Tuesday, June 17, 2014

What Your Agent Isn't Telling You About Your Tech E&O Insurance Policy

Everyone is wary of the small print of the insurance policy. The devil is in the details, right?

Most general liability forms are standard and written by the Insurance Services Office (ISO), so even though they are wordy and in an insurance language the policies have at least been vetted by countless court cases, decisions, and attorneys over the last 50 years.

However, E&O forms are all written by individual companies and each one is different.  The policiy forms are constantly changing to keep up with new technologies.  The internet only started around 30 years, Facebook started 10 years ago, now we have Snapchat and Tinder and who knows what is next.

My point is that as soon as a company creates a form, it must rewrite the policy form in order to exclude new tech that they didn't foresee when they created the product.  These exclusions could be far reaching in their wording and exclude other things that you may assume were covered.

I recently spoke to a technology insurance underwriter for the biggest tech carrier in the US. Besides going over the regularly included Tech E&O coverages such as:
  • Denial of Service (DOS) attacks
  • Losses from malicious hackers
  • Copywrite or trademark infringement
  • Failure to prevent disclosure of private information
  • Failure to prevent the introduction of malicious code
We discussed at length one crucial coverage:

Breach of Contract

According to my source at the company, 92% of claims came from breach of contract. Breach of contract coverage, sometimes called breach of warranty or representation, provides protection for your software or website company if your customer sues you for a number of reasons, but the main categories are:
  • Negligence
  • Failure to perform

Many major US carriers exclude breach of warranty all together or have additional exclusions that can strip coverage in the event of a claim.
  • Exclusion for contractual liability - liabilities that you agree to by contract but may or may not have to do with the work you are specifically doing
  • Exclusion for breaches of contract that stem from a payment/fee dispute
  • Exclusion for any breach of warranty
Not only are you missing out on coverage if you lose the law suit, but many times the most expensive part is the attorney fees. If the claim is denied, then the company won't pay any money to defend you in court.

Not having this coverage can cost you big money. For example, a recent claim involved a software developer who created a software to conduct risk modeling. The customer relied on the software in order to make financial decisions. The company went bankrupt and blamed the software company because the client's decisions were based on the software risk modeling.

The claim expenses alone cost over a $1,000,000 and the payout in the end was over $4,000,000. - This claim scenario came from The Hartford (see disclaimer below)

For a small software company, a lawsuit can bankrupt the company or force it to make hard decisions such as laying off workers that the company wouldn't have had to make if it had the correct coverage.

Have you been involved in a tech related lawsuit related to breach of contract?
I'd love to hear your comments.

My Disclaimer - This post is not a substitute for professional legal advice. This post does not create an insurance agent-client relationship, nor is it a solicitation to offer legal/insurance advice. If you ignore this warning and convey confidential information in a private message or comment, there is no duty to keep that information confidential or forego representation adverse to your interests. Seek the advice of a licensed insurance agent in the appropriate jurisdiction before taking any action that may affect your rights.
Hartford's Disclaimer - The scenarios summarized herein are offered only as examples. Coverage depends on the actual facts of each case and the terms, conditions, and exclusions of each
individual policy. Please refer to the policy to determine all terms, conditions, exclusions and limitations of coverage. Coverage is provided by the property and casualty
companies of The Hartford Financial Services Group Inc. and may not be available in all states. All information and representations herein are as of January 2013.
018993 Rev Printed in U.S.A. © January 2013 The Hartford Financial Services Group Inc., Hartford, CT 06155 All Rights Reserved

This post was originally posted on LinkedIn on 6-16-14 https://www.linkedin.com/today/post/article/20140616214826-23362016-is-your-tech-company-missing-its-most-important-coverage?trk=prof-post