In the ever-changing technology industry,
it’s a fact that products and services may
fail to perform as expected. Many technology companies do not realize their general
liability policy does not protect their business
against failure causing financial injury to a
third party, such as a customer or vendor,
says Ken Harrison, commercial insurance
broker with Westland Insurance Brokers.
With attorney fees averaging $300 to $400
per hour, industry experts estimate the average cost to defend a financial injury claim
often exceeds $200,000. What business owners need to know is there is insurance available providing coverage for defense costs
and settlement awards through a technology
errors and omissions (E&O) policy.
Smart Business spoke with Harrison about
technology E&O insurance and how business owners can be assured they are making
informed buying decisions when it comes to
protecting their company.
Why is it important to have E&O coverage?
E&O insurance protects businesses against
failure of their products or services causing
financial injury to a third party, such as a customer or vendor. It also protects against
breach of contract when a business fails to
deliver services or products in accordance
with contractual terms. It is important to
have an E&O policy because it fills in gaps
left by a general liability policy that often protects against third-party bodily injury and
property damage but stops short of providing
coverage for monetary damages, such as loss
of profits. Each policy may differ, so it is
important to work with a broker to determine your specific needs.
Who should purchase technology E&O insurance?
Networking and information technology
companies, electronics manufacturers, technology consultants, and telecommunications
firms all require such coverage. Because
technology companies are at the forefront of
innovation, unforeseen or unanticipated failures sometimes occur. Without E&O insurance, hardware, software and telecommunications companies are putting the longevity
of their business at risk.
Why is E&O coverage often not purchased?
One of the main reasons companies do not
purchase E&O insurance is because they are
not aware of or informed of their exposure.
Many customers say they have contracts in
place with all their customers and vendors
that limit their liability and hold them harmless should failure occur. While a legally
reviewed contract with well-crafted protective clauses could prevent companies from
paying indemnity, it does not prevent a customer or vendor from filing suit or leaving the
contractual interpretation up to a judge or
jury. Without an E&O policy, a company
being sued could be left to find counsel on its
own and pay damaging legal expenses out-of-pocket.
Other reasons technology businesses do
not buy E&O coverage include not being contractually required to carry it or not wanting
to pay the additional premium such a policy
would cost. Every technology company has
some form of E&O exposure. Whether a
small start-up business or a large multinational corporation, there are carriers and
policies available to match individual business needs. Every buyer should, at minimum,
be aware of his or her exposure and be confident he or she is making informed buying
decisions when it comes to E&O insurance.
What is important to understand about a
technology E&O policy?
Coverage varies among carriers. This is
why it is important to have an experienced
broker to point out the differences and match
companies with a policy that best fits their
needs. Some key aspects include:
- Claims-made versus claims-made and
reported policies. No customer should be
purchasing an E&O policy without knowing
the difference between the two. Be on the
lookout for hidden reporting triggers. - Enterprisewide and worldwide coverage. This means the policy is not limited solely to technology products or services and
coverage will respond to losses and lawsuits
outside the United States. - Definition of damages and payment.
How a policy defines damages determines
how it will respond and pay in the event of a
claim. While some policies may leave damages undefined and left to carrier interpretation of the loss, other policies will be specific
about the type of damages covered. - Indemnification versus pay-on-behalf.
Indemnification policies could leave an
insured business on its own to pay defense
fees and then await reimbursement. - Terms. Insurance buyers should read
exclusions carefully and also be interested to
know whether their policy includes cost of
contract, delay in delivery, security breach,
choice of counsel and duty to defend clauses.
What should technology business owners
look for in an E&O insurance carrier?
One should partner with a carrier that
offers breadth of coverage and has specialists in underwriting, risk control and claims
handling dedicated to servicing technology
companies. There are a limited number of
carriers in the market that truly specialize in
writing insurance for technology businesses.
Take the time to research the various carriers
and talk with a broker about the one that can
best protect your business.
KEN HARRISON, MBA, is a commercial insurance broker with Westland Insurance Brokers where he specializes in property and casualty insurance for technology companies. Reach him at (949) 553-9700 or [email protected].
