There are over 20 carriers offering E&O insurance for technology companies, to protect companies from the potential devastation of a lawsuit. However the quality of coverage they are providing varies considerably.
Throughout the insurance world, E&O policies typically provide coverage for occurrences involving professional negligence – essentially these policies are a type of malpractice insurance for companies providing professional services. The coverage has generally provided protection for an insured’s liability in tort and not in contract.
Technology companies blur a traditional divide between those firms providing a product and those providing a professional service. For example, commentators have debated whether software or other technology products are a “service” or a “product”. In reality, many technology companies’ activities will include both the development and sale of a good (e.g. software) and the provision of a service (e.g. installation, calibration, design, consultancy).
The distinction between whether the insured is providing a service or product is an important one. In the U.S. ‘pure financial losses’ ( i.e. losses to a third party without personal injury or property damage) caused by a defective product will not be recoverable in tort while pure financial losses due to negligent provision of services are normally actionable as a tort.
Many (but certainly not all) carriers will limit claims alleging a breach of contract against an insured through either a blanket exclusion in their policy or excluding any claims arising from contractual obligations which go beyond the duty to exercise a degree of care or skill consistent with industry standards.
The third party in Technology E&O claims is almost always the insured’s customer and as such these claims generally arise out of a contractual relationship. Oftentimes due to the nature of a technology company, it is difficult to distinguish between what is negligence in the provision of services and that which gives rise to a breach of contract claim due to a defective product.
As a result, while the claim or suit may also include non-contract claims such as negligent misrepresentation or fraud (often asserted in an attempt to avoid liability or damages limitations in the contract), the heart of an E&O claim is almost always the breach of contract. This leaves a considerable amount of ‘grey’ area for those carriers whose policies restrict breach of contract claims. For those who exclude breach of contract claims altogether, the insured and insurer will be left with the task of distinguishing between what part of the claim relates to the insureds liability in tort and what part relates to a breach in contract. The latter would not be covered by insurance.
According to Karen I. Johnson, Complex Claims Manager for Travelers Insurance, “In almost all [technology and manufacturing] E&O claims/suits, there would be no basis for holding either party liable to the other absent of the existence of the contractual relationship. For this reason, purchasers of E&O coverage should carefully consider how the various coverage offerings treat breach of contract claims.”
For technology companies looking for clarity with respect to what protection they are buying, reviewing your policy exclusions with your broker is a must. Contractual liability is just one of several exclusions, which can greatly restrict coverage under an E&O policy.