Information Technology and Risk Complexity

In today’s legal environment, nearly every company faces some kind of litigation risk. With the growing ubiquity of technology in not just the corporate market, but the consumer marketplace as well, the risk for global technology companies is usually connected with their various products and services. Technology companies may become exposed to litigation risk as a result of product failures or projects that run into trouble.

IT projects are frequently large and complex, often go over budget and take more time than originally estimated. Some projects may run into such significant problems that they are never completed. Others may fail to live up to expectations. Technology products, systems and services, meanwhile, may fail to perform as expected. In addition to these risks, new risks have emerged relating to how consumers are impacted by a technology company’s product or services.

Technology companies have relied on errors and omissions (E&O) policies to help protect them in case of defects, deficiencies or inadequacies with their products and services. Traditionally, these companies purchased a global policy issued in the United States. In these cases, the litigation risk was generally from another business, usually a corporate customer seeking damages for economic injury to its business.

But a new trend has begun to emerge. The corporate customers of global technology companies have begun requiring their technology vendors to buy admitted insurance in the local market. These policies are then often combined with a controlled master policy. In other cases, technology vendors are themselves choosing to buy admitted insurance in the local market to obtain specialized coverage as they respond to growing concerns about local consumer protection laws.

While the combination of admitted policies and controlled master policies has been the standard practice in the global property and liability markets and has been an emerging trend in the directors and officers (D&O) markets, this is a brand new development in the E&O market.

Technology Projects Fraught with Risk

Businesses are under constant pressure to keep their computer systems up-to-date and running smoothly. After several years, businesses often face difficult decisions about upgrading systems that have started to become obsolete or that no longer meet the company’s needs. New technology projects, however, can be fraught with risk. Projects may easily go off track, resulting in losses and lawsuits. Consider these examples:

Healthcare plan administrator CareSource Management Group sued Lawson Software in 2011, claiming an enterprise resource planning software project hadn’t been able to get beyond the testing phase and that the project had experienced numerous problems, according to an IDG News Service. CareSource is demanding at least $1.5 million in damages.

Chemical products manufacturer Avantor Performance Materials filed a lawsuit against IBM in 2012 for fraud and breach of contract over the implementation of a software project, according to Reuters. Avantor is seeking tens of millions in damages from IBM.

Whaley Foodservice Repairs filed a lawsuit against Epicor in 2011 because of problems with an enterprise resource planning project. The lawsuit claimed that the project racked up five times its expected implementation costs and was delayed multiple times. Whaley was seeking its money returned as well as compensation for damages, according to a Computerworld report.

As these examples show, technology companies and their customers face significant risk when taking on a major IT project.

In other cases, however, technology vendors are at risk of litigation from consumers. Apple Inc. was sued in Texas last year over allegations it knew of defects in the motherboards of its MacBook and MacBook Pro laptop computers and didn’t correct them, according to a Bloomberg report.

While multinational technology companies typically have purchased global E&O policies issued in the United States, this has begun to change. Many corporate customers now want their vendors to have admitted E&O insurance from the local market.

This trend has begun to emerge in the European Union, Japan, India and Israel.

A Trend Toward Admitted E&O Policies

Businesses often buy admitted policies to meet the regulatory requirements of the various jurisdictions where they do business. When it comes to property insurance, for instance, regulators may require businesses to purchase admitted insurance.

E&O, however, is not usually a mandatory coverage, and the requirement for admitted insurance has not generally come from regulators but from the technology vendor’s business customers as a contractual requirement.

These businesses have begun to impose this requirement on their IT vendors for a number of reasons, including currency and tax issues. While technology vendors are now purchasing E&O insurance in the local market because of these contractual requirements, sometimes they are purchasing it on their own in response to concerns about consumer based litigation. When the injured party who is filing suit is a consumer, the nature of damages sought is greatly influenced by consumer protection and regulatory laws.

The practices of the global property and D&O markets have also had an impact. Because it has become the standard practice in those markets for companies to buy admitted policies and combine them with a controlled master policy, that practice has become more common for the E&O market as well.

For their part, technology companies may prefer admitted polices because of differences in policy language, triggers and claims reporting requirements. Some policies, for instance, may be on a claims-made basis, while others may be on an occurrence reported basis. Some technology companies may consider an admitted policy combined with a controlled master policy to offer better coverage than a global policy issued in the United States.

When arranging a global program, technology vendors need both the admitted policies from the locally licensed insurers as well as the controlled master policy, which would provide difference in conditions (DIC) and difference in limits (DIL) coverages, all coordinated out of one location. The DIC/DIL master policy works with the local admitted policies to provide the U.S. insured with global coverage.

Technology vendors and their insurance agents should look for insurers that have the expertise and ability to place the required coverages in the local markets and to write the master policy as well. It is also important to look for an insurer with solid financial strength ratings, top-notch loss control and claims handling services and a global network of brokers and affiliates.

With a well-structured global program combining both admitted local policies and a controlled master policy, technology companies will have broad E&O insurance coverage that also will meet the needs of their customers.