Errors & Omissions: Tech

16 /Jun

Tech companies regularly have their products or work called into question. Even your best customer may file a claim against your company, alleging you are responsible for causing their lost profits or business disruption.

Beyond the time involved in responding to such claims, the potential costs to defend your company and settle a claim could be ruinous to your business if you don’t have the right insurance coverage. Does your tech company have an errors and omissions (E&O) insurance policy?[1]

Innovation can be high risk and high reward, and its important that you have the correct cover in place should things go wrong.

 

What is E&O insurance?

E&O insurance for the tech sector is a type of professional liability insurance, and covers claims brought against you for errors, omissions or breach of duty, related to the professional services or products you provide.

Tech E&O is intended to cover two basic risks : (1) financial loss of a third party arising from failure of the insured’s product to perform as intended or expected, and (2) financial loss of a third party arising from an act, error, or omission, breach of contract &/or duty, committed in the course of the insured’s performance of services for another. [2]

 

Is E&O covered by Products Liability?

It is a common misconception that products liability will “pick up” E&O claims. Products liability typically relies on material damage or bodily harm to trigger cover, for example, if you supply a component that overheats and causes a fire.

However, not all failures will result in damage or bodily harm. If the failure renders the product useless, or causes financial loss, it will not be covered by your Products liability policy.

Also, it is important to note that it is often a contractual requirement for you to have an E&O policy in place.

 

E&O Claims Scenario

An information technology company was retained by a client to streamline its business operations within a single software system. Following multiple years of development, the system went live across the client’s stores. It was later alleged the software lacked the required functionality and contained critical defects, such as a failure to properly track incoming and outgoing inventory and issue corresponding invoices.

The client sought damages in excess of £5M. The claim was ultimately resolved for approximately £2M with defence costs totalling £200K.[3]

 

References:

[1] https://www.travelers.com/resources/business-industries/technology/5-technology-errors-and-omissions-insurance-risks

[2] https://www.irmi.com/articles/expert-commentary/tech-e-and-o-a-primer-for-risk-managers

[3] https://www.chubb.com/us-en/_assets/doc/2019-02.27-eo-claims-scenarios.pdf

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