6 common errors and omissions claims for technology companies
Technology and IT services companies are susceptible to professional liability claims. Learn how errors and omissions or professional liability insurance can protect your technology business from the most common claims.
Who’s at risk for technology errors and omissions claims?
Small businesses that provide professional services in information technology and related fields are at risk for professional liability or errors and omissions claims and lawsuits. If a client could claim that they suffered financial losses due to your inadequate or negligent work, then you likely need errors and omissions insurance (E&O).
The costs of a claim can be steep. Legal fees, court costs and judgments can easily add up to thousands of dollars. And professional liability claims also cost you time and resources, and can do lasting damage to your company’s reputation.
Professional liability risks for tech vendors
If a client is unhappy with your company’s work, they may decide to file an errors and omissions lawsuit and sue your business. The reasons can range from trivial complaints to major issues that have a real impact on the client’s business.
When you’re dealing with data and sensitive information, technology E&O claims can be very serious. Every tech company is at risk for errors and omissions claims, including:
If a client sues your company, they have to prove that you failed to follow through on certain promises, or perform up to industry standards.
For example, they could claim you mishandled their cybersecurity, which led to a data breach. A client could also sue you for delivering a project late or going over budget.
There are a wide range of reasons your company could find itself facing an errors and omissions claim. Examples of some of the most common ones are detailed below.
6 errors and omissions claim examples you should know
To avoid legal action, being prepared for potential lawsuits is key. You need to understand your company’s biggest risks, and put measures in place to limit liability.
To help you prepare, we’re sharing the six most common technology E&O claims that your company might face.
1. Data breach
Technology companies and IT firms handle massive amounts of data every day. With each new client or project you take on, the volume of data skyrockets, along with the threat of a data breach.
If a client’s sensitive information is compromised and they believe your company is at fault, they will likely file a lawsuit. Technology E&O insurance usually includes cyber liability insurance, which protects against this risk.
2. Breach of contract
When you start working with a new client, it's essential to have a detailed contract in place.
A contract outlines your promises to the client, and holds you accountable for delivering what you owe. However, if you're unable to meet your obligations for any reason, the client has grounds to sue your company for breach of contract.
3. Breach of warranty
A breach of warranty can apply when your product or service doesn’t live up to the standards you've promised.
For instance, if you sell website coding software to a client and it caused their website to crash, the client could sue you for breach of warranty because your product didn't deliver on certain expectations.
If your company lies to a client for financial or personal gain, you can expect an E&O lawsuit for fraud.
For example, maybe you lied about the services and expertise your company has in order to land a high-paying client. But when the client realizes you don’t have the skills to help them, they can sue your company for fraud.
Negligence E&O claims occur when a company fails to use reasonable care, and it negatively affects your client in some way. Typically, these lawsuits are filed as a result of poor oversight that results in errors.
For example, if you helped a client code their website but there were bugs in the final product, they could argue that your work was careless.
You could be at risk for a misrepresentation claim if your company makes a false statement to a client in order to persuade them to sign a contract.
For example, say you quoted a client $500 per month for remote IT management, but you didn't disclose the $100 fee to use your data storage each month. That would be considered a misrepresentation.
Protecting your tech firm against E&O claims
E&O claims are not uncommon for tech companies, but there are ways you can prevent lawsuits from happening. Here are several actions you can take to protect your firm.
Sign a contract before work begins
Make sure you have a detailed contract that has been reviewed and signed by both parties before any formal work begins. The contract should include expectations about deadlines, payments and other agreed-upon expectations.
If your company is new, consider working with an attorney to create a contract template.
When you're working for a client, make sure to document everything you do. Keep and organize correspondence, meeting notes, receipts, invoices, and so on.
It will be much harder for a client to sue your company when there is proof of your interactions.
Your company is an extension of your client’s team, so it's important to prioritize honesty and transparency.
If you know you're going to miss a deadline or a project is going over budget, let them know. That way you can manage expectations, and both parties can work together to solve problems before they happen.
The value of errors and omissions insurance
One of the best ways that business owners can protect their company from litigation and reduce potential risk is to get errors and omissions insurance.
If a client sues your company, an E&O insurance policy will pay for your legal costs, such as:
- Attorney's costs
- Court fees
- Settlement costs
- Court-ordered judgments
Keep in mind that an E&O policy will only cover your company if you had an active policy at the time of an incident and when the claim was filed (it's a claims-made policy).
Don’t wait until something happens before purchasing insurance. Getting E&O coverage can give you peace of mind and save you from expensive legal battles.
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