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Your legal defense costs alone may bankrupt you, if you are lucky enough tofind an attorney who understands your technology and has time to defend you.
Most insurance companies have a minimum annual premium that usually starts at around $5,000. Generally, there is a deductible that the insured company pays first, which is usually around $5,000. Most companies have a top side limit of liability of around $5 million, with the option to purchase excess coverage up to around $15 million.
Most Commercial General Liability (C&G) are issued on a named peril basis and do not provide coverage for programming errors, contract performance disputes or issues related to data corruption. Your existing C&G business insurance policy will probably exclude the technology liability issues.
Insurance industry statistics are showing a clear trend that a claim for technology errors are growing in size and frequency. A client who buys your business software and has a system crash will likely seek a claim against your company.
And, if your company does not have technology E&O, and if you do not have your own professional E&O, you could be sued personally.
The merit of the claim against your company, and against you, has very little to do with the costs and burdens imposed on your company. The claim could be totally worthless and baseless, and you will still be subject to costs.
How Much Does A Claim Cost?
Several real life cases can give a general impression of the costs of aclaim.
A Claim For Corrupted Data
A communications company sued its software vendor for lostrevenue and expenses to recover billing files for wireless customers that wereaccidentally deleted by the vendor during a system upgrade. The insurance paid $750,000 to indemnify (make whole) the communications company forits loss.The insurance company also paid $150,000
A Claim For Breach of Inadequate Internet andCommunications Security
A customer sued a telecommunications firm, claiming thatthey were sold a defective system with inadequate security protections. Thesystem allowed hackers to gain access and use the system for free.
The insurance company paid $3,450,000 to indemnify the customer who made the claim.
A Claim On Inability to Meet Advertised Specifications of Computer Equipment Performance
A group of consumers who bought computers filed a class action claiming that the computer did not have the processing speed that had been advertised. In their claim, the consumers demanded a full refund of the purchase price.
The indemnity paid by the insurance company was $1,600,000.
How Do You Buy This Insurance and When Do You Buy It?
For young companies, the process of searching for the right insurance company will be arduous. It is likely that few insurance carriers are going to be interested in providing coverage for a young company with an untested product or service.
However, future premiums are based upon the claims history,so the best time to obtain the coverage is very early in the company’s history,well before the first claim is made. The insurance coverage is based upon a“claims-made” basis, and unlike pre-existing conditions coverage in ObamaCare,the company will need the coverage before a sickness occurs.
After a claim occurs, the ability to obtain coverage will be even more difficult, and even with coverage during the time a claim arises,after the claim is settled the insurance premium will likely go up. Or, in some cases, the policy will not be renewed.
The best time to begin the search for technology errors and omissions insurance is the day after the company is incorporated.
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About the Author
I am a portfolio manager and an insurance agent. I also manage a new crowd funding website called the Private Capital Market.com, where tec
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