How to GET PAID by your E&O policy
Posted by John Moccia on Tue, Apr 03, 2012
In previous posts we discussed how an E&O policy can provide your company with a shield for various liability claims. As with all liability policies, E&O claims that are paid out will always go to a third party: the law firm providing your defense or the claimant if there should be a settlement or judgment made against you. The insurer will never make out a check with your name on it, right? Wrong. Here’s how you can get paid by your own E&O policy:
With the adoption of technology platforms (the Internet) as a source of income and the proliferation of new regulatory guidelines, businesses face many new financial risks. Most of these have, to date, gone unaddressed by traditional insurance policies. For example if your company is selling its products or services either partially or entirely over the Internet, and that channel is compromised by a hacker you will lose revenue. Even if you have business interruption coverage on your company’s standard policy, it will not respond to the loss as there needs to be physical damage to tangible property. Some errors and omissions policies now offer business interruption/lost revenue protection for security breach and other internet related losses. Another example that highlights this gap in 1st party insurance coverage (meaning the policy holder is paid by the insurer, not a third party claimant) has to do with privacy. Suppose you collect data from your clients or users and have a security incident. Almost every State now requires that you notify these users that their personal data may be at risk as a result of your security failure. Some requirements go as far as to require ongoing credit monitoring for several years. For a company with thousands of clients/users this could pose a huge financial burden. Breach notification coverage, available on some E&O policies, will provide you with the necessary funds to cover these expenses.
Errors and Omissions insurance has morphed in recent years to address risks such as those cited in the examples above. This insurance often goes by other names such as “cyber insurance” as the intent is to cover the losses associated with doing business on the Internet. As a Tech company you would be wise to have a hybrid policy that provides the liability protection of an errors and omissions policy along with the first party coverage that is found in cyber insurance. This way you transfer the risk of defense and indemnity (liability) to the insurance company – while also protecting the top line of your balance sheet.