As anyone in the tech industry understands, your progress and good fortunes can turn on a dime. One day you launch the hottest new app or service, for example, and the next day someone unveils something slicker and faster.
Or, a simple mistake can cause your business irreparable harm.
You’ve worked hard to elevate your business, and competition is expected and manageable. But what steps can you take to protect against your own errors?
Errors and omissions insurance, also known as E&O, can help safeguard your tech company against honest mistakes and oversights. Service-based organizations and innovators should consider securing such coverage to help lessen the impact of that inevitable, but likely, unforeseeable incident.
As a commercial business insurance agent for two decades, I once had a client who designed enterprise resource planning software for small businesses. He started his own shop and found a market among all the big industry players. His first rollout included a bug, unnoticed during testing, that caused the miscalculation of customer sales tax, resulting in an underpayment penalty. The customer looked to the software designer for damages. Fortunately, the tech company’s E&O policy covered errors of this type.
The Nuts and Bolts of E&O Insurance
E&O insurance, which is readily available through most agencies and brokers, helps insulate business proprietors and their employees from negligence, mistakes, or omissions that might occur during the normal course of business. Examples of such missteps include clerical errors, poor communication with clients, or a failure to honor good faith promises. If such an occurrence results in financial damage to a customer, E&O can help make them whole while also providing remuneration for any legal fees, jury awards, and/or court costs.
Not every claim is valid, though. I once insured an independent programmer who wrote a piece of code for a manufacturing business. One of the company’s IT employees altered the code, causing it to slow orders for the assembly line. When the manufacturer filed a claim against the programmer, the latter was able to prove the code alteration in court, with defense costs covered by E&O.
It is important to know what a professional liability policy covers (and what it doesn’t). For example, tech E&O insurance policies commonly exclude 1) criminal or fraudulent acts, 2) injuries to onsite visitors, and 3) customer warehouse damages caused by a business owner or employee. However, general liability insurance typically covers such occurrences.
Why E&O Insurance Matters for Tech Companies
The complexity of a tech company’s products and services makes it vulnerable to risks that can cause clients financial or reputational harm. Software glitches, cybersecurity vulnerabilities, hardware failures, and underperforming components can all lead to claims against a tech entity.
In this industry, an aggrieved buyer may, for example, file claims through an attorney or insurer to seek financial relief from, say, a software purveyor. Tech E&O insurance steps in at that point, helping to cover costs ranging from legal defense to general damages. E&O may also help cover amounts agreed to in a settlement or monetary amounts that a judge or jury may award at trial.
A Sampling of Claims Situations for Tech Companies
Situations that could prompt claims against the sellers of products or services include:
- A piece of software contains bugs. User frustration mounts, and the customer incurs financial harm.
- A webmaster launches a site that continually sends visitors to unsavory links, causing harm and threatening the viability of any devices used to access it.
- A server does not meet the specs outlaid in sales literature, creating storage issues for a client.
E&O Insurance Coverage Summary
While policyholders can tailor E&O policies to address risks specific to the tech industry, they typically cover the following:
- Defense costs or legal fees associated with defending third-party claims.
- Settlements, judgments, or compensation if a tech company is found negligent.
- Protection against lapses in service, as when a failure to properly monitor cybersecurity systems leads to a hacking incident.
How to Select the Right E&O Policy
As an agent, I guided my tech clients through the process of choosing and purchasing E&O coverage. With the insured party present, I pored over every policy detail, both before issuance and upon delivery. My process included a signed acknowledgment of said review, to eliminate future misunderstandings, as well as the following tasks:
- Performing Risk Assessment. You can engage a carrier’s risk managers to help identify exposures.
- Determining Coverage Limits. Tie those exposures to dollar amounts or policy limits that cover potential claim amounts in worst-case scenarios.
- Scrutinizing Policy Exclusions. Assume nothing. Hidden exclusions can lead to inadequate insurance coverage (or none at all).
Is There a Distinction Between E&O and Professional Liability Insurance?
While these coverages may sound similar, there are subtle differences. For tech organizations, E&O insurance targets the risk associated with products and services. Professional liability might cover a broader spectrum. For example, a company officer making misleading statements about a competitor might spark a claim handled by professional liability insurance.
Prevention and Best Practices
A surefire way to minimize risk is through preventive measures.1 Be sure to create thorough quality assurance programs. Also, perform periodic IT system maintenance and updates while providing rigorous compliance and security training to employees.
Sewing It All Up
Good developers and programmers use systematic logic to make their code hum. You might look at shoring up your tech business in a similar light. E&O insurance, one strong piece of a comprehensive insurance program, is part of a targeted company strategy keeping you on the path to profit and prosperity.
- https://rms.iiaba.net/Resources/Pages/Publications/VU/FacultyTop3.aspx ↩︎