Top 3 Causes of Technology E&O Claims

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One of the most significant concerns for tech companies, from startups to enterprises, is the potential for errors and omissions (E&O) claims. Tech E&O insurance, also known as professional liability insurance, is designed to protect technology businesses from the financial consequences of such claims. In this blog post, we'll explore the top three causes of tech E&O claims and provide real-world examples to illustrate the importance of having adequate coverage.

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Software and System Failures

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One of the most common causes of tech E&O claims is software and system failures. According to a report by the Insurance Information Institute, software and system failures account for approximately 35% of all tech E&O claims. These failures can range from minor glitches to catastrophic events that result in significant financial losses for clients.

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Real-world examples of software and system failures abound. In 2018, a software bug in the trading platform at Knight Capital Group caused the company to lose $440 million in just 45 minutes. The glitch led to a flood of erroneous orders, resulting in massive losses for the firm and its clients. Another notable example is the Equifax data breach in 2017, which exposed the personal information of 147 million people. The breach was attributed to a vulnerability in the company's web application, highlighting the importance of robust security measures and regular software updates.

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To mitigate the risk of software and system failures, technology companies should invest in rigorous testing and quality assurance processes. Regular security audits and vulnerability assessments can help identify potential weaknesses before they can be exploited. Additionally, having a comprehensive tech E&O insurance policy can provide financial protection in the event of a claim arising from a software or system failure.

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Data Breaches and Cyber Attacks

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Data breaches and cyber attacks are another leading cause of tech E&O claims. According to the 2020 Cost of a Data Breach Report by IBM and the Ponemon Institute, the average cost of a data breach is $3.86 million globally, with the United States having the highest average cost at $8.64 million. These staggering figures underscore the importance of robust cybersecurity measures and adequate insurance coverage.

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Real-world examples of data breaches and cyber attacks are unfortunately all too common. In 2019, Capital One suffered a massive data breach that affected approximately 100 million individuals in the United States and 6 million in Canada. The breach was caused by a hacker who exploited a vulnerability in the company's web application firewall. Another notable example is the WannaCry ransomware attack in 2017, which affected more than 200,000 computers across 150 countries. The attack encrypted users' files and demanded a ransom payment in Bitcoin to restore access.

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To protect against data breaches and cyber attacks, technology companies should implement strong cybersecurity measures, such as multi-factor authentication, encryption, and regular security updates. Employee training on cybersecurity best practices is also crucial, as human error is often a contributing factor in data breaches. Having a comprehensive tech E&O insurance policy that includes cyber liability coverage can provide financial protection in the event of a breach or attack.

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Negligence and Errors in Professional Services

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Negligence and errors in professional services are the third most common cause of tech E&O claims. According to a report by the National Association of Insurance Commissioners, professional services claims account for approximately 25% of all tech E&O claims. These claims can arise from a wide range of issues, including missed deadlines, budget overruns, and failure to meet client expectations.

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Real-world examples of negligence and errors in professional services are varied and can have significant consequences for both the technology company and its clients. In 2019, Hertz sued Accenture for $32 million, alleging that the consulting firm had failed to deliver a functional website redesign project on time and within budget. The lawsuit claimed that Accenture's negligence and lack of expertise resulted in significant financial losses for Hertz. Another example is the case of Brite:Bill, a billing and revenue management software company, which was sued by a client for $7.5 million in damages due to alleged negligence and breach of contract. The client claimed that Brite:Bill's software was riddled with errors and failed to meet the agreed-upon specifications.

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To minimize the risk of negligence and errors in professional services, technology companies should implement robust project management processes, including clear communication channels, regular progress updates, and detailed documentation. Thorough testing and quality assurance measures are also essential to ensure that deliverables meet client expectations. Having a comprehensive tech E&O insurance policy can provide financial protection in the event of a claim arising from negligence or errors in professional services.

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The Importance of Tech E&O Insurance

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In light of the top three causes of tech E&O claims discussed above, it's clear that having adequate insurance coverage is crucial for technology companies. Tech E&O insurance, also known as professional liability insurance, is designed to protect businesses from the financial consequences of errors and omissions claims. This type of insurance can cover legal defense costs, settlements, and judgments arising from claims related to software and system failures, data breaches and cyber attacks, and negligence and errors in professional services.

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When considering tech E&O insurance, it's essential to work with an experienced insurance broker who understands the unique risks and challenges faced by technology companies. A knowledgeable broker can help assess your company's specific needs and tailor a policy that provides adequate coverage at a competitive price.