Sunday, April 19, 2009

Professional Liability Insurance

Liability Insurance Protects You Against

Professional Liability Insurance

What Is Professional Liability Insurance?

Whether your company employs hundreds of consultants or you work out of a home office, if you make your money providing IT services, you need Professional Liability insurance.

Also known as Errors and Omissions insurance, Professional Liability insurance is your most critical coverage. Professional Liability insurance protects you and your business from potentially catastrophic litigation caused by charges of professional negligence or failure to perform your professional duties. This might include errors and omissions resulting in loss of client data, software or system failure, claims of non-performance, or negligent oversell.

If you are a subcontractor working on a client site, your client may require that you provide proof of General Liability and Professional Liability insurance.

Professional Liability insurance may be described in your contract in this way: "Contractor will maintain at its expense: Professional Liability insurance in the amount of $1,000,000 including coverage for errors and omissions caused by Contractor's negligence in the performance of its duties under this agreement."

Why Do I Need Professional Liability Insurance?

Your business provides a highly specialized service that many of your clients don't fully understand. At the same time, the projects you work on are highly sensitive and critically important to your client's business. But you’re only human. If your errors and omissions result in loss of client data or a software or system failure, or if you fail to perform your duties, your client may be left unable to operate its business. This risk opens you up to litigation. That’s where Professional Liability insurance comes in.

For example, if your work damages a company's client database, the cost to reconstruct that database may exceed typical costs for replacing hardware and software. In fact, some client companies have won extremely large settlements when subcontractors have lost irreplaceable data. Professional Liability insurance would cover such costs, within policy limits.

If you develop software as a professional independent contractor, copyright ownership may be a murky issue, and much depends on the terms of contract. If you design Web sites and software, or you work with or "fix" previously purchased software for clients, you are at risk for copyright infringement and/or charges of misappropriating trade secrets. If you should be accused of such charges, Professional Liability insurance would cover the cost of your legal defense.

You may think your General Liability insurance policy covers such instances, but that’s not the case. General Liability insurance covers claims of bodily injury and property damage only, and typically excludes coverage for claims related to the delivery of professional services. For example, if you damage a computer, which might fall under General Liability insurance coverage, you may simply be responsible for the cost of replacing it. But the cost of your company's professional errors, omissions and negligence is usually far greater than the costs covered by your General Liability policy.

Whether a claim is baseless or not, mounting a legal defense can bankrupt your company. Professional Liability insurance protects your company and your future by responding to professional liability claims and helping you keep your business operating as potential lawsuits move through the courts. Without Professional Liability insurance, your company could be financially overwhelmed.

Because laws and legal precedents governing the relatively new technology industry are still being developed, computer professionals are often in legally uncharted territory. That makes Professional Liability insurance even more critical to your company’s long-term survival, as you may find yourself being sued tomorrow for actions that are completely in line with today’s consulting expectations. Because professional requirements and duties are largely undefined in legal terms, Professional Liability insurance protects you against the unknown and the unforeseeable.

Claims Scenarios Covered by Professional Liability Insurance

Below are some actual scenarios in which technology companies have faced litigation. In such scenarios, Professional Liability insurance can pay for a strong legal defense and save a small business from bankruptcy. You may face similar professional liability risks every day:

1. A software design error causes an MRI machine to be rendered inoperable, allegedly causing loss of profit to the hospital.

2. A client contracts with a software consultant to develop a software system. The contract contains specific benchmarks for speed and other requirements. These benchmarks are not reached, allegedly as a result of the consultant’s negligence. The consultant is sued for loss of profit due to negligence, breach of contract, and negligent misrepresentation.

3. A plaintiff purchases from a telecommunications specialist a piece of hardware: a digital telecommunications switch. The contract also calls for the specialist to connect the switch to the purchaser’s networked computer system, and to provide maintenance. Several months after installation, the switch fails, causing the purchaser significant downtime. The customer sues, alleging lost revenue and loss of reputation. The question arises as to whether the failure was due to faulty design or manufacture of the switch, or due to the failure of the specialist to adequately connect the switch to the network or to provide proper maintenance services.

4. While transferring data from a legacy to Web-based system, a database is compromised, resulting in the loss of valuable corporate sales information.

5. A software developer is sued when, during the execution of a contract to build an Internet application for a company, the developer is allegedly negligent in the staffing of the project, which resulted in an alleged breach of contract.

What To Look for in a Professional Liability Insurance Policy

Be sure your Professional Liability policy includes the following key features:

1. Coverage that includes legal defense costs. Professional Liability insurance should pay for any resulting judgments against you, including court costs up to your policy’s coverage limits.

2. Coverage that extends to both W2 employees and 1099 subcontractors. Professional Liability insurance should protect your company from claims resulting from the work done by 1099 subcontractors on your behalf. However, 1099 personnel need their own errors and omissions insurance because your Professional Liability insurance policy may not defend them if they are sued separately or in addition to you.

3. Optional coverage for allegations of copyright infringement and intellectual property infringement. As part of your Professional Liability insurance policy, intellectual property infringement coverage protects you against claims alleging copyright infringement. Software, systems or processes are some of the most commonly known "intellectual properties."

4. Personal injury coverage. Having personal injury coverage as part of your Professional Liability insurance policy protects you against claims of libel, slander and invasion of privacy.

5. Worldwide coverage if the suit is brought in the United States. Be sure to ask if your Professional Liability insurance covers such litigation.