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How Does Errors & Omissions Insurance Help Tech Companies?
Tech companies, from startups to enterprises, face a unique set of risks that can potentially lead to financial losses and reputational damage. While new tech products and services tend to improve the world, they also come with new risks not previously seen by users and developers alike.
For example, surveillance concerns from drones or safety issues of self-driving vehicle technology have only recently become relevant to most people.
It's critical that developers and users of new products and services have adequate protection in case the technology malfunctions. This is where insurance can be a valuable facilitator for adoption!
One of the most critical types of insurance for technology companies is Errors & Omissions (E&O) insurance, also known as Professional Liability insurance. Technology E&O insurance provides coverage for claims arising from alleged negligence, errors, or omissions in the services or products provided by tech companies.
What is Technology Errors and Omissions Insurance?
Technology Errors and Omissions (E&O) insurance is a type of business insurance for IT companies that protects against claims of negligence, mistakes, or oversights in the services or products provided. It covers legal defense costs and damages awarded to the claimant if the tech company is found liable. According to a report by the Insurance Information Institute, the average cost of a technology E&O claim is $537,000, with legal defense costs accounting for a significant portion of this amount.
Real-World Examples of Tech E&O Claims
1. In 2018, a software company faced a lawsuit from a client who claimed that the software they had purchased was defective and caused significant financial losses. The company's Technology E&O insurance policy covered the legal defense costs and the settlement amount, which totaled $1.2 million.
2. A data breach at a cloud storage company in 2019 exposed sensitive customer information, leading to multiple lawsuits. The company's Tech E&O insurance policy provided coverage for the legal defense costs and the settlements, which amounted to $4.5 million.
3. In 2020, a mobile app development company was sued by a client who alleged that the app they had commissioned was not delivered on time and did not meet the agreed-upon specifications. The company's Technology E&O insurance policy covered the legal defense costs and the settlement amount of $500,000.
Key Coverage Areas of Technology E&O Insurance
- Negligence: This covers claims arising from errors, omissions, or negligent acts in the services or products provided by the tech company. For example, if a software company delivers a product with bugs that cause financial losses to the client, Technology E&O insurance would provide coverage for the resulting claim.
- Intellectual Property Infringement: Technology E&O policies often include coverage for claims of intellectual property infringement, such as copyright or trademark violations. According to a study by the American Intellectual Property Law Association, the average cost of an intellectual property lawsuit is $3.1 million.
- Data Breaches: With the increasing frequency and severity of data breaches, Technology E&O insurance has become essential for tech companies that handle sensitive customer information. A study by IBM and the Ponemon Institute found that the average cost of a data breach in 2020 was $3.86 million.
- Contractual Liability: Technology E&O policies may also cover claims arising from breach of contract, such as failure to deliver services or products as promised. A report by the International Association for Contract & Commercial Management found that the average cost of a contract dispute is $309,000.
Importance of Technology E&O Insurance for Tech Companies
- Financial Protection: Technology E&O insurance provides financial protection against the high costs of legal defense and settlements in the event of a claim. Without this coverage, a single lawsuit could potentially bankrupt a tech company.
- Competitive Advantage: Having Technology E&O coverage can give tech companies a competitive edge when bidding for contracts or seeking investment. Many clients and investors require proof of insurance for tech companies before engaging in business relationships.
- Reputation Management: Technology E&O insurance can help tech companies manage their reputation in the event of a claim. The insurance provider can assist with crisis communication and public relations efforts to minimize the impact on the company's brand.
- Peace of Mind: With Technology E&O coverage, tech companies can focus on their core business operations without worrying about the financial and legal risks associated with errors, omissions, or negligence.
Choosing the Right Technology E&O Insurance Policy
When selecting a Technology E&O insurance policy, tech companies should consider the following factors:
- Coverage Limits: The policy should provide sufficient coverage limits to protect against the financial risks associated with the company's operations. A study by the Ponemon Institute found that the average cost of a Tech E&O/Cyber liability claim for small and medium-sized businesses is $879,582.
- Deductibles: The deductible is the amount the tech company must pay out of pocket before the insurance coverage kicks in. Higher deductibles generally result in lower premiums but also increase the company's financial responsibility in the event of a claim.
- Exclusions: Tech companies should carefully review the policy exclusions to ensure that their specific risks are covered. Some common exclusions in Technology E&O policies include intentional acts, criminal behavior, and bodily injury or property damage.
- Claims Handling: The insurance provider's claims handling process should be efficient and responsive. Tech companies should look for providers with a track record of timely claims resolution and a network of experienced legal defense attorneys.
In Conclusion
Technology E&O is a critical component of insurance for tech companies. It provides financial protection against the unique risks faced by tech companies, such as negligence, intellectual property infringement, data breaches, and contractual liability. With the high costs of legal defense and settlements, Technology E&O coverage can mean the difference between survival and bankruptcy for tech companies.
When selecting a Technology E&O insurance policy, tech companies should carefully consider coverage limits, deductibles, exclusions, and claims handling. By partnering with an experienced insurance provider and implementing risk management strategies, tech companies can protect their financial assets and reputation in the event of a claim.
