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Why E&O Insurance Is More Important for Tech Firms than Others

Why E&O insurance means more for tech firms. (Hint: they have a higher risk of E&O lawsuits.)

Monday, March 24, 2014/Categories: errors-and-omissions

Let’s get one thing straight off the bat: not every small firm needs Errors and Omissions (E&O) Insurance. In some industries, there’s just not a great enough risk of lawsuits to justify the cost of an E&O policy.

But if you own a small technology company, you should be aware that your risk of an E&O lawsuit could well be higher than that of owners of businesses in other industries. Here’s a look at why your exposure is greater and why forgoing E&O Insurance could cost you big time.

Why E&O Insurance Is Worth the Cost for Tech Firms

E&O Insurance protects your business against claims that allege you either made a mistake in your work or failed to do something that you should have done – and that your error or omission resulted in a financial loss for one of your clients.

Tech firms tend to have a higher exposure to E&O claims because…

  • Laws can’t keep pace with new technology. Legal statutes are notorious for lagging behind technological developments, and will continue to do so for the foreseeable future. This means that, if one of your clients brings you to court charging that your error or omission resulted in a financial loss, the court might not have any precedent or existing case law to turn to in making its decision. This means that the outcome of your case is dependent on the judge, jury, and / or attorneys involved – and if any of those parties is unfamiliar with the technical aspects of your case, you could face an uphill battle.
  • The technology knowledge gap means potential miscommunications. Because your clients may not fully understand what you do, they may be dissatisfied with your finished product, even if you believe you did thorough work according to your contract and project outline. In other words, you could face an E&O lawsuit from a dissatisfied client simply because he or she expected more or didn’t understand the scope of your proposed work. Even if your client’s grounds have little legal footing, you could be responsible for the cost of legal bills for your E&O defense.

 Steps to Take for Less E&O Risk Exposure

Whether or not the cost of E&O Insurance is justified for the exposure you face, you can minimize the risk that you’ll face an E&O lawsuit and its attendant costs by putting a few precautionary measures into place:

  1. Work with lawyer-approved contracts. Including certain language in client contracts from the start will limit the likelihood that you’re found to have E&O liability in the event of a lawsuit.
  2. Over-communicate with clients. Ask questions to see whether your clients understand the work you’ve agreed to do. A little extra explaining in the beginning can save a lot of headaches (and costs) down the road.
  3. Limit the scope of the work you do. Certain projects expose tech professionals to higher-level risks than others. If you can’t afford E&O Insurance costs, stick to projects that come with minimal likelihood of triggering a suit.

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