There are many reasons which can result in claims against IT/ ITES companies. Some of them are listed below.

  • Failure to complete and deliver crucial components
  • Failure to test and implement the applications and systems as promised
  • No tool in place to run regression and performance tests and very insufficient unitary tests and inexistent integration tests
  • No procedure for life cycle management Software fails, client can’t offer services online as anticipated
  • Software fails, client can’t offer services online as anticipated
  • A routine test on a client’s system causes a crash resulting in lost business
  • Software corrupted, data destroyed resulting in lost business/increased cost
  • Software fails, resulting in lost time and production & lost revenue
  • Failure to back up customer’s data or inadvertent erasure of client’s hard drive
  • Data breaches

“whatever can go wrong, will go wrong”.

This Murphy’s law applies equally well to IT/ITES sector where, notwithstanding all the care and caution exercised by the vendors,  things may go wrong. If this wrong results in loss to the principal, there is a possibility that the principal may initiate legal action for recovery of that loss. Customer loyalty cannot be taken for granted in today’s world because of inflation of expectations. Customers are now not necessarily sold to the idea of long term relationships. They demand result for every amount they pay. They are not taking any failure or under performance on the part of the service providers in their stride. They expect the service providers to pay – for negligence or failure.

Errors & Omissions liability (E&O) insurance aka Professional Indemnity (PI) insurance provides indemnity in respect of losses from some these exposures the Information Technology industry faces.

E&O policy will pay for amounts that the insured is legally required to pay to compensate others (its customers) for loss resulting from the insured’s wrongful act or that of another for whom the insured is legally liable.

The policy provides indemnity in respect of:

  • Legal costs in defending proceedings brought against them
  • Any damages awarded including out of court settlements

The wrongful act must be in the insured’s performance of professional services for others for a fee. Wrongful act includes any actual or alleged negligent act, error or omission in the performance of professional services for others for a fee or in the failure of software products to perform the intended function or serve the purpose intended.

Consequences of professional negligence can be very serious. Requisite care while finalizing the contractual terms and conditions, proper project management practices supported by suitable risk transfer methods are necessary to mitigate the adverse impact from liabilities resulting from professional negligence towards protection of the balance sheet.

One way to transfer the risk is to obtain appropriate professional indemnity insurance. Some insurers offer policies combining professional indemnity and general liability covers. As in the case of other insurance policies, this PI/ E&O policy also has extensions and exclusions which need to be clearly understood before the commencement of cover so as to avoid contract unpredictability.

(The information contained and ideas expressed herein represent only a general overview of subject covered. It is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insurance buyers should consult their insurance and legal advisers regarding specific coverage and/or legal issues)