Insuring tech companies: Be sure you're covered for costly errors
If you run a software or technology company that lacks adequate insurance, any mistakes you make that cause harm others may undermine your ability to stay in business.
The failure of a product to function properly after it's sold often results in economic losses for the business that created it, says John Rains, vice president of Alliant Insurance Services, a brokerage in San Diego. "That is where we see most of the claims for tech firms," he says.
In the age of the Internet, businesses increasingly depend on technology to connect with their customers, says Veronica Somarriba, worldwide manager of the technology segment at insurance giant Chubb. If products fail, these customers expect to be compensated for any loss. For this reason, technology companies carry errors-and-omissions coverage, also known E&O or professional liability.
"As a technology company, you have an obligation to develop a product that works," Somarriba says.
Companies that sell software online may have customers all over the world, Rains says. This increases their exposure to lawsuits outside the U.S. However, policies can be written to pay for claims and legal defense costs in other countries.
"Technology has opened up the world," he says. "We may get claims outside the jurisdiction of the United States. They may choose to sue you in their country. If your policy is not global in scope, you won't have coverage."
Most companies that buy products from tech businesses require contracts obligating those businesses to carry at least $1 million in general liability coverage, along with another $1 million for E&O, says Joe Coray, vice president of technology and life science practices at The Hartford. Coray recommends buying these policies from a single insurer, since separate carriers sometimes have disputes over whether general liability - which protects you from a broad range of claims, including bodily injury - should be used instead of E&O.
"It really should be a coordinated policy," he says.
What other coverage will you need?
Insurance offers an opportunity to reduce your risks, but only if you understand where your largest exposures are. In addition to E&O and general liability, the following types of insurance are important for software companies and other technology businesses:
- Property. Like all businesses, technology companies need policies to protect them from damage to their businesses and contents caused by such perils as fire, flood and theft.
- Cyber liability. This product can protect you from losses stemming from computer network failures or security breaches that result in the leaking of confidential information. Dirk Vanderwall, a surplus lines agent at Swett & Crawford in Los Angeles, says these policies may cover public relations services to help repair your reputation if you're responsible for a data loss that harms your clients.
- Umbrella liability. This provides protection beyond your basic liability coverage, as a cushion against unusually high losses.
- Workers' compensation. Typically required by states, this pays for medical care and replaces a portion of lost wages for workers injured on the job, regardless of who's at fault. For details, contact your state's insurance department.
- Business auto. This covers you for claims caused by vehicles that you or your employees use while doing business.
- Employment practices liability. This covers claims that may result from hiring, firing, charges of harassment and allegations of discrimination.
- Employee dishonesty. This covers losses caused by employee theft.
- Loss of income. This can provide income for a specified period if your company is forced to shut down.
How much will it all cost?
Determining your premiums will depend on how great a claims risk your business poses. To make a profit, insurers must charge enough money to offset losses. Coray says it's difficult to come up with a standard cost for insuring a software or technology company, as risks, products and services vary widely.
"It is going to cost between 2 and 10 percent of your annual revenue, but it really varies by what you do and what type of a company you have," he says. "Underwriters generally want to understand what the insured company) does, what type of product or service they are putting in the marketplace."
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