2018-07-05 00:00:00 UTC
India is a hub for IT, ITES(Information technology enabled services), customised software or SaaS solutions. A large part of this sector serves businesses, especially those based abroad. Often, a contractual requirement is liability insurance. For the software sector, insurance requirements can be as extensive as Commercial General Liability, Professional Indemnity, and Cyber Liability
This article talks about professional indemnity, (aka Professional liability or Errors & Omissions) policies for such companies.
Professional indemnity covers your legal liabilities incurred while performing your services as a professional. This means that in the event your client feels you have not performed your services well enough and takes legal action, your costs will be covered by the policy. Many companies require their sub-contractors to take the policy so that in case one of their customers takes legal action against them, legal liability across the whole chain of service providers and sub-contractors is covered.
Liability policies in general are very flexible, allowing for various extensions and terms to be changed in order to suit the business.
Below is a list of benefits commonly offered to software providers for errors & omissions. Depending on the insurer and the requirement, covers may or may not be sub-limited. In some cases, insurers might not offer certain benefits at all.
If during the Policy Period the Policyholder company acquires a company(with majority control) then that subsidiary company can be added to your policy. This cover is only offered if the turnover of the acquired company doesn’t exceed 10-20% of the prent company’s turnover. This percentage can be increased up to a point.
The Insurer will pay on your behalf all Loss resulting from Claim alleging any breach of confidentiality or misuse of information in the performance of the Professional Services.
The Insurer will pay the cost of attendance at ay court, arbitration or adjudication hearing by any Insured Person as a witness for any Claim covered by the policy, where such attendance is required by the court or arbitrator. The Sublimit for this clause is specified in the quote and varies with insurer.
Any Loss resulting from Claim alleging any libel, slander or defamation or injurious falsehood by the Insured in the performance of Professional Services is covered.
If it is established by a judgment, of a court, tribunal, commission or arbitrator that the defamation was intentional, then it is not payable.
If the written consent of the Insurer cannot be reasonably obtained before Defence Costs or Legal Representation Costs are incurred by you, the Insurer agrees to give retrospective approval for such amounts incurred to the point in time when you could reasonably have sought the Insurer’s written consent. This cover is generally sub-limited.
Under the fraud and dishonesty clause, any loss resulting from any claim for Fraud/Dishonesty of any employee of the Company is covered under professional indemnity. As with all liability policies, intentional fraud is not covered.
This clause covers loss resulting from a claim alleging any infringement of Intellectual Property Rights in the performance of Professional Services. Different insurers have different sub-limits/conditions where they exclude patent infringement, but many times insurers will offer full cover.
This clause covers any loss resulting from any Claim where liability results directly from a Wrongful Act of an Insured arising out of the Professional Services carried out for and in the name of any joint venture of which you are a part.
In respect of any Inquiry, the Insurer will pay Legal Representation Costs to or on behalf of the Insured. In some cases, the deductible doesn’t apply here.
Any claim arising from the loss or destruction of documents while performing professional services is covered. The cost of replacing or restoring the documents are also borne. Documents in almost all cases will also include electronic data.
If you first determine that you have committed a Wrongful Act requiring remediation or mitigation, the Insurer will pay the reasonable and direct cost of any remediation or mitigation. This benefit is usually sub-limited to a % of the total limit of liability(or sum insured)
The Insurer will pay for any costs and expenses for the services of a public relations consultants for to protect your reputation that has been brought to question as a direct result of a Claim covered under the professional indemnity policy.
Vicarious liability is liability incurred by you through any agent of yours, a third party who is in your service. Sub-contractors are also covered under this clause. Having the sub-contractors take their own liability insurance allows for a reduction in your premiums.
Specially created for software sector, this benefit covers any delay or failure of your technology product, even if you have given in writing that you will do the work within stipulated timeframes
This cover is only offered if the insurer is comfortable with the nature of your work in the software industry and the type of software you build(its function, industry, etc.)
Any loss arising from claim alleging unlawful interference with privacy of individuals is covered under this extension.
All liability policies have universal exclusions. The exclusions under a tech E & O policy(professional indemnity for technology sector clients) are:
Any negligence, fraud, or action that is found to be committed intentionally is not covered. The purpose of a liability policy is to manage the risk of operating your business. In case of grievances that are handled through long and drawn out legal processes, the lack of a policy will place financial strain that could seriously damage the future(not to mention finances) of your business. Any claim payment that would place sanctions on the insurer by regulatory or government authorities is also not covered. This is known as sanctions limitation clause.
If you have a contract that specifies a certain monetary penalty in case of failure of service, that payment will not be covered. For example, failure of product clause covers you if you say you will deliver your product in a certain time frame and don’t meet your deadline. However if your contract specifies the amount that you will pay in case you don’t deliver, then that payment is not covered. Contractual liability is covered in a few foreign markets, but in india it is not, due to fear of fraud, etc.
An errors & omissions policy will only cover liability claims arising from performance of professional services. Any claim arising due to bodily injury and property damage is not covered(as it would fall under public liability)
Any claim arising from a cyber attack is not covered(as it would fall under cyber liability)
Claims arising from employees are not covered(covered under employer’s liability or workman compensation) Any claims against top management alone will not be covered, as this would fall under director’s and officers liability
All liability policies have a limit of liability(or sum insured). It is expressed as a ratio in the form of AOA:AOY. AOA stands for Any One Accident, this is how much the insurer will pay for any single claim AOY stands for Any One Year, this is how much insurer will pay in any single policy year. Standard ratios are 1:1, 1:2, or 1:3 or 1:4
Every policy has a deductible, or retention, which is the amount you pay out of pocket for every claim payment(the amount is ‘deducted’ from every claim payment the insurer makes). Certain clauses may no have retention applied to them. Deductible will also vary with territory, and most insurers set one deductible for claims in india and another for claims in North America/Rest of the world.
A professional indemnity policy is valid in the geography mentioned as its territory. Most common options are India only, India and USA/Canada, and worldwide. Specifically tailored options are available but rarely used.
At Perilwise, we customise products for every customer, and also explain the product and its benefits in a concise manner, allowing you to make an informed decision about your policy. We also structure your liability requirements to minimise costs and enable growth, ensuring you can bag multiple contracts using the same policy. If you have questions or need help regarding your professional indemnity policy, contact us below!