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Common Risks for IT Project Risk Managers Part 1: Financial Exposures

Common Risks for IT Project Risk Managers Part 1: Financial Exposures

In Part 1 of this series on risk for IT project and risk managers, a discussion of what financial exposures project managers face, how they can reduce those exposures with E&O Insurance, and what E&O coverage costs compared to and E&O lawsuit.

Thursday, January 09, 2014/Categories: errors-and-omissions

While you may think you're unlikely to be sued, the reality is that more than half of all lawsuits target small businesses. As an IT project manager, you need to prepare for possible lawsuits, work to prevent them, and take steps to reduce your financial risks.

This article is the first in a series on IT financial risk, where we'll look in depth at your professional liabilities, which are the risks associated with the work you deliver to customers. In Part 1, we'll go over…

  • What is an Errors and Omissions claim?
  • What do E&O lawsuits cost?
  • How does the cost of insurance compare to the potential cost of a lawsuit?

What Is an Errors and Omissions Claim?

When customers sue you because they are dissatisfied with your work, allege you haven't fulfilled a contract, or believe you've made a mistake, you'll file an E&O claim with the insurance company from which you bought your E&O policy.

Errors and Omissions Insurance can pay your legal expenses when you’re involved in a lawsuit over your professional liabilities. In 2012, Major Brands, a beverage distribution company, sued business software company Epicor over problems with its sales software. Major Brands claimed millions of dollars in damages after Epicor failed to install the software promptly, and was unable to fix a "lag" issue that made sales entry painstakingly slow.

This is exactly the unfortunate situation IT project managers can find themselves in. Like the software supplier Epicor, you could run into difficulties customizing software for a specific industry. When the difficult task is finally completed, ongoing bugs and latency issues could make the program inefficient or difficult to use. The big contract you'd been waiting for suddenly turns into a mess of litigation and expensive legal bills.

Assuming Epicor had an active E&O policy in place at the time of the lawsuit, it would have filed a claim on that policy with its insurance company to collect money to fund its legal defense.

What Do E&O Lawsuits Cost?

Lawsuits are like snowflakes – each one is unique and they can vary wildly in cost. On the low end, a lawsuit may only cost a few thousand dollars, especially if it is dropped or dismissed by a judge. On the high end, you could pay a million dollars in legal fees, damages, and other expenses (as we saw in the example above).

Lawsuits are expensive because of the many costs associated with them, which might include…

  • Lawyer's fees.
  • Settlements to end a lawsuit without going to court.
  • Witness expenses (e.g., when you hire an expert witness to testify on your behalf).
  • Court fees.
  • Judgments awarding damages to your client.
  • Your client's legal fees (typically only if you lose).

Covering the cost of a lawsuit can force your business to scale back hiring or increase its prices to current customers – more than 70% of businesses in a lawsuit end up doing just that. That's not good for business.

The Cost of Insurance vs. the Potential Cost of Lawsuits

E&O Insurance policies typically offer coverage in $1 million increments. Your premiums will vary depending on the size of your company, the deductible you choose, and your total annual revenue.

For many small businesses, E&O premiums cost a few thousand dollars a year, much less than the six-figure legal bill you'd have to pay after a lawsuit. (For a closer look at how investing in E&O coverage can save your business money, read the post “A $2,500 Investment That Can Save Computer Consultants Hundreds of Thousands.”) To get a more specific breakdown of the cost and coverage E&O policies offer, read this guide to the cost of Errors and Omissions Insurance.

Or if you'd like a free insurance quote in a matter of minutes, fill out our online insurance form. Our IT insurance agents can send you a quote usually within ten or fifteen minutes.

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