Most firms that provide technology services or products have insurance to protect them against the risk that a dissatisfied customer will bring a claim or a lawsuit against them for damages arising out of the company’s products or services. It is very likely that such firms purchase general liability insurance, which is an important product that covers many different risks, including property damage, bodily injury, advertising injury, and other business-related claims. Most importantly, general liability insurance policies often require the insurer to defend the company in the event of litigation, making it a particularly valuable type of insurance. But will general liability insurance protect your tech company in the event of a claim by a client for purely financial damages? The short answer is, probably not. This is the reason for tech firms to consider a Technology Errors and Omissions (Tech E&O) policy as part of their overall coverage program. Using the examples below, this article discusses the coverage such policies can provide.
Example 1: Tech Product
Let’s say your company designs and provides building design software to architecture firms. Due to a problem with your software, several architectural designs for major projects have incorrect specifications, which impact many large projects. As a result, your company’s clients lose revenue because they have to revise the design plans for these projects, which takes additional weeks of architect time. If the architects then sue your company for damages, it will have to defend itself in the lawsuit and possibly pay a settlement or judgment to the architecture firms.
Example 2: Tech Services
Instead of selling a product, some companies provide technology services, which could result in financial damages to clients. For example, imagine your company provides cloud document hosting services and, due to a system glitch, loses the electronic files that are needed for a big merger, causing the merger to be delayed. That delay results in millions of dollars in damages to the parties to the merger, which those parties will likely seek to recover from your company.
Naturally, in the scenarios described above, you should look to your insurance program to see if you have coverage for such an event.
General Liability Policies Don’t Cover Everything
General liability policies generally do not cover pure “economic losses,” so you would likely be out of luck there. Specifically, while general liability policies do cover product liabilities, they generally only cover claims involving bodily injury, property damage, or advertising injury to third parties. In the first example above, the architects are not complaining of bodily injury, damage to their property, or damage arising out of the tech company’s advertising activities; rather, they are suing for financial damages to their business arising out of the failure of the software to perform as it should. The same applies to the second example above—neither of the parties to the merger experienced bodily injury, property damage, or advertising injury, even though they experienced significant financial losses. Unless your product or services caused damage to a person or to others’ property, such claims would not be covered under your general liability policy.
Further, most general liability policies exclude coverage for professional services. This is important for companies that provide services, but not products, like the cloud hosting company in the second example.
What Do Tech E&O Policies Actually Cover?
Tech E&O policies are a type of professional liability policy that covers providers of technology services or products for financial losses to their customers that result from errors or omissions on the part of the tech company. Specifically, Tech E&O insurance covers financial loss to a company’s client due to failure of the company’s product to perform as expected, and it also covers loss to a company’s client due to an act, error, or omission of the company in providing services to its client. In addition, these policies provide that the insurer must defend against such claims on behalf of the insured.
The examples above should fit within the coverage of a typical Tech E&O policy. Most such policies provide coverage for an act, error, omission, negligence, or breach of duty resulting in loss to a third party. A Tech E&O policy should also cover loss arising out of the failure of an insured’s product or technology services to perform as expected.
If you are looking for a Tech E&O policy, you should try to find one with the broadest coverage available. Depending on your company’s specific needs, it is important to make sure that coverages for contractual liabilities, delays, copyright infringement, and warranty claims are included.
Tech E&O policies exclude bodily injury and property damage, so it is crucial to make sure you also have a general liability policy in place to cover those risks. In addition, Tech E&O policies do not provide coverage for deliberate acts, including dishonest, intentionally wrongful, criminal, or malicious acts, or other violations of law, some of which can be covered by crime policies. Given the variety of coverages that your company may need, you may want to consider working with an experienced broker or coverage counsel to place and periodically review your insurance program to ensure that it meets your company’s requirements.