It’s the One You Never Saw Coming That Gets You

May 30, 2012 No Comments »

Is an Errors and Omissions Claim Looming for Your Technology Company?

Clients, prospects and friends in the tech community ask me all the time for examples of Errors and Omissions (“E&O”) claims.  Typically, it’s for one of two reasons; #1 – they want to assure themselves that what happened to “the other guy” or “that company” can’t/won’t happen to them or #2 – because they don’t understand the insurance product that a client or vendor is forcing them to buy and they want to know what it’s all about.

There are a number of insurance companies who have developed a expertise in developing protection designed for technology based companies.  Below we compiled claims examples from some of these companies (some actual and some scripted).

 

Undoubtedly as you read through the list you will as yourself asking, “could it happen to me or my company?”  It’s important when you look through the claims not to take the specific type of company or service too literally.  What happened to a bank client can happen to a lawyer, retail store or non-profit entity.  Keep track by writing down the number from Couldn’t Happen (1) to Very Possible (5) and come to your own conclusions.

 

The software used to calculate early loan payoffs contained a bug.  Twelve months of loan activity was incorrectly stated.  The bank lost $365,000 of interest and wants you to make them whole.

 

Couldn’t Happen Possible Very Possible

1                   2                   3                   4                   5

 

A system used to process stock purchases eliminated transactions on a random basis.  Revenue was lost because corrections made at a later date did not reflect the changes in the market. Your client holds you responsible.

 

Couldn’t Happen Possible Very Possible

1                   2                   3                   4                   5

 

A telecommunications switch you installed (purchased on behalf of your client or recommended to your client) failed due to a defective component part.  Customers using the switch lost power and were unable to operate during their normal business hours.  Revenue was lost due to the downtime involved and your client is being sued by his numerous customers.  He is holding you responsible for the damages.

 

Couldn’t Happen Possible Very Possible

1                   2                   3                   4                   5

 

A law firm loses critical client information when its data compression software destroys corrupts files.  Although the software problem was corrected you inadvertently installed the wrong version. The firm claimed over $450,000 in costs to re-construct case files and another $500,000 in lost revenues against your, its systems integration company.

 

Couldn’t Happen Possible Very Possible

1                   2                   3                   4                   5

 

A consultant filed suit against a customer for payment of a project completed by the consultant.  The customer, in turn, filed suit against the consultant alleging non-performance – stating that the program did not perform as promised by the consultant.  Although settlement was reached in the tens-of-thousands of dollars, there were also extensive legal fees at more than half of the settlement amount.

 

Couldn’t Happen Possible Very Possible

1                   2                   3                   4                   5

 

A consultant involved in programming, consulting, process and installation quoted a price of $65,000 to automate a particular process for the claimant.  The project ballooned to $125,000 over a 2-year period mostly due to requests for additional functions for the system.  The claimant continued to pay all bills until a dispute arose over a partial billing and a claim was filed.

 

Couldn’t Happen Possible Very Possible

1                   2                   3                   4                   5

 

A computer-operated newspaper editing and automatic typesetting machine simply fails causing the entire system shut-down resulting in the loss of the morning edition of the newspaper.  Hundreds-of-thousands of dollars of circulation and advertising income was lost.

 

Couldn’t Happen Possible Very Possible

1                   2                   3                   4                   5

 

The operations software of an inventory control system fails to perform as intended forcing the user to revert to a manual system.  This error resulted in hiring of extra people, overtime expense, and lost income because orders and restocking could not be done efficiently.  The claimant asserts that the almost $1,630,000 of expenses and lost revenue is the responsibility of the installer of the operations software.

 

Couldn’t Happen Possible Very Possible

1                   2                   3                   4                   5

 

A software vendor was sued by customers who alleged the vendor’s software was infected with a computer virus which caused the loss of data and expenses to “cure” the virus.

 

Couldn’t Happen Possible Very Possible

1                   2                   3                   4                   5

 

A jury rendered a multi-million dollar judgment against a computer systems vendor because a system it sold to a customer was inadequate for the customer’s needs, causing the customer to go bankrupt.

 

Couldn’t Happen Possible Very Possible

1                   2                   3                   4                   5

 

 

ADD YOUR TOTAL FOR THE CIRCLED NUMBERS:   ________________

 

DIVIDE THE ABOVE FIGURE BY 10 TO GET THE AVERAGE EXPOSURE AND CIRCLE IT BELOW

 

Couldn’t Happen Possible Very Possible

1                   2                   3                   4                   5

 

 

These cases are all intended to be illustrative only and the applicability of coverage depends upon the total circumstances of the claim, but there may be more to the protection than simply meeting the needs of your vendor or customer.  Carefully review and understand what you are buying when you purchase Errors and Omissions insurance for your Technology-based company.

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