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By definition, Errors and Omissions (E&O) insurance covers professionals for actual or alleged errors, omissions or mistakes – caused by them or their products & services – which results in another party’s financial harm. Technology and digital media companies secure E&O insurance to safeguard against claims that the services they provide to others did not function properly. Once triggered by a suit or other demand for damages, an E&O policy will pay to defend the policy holder (pay legal defense fees) and any settlements or judgements that are made against them. This is the case regardless of whether the claim has merit or not. Put simply, an E&O policy responds to claims for a “failure to perform“.
Commonly, claims come from clients who purchased a service/system and then allege that the system didn’t work, resulting in their financial loss. Let’s use the example of a client that purchases a mission critical software system to manage all of their business’s financial functions…..payroll, payables, receivable, taxes, etc…..the software promises to streamline all of these items where the client was previously using multiple platforms and vendors. Just a week after the client “flipped the switch” and started using the new system there was a crash. All of their data is lost and it takes them two full weeks to correct the problem. During this time they lose thousands of dollars recreating data, paying overtime, contacting clients, incurring penalties for non-payment of bills – and the list goes on. They sue the IT provider for all of the financial damages including their legal expenses, lost opportunity costs & loss of future revenue – and they want their money back for the faulty system which they ended up scrapping.
In this case if the IT provider were to submit the claim to their General Liability (GL) provider, the claim would be denied. General Liability covers claims for bodily injury & property damage – neither of which occurred in this situation. They would also submit the claim to their E&O insurer. While there is no industry standard, off-the-shelf E&O policy (every insurer has their own contract with it’s own terms, conditions, coverages, exclusions, etc) a typical E&O policy will pay the defense expenses incurred by the IT provider, along with the consequential damages claimed by the clients…..but, most likely, not the return of fees paid for the faulty system. More on this in a future post….
In the end, E&O is a risk transfer tool that companies can use to hedge against claims for mistakes made by their people or the products/services they provide.
Errors & Omissions insurance is one of the most misunderstood coverages that Technology & Digital Media companies will encounter – and with good reason. It is a coverage that goes by many different names (E&O, professional liability, cyber liability…), has no industry standard policy form (like a general liability policy, where every carrier is providing essentially the same coverage) and it changes on what seems like a daily basis. To help simplify and demystify Errors and Omissions coverage, we will provide a multi-part series of posts that cover the basics about Errors & Omissions insurance. These are the topics that we will addess in the coming weeks:
- E&O – WTF? (What’s that for??)
- E&O Insurance – Checking the box
- The E&O Trifecta – Covering Intellectual Property, Privacy and Media
- Cha Ching! How to get paid by your E&O policy
- How Much does E&O insurance cost ?(& secrets to getting the cost down)
- What is involved in getting E&O Insurance?
- How E&O Claims are triggered and what happens when they are?
- The 5 Most Important Considerations for E&O Buyers
I didn’t see the A-Team movie this Summer, but have to admit as a child of the 80’s I was a big fan of the TV show. I remember vividly watching the pilot as a 13 year old after the Redskins beat the Dolphins in Super Bowl XVII. I know BA hates flying, I know the crack commando team went to prison in 1972 for a crime they didn’t commit, and I know that Hannibal (George Peppard, the only Hannibal) is a cigar smoking, master of disguise.
 The real A Team So what does this all have to do with insurance? Probably not alot…but here’s a shot:
We work with many VC’s as part of our role in managing the insurance program for members of the NVCA. And we have found that, like most innovators, Venture Capitalists are so focused on working IN their business that they sometimes don’t spend enough time working ON their business. This is evidenced with our frequent discovery of poorly structured insurance placements for VC’s, on even the simplest of insurance policies. (Clarification – it’s not a policy holder’s fault if their insurance is not up to par….that is their broker’s job. The policyholder is only responsible for choosing the right broker) Take a General Liability (GL) policy for example: every company has one of these babies. It covers your business for claims that you, your employees or products/services caused someone else bodily injury or property damage. But it also covers a wide variety of personal injury issues that could come into play for a VC. Since most insurers (I’m not aware of any) don’t have a specific classification in their policies for a VC firm, they will categorize them as investment advisors or some other similar financial organization. And in doing so they will also receive a myriad of exclusions that are typical for financial organizations….inluding ones that will severly limit their ability to cover personal injury claims. Insurers also worry about picking up vicarious risks stemming from activities of portfolio companies….hence, more exclusions.
Continue reading VC Insurance and the A Team
…but we got em anyway.
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When faced with the task of setting up Payroll, Employee Benefits, Human Resources and Workers Compensation Insurance many startup Tech/Digital Media companies turn to Professional Employer Organizations(PEOs). The concept is that, using a PEO, the company can outsource all of these items to another company and take advantage of economies of scale by participating in their larger group buying power. And by using a PEO they can pass off unwanted administrative tasks and focus on their own business. When working with a PEO the company pays the cost of the services plus a monthly, per employee, fee for the administration of the program. The startup must take the entire bundled package from the PEO, which often includes HR services that they, as a small company, may never use (recruiting, workplace safety, training, etc.).
But what would the cost be to do it yourself (DIY)? Do the benefits of outsourcing really make financial sense? And does it scale for a company that expects high growth, or will it create an unnecessary financial drain on much needed cash?
Continue reading Startup Tech Co’s – PEO or DIY?
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