Professional Liability Insurance protects IT professionals from the costs of lawsuits and damages brought on by dissatisfied clients.
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When companies provide professional advice or services, they may be held liable if clients feel their work isn’t up to expected standards. This is a crucial consideration for IT firms because technology plays an important role in most modern businesses, and its failure can have a major impact. If you provide clients with technology products or services that fail or don’t work as expected, your clients could suffer significant financial losses, and they could sue you for damages. To protect themselves against lawsuits of this type, companies in the IT industry should consider Professional Liability Insurance.
What is Professional Liability Insurance?
Professional Liability Insurance, also commonly known as Errors and Omissions or E&O insurance, protects companies from the costs of lawsuits and damages related to their professional services. If a dissatisfied client brings a suit against you claiming negligence, poor performance, or any failing of your professional duties, Professional Liability Insurance would pay for any legal defense costs, judgements, or settlements.
Professional Liability Insurance policies are typically tailored for specific professions, as each profession may encounter different professional risks. For instance, coverage for doctors and medical professionals may differ significantly from the coverage provided for construction workers. IT and technology professionals are also exposed to liabilities that may differ from other professions, and as such, many insurance companies offer policies designed specifically for the IT industry, often called Technology Errors and Omissions Insurance.
Professional Liability Insurance can serve as a complement to the protections of commercial general liability (CGL) insurance, and it’s important to understand the differences between the two. General liability policies cover claims related to third-party bodily injury, physical property damage, and personal and advertising injury. However, they do not cover professional errors that lead to financial losses and lawsuits. IT companies should also note that CGL policies do not cover electronic data loss. IT companies who wish to protect themselves from potential professional mistakes that lead to client data loss should consider a Professional Liability policy.
- You run a mobile app development studio and are hired to create a new app for a local restaurant chain. Your team failed to do extensive testing on the app, and when the app was released to the restaurant’s customers, it caused phone failures for a subset of customers. The restaurant chain had to pay another company to fix the issue with the app. They sue your studio for damages.
- Your company manufactures image sensors for security cameras and recently provided sensors to a small home security firm. After installing your sensors in their camera systems, the security firm receives complaints from their customers that their cameras stop working under certain temperatures. The security firm discovers the issue is caused by a defect in your image sensors. The firm sues your company for damages.
Why do IT professionals need Professional Liability Insurance?
Whenever a company does business, there is always a risk that professional errors could occur. Since almost all companies rely on some form of technology, from websites to software to computers, IT professionals and businesses can be easy targets to blame for any failures in technology. Moreover, today’s technology can be extremely complicated, and even seemingly minor mistakes can lead to larger systematic failures, causing expensive losses for clients. A client could even sue for a perceived error although your company did nothing wrong, resulting in costly legal fees to defend the case.
Although Professional Liability Insurance is not legally required for the IT industry, in many cases, client contracts will require your IT company to have Professional Liability Insurance in order to protect the client’s investment. However, even if it’s not contractually required, choosing to purchase a Professional Liability Insurance policy can protect your company from common professional risks and safeguard your business from the expensive costs of dealing with client lawsuits. In addition, holding coverage for professional errors and omissions may serve to help your company win business by giving clients peace of mind that if things go awry, your business is backed by a reputable insurer.
What does Professional Liability Insurance cover?
Professional Liability Insurance covers claims arising from work errors or mistakes, omissions, product failures, negligence, inaccurate advice, or uncompleted work. Your insurance policy will cover legal costs, attorney fees, court costs, and any settlements or judgments against your company.
Claims of professional errors occur when an IT company is accused of making a damaging mistake while providing services.
- Example: Your company provides cloud storage services. During a service update, one of your employees accidentally wipes the data of one of your largest clients. The data is unable to be recovered, causing hundreds of thousands of dollars in losses for your client.
Product failure claims occur when your company provides a technology product or service that does not work correctly, causing financial damage to a client.
- Example: Your company manufactures touch screens for a client that makes grocery store self-checkout machines. The screens stop working after six months, and the client has to pay for their replacement.
Claims of inaccurate advice apply in cases where a company advises a client. If the client follows recommendations and suffers financial loss as a result, they can make a claim of inaccurate advice.
- Example: Your IT consulting company recommends that a client use a particular software for their network security. The software isn’t compatible with the client’s computers and crashes their network. The client must hire another firm to fix the issue with their network.
Uncompleted work claims occur when a company misses important deadlines or doesn’t complete work as expected.
- Example: Your web design company is hired to create a website for a retail client. The client needs the website to be completed by a certain date, as their marketing and advertising are geared toward this launch date. Your company misses a number of milestones and will be unable to meet the deadline, and the client must hire another design firm to take over the project.
What are the key exclusions to Professional Liability Insurance coverage?
There are a number of common exclusions in Professional Liability coverage. These include:
- Bodily injury. If, in the course of your professional duties, you cause bodily injury or death of a third party, this would generally be covered by a commercial general liability policy.
- Property damage. Third-party physical property damage is also covered by commercial general liability insurance and not Professional Liability Insurance. Note that data loss and other non-physical damage is not included in CGL policies and could instead be covered by Professional Liability Insurance.
- Personal and advertising injury. Personal and advertising injuries include slander, libel, publications that violate privacy, copyright infringement, false arrest, wrongful eviction, and malicious prosecution. In most cases, personal and advertising injury is covered by CGL.
- Malicious, dishonest, intentional, or illegal acts.
Does Professional Liability Insurance cover bodily injury or property damage?
A commonly problematic area of coverage is third-party bodily injury and property damage caused by your professional work, particularly as it pertains to software or programming. Though in general, your CGL policy would cover third-party bodily injury and property damage, if the injury arises out of your professional work, many CGL policies will exclude this coverage. And because Professional Liability Insurance excludes bodily injury and property damage, you may face a gap in coverage.
- You develop software for assembly line machinery, and you recently developed a custom software package for an automobile manufacturer. An error in your code causes the manufacturer’s machinery to malfunction, injuring an employee on the assembly line. Your Professional Liability Insurance policy does not cover this incident as it involves bodily injury, and your CGL policy also excludes coverage because the incident is a result of your professional work.
Because there is no standard Professional Liability Insurance contract, and coverage is typically tailored to specific professions, it’s unlikely that your insurer would by default include coverage for third-party bodily injury or property damage. For architects and building engineers, this coverage is usually included in Professional Liability Insurance, but for IT professionals, there is no overarching standard. If you need coverage for third-party bodily injury or property damage that may be caused by your work, make sure that your insurer includes contingent bodily injury and property damage coverage as part of your Professional Liability policy.
Does Professional Liability Insurance cover cyber liability?
Depending on your specific policy, Professional Liability Insurance for the IT industry can cover financial losses suffered by third-party data breaches and cyberattacks that are a direct result of your professional error or omission. If your company provides technology or services that fail in some way, causing client data to be damaged, hacked, or extorted, you may be sued for damages. In this case, lawsuits could be covered by your Professional Liability Insurance policy, including legal fees, attorney fees, court costs, and settlements or judgments.
However, this coverage does not apply to first-party claims for loss of your own company’s data. If your company itself holds sensitive client data such as credit card numbers or bank account information, and the data is stolen through a cyberattack, your Professional Liability Insurance would not cover the cost of recovery from the crime. For companies that store large volumes of personal information, a separate cyber liability policy can provide coverage. If your company is involved with storing personal data or providing the tools to store data, it’s important to make sure you’re covered for cybercrimes.
- Your software company provides clients with an online shopping system that stores credit card information. A vulnerability in the system’s coding means that hackers are able to steal customer information from your clients. Your Professional Liability Insurance would cover the legal fees and any judgements or settlements resulting from the lawsuit.
- Your web hosting company stores personal information belonging to clients who host their websites with you. Hackers are able to access and steal your clients’ personal information. Because your company stored this information, your Professional Liability Insurance would not provide coverage for the costs of recovering from the hack, including data recovery costs, customer notification costs, and credit monitoring service fees. Cyber liability insurance would cover these expenses. Professional Liability Insurance would cover the costs of any lawsuits brought on by clients who suffered financial loss from the cyber attack.
Do you need an active Professional Liability Insurance policy to receive coverage?
Unlike many other types of liability insurance, Professional Liability Insurance policies usually work on a claims-made basis, meaning that claims will only be covered if they are made while the policy is active. If your policy is no longer active, claims will not be covered, even if the incident occurred while your policy was active.
- Your tech installation company had a Professional Liability policy active from January 1, 2019 to December 31, 2019. In March 2019, you installed a server system for a client. In April 2020, the client’s servers crash due to mistakes made during the installation, and the client files a claim against your company. Although the policy was active when the incident occurred, your insurer will not provide coverage because the claim was made after the policy lapsed.
It’s important to keep this facet of Professional Liability Insurance in mind because professional errors can sometimes be discovered at a much later date, long after work has been completed. In addition, many policies have a retroactive date. If your policy has a retroactive date, any claims filed as a result of incidents that happened before the retroactive date will not be covered, even if the claim is made while your policy is active.
What are the limits of Professional Liability Insurance?
The limits of your insurance policy are the maximum amount your insurer will pay for damages, settlements, and legal fees. Most policies have a per-claim maximum as well as a maximum for each policy year. For example, your policy could have a $1 million per-claim maximum and a $3 million maximum for the entire year.
It’s important to note that unlike commercial general liability policies, the cost of defending court cases is included in the limits of insurance for Professional Liability Insurance. This is known as “shrinking limits.” The legal fees associated with the case are subtracted from the amount the insurer will pay for any settlements or judgments. Because court cases can be expensive, this is an important consideration when deciding how much coverage to buy. Policies with higher limits of liability will result in higher premiums.
Does Professional Liability Insurance have a deductible?
Unlike many other types of liability insurance, Professional Liability Insurance policies typically include a deductible. This is the cost you are responsible for before the insurance company begins paying for a claim. A policy with a lower deductible will have a higher premium.
What is media liability insurance?
Media liability insurance is a type of Professional Liability Insurance, specifically designed for media businesses, that provides protection from the costs of lawsuits and damages related to failures in professional services, in addition to covering personal and advertising injury. Media liability insurance can provide additional protection for lawsuits alleging libel, slander, copyright or trademark infringement, and invasion of privacy. Certain types of IT companies, including those involved in developing content for public consumption like web design firms or digital marketing agencies, may find media liability insurance better suited to their needs.
Pricing and Quotes
AdvisorSmith found that the average cost of Professional Liability Insurance for small businesses is $1,034 per year. This average is based upon small businesses with under $500,000 in revenue, with limits of $1 million.
In order to get an accurate estimate on pricing, it’s best to get a quote from a reputable insurance company. Below we’ve highlighted a few of our trusted partners who offer Professional Liability Insurance:
|Provider||Professional Liability||Business Owner's Policy||Cyber Liability||General Liability|
Companies in the IT industry open themselves to liability by providing technological services. Given the complexity of certain technologies and how dependent today’s companies are on their technology, there is always a chance that a failure or mistake on your part could lead to considerable financial losses for your customers. Unfortunately, losses for your clients mean that you may well be held financially liable. Even if your company has done nothing wrong, the costs to defend a legal case can be high. Professional Liability Insurance can help protect your company against the risk of mistakes or errors in your professional services or advice and give your business the financial backing it needs to defend against client lawsuits.