M-F 8:00AM TO 5:30PM CST
Better coverage. Better price.
Don't Risk IT
Court Ruling Could Affect How Tech E&O Insurance Is Handled

Court Ruling Could Affect How Tech E&O Insurance Is Handled

A new court ruling shows one situation where IT insurance might not protect your business from the cost of a lawsuit. Here's how your business is affected.

Thursday, May 21, 2015/Categories: cyber-liability

Some IT businesses assume that every lawsuit will be covered by technology E&O Insurance, but that's not the case. A recent lawsuit between a data / billing company and its client shows how crucial it is for IT professionals to know the limits of their policy.

Sued Over Breach of Contract? Beware the Limits of Your E&O

Federal Recovery Acceptance handles payment information for its clients, processing credit card and ETF payments in secure, encrypted ways. FRA has E&O Insurance, but its insurer refused to cover a lawsuit when one of its clients, fitness chain Global Fitness, sued over breach of contract. According to Lexology, here's what happened:

  • FRA processed Global Fitness's member accounts and financial transactions.
  • When Global Fitness wanted all of its data returned, FRA returned some – but not all – payment information.
  • After going back and forth, Global Fitness was able to get most of its customers' data returned.

Global Fitness claimed FRA breached its contract and claimed that the company was withholding this data in an attempt to extract more fees.

When Your Insurance Won't Cover Your IT Lawsuits

As the report states, FRA's insurance carrier refused to cover the lawsuit because it claimed that the IT company was intentionally breaking its contract with Global Fitness. The insurer reasoned...

  • FRA knowingly acted in the wrong – it wasn't an accidental error or omission.
  • Most insurance policies won't cover intentionally wrongful or fraudulent acts.

This week, a judge ruled in favor of the insurance carrier, which means that FRA has to pay its own legal bills for the lawsuit in question. In this case, FRA intentionally violated its contract by refusing to return its client's data.

This lawsuit stands as an important reminder: IT insurance policies don't cover everything.

Some IT professionals fall into the trap of thinking their business insurance is "lawsuit coverage." While insurance often covers the cost of lawsuits – legal fees, lawyers' bills, and damages you owe clients – there are limitations on which lawsuits are covered. Insurance doesn't give you license to break contracts or act recklessly. If you do so, your insurer may refuse to cover your claims.

Protect Your IT Business By Learning More about Your Tech Insurance

The solution to this problem is to make sure you've spent some time getting to know your IT insurance policy. While you don't have to become an expert in small business insurance, it might be helpful to talk with an IT insurance agent about what is and isn't covered.

Here are tips to help you avoid costly misunderstandings when it comes to your IT insurance:

  • Understand what your E&O policy does and doesn't cover before choosing a policy. Work with insurance agents who specialize in IT liability insurance and know the risks your industry faces. They'll be able to answer your questions quickly and explain your policy in detail.
  • Know that not all E&O / Cyber Insurance policies are the same. While FRA's insurer didn't cover the lawsuit, other insurance providers may have covered the claim differently. Policies vary from carrier to carrier. Insurers revise and update their IT coverage each year as threats, cyber risks, and data-related liabilities change.
  • Keep in mind that most policies won't cover wrongful or fraudulent acts. Insurance doesn't give you carte blanche. IT consultants are still responsible for delivering their contracts and acting in good faith with their customers.
  • Pay attention to new tech rulings. Technology is evolving faster than laws and insurance policies, which means that rulings like this will be an important part of determining how IT insurance works. As insurers establish more precedents on what IT liabilities they will and will not cover, your lawsuit coverage will slowly change. This ruling reinforces that intentional breach of contract probably won't be covered by E&O.
  • Make sure your E&O Insurance has third-party Cyber Liability coverage. This can offer coverage for lawsuits when problems with your technology lead to data breaches on your client's network. See "Third-Party Vs. First-Party Cyber Risk Insurance: Protect Your IT Firm Right" for more on how client-side data breaches can lead to lawsuits filed against your business.

If you have questions about your IT liability and insurance coverage, don't hesitate to talk with a TechInsurance agent. With our background insuring thousands of IT consultants, we can easily answer your questions about tech liability.

The Small Business
Insurance Leader
800.688.1984 | 8 am - 5:30 pm CST | M-F
Customer Rating 4.9 out of 5
Read Customer Reviews


The Small Business Insurance Leader