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What do technology E&O claims typically look like?

Let's take a look at some of the most common technology E&O claims examples. Learn how you can avoid them and survive them if they occur.

Written by Embroker Team Published September 9, 2024

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Technology E&O claims are becoming a greater threat to technology companies with the rapid growth of the technology industry this past decade.

Back in 2010, only two of the top 10 most richly valued companies in the world were tech corporations (Microsoft and Apple).

Ten years later, Microsoft and Apple were joined by more tech giants such as Google, Amazon, and Facebook—companies that, for better or worse, have shaped and defined the world in which we currently live.

Innovations in technology have changed our daily lives in a very palpable way, with innovative offers such as on-demand consumer choices, cloud computing, and streaming services introducing a new level of convenience to our lives.

But with innovation always come new risks—risks that require new methods and new ways of thinking when attempting to decrease your exposure to them.

This is how technology errors & omissions insurance was born.

Typical errors & omissions, or professional liability, insurance was designed to cover the risks of professionals who offer their advice or services to customers.

This type of liability insurance was designed to protect lawyers, accountants, real estate agents, and other professionals who could potentially be sued by clients if the clients believe that the services provided to them by these professionals were not up to par.

Tech E&O insurance was created to specifically protect technology companies by covering risks associated with financial losses suffered by clients related to a technology product or service’s failure to perform as intended or losses arising from acts, errors, or inadequate, negligent work committed by the tech company in the course of its performance of these services.

The cost of technology E&O claims can be substantial. Not only are settlements in such claims often steep, so are the legal fees and court costs that can arise even if the court decides that your company did nothing wrong.

Technology E&O claims are not only expensive to manage, they can also incur serious damage to your tech company’s reputation if they are not handled with care.

That’s why having the right tech E&O insurance policy is so important for modern tech companies.

What Types of Businesses Should Purchase Tech E&O Insurance?

Man holding up security protection shield with laptop in the center, woman is holding her hands up in disbelief after suffering technology e&o claims at her tech startup

If you’re a technology company, tech E&O insurance should be considered compulsory.

The majority of risk in the tech industry comes from the fact that tech companies collect and handle a lot of sensitive customer and client data and no matter whether you’re a giant corporation or a burgeoning tech startup, the level of exposure to these risks is the same.

Technology errors and omissions insurance should be considered mandatory coverage for software as a service (SaaS) companies, e-commerce startups, tech startups, IT consultants and project managers, software development companies, and just about any other type of tech company that exists.

A client could sue you for missing a deadline stipulated in a contract or going over budget. Or you could suffer a data breach in which the client’s data was compromised, and that could lead to a lawsuit as well.

There are numerous scenarios in which your tech company could be sued by its customers and clients.

But thankfully, tech E&O insurance, if purchased, would help cover a majority of the costs arising from such situations.

Let’s take a look at some of the most common technology E&O claims and learn what your tech company can do to both avoid them and survive them if they do occur.

Common Examples of Technology E&O Claims

examples of tech E&O claims illustration

No matter what kind of tech company you are, sooner or later, your work is going to be called into question by your clients.

This is especially true for young startups that are growing and still working out the kinks in their products or services.

Responding to technology E&O claims will cost you valuable time and, most importantly, money.

Not only can it cost a lot to resolve technology E&O claims, you can also deal with business interruption and a loss of profits while focusing on these issues.

It’s also important to remember that not all tech E&O policies offer the same protection, which is why it’s incredibly important to work with an insurance agent or broker to define your risk profile and then procure coverage that will cover the unique risks of your tech company.

For a quick guide on how tech E&O policies work and the type of coverage they offer, watch this video:


Now let’s take a look at some common technology E&O claims examples to provide you with a better understanding of the types of risks to which tech startups are regularly exposed.

Cybercrimes

Just about every technology company in existence deals with huge amounts of data on a regular basis, much of it very sensitive data, such as credit card numbers and other personal information.

The more data you deal with, the more attractive you become to cybercriminals.

And it’s not just large corporations that are targeted by cybercriminals, according to the Verizon Business 2020 Data Breach Investigations Report, 28% of data breaches in 2020 involved small businesses.

If a data breach does occur and your client’s sensitive information is compromised by the breach, you could be facing lawsuits.

That’s why a good technology E&O policy is usually coupled with cyber liability insurance to make sure that you are protected in such situations.

Technology e&o claims often allege that it was the company’s duty to protect the data that was entrusted to it, which means that the company would be responsible for restoring the security of any information that was compromised.

A good cyber liability policy will also cover the costs of hiring consultants and forensic experts who will investigate the data breach and help restore your company’s infrastructure and (hopefully) its reputation.

Breach of Contract

A breach of contract occurs when your company is unable to deliver on promises that were made official by way of a business agreement.

This type of failure to meet contractual requirements or perform services that were promised in contractual form is probably the single most common type of professional liability claim that arises.

It’s a particularly pronounced risk for tech companies since nearly every interaction between a tech company and its clients and partners is usually accompanied by some type of contract.

If you don’t meet the duties that were stipulated in your contract, your clients or partners can hold you liable for losses resulting from your inability to deliver what was agreed upon.

Obviously, the solution is not to avoid contracts, because that would probably do your company more harm than good.

The best way to manage and mitigate the risks that come with entering business agreements with clients and other third parties is by purchasing a tech errors and omissions policy to provide coverage in the case that you are responsible for a breach of contract for whatever reason.

Negligence

Claims citing professional negligence occur when a company negatively impacts a third party by failing to exercise reasonable care.

These claims are related to errors, omissions, and oversights made by you or your employees that impacted a third party negatively.

In a tech company, negligence claims can often involve mistakes in code that led to bugs or other problems for your clients—mistakes that were avoidable and could be chalked up to a lack of attention and care on your company’s part.

Breach of Warranty

A breach of warranty claim is usually related to expectations that a client had regarding the performance of your service or product which your service or product did not meet.

If you had guaranteed your client that their website would be more stable as a result of your company’s services but the website continued to face issues and crash regularly after your work was done, the client could file a breach of warranty lawsuit that claims that your service did not live up to the standards that were promised by your company.

And while such claims are often very hard to prove, defending your business again a breach of warranty claim could still prove to be a long and costly process.

Copyright Infringement

Since we are talking about tech errors and omissions, copyright infringement in relation to a tech company will usually be software-related. Tech errors and omissions will protect you if you’re the company that is being accused of software copyright infringement or if another entity is encroaching on your copyright.

In the first instance, your insurance policy would provide defense and potential settlement costs while, in the second instance, your policy would typically cover the costs of bringing in a copyright expert to end the infringement and collect damages from the entity that encroached on your software copyright.

Misrepresentation and Fraud

If you tell your client that you can perform a service for them for $400 a month but don’t mention various other monthly fees that actually bring the total up to $700 per month, you can face a misrepresentation claim.

Any time you provide a false statement or leave out important details while pursuing a client in order to make your offer seem better than it actually is, you run the risk of facing a misrepresentation or fraud claim if the client believes that they were deliberately misled.

A tech E&O policy would cover costs related to such a lawsuit.

Online Defamation

Once again, in the case of tech companies, infractions such as slander and libel usually occur online.

If your company has communicated a false statement that allegedly harms the reputation of another business or individual, you can face an online defamation lawsuit.

Anything that is found on your website or on your social media accounts and was created by someone working for your company that potentially damages the reputation or leads to lost income for a third party as a result of smear campaigns or slander can lead to a claim being filed against your company.

The popularity of social media has made these types of claims much more common since slander and libel can be committed via comments and posts that might have been created by outside users who don’t work for your company.

However, vicarious liability exists even in these types of circumstances since the slanderous claims were made on a website or profile that is operated by your company.

Tips for Avoiding Technology E&O Claims

Man with crossed arms looks at computer, computer monitor displays two browser tabs with a locked symbol to signify technology even &o claims

While there is practically nothing that you can do to guarantee that your tech startup will never face technology E&O claims, there are some best practices that you can try to implement to the best of your ability in order to prevent these types of lawsuits from happening regularly.

Let’s take a look at some of them:

Always Have a Contract: As we’ve already mentioned, many technology E&O claims do arise from contractual disputes.

However, having a contract in place still protects your business much more than it exposes your company to claims.

Not having contracts in place opens you up potentially to even more frivolous lawsuits that could arise from the fact that you haven’t made any formal agreements or set any concrete expectations for your work.

If you are just getting started and don’t have a lot of experience with contracts, asking your lawyer (in-house or otherwise) to help you create a template for the most common types of contracts that your business would need.

Document Your Work: Keep track of everything you do so that if a claim does occur, you are able to prove or disprove accusations with the help of correspondences, meeting notes, invoices, receipts, and any other documents that could prove to be helpful in a variety of claims.

Be Transparent: Be honest with your clients or partners if you end up running into problems.

If you’re upfront and transparent about possibly missing deadlines or not being able to deliver services and products on time, letting the third party know and trying to work out a solution is a much better approach than staying quiet and hoping that they won’t be angered enough to file a claim against your business.

Always be open with your clients and partners and strive to work together to solve problems and manage expectations in an effort to keep everyone happy with the business arrangement and how it’s developing.

What Does a Tech E&O Policy Typically Cover?

Open laptop displaying large umbrella to symbolize coverage from technology e&o claims

If you’re an early-stage startup, even one that has just received VC funding, you still might not be a profitable business.

That’s why having insurance is possibly more important for small companies than it is for giant corporations.

One expensive lawsuit can completely derail your growth plans or force your business to shut down in a worst-case scenario.

Technology errors and omissions insurance is probably the single most essential insurance policy that a tech startup should purchase.

As we’ve discussed, failure to perform, failure to deliver, and various other cases of contractual liability and professional negligence are risks that tech startups face most, which is why having an insurance policy in place to make sure that the financial toll of such cases is never devastating to a young company is so important.

A typical technology errors and omissions policy would pay for legal costs such as court fees, legal counsel costs, court-ordered judgments, and settlement costs.

It’s important to note that tech E&O policies can’t be retroactive, which means that you can’t wait for technology E&O claims to occur and then purchase coverage to protect yourself from it.

All E&O policies are claims-made policies, meaning that they cover your company only if the policy was active at the time of the incident and when the claim was filed.

Getting tech E&O coverage as soon as your business lands its first customer is something that can give you the peace of mind you need to be able to operate your tech company confidently without worrying about a very expensive legal battle potentially crippling your entire operation.

Further Coverage Considerations

No matter what insurance policy you plan on purchasing, it’s incredibly important to make sure that you are working with an experienced insurance broker that is very familiar with your industry and the coverage needs of your company.

A good insurance broker will work with your company to identify risks, create a risk profile for your business, and then guide you in the process of deciding which insurance policies you need to buy in order to cover your business’s most costly potential exposures.

Here are things to consider and ask your broker about when discussing your tech E&O coverage needs:

Make sure that your policy is always renewed on time so that there are no gaps in coverage. If a lawsuit is filed in relation to something that happened while your policy was inactive, it probably won’t be covered—even if you’ve renewed your policy since.

For example, if your software product features regular releases and new versions and a customer files a claim related to a product update that came out while your policy was inactive, you might not be covered in such a case.

Exclusions also need to be closely evaluated, because all tech errors and omissions policies are bound to have them.

A common exclusion is for wear and tear. Some E&O policies will not cover a claim related to a product malfunction caused by wear and tear.

Tech E&O policies also don’t cover claims resulting from criminal or illegal acts performed by you or your employees. Financial insolvency is also something that a tech E&O policy usually won’t cover.

While some do cover copyright infringement and libel claims, others don’t. If you really need this type of coverage, talk to your broker in order to find the right solution. In most cases, the best solution will be to add intellectual property coverage to your tech E&O policy.

And as we already mentioned, in today’s online-first world, technology E&O claims are often very closely tied to the world of cyberattacks and cybercrimes, which is why just about any broker will tell you that you should also purchase a cyber liability policy that compliments your tech E&O policy and fills potential gaps in your tech E&O coverage.

You can get your cyber insurance quote with Embroker in under 10 minutes.

If you’re the founder of a tech startup and want to learn more about tech E&O coverage and any other insurance policies that growing tech startups should procure, don’t hesitate to talk to one of our expert brokers from Embroker’s technology practice at any time.

 

 

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