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Tech E&O insurance is intended to cover two basic risks : (1) financial loss of a third party arising from failure of the insured’s product to perform as intended or expected, and (2) financial loss of a third party arising from an act, error, or omission committed in the course of the insured’s performance of services for another.1

Consider a product failure loss example. The insured sells component parts to a computer manufacturer. The components are installed in the computer manufacturer’s products. The component parts are supposed to perform a certain function, and if they don’t, the computer manufacturer’s product doesn’t work (either at all, or just not as well as it was supposed to work). Six months after the computer manufacturer’s products are in the market, the insured’s component parts stop working.

The component parts don’t explode or otherwise break, so they don’t cause any physical damage to other parts of the manufacturer’s product. They simply just stop working or working as intended, rendering the manufacturer’s product totally useless or less useful. The manufacturer now has to recall its products to replace the faulty component, and has claims against it brought by the purchasers of the product, and perhaps others as well—all who suffer financial loss because of the product failure. The computer manufacturer makes a claim against the insured for all the damages at issue. The foregoing is a product failure example. (It should be noted that most Tech E&O policies exclude product recall, but the better ones except from such exclusion the damages for loss of use of the failed product.)

Now consider an error or omission loss example. The insured is hired to create a computer system or network for a customer, where the system or network is supposed to be able to perform certain functions, like process various transactions being called in from all around the country, or analyze data from sales information to draw certain conclusions on which the customer can act when implementing marketing strategies, strategic directions, etc. The list can go on and on. (Interestingly, when a tech company uses its own products in building such a system or network or other "solution," it faces both product failure risk and error or omission risk.)

However, once the insured finishes putting the system or network in place, it turns out that it just doesn’t work. It doesn’t draw any conclusions from the data analysis. It can’t process the transactions like it was supposed to, or not fast enough in order to make the system viable. The customer now is in a bad situation. It just paid for something useless, and is suffering financial loss (lost revenue, increased expenses, etc.) because it doesn’t have use of the system that it fully expected to have in place. The foregoing is an error or omission example. (Source: irmi.com)

Call us for a consultation on technology errors & omissions insurance in San Francisco at 415-512-2100.

Footnotes
1 I have not included in item (2) loss arising from the insured’s business-to-business (B2B) and business-to-consumer (B2C) eBusiness activities. Depending on the policy wording and structure of the program, financial loss of a third party arising from such activities can be covered by a Tech E&O policy. I’m not including it here in this description because most insurers, philosophically, distinguish between traditional Tech E&O risk and this B2B/B2C risk, and therefore exclude cover for B2B/B2C risk in the main policy form, and require additional provisions (and usually additional premium) to buy back the cover.

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