In the second of our series about essential insurance for your tech startup we take a look at Professional Liability insurance. What is it? Why is it important and when should I consider spending money on it?

E&O / Professional Liability Insurance

Professional Liability Insurance, also known as Errors and Omissions (E&O) or Professional Indemnity (PI) is designed to protect professionals, and the companies they work for, against claims made by clients or third parties for alleged negligence, unintentional errors, or omissions in the provision of professional services.

In the technology industry this insurance is often referred to a Technology E&O (Tech E&O) and whilst the premise is the same it also extends to provide coverage to an organization’s technology product and/or services. A good example of this would be one where a technology company negligently migrates data from an old system to a new one and damages or destroys the data.

Professionals who may require E&O / Professional Liability Insurance include professional advisory firms (accountants, lawyers, financial advisors), technology companies, healthcare providers and now emerging technology companies such digital assets and fintech’s. In some counties it can be a regulatory requirement to practice or more commonly, for technology companies, needed as part of a contractual agreement.

Professional Liability Insurance, typically covers a wide range of claims, including:

  • Legal Defence Costs The insurer will pay for the cost of defending a claim made against the policyholder, including legal fees and court costs for unintentional acts of negligence like bad advice, misrepresentation or simply failing to deliver the agreed services.
  • Settlements and Judgments If the policyholder is found to be liable for a claim, the insurer will pay for any settlements or judgments up to the limit of the policy.
  • Loss of Documents or Data Most policies also cover losses that occur as a result of the loss, theft, or damage to client data or documents.
  • Copyright Infringement Some policies can protect you if you have unintentionally violated someone’s copyright, whether in logos, designs, written words, etc
  • Reputational Damage Some policies also provide reimbursement for costs to use the services of a public relations firm

For technology companies the policy can be further extended to protect for non-malicious cyber loses such as unintentionally losing client data

Why do startups need E&O / Professional Liability insurance?

E&O / Professional Liability Insurance is particularly important for technology startups. These companies often face unique risks due to the innovative nature of their products and services. Here’s some of the reasons why E&O / Professional Liability Insurance is vital for startups in the tech industry:

  • Protection from Liability: Startups, especially those offering software, apps, or technology services, can be susceptible to claims of errors or omissions in their products. E&O / Professional Liability Insurance protects the startup from the financial fallout of such claims, including legal defense costs and potential settlements.
  • Contractual Requirements: Many startups work with clients and partners who may require E&O / Professional Liability Insurance as part of their contracts. Having this coverage in place can help your startup secure more business opportunities.
  • Regulatory Requirements: In some jurisdictions’ E&O / Professional Liability Insurance may be required as part of a licence application or if not specifically mandated will be viewed on favourably by regulators.
  • Risk Mitigation: For early-stage companies with limited resources, a single lawsuit or claim could be financially devastating. E&O / Professional Liability Insurance acts as a safety net, allowing startups to continue their operations and mitigate the risk of bankruptcy due to legal claims.
  • Professional Services: If your startup offers consulting or professional services, you are at risk of claims related to advice or recommendations that lead to financial losses. E&O / Professional Liability Insurance can protect your startup in such situations.
  • Credibility: Having E&O / Professional Liability Insurance can enhance your startup’s credibility. It demonstrates to clients and investors that you take responsibility for your work and are prepared to address any potential mistakes or omissions.
  • Data Security: Cyber liability coverage, often included in Technology E&O policies, is crucial for startups that handle sensitive customer data. It can help cover costs associated with data breaches or cyberattacks.
  • Tailored Coverage: E&O / Professional Liability Insurance policies can be tailored to suit your startup’s specific needs, including adjusting coverage limits and deductibles. Work with an insurance professional to ensure your policy aligns with your risk profile.
  • Startups in Growth Stages: As your startup grows, the complexity of your services and the number of clients you serve may increase. With that growth comes an increased potential for errors and omissions. E&O / Professional Liability Insurance can evolve with your business to accommodate these changes.
  • Investor Expectations: Investors, especially venture capitalists and angel investors, may view E E&O / Professional Liability Insurance as a sign of responsible risk management. Having this coverage can make your startup more attractive to potential investors.
  • Cost Considerations: While startups often need to manage expenses carefully, the cost of E&O / Professional Liability Insurance can be relatively affordable compared to the potential financial impact of a lawsuit. It’s an important investment in the long-term health of your business.

When should I consider E&O / Professional Liability Insurance?

If you are providing any type of professional services then E&O / Professional Liability Insurance should be considered from the start. If not, the driver could be purely down to a push factor such as your major client requiring it as part of the contract or a regulator asking for evidence of it as part of your licence application. In either case should you need impartial advice as to what to buy and when, please Contact Us

How can Continuum help Tech Startups? 

Whatever stage you are at with your startup, taking out E&O / Professional Liability Insurance  via Continuum provides many advantages.

We will:

Please contact us for a chat and a free assessment of your E&O / Professional Liability Insurance needs.