Sage Clements came by the Insurance Requirements studio to talk Tech E&O and Cyber coverage recently. We had a great conversation about why Tech companies need E&O and Cyber policies, why it’s important to read policy language, and what questions to ask your agent when choosing the right coverage for you.
But before jumping into that, I wanted to step back for a bit and write a primer on both coverages. In this post, we focus on Tech E&O. Keep an eye out for my next post on Cyber coverage.
As a Technology insurance underwriter, a lot of my conversations center around Technology Errors & Omissions coverage, or Tech E&O for short.
What is Tech E&O?
Tech E&O protects you against a customer’s claim alleging they suffered financial damages or economic loss from a:
- Negligent act, error, or omission
- Breach of warranty or representation
- Failure to perform or serve intended purpose
Wow, who let the lawyer take over?! Why don’t we make that a little easier to understand, shall we?
Negligent Act, Error, or Omission
This means you made a mistake in your work that allegedly led to your customer’s economic damage. A mistake covered here might look like: failing to include code that integrates to critical systems, providing staff augmentation that did not have adequate expertise, or providing a software deliverable that was not to customer specification.
To be clear, coverage is for accidents, not intentional acts. Generally speaking, Tech E&O excludes coverage for things that you do on purpose to cause economic damage.
For most companies, you might be able to work with your customer to remedy the situation by providing a fix to the work in question, but it’s always a good idea to have insurance in place should the situation deteriorate into a lawsuit.
Breach of warranty or representation
You may not go as far to say that your product will 10x your customer’s revenue, but you may warrant uptime of your platform or that your product will be free of defects for a 12 month period.
Sometimes your product or service doesn’t live up to the standards you set forth in your contract. If that happens, your customer may allege financial damages. Financial damages could look like added expenses from having to implement a new solution in a hurry. Or your customer may have missed out on a big chunk of their revenue as a result of downtown.
Failure to perform or serve intended purpose
When talking about this this clause, I open the most eyes on Tech E&O coverage. I get a lot of pushback along the lines of, “I don’t need Tech E&O. My services never fail, I’ve never had an error. There’s no possibility of a claim from my customers.”
This mindset assumes that you have to do something wrong to be sued. This part of Tech E&O coverage really speaks to your customer’s perception, rather than a bug or error on your part.
For example, let’s say you run a company called Cymbal. You’ve created a software that allows your customer to track their sales activity. Your marketing is slick, including customer testimonials for days. Things like, “My company used Cymbal and we saw a 15% uptick in close rates,” or, “Wow, this software is the real deal, my revenue jumped 30% in less than 2 months.”
One day you have a new customer that gets up and running and doesn’t experience the same success as the testomonials. Their sales remain flat, and start to dive after 90 days. There’s nothing wrong with the software, but the customer’s intended purpose for using your software was to boost sales.
After a long implementation and onboarding period, they express they’re not satisfied. They explain they spent a lot of time and money on the software and it simply didn’t live up to their expectations. If they believe they can’t resolve the situation with you, the customer may choose to sue Cymbal, alleging financial damages from using your software.
Even if Cymbal is able to prove that there was no wrong doing or even if it was the customer’s fault, that doesn’t erase the lawsuit and the need for legal counsel to defend the suit. This is where Tech E&O coverage would step in.
Tech firms provide professional services. For the most part, their software won’t physically harm someone or damage someone’s property. The biggest exposure, then, goes back to economic damage they may cause if their product/professional services fail.
Tech E&O is the policy you’ll want to secure to protect you from allegations of negligent acts/errors/omissions, a breach of warranty/representation, or the failure of your product/service to do what the customer intended.
Please keep in mind it’s important that you talk to your insurance agent or broker about purchasing the best policy for your unique situation.