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Part 1: Financial Risks for IT Professionals

For small IT firms, the biggest financial exposure (besides not bringing in enough revenue) comes from the threat of lawsuits.

While you may think you're unlikely to be sued, the reality is that more than half of all lawsuits against U.S. companies target small businesses. And small companies pay more than $35 billion per year out of pocket to defend themselves against lawsuits. As an IT professional, you need to prepare for possible lawsuits and work to prevent them so you can reduce your financial risk exposure.

Of the types of lawsuits your business might face, Errors and Omissions suits are among the most expensive. To understand how E and O lawsuits can threaten your bottom line, it's important to know the answers to the following questions:

  1. What triggers an E&O lawsuit?
  2. What do E & O lawsuits cost?
  3. How does the cost of insurance compare to the potential cost of a lawsuit?

1. What Triggers an E&O Lawsuit?

A dissatisfied client triggers an Errors & Omissions lawsuit.

When one of your clients loses money and thinks you're to blame (because, in the client's opinion, you did shoddy, incomplete, or negligent work, or made mistakes or oversights), they can sue you to recover their financial losses. This counts as an E and O lawsuit.

E & O Lawsuits in Action: Major Brands Vs. Epicor

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.

Assuming Epicor had an active Errors and Omissions 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. If Eipcor had no E&O policy, it would have had to fund the lawsuit from its business assets.

2. What Do Errors & Omissions Lawsuits Cost?

Lawsuits are like snowflakes – each one is unique. 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 more than a million dollars in legal fees, damages, and other expenses.

In a typical E and O lawsuit, you might have to pay for…

  • Lawyers' fees.
  • Settlements to keep a lawsuit out of 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 (if you lose).

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

3. How Does the Cost of Insurance Compare to the Potential Cost of a Lawsuit?

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 likely have to pay after a lawsuit.

For a closer look at the cost of Errors and Omissions Insurance, jump ahead to the section, "What Does Errors & Omissions Insurance Cost?"

Next: Part 2: Legal Risks for IT Professionals

70% of businesses raise prices or cut hiring when sued