What Is Tech E&O Insurance? A Comprehensive Guide

Understanding Tech E&O Insurance

Insurance concepts can get quite specific, but this shouldn’t stop a technology service company from having in-depth discussions with its brokers and getting the most out of its coverage. Here is some key knowledge to carry out these discussions about E&O.

What Is Covered by Tech E&O insurance?

• Negligence or errors in tech services: In cases of claims involving professional negligence or mistakes in the services provided.
• Product failures: Issues stemming from the malfunctioning of software or hardware products.
• Cybersecurity incidents: Provides coverage if a tech product or service leads to a data breach or exacerbates a cybersecurity issue.
• Defamation, libel, or slander: Protects against claims of harm caused by statements or representations made by the company.
• Loss of client data: Offers coverage for incidents resulting in the loss of client data, whether through accidental deletion or system failures.
• Project delays and overruns: Covers liabilities arising from delays in project completion or budget overruns attributable to technological errors or omissions.

What Is Not Covered by Tech E&O insurance?

• Intentional wrongdoing and fraud: Deliberate illegal acts or fraud committed by the company or its employees.
• Bodily injury or property damage: Claims related to physical harm or damage to property, which are usually covered under general liability insurance.
• Patent infringement: Most Tech E&O policies do not cover patent infringement or intellectual property disputes outside of copyright and trademark issues.
• Employment practices liability: Issues related to employment practices, such as discrimination, harassment, or wrongful termination.
• Costs beyond policy limits: Any costs or damages that exceed the policy’s coverage limits.
• Known circumstances or claims: Claims arising from circumstances or incidents known to the insured before the policy inception.
• Contractual liabilities: Liabilities that arise solely from a contractual agreement, unless the liability would have existed in the absence of the contract.
• War and terrorism: Acts of war and terrorism are typically excluded from standard Tech E&O policies.

Key Terms and Concepts To Know

• Insured: A person or entity covered by an insurance policy.
• Claim: Request made by the insured to their insurance company after covered incidents take place during the active policy year.
• Occurrence: An occurrence is a covered incident taking place when your insurance policy is active. Occurrence insurance also refers to another type of policy that differs from claims-made, which varies on costs and coverage time-frame.
• Policy limits: This refers to the financial cap or maximum amount of money an insurance company can cover on a claim made by the insured.
• Deductible: The agreed-upon amount of out-of-pocket money an insured must pay before insurance coverage kicks in to cover the remaining expenses.

Companies That Need Tech E&O Insurance

From the covered cases, it’s clear that companies that provide tech-based services or products benefit the most from Tech E&O insurance. This is especially useful when professional errors and omissions can lead to significant financial loss or reputational damage to your company.

Tech E&O Insurance is a must-have for the following technology professionals and companies in particular:

1. Software & app developers: In instances where claims are made due to software malfunctions or delivery delays that can cause financial loss to clients.
2. Website designers: Safeguards against potential legal actions due to website errors, downtime, or performance issues impacting client business.
3. Cybersecurity companies: Covers liabilities related to data breaches or security failures in the cybersecurity solutions they provide.
4. Digital marketing agencies: Defends against claims of misrepresentation or ineffective marketing strategies that could harm a client’s business.
5. IT professionals: Protects against claims of negligence or inadequate information technology services leading to client data loss or compromise, or system failures.
6. Cloud computing companies: Covers potential liabilities from service interruptions or data losses and breaches that affect their clients’ operations.

Emerging Risks for Technology Companies

The cyberworld is constantly evolving, with new opportunities and dangers emerging every day. Importantly, tech companies are arguably at more risk of cyberattacks due to the amount and type of data they tend to handle. Let’s dive into these.

Cybersecurity Threats

It’s no secret that cyber attacks have been rising exponentially in recent years — in fact, 2023 is often cited by tech professionals as the worst year yet for cybersecurity. Coupled with this, the costs of mitigating these attacks have increased: IBM reported the 2024 global average cost of data breaches is a whopping $4.88 million.

Ransoms are often colossal, causing disastrous consequences for the victim. Earlier this year, Ticketmaster was held ransom after hackers stole the personal data of 560 million customers, demanding $500,000 in payment. Governments and even the FBI have been involved in the situation.

Another major cybersecurity threat to tech companies is distributed denial of service (DDoS) attacks, where a company’s server is flooded with internet traffic by an attacker, blocking users from accessing services and information. This particular threat is only on the rise as the Internet of Things (IoT) continues to expand, with Cisco forecasts indicating that attacks doubled from 2018-2023.

The common link between these top trending cybersecurity threats is that data security is utterly compromised. We live in a day and age where data is the most valuable commodity, and to risk this is to risk your business.

Data Privacy Breaches

Data privacy breaches are one of the worst nightmares for a company. They can lead to a plethora of disastrous consequences, including reputational harm, legal liabilities, and huge financial losses.

Recent insights show that 68% of data breaches are the result of unintended events — like a team member falling prey to a phishing scam. Training employees in cybersecurity and how to spot a potential threat should be a business priority.

AI and Machine Learning Risks

A burning question here is why are businesses becoming more vulnerable to cybersecurity threats? One of the often-cited reasons is the growing integration of AI into business operations.

Research from Kaspersky shows that over half of companies have integrated AI and IoT into their infrastructures. With the wider implementation of these solutions into an organization’s digital processes, the more difficult it is to protect them from cyberattacks.

That’s because AI and machine learning (ML) solutions, such as large language models (LLMs), process huge swathes of data. With so much information circulating between a multitude of sources, the risk of cybersecurity threats only increases — unless an organization is taking the right security measures to bolster its digital infrastructure as it expands.

Intellectual Property Infringement

While IP insurance has its own comprehensive coverage, E&O can cover many IP-related cases that tech companies frequently face, helping them retain IP coverage for critical legal and financial protections.

For example, in such a highly competitive market where many software developers and engineers work for different companies during their careers, it’s not uncommon for the code in one software product to resemble that of another. This represents a copyright infringement, and tech E&O can help alleviate the costs of legal claims made against your company, which is particularly valuable when considering strategies for loss retention in such scenarios.

This same case can happen for technology products and hardware companies, where a patented product seems to take elements from another one, enough to commit patent infringement. The lengthy Apple and Samsung patent war over the similarities between the iPhone and Samsung’s smartphones is a perfect example of this type of incident.

It is therefore crucial that companies secure IP coverage to protect their rights and diminish risk of infringement.

Regulatory Changes

As cybersecurity needs are constantly evolving, so are the regulations surrounding them. Companies must keep pace with regulatory changes in order to ensure they’re best protected against potential threats.

Any company handling data, especially consumer data, must be on top of managing and protecting it. With cybercrime on the rise, governments and regulators are introducing more rigorous regulations to protect corporate and personal data. According to a recent article from MIT Sloan, over 170 new regulations have been passed in the past two years alone.

Factors Affecting Tech E&O Insurance Premiums

When opting for an insurance premium, organizational leaders must step back and examine their company’s specific needs and the context in which they function. That means considering things like industry, company size, location, and more.

• Company size and revenue will have a direct impact on insurance costs. As a company (and its revenue) grows, there are more added complexities to business operations, which heighten risk. In fact, insurance policies are usually priced according to ‘rate’ or ‘rating basis’, which uses revenue as a key variable in the formula.
• The industry sector will heavily impact costs and terms of insurance premiums. For example, companies operating in healthcare and finance will often need more protection due to the nature of the data they handle.
• A company’s number of employees is another factor to consider when looking at insurance. The more employees on your company’s payroll, the more financial assets are at stake. There’s simply more risk exposure for companies with large workforces, and payroll goes hand-in-hand with revenue.
• Claim history and losses can massively affect a company’s insurance policy, and if your organization has made a few claims in the past, this can ramp up the insurance cost. However, there is a silver lining — if your track record with claims is clean, this can help drive insurance rates down over time.
• How an organization carries out its daily business and the nature of its operations will shape the insurance premium, much like the industry it operates in. Whether operations involve higher risk due to aspects like safety or handling of sensitive information, this will directly affect a company’s liability.
• Geographic location plays a significant role in insurance premiums. An insurer will assess geographic factors such as local weather patterns, crime rates, and local regulations to determine a suitable policy. Companies in locations that are prone to natural disasters, like flooding, for example, can expect higher premiums on their insurance policies due to the added risk.
• Finally, the regulatory environment will affect an organization’s insurance policy. Some states or governments have more stringent rules around minimum coverage for liability. Moreover, the aforementioned factors such as industry type, operations, company size, and location can all shape the insurance standards an organization may be held to in a regulatory environment.

Examples of Tech E&O Claims

Now that you know the basics, how can you know when your company might need E&O insurance? Here are some common policy claim scenarios for this coverage.

Intellectual Property Infringement

While IP insurance has its own comprehensive coverage, E&O can cover many IP-related cases many tech companies go through.

For example, in such a highly competitive market where many software developers and engineers work for different companies during their careers, it’s not uncommon for the code in one software product to resemble that of another. This represents a copyright infringement, and tech E&O can help alleviate the costs of legal claims made against your company.

This same case can happen for technology products and hardware companies, where a patented product seems to take elements from another one, enough to commit patent infringement. The lengthy Apple and Samsung patent war over the similarities between the iPhone and Samsung’s smartphones is a perfect example of this type of incident.

Trademarks are equally protected in case a tech company uses similar ones to another company.

Negligence and Errors & Omissions

Say you rushed to launch your healthcare SaaS platform without noticing it had essential bugs that could lead to data deletion. As a consequence, one of your clients loses vital patient information, leading to delays in appointments and medical bills that ultimately cause financial and reputational losses. The client then sues your company, resulting in a tech E&O insurance claim from your end.

Another prime example of a situation covered by negligence is a lawsuit stemming from a breach of contract. For instance, Elon Musk is currently suing OpenAI, the company behind ChatGPT, for breaching its original promise of operating as a non-profit organization after partnering with Microsoft, for which it has made profits. The lawsuit was previously dropped and reignited, so it remains to be seen whether Musk will pursue his battle any further.

Cybersecurity Incidents

Technology businesses are arguably more prone than any other company to cybersecurity incidents — and malicious hackers have never been so active. Their digital nature easily puts them at risk of ransomware attacks, phishing scams, and social engineering attacks that can expose their sensitive customer data, from social security numbers to credit card information, addresses, and more.

Let’s paint the picture. A company falls prey to a ransomware group that encrypts its sensitive information, forcing it to shut down its services temporarily. Such a case can have deep legal and financial ramifications, including clients suing the company for failing to protect their information technology systems. Tech E&O insurance will soften these blows.

Regulatory Violations

Regulatory frameworks are essential parts of every industry. They ensure the playing field is leveled for the market to work fairly — although rules aren’t always the most straightforward. Whether due to a lack of preparation or the means to be compliant, tech companies might incur violations of regional data privacy laws like GDPR or the CCPA, financial laws like the US Securities and Exchange Commission (SEC) security laws, or antitrust laws from fostering anti-competitive practices.

For example, in 2023, fintech investment adviser Titan Global Capital Management was accused of misleading investors about crypto performance the previous year. The SEC hit them with a securities violation lawsuit which they settled for $1 million. In similar cases, tech E&O insurance can help cover a certain portion of defense costs for these fees.

Best Practices for Tech E&O Risk Management

Even tech giants can run into major risks — think of Apple and Samsung. Risk management strategies won’t make your company bulletproof, but they will ensure you can weather storms should you run into trouble.

Risk Assessment and Mitigation Strategies

A risk management strategy is your safest bet to become proactive in the face of threats. It’s also a necessary step before acquiring insurance — having one is a win-win scenario. To build a comprehensive strategy, you should follow these five steps: identification, analysis, evaluation, tracking, and treatment of specific risks.

Addressing cyber risks this way helps you cover all fronts, from potential dangers to imminent ones, ensuring your company is ready to take on any challenges.

Cybersecurity Best Practices

It’s better to be safe than sorry, and cybersecurity is the one area where you definitely want to apply this. An incident can be costly, which is why investing in robust cybersecurity can afford you peace of mind and guaranteed business growth. Here are some steps you should take to improve your digital protection:

• Use a firewall and keep it updated.
• Implement Multi-Factor Authentication (MFA) for every user in your organization.
• Foster a cybersecurity culture, from the executive to junior levels.
• Offer cyber awareness training and make it mandatory for employees to complete.
• Regularly update your patch software.
• Plan for the aftermath of an incident.

Compliance Tips

A big part of a startup’s success is rooted in its compliance adherence. Depending on your industry, regulations and compliance frameworks exist to ensure your operations benefit you, the industry, and your clients. As such, the best compliance tip will always be to become compliant as early as possible.

This is because once your company starts growing, it will be difficult to adjust to compliance measures that might call for drastic operational changes. However, if you start early, you can inject compliance into every area of your business, building a stronger foundation for expansion while being compliant.

Employee Training and Awareness

Training is always a worthwhile investment for a tech company. Keeping your employees updated on the latest technological practices, whether cybersecurity, engineering, or HRtech, means your team is fit to offer outstanding service in such fast-paced environments.

This becomes even more essential in cybersecurity, where hackers move at lightspeed to develop ingenious scams and viruses. Offering cyber awareness training on an ongoing and mandatory basis ensures your teams are ready to take on threats and act to prevent them.

Incident Response Planning

Incidents can happen when you least expect them — a cyberattack, a natural disaster, a system shutdown, you name it. Nobody’s safe from these kinds of unexpected threats, but those with incident response plans can fare better than the unprepared ones.

These plans involve six stages: preparation, identification, containment, eradication, recovery, and lessons learned. Getting key team members together to craft this plan, communicate it, and put it into action is crucial to how successful your incident response is.

Tech E&O insurance helps address those pressing issues that high-growth, promising startups might run into on their way up. From knowing key terms to understanding how coverage works and reading about real-life cases this business insurance can apply to, we hope this guide equips you with the right knowledge to acquire or improve your E&O coverage. Beyond speaking to your insurance broker, it’s critical to build risk management strategies, craft incident response plans, train your employees, and so many other best practices for your startup to overcome the obstacles on its path to success.

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