One of the last things on the list of concerns of most new high technology companies is insurance coverage. The company’s focus is on achieving success, not averting disasters. As a result, many small companies purchase little more than workers compensation coverage and insurance on computers located at the office, leaving themselves unnecessarily vulnerable to very large risks.
This article discusses some of the special insurance requirements of high technology companies.
Product Liability and Errors & Omissions: In traditional industries, one of the most important forms of insurance is product liability, which covers the bodily injury and property damage caused by physical products. This insurance is still important for high tech manufacturers of hardware and instrumentation. But computer software is fundamentally intangible, and the type of damage most likely to be caused by software and other high technology products is financial loss, without physical damage. The insurance coverage for this financial loss is called “errors and omissions,” or “E&O,” and is often available at a relatively low cost. We are aware of two major carriers of this insurance for software companies, both of whom generally include other necessary types of business insurance with E&O coverage for a package price.
E&O has another important aspect: It covers damage to the insured’s product, not just damage caused by the defective product. For example, if a defect in a circuit board causes a fire, E&O insurance will pay to replace the surrounding equipment.
As with other types of insurance, buyers should be sure that E&O coverage is tailored to their particular needs. For example, policies are available for systems integrators and value added resellers which will cover errors made in the conversion of data, programming and systems analysis or design, and will also protect against the presence of unintended viruses in customized software.
Loss of Documentation, Research and Prototype: This insurance will pay for lost work in process, and the business income lost due to any resulting delay in getting to market.
Transit, Other Location, and Trade Show/Exhibition: These coverages are usually written as a combined package. They protect against losses in moving the company’s property to and from trade shows, and from theft and damage at the show. “Other Location” insurance will also cover the company’s computers and other property outside of the office. For the software company that has expensive computers being used by employees at home, this can be a very important benefit.
Transit insurance can also cover shipments that are lost or damaged in transit to customers. While most sales contracts provide that the customer assumes the risk of loss as soon as the goods are picked up by the shipping company, it is nevertheless quite difficult to get a customer to pay for a shipment it has not received.
Employee Dishonesty: This insurance covers not only thefts of cash, but also equipment and software. A good insurance company will not only provide this coverage, but also advise on management controls to reduce losses, such as requiring that the employee who reconciles the bank statement be different from the person who writes the checks.
Car Rental: This can be a surprisingly tricky area. Every company should have “non-owned and hired” automobile coverage. This protects the company against lawsuits for accidents involving employees driving a car not owned by the company – either the employee’s car, or a rental vehicle. This insurance does not cover damage to a rental car. For this, many credit card companies will provide free “collision damage waiver” or “CDW” coverage, which is also offered directly by the car rental companies. It is important to note that the credit card CDW may not cover theft of the car, nor a rental company’s claim for the money it loses in rentals while the car is being fixed or replaced. Insurance companies can design coverage in these areas for each company’s particular needs.
TLB Comment: For the small company, obtaining proper insurance coverage can also speed the process of closing sales, since some buyers may demand that the company assume extensive liability with respect to product defects. If the seller has insurance coverage for this liability, it may be able to be much more flexible in contract negotiations. We suggest that any company in need of insurance contact a broker which specializes in insurance for that company’s industry. This will enable the company to most effectively use the broker as an insurance adviser, and not just as a purchasing agent.
We appreciate the assistance of Stephen Weiner, of the Boston insurance firm of Sisson & Weiner, in preparing this article.