrong on, say, a large online auction marketplace platform? Is the liability split between the auctioneer and the platform, or does it primarily land on a single party?
When you’re on a marketplace type platform, you might expect that the securities should be higher. Built in. And to an extent they are, but they’re not fool-proof. Most people who use these platforms think the platform itself will cover their responsibility should anything go wrong. However this usually isn’t the case. Most platforms have a contract you sign that indemnifies them. It removes any legal responsibility from them. The auctioneer is the liable party. They don’t want to be responsible for the various things that could go wrong on your end.
Now the auctioneer also has a contract with the buyer and the seller. It’s important for them to limit their own liability with the buyer and the seller, to avoid getting caught in the middle should anything go wrong. There are simply too many variables at play to be completely certain that something won’t go wrong and harm some party in some way. A great example of this is just this past week. Amazon’s web services, which host servers that tons of software companies rely on, went down. That’s pretty much out of everybody’s control, except I guess the people at Amazon. That’s the infrastructure going down. If the lights go out at a live auction, it’s not a huge deal. You still have paper. But if the servers crash in the middle of an online auction, there’s no recourse.
So now your bidder can try to sue you because they didn’t get the opportunity to keep bidding, and your seller can do the same because you failed to maximize the value on their item. If it’s a reserve auction you can just halt the auction, but if it’s absolute you’re in real trouble. Technically you’re not allowed to stop the auction. So the contract that you enter into with your buyers and sellers needs to reflect that you’re not responsible for any failure of the bidding infrastructure.
So related to that, what’s the best way for auctioneers to be proactive about avoiding situations where they might need insurance to begin with? Is it, for instance, worth it to have a legal professional write your Terms and Conditions for you, to ensure that you’re fully covered legally?
By all means. That will always be worth every penny. You really want to make sure your terms and conditions don’t stick you with the liability. That should be the first layer of protection. Insurance is the fallback should that fail. I want to help auctioneers put safeguards in place to minimize the risk to begin with, not just insure it. It’s like with a building – sure, you want to insure it, but you also want to have sprinklers inside it to minimize damage.
So if you have professionally written terms and conditions, you can feel pretty good about your situation starting out. I feel like most auctioneers don’t take advantage of the services of other professionals as much as they should. They’ll preach the importance of using a professional auctioneer to maximize the value on an item instead of going with a tag sale, but then they won’t follow their own advice when it comes to their own business. You can’t be your own lawyer, your own insurance person. Don’t cut corners to save money. It will be worth it. Not just that – find a broker who understands the auction industry. Your local guy probably won’t be used to auctioneer-specific risks. You need to find someone who specializes in it.
Your terms and conditions should be customized for online auctions, if you’re doing them, and for whatever other specific components your business deals with. Things usually don’t work the same way in the real world as they do in the online world, and that’s something that needs to be taken into consideration when writing up these contracts. And you shouldn’t trust yourself to know how to do it in the best way that gives you the most legal coverage.
Any other general tips we didn’t cover?
Auctioneers who do online auctions need to be conscious of credit card charge backs. A person can pay with a credit card, then they can claim they didn’t get the item, or that it wasn’t as advertised, or all kinds of things. Then they charge the credit card back, and suddenly the auctioneer is out the item and the money. It happens and it’s something auctioneers need to be prepared for. When you accept credit card payments online, you, the auctioneer, are 100% responsible for that. Stolen credit card used to pay for something? Auctioneer is responsible.
Privacy concerns also become an issue when you go online. This is a huge part of online auctions, as well as just when dealing with computer systems in general, even in traditional auctions. Private info can be stolen. 47 states have “database notification” laws, saying that if you lose any personally identifiable information about your bidders, by law you have to notify everyone affected. Most people aren’t even aware of that. So, how many records is that, how many people are you notifying? Even if it’s something on a laptop, and someone steals the laptop out of the car or whatever. You have to notify everybody who has registered for one of your auctions. Everybody in the affected database.
For the average small business, a category that I think most auctioneers would be included in, the average cost of a single data breach is about $188k. Statistically, 60% of those businesses will fail within six months if that happens, because they just can’t cover the expense. Those laws exist whether it’s paper or electronic data that’s stolen, but it goes back to that earlier point about online exposure. It’s just easier to lose things online, or when it’s in an electronic format. All that stuff used to be in a four-drawer filing cabinet somewhere, but now it’s all on a thumbdrive. You don’t need a truck to steal a thumbdrive. And these are all things auctioneers need to be prepared for in advance.
Moral of the story? You need to protect yourself and one way to protect yourself is through selecting an auction platform that works for you. Sharp Auction Engine offers a free 30-day trial.
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