In the same way that doctors have Malpractice Insurance, IT companies can purchase Professional Liability Insurance (often called Errors & Omissions, or E and O Insurance), which protects them from a number of tech liabilities and cyber risks.
In general, Professional Liability Insurance covers lawsuits alleging that your work didn’t live up to the terms outlined in your contract. Professional Liability claims fall into two categories:
- Errors: Professional mistakes developers or other IT professionals make (e.g., coding mistakes, software bugs, and incorrect consultations).
- Omissions: Incomplete work or a failure to prevent something bad from happening (e.g., software that did not perform all of the functions a client required).
To put it another way: an error is an active mistake (doing something wrong), whereas an omission is a failure to do something that was agreed upon (not doing something at all).
Does E & O Insurance also cover data security? Yes, Errors and Omissions Insurance also offers cyber liability coverage sufficient for most IT businesses. This insurance pays for lawsuits over data breaches that affect a client’s network. If software you installed is hacked, your business could be sued. Fortunately, E and O covers these liabilities. (To learn more about cyber risk coverage, check out "Where's Your Cyber Risk Insurance Hiding?").
What Common Tech Errors Cause Lawsuits?
IT companies turn to Errors and Omissions Insurance to protect them from common mistakes they can make in their coding, software testing, or data security. Some of these errors include…
- Introducing or failing to eliminate software defects or bugs.
- Designing software with inadequate usability, security, or performance.
- Implementing software or network processes that violate a client's legal requirements (e.g., businesses with medical data must follow HIPAA and HITECH, two strict data protections laws).
- Installing or building the wrong software (i.e., software that doesn’t meet the specifications a client laid out).
- Mismanaging a server, causing a client website to be unavailable.
When a client files a lawsuit over these errors, they will typically sue for the fees the IT consultant charges, lost profits, and other related costs like wasted time or damage to their reputation.
Omissions: Incomplete or Overlooked Work that Leads to Lawsuits
An omission is when an IT company fails to do something or leaves something out of a finished product. These are situations when IT professionals "should have known better" or "should have done more." They include…
- Failing to deliver software that contained all the features the client requested.
- Not educating clients on proper security settings and protocol for new software.
- Rushing software testing or not testing sufficiently for the software’s ultimate application.
- Installing substandard software when other IT professionals would have used better options.
- Not taking adequate steps to prevent a data breach.
- Responding to a data breach too slowly.
- Failing to encrypt data stored on servers or passing between them.
- Failing to meet the terms of a contract (e.g., delivering the work past deadline).
As you can see, some of these omissions are vague. A client might insist you "didn't do enough" to prevent a data breach, but what does that mean? Does that really mean you're liable?
What it means is that you can be taken to court, where it might be your word vs. the client's. E&O Insurance protects you from these vague accusations.
You Can Still Be Sued Even if You Never Made an Error or Omission
As you read over these lists of errors and omissions, you might have thought to yourself, "but what if a client claims I did one of these things, but I was innocent?" Good question.
E and O Insurance benefits will cover you even in the event of unfounded lawsuits (sometimes called "frivolous" lawsuits). Even if a client’s claim isn’t supported by the facts of the case, your small business insurance can still pay for your legal defense.
A Final Word: The Cost of a Lawsuit vs. E & O Insurance Rates
IT lawsuits are extremely expensive, often costing well over $100,000. In addition to the cost, they can take years from the moment you are served with a notice to the final judgment in the suit.
Errors and Omissions Insurance costs far less, in both time and money. The specific costs depend on your business (see our free sample E&O Insurance quotes broken down by tech industry), but generally speaking, E&O policies range from $1,000 to a few thousand dollars each year for small tech firms. E & O Insurance is an investment: paying a little now prevents you from paying a lot for a lawsuit later.
Now that you know some of the common errors and omissions IT businesses face, take a look at more tips on software risk management in the post "How to Avoid Errors and Omissions Lawsuits."