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Innovation & Liability Litigation: 4 Reasons to Buy E&O Insurance

Hot tech startups are now a normal part of the IT business landscape. But when companies grow and innovate quickly, they’re also frequently the target of lawsuits.

For example…

  • As reported in Fortune, blood-testing startup Theranos is facing a consumer fraud class-action lawsuit for allegedly misrepresenting the accuracy of its tests.
  • Home rental site Airbnb is facing pushback in many communities, as well as a racial discrimination lawsuit, according to an article on CNBC.
  • Ridesharing company Uber has already faced a variety of lawsuits, including a case of false advertising (detailed here in LA Weekly).

In each case, these tech giants are likely looking to insurance liability policies to help cover mounting legal expenses.

Uber: Innovative, Growing Fast, and Bogged Down in Lawsuits

Uber had an expensive start to 2016. It agreed to pay $28.5 million in February 2016 to settle claims it misled customers about safety procedures and fees, according to an article in The Chicago Tribune.

But the biggest legal challenge Uber has faced so far is over the misclassification of its drivers as independent contractors. As reported by Reuters, Uber agreed to pay $100 million in April 2016 to settle a lawsuit claiming its drivers in California and Massachusetts should be classified as employees. As part of the settlement, it was agreed that drivers in those two states will remain independent contractors, although according to an article in TechCrunch, another lawsuit was immediately filed to challenge the issue in the rest of the US, so Uber’s fight continues.

“It appears that Uber has been willing to pay out large sums to maintain its independent contractor model,” says attorney Robert Dow, partner at (@agglaw). “We expect this issue to continue to plague Uber for some time to come.”

Why is Uber fighting so hard to maintain its drivers’ status as independent contractors instead of employees? Two big reasons are likely money and liability. Dow says converting all drivers to employees would be an expensive proposition for Uber, including changes in…

  • Payroll taxes.
  • Overtime pay.
  • Employee benefits.
  • Liability for employee errors (i.e., Uber would have more).

“Ridesharing companies are careful to classify and treat drivers as contractors,” says attorney Phil Griffis (@PhilGriffis) of , “and so persons injured by Uber drivers will have a tough road to prove liability.”

If you use independent contractors, you can probably relate to Uber. Hiring contractors can help you take on bigger projects and clients, but it also leaves you vulnerable to contractors’ mistakes. Though the contractor is not technically your employee, if an issue comes up, you could potentially be held liable for any damages – just like Uber.

How Technology E&O Insurance Can Help Any Tech Business, Big or Small

In the cases of Uber, Theranos, and Airbnb, a liability insurance policy would likely help cover legal costs. But liability insurance isn’t just a necessity for large tech startups. If you are a one-person IT business, Errors & Omissions Insurance (also known as Professional Liability Insurance) can help by covering the costs of your legal defense and any resulting damages from a lawsuit. Imagine if:

  • You miss a deadline. Delivering a project on time is a major challenge for most businesses, and if you fail to stay on track for a client, it may end in litigation.
  • You don’t finish a project. Maybe your developer quit and you lacked the resources to finish it, or maybe the client dragged their feet and caused the issue themselves. Even if it’s their own fault, they could still sue your business.
  • You make a mistake. Until we all get replaced by robots, there will always be a chance that you make a mistake while working for a client. If it’s a big enough goof, they could sue you.
  • Your contractor makes a mistake. If you regularly hire contractors, you should either verify that they have an independent contractor liability policy of their own, or add them to your tech E&O Insurance policy.

“If you think you’re going to hand [a project] off to an independent contractor to do most of the work for you, it’s a matter of good practice to insist that they have their own coverage,” says Aldo Leiva, partner and chair of data security and privacy practice at (@LubellRosen).

Other Policies That Can Help Protect Your Bottom Line

In addition to Professional Liability Insurance, you might want to consider other useful policies for small IT business owners, such as…

  • General Liability Insurance. Also known as slip-and-fall insurance, General Liability provides coverage for third-party property damage and bodily injuries, as well as advertising injuries.
  • Workers’ Compensation Insurance. State laws vary, but it could be mandatory for you to carry Workers’ Comp, even if you only work with independent contractors. Your costs should be affordable, given that IT work tends to be low risk.
  • Employment Practices Liability Insurance. If you do have employees, this policy can protect you against lawsuits for discrimination, wrongful termination, harassment, or other issues that might cause distress for a current, prospective, or past employee.

While your business may never be on the same scale as a tech startup like Airbnb or Uber, it doesn’t mean you shouldn’t take advantage of the same types of liability insurance coverage they use to protect company assets.