As we often say nobody wants to spend their hard earned revenue on an intangible product like liability insurance but unfortunately there are times when it becomes a requirement and contractual liability is often one of the triggers. In the article, we explore the common contractual requirements around insurance and how to negotiate the best outcome.
If your business offers a technology service, then chances are that at some point you will come across insurance as a contractual requirement. If you are an Asian firm entering into a partnership with a North American company, then these requirements will likely be quite complex and onerous if you have not experienced it before. In this article we take you through what these requirements commonly are, why they are there and how to go about putting them in place – while also managing your own cash flow.
Common Insurance Requirements on Technology Services Contracts
While this will differ from company to company and also the jurisdiction that they operate in, commonly the following are the core insurance that could be required:
General Liability Insurance: This insurance provides coverage for bodily injury, property damage, personal injury (such as libel or slander), and advertising injury. It’s usually required to protect against third-party claims arising from the services provided.
E&O / Professional Liability Insurance: Also known as Tech E&O insurance, it protects against claims of negligence, errors, or omissions in the services provided. This coverage is particularly important for technology services contracts where mistakes or failures in service could lead to financial losses for the client.
Cyber Liability Insurance: Given the increasing risk of cyber threats and data breaches, cyber liability insurance is becoming more common. It covers liabilities arising from data breaches, cyberattacks, or other unauthorized access to data or systems.
Workers’ Compensation Insurance: If the service provider has employees, workers’ compensation insurance may be required to cover medical expenses and lost wages for employees who are injured or become ill while performing work-related duties.
In addition, we have also seen that these insurances may also be added:
Commercial Auto Insurance: If the contract involves the use of vehicles for business purposes, commercial auto insurance may be necessary to cover liability and property damage in case of accidents.
Property Insurance: This insurance protects the service provider’s physical assets, such as equipment, buildings, and other property, against damage or loss from perils like fire, theft, or natural disasters.
Business Interruption Insurance: In the event of a covered loss that disrupts the service provider’s operations, business interruption insurance can help cover lost income and ongoing expenses during the restoration period.
Crime Insurance: To protect against dishonest acts and theft by employees, particular if those employees are working on the site of the client
Umbrella/Excess Liability Insurance: This provides additional coverage above the limits of other liability policies. It can be valuable in situations where a claim exceeds the limits of the primary insurance policies.
Vendor Insurance Requirements: Some clients may require service providers to obtain insurance coverage with specific limits and endorsements. These requirements should be clearly outlined in the contract.
Additional Insured Endorsements: Clients may request to be added as additional insured on the service provider’s insurance policies. This provides the client with coverage under the provider’s policy for certain liabilities related to the services performed.
What is your client looking to achieve?
The tech sector is fast-paced and pioneering but with innovation comes risk, making companies in this industry more vulnerable than most. As the industry evolves, pushing boundaries and exploring new frontiers, the potential for unforeseen risks rises. As a result, contracts, agreements and liabilities are becoming more and more complex and insurance plays an ever more important role in protecting tech companies and their clients from financial loss.
The technology industry is global, so contracting out various services has become normal, hence why the client facing firm wants to protect itself but not take all the risk on behalf of the people they are paying services for. Given the intricate nature of technology projects and the potential impact of errors such as software glitches or hardware malfunctions, professional liability insurance is a critical component of risk management.
Tech E&O is one of the most important areas of insurance cover to consider. The liability costs arising from an errors and omissions claim can be huge – and potentially fatal to a business. Insurance is a vital component in managing risk and protecting against potential liabilities and unforeseen events, not only for your company, but also for your clients, who may have specific demands in terms of contractual risk coverage.
I don’t want to pay for all this insurance, what do I do?
Well, the good news is that many of these requirements can be sourced locally and some of the core coverages like Workers’ Compensation Insurance and General Liability Insurance are generally available and inexpensive to buy.
The more complex (and hence more expensive) coverage like E&O/ Professional Liability or Cyber Insurance may take a bit more time to source, will generally require more information to be submitted and require the services of a specialist broker (like Continuum) who understand the coverage and requirements. It’s important to make sure that the insurance you are buying in your own country matches the requirements of your business partner. The wordings of such insurance can often be confusing to most people who are not familiar so it’s also important to get proper advice.
The strategic approach is to source some quotations from reputable insurers and then share these with your business partner to check it meets their requirements before proceeding to purchase. Their also may be an opportunity to negotiate some of the coverage elements (for example: the limit of liability or territory of coverage) which can bring the price down. Remember also that once you have finalised your clients requirements you can then go back and negotiate with your broker to get the best deal.
Helping Tech Companies Manage Risk
In summary, whilst being “forced” to buy insurance via contract can feel like a burden on the balance sheet at the time it is there to protect your business in the event that there is a is a complex claim that could completely wipe out all that you have built.
Whilst businesses that operate in a lower litigious environment like Southeast Asia may not see the immediate risk the policy can be used for more than one contract (provide the partner doesn’t want to be a joint insured) and often comes with addition areas of coverage that can add value.
Our aim at Continuum is to support businesses in the technology sector by providing practical, jargon-free advice on how to deal with contractual insurance requests. We can answer all your insurance questions and help you put in place a comprehensive suite of insurance products to adequately protect the interests of your future partners and clients, as well as your own. We go the extra mile to understand your business and the risks you face and aim to establish long-term relationships to support you as you grow and evolve.
Contact Us to find out how we can help advise you on contractual insurance and gain peace of mind that you are getting the best deal……….and that large contract !
