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Why does a tech company need E&O insurance coverage?

If a manufacturer faces an insurance claim related to the making or sale of a product to the public, their coverage comes in the form of a products liability policy against any losses or injuries caused by a defect or malfunction of the product. (It can also cover for a design defect or defective warning too.)

I often use the analogy that for a Technology company, Errors and Ommissions (E&O) coverage is basically a Tech company's equivilent of Products Liability Coverage.

A tech E&O policy protects a company against claims of financial loss to a third party caused by errors, poor performance or failure to perform your work as promised in a contract. An E&O policy will cover your legal defense costs and any resulting judgements against you (to your limits purchased).

Considering that anyone can sue you and you still have to defend yourself, even if you perceive it to be a meritless allegation, having your legal defense costs paid for helps to avoid paying costly legal bills.

Some Common E&O Questions:

So who is actually covered?
Coverage extends to both W2 employees and 1099 subcontractors. Depending on the policy, it certainly can be worldwide in scope as well.

When should I purchase E&O?
Tech companies should purchase E&O prior to launching their products, but certainly once you have (or ideally just before you have) customers.

What are the right coverage amounts?
For smaller firms, a $1M or $2M limit is usually sufficient. As a company's revenues increase, they are wise to increase their E&O limits accordingly as their own risk exposures rise.

As firms grow and start to have contract opportunities with larger entities like Hospitals, Governments, Public Companies, etc., they are often met with mandatory insurance limit requirements they must have in place before they will sign a contract with you.   Clients contact me regularly to increase their E&O limits in order to fulfill a new contract requirement.

While in some cases you can try to negotiate these contract limit requirements, in most cases it's a case of the golden rule: "He who has the gold makes the rules" and you basically face a take it or leave it type of choice whether or not to increase the insurance limits required for the contract. Most usually get it.

With this background overview on what E&O coverage is and what it covers, the next relevant question people have is: "So how often and what type of claims actually occur?"

In upcoming posts, I will share some real life E&O claim examples as case study examples that can and do occur all the time.   Please feel free to contact me with any questions or issues to discuss.
 

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