In the technology industry, even the most careful businesses can face errors and omissions (E&O) claims. Some clients may even take legal action not because of an actual error but due to unmet expectations or dissatisfaction with project outcomes, even if your business did everything correctly.
Let’s imagine your tech business provides software to an accounting client. A few months later, the client suffers a data breach and blames your company, alleging inadequate security. It is later revealed that the breach was due to the client’s negligence, as they failed to implement the specific security measures your company recommended. Despite no error or negligence on your part, this claim still results in significant legal costs for your business.
Tech E&O insurance protects your business by covering defense costs associated with these claims. Even if a claim is unfounded (lacking evidence or a solid basis to substantiate and support it), the legal expenses to defend your business can be substantial. By covering the legal cost associated with a claim, E&O insurance supports your financial health so that you can focus more on innovation and growth and less on the legal and reputational ramifications of baseless claims and associated costs.
Baseless Claims
While the number of E&O claims is increasing, many are baseless. Some claims may be withdrawn or dismissed, but many involve lawyers and litigation and get expensive fast.
When considering Cyber and Tech E&O insurance options, buyers often consider how E&O insurance protects a business from a mistake in professional services. However, many claims are brought by challenging or unhappy clients who file a claim even if you did nothing wrong. The protection provided by a cyber/tech E&O insurance policy may be as crucial for baseless claims as for when a mistake occurs.
For example, a customer may object to unexpected costs, incomplete work, or ”late” delivery without consideration of the contract wording. The customer may expect work outside the scope of the original order but not agreed upon, which may still result in a claim and significant legal expenses.
Contract wording is critical in providing protections for tech companies, such as defining the scope of work. For example, let’s say you provide database consulting services to small businesses, and a client asks you to recommend a database service for storing customer information. A few weeks later, the client’s database is hacked, exposing customer financial data. As a result, the client files a claim alleging that your company—not the database service—did not properly advise you, and therefore you should be held responsible.
In this type of claim event, your company’s E&O insurance policy would cover the legal costs and any potential settlements or judgments brought against your company.
Conclusion
The importance of tech E&O, including cyber insurance, cannot be overstated. It serves as a safety net against both first- and third-party claims—even those that are baseless. Unfortunately, too many businesses believe their company has little or no exposure and either purchase inadequate coverage or forego this crucial coverage entirely. In an increasingly litigious and unpredictable business environment, E&O insurance is no longer just an option but a necessity.
About eSpecialty Insurance and Bob Sargent, Founder and CEO
eSpecialty Insurance was established to revolutionize the customer journey in specialty insurance. Bob is a founder and early-stage investor with decades of experience as an underwriter and broker addressing unusual, complex, and challenging exposures. He helps businesses to secure the most comprehensive insurance solutions at competitive rates.
Email [email protected] or call (435) 252-1077 to learn more.