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 gainst 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 when selecting 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 firstname.lastname@example.org.