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Errors and Omissions Insurance

In Joel's new (and excellent) article about office space he mentions Errors and Omissions insurance.  This stuff became obscenely expensive as Y2K was getting closer, and quite a few companies simply quit writing it.

How many of you in the software business have it now, what are you paying for $xxxK coverage, and where did you get it?

Mitch & Murray (from downtown)
Friday, March 28, 2003

Don't mind my ignorance,

Could someone please explain me what 'Errors and Omissions Insurance' means?

Regards,
JD

JD
Saturday, March 29, 2003

Google is your friend: http://www.insurepro.net/html/errors_and_omissions_explained.htm

"Errors and Omissions Insurance protects your company from claims if your client holds you responsible for errors, or the failure of your work to perform as promised in your contract."

RocketJeff
Saturday, March 29, 2003

Unfortunate that someone with real knowledge hasn't stopped by. So, I will tell you what I know through the rumor mill.  :-)


I've mainly discussed this with people on newsgroups and other boards, so be forewarned that this 'information' is rumor based. The typical pricing I've heard mentioned for solo independent consultants in IT is around $5000/yr for $1 million of liability coverage.


Here's the kicker, though. The insurance is generally written such that the coverage won't cover you for work you do in a given year that you are sued over in a subsequent year unless you keep the policy in force continuously right up through whenever you are sued.


In other words, it's apparently not possible to pay the premiums in one period in which you do work for a possible high-liability situation and then expect that you are covered from liability for that work from that point on, unless you keep paying the premiums. And it doesn't matter if you continue to engage in high risk activities later or not.


My impression is the following: very few ICs in our business buy E&O insurance. The incidence of lawsuits is present but generally negligible. Nolo Press's standard contracts contain wording that indemnifies the consultant from liability in excess of fees paid by the client for the services.  And most of us incorporate in order to shield our personal assets from professional liability. My own "protection plan" consists of this basic philosophy, contract protection + corporate shielding.

Hope that helps. I'll try to post some URLs of plans if I can scrounge any.

Bored Bystander
Saturday, March 29, 2003

And if E&O works like legal malpractice insurance, it will go up every year, since each year the insurance company's risk increases (by year five they're covering you for five years worth of work)

I don't know if that's how IT E&O works, but you probably want to ask so you don't get a nasty surprise.

Philo

Philo
Saturday, March 29, 2003

Bored Bystander, If you look at the URL I gave in my reply I think you'll find some 'real knowledge'. Again, a simple Google search would suffice.

RocketJeff
Saturday, March 29, 2003

Hmm, now you got me wondering... do we really need E&O insurance or is it just a waste of money?

Joel Spolsky
Saturday, March 29, 2003

We're a small shop - 6 developers. I own 50% of the company and take an interest in all business matters. For the last 5 years we have carried E&O. Our rate is based on sales numbers. Our current policy is up for renewal, and here's what we're looking at: Roughly $4500.00 (up slightly from the last several years) for 3 Million in E&O (Plus umbrella) coverage.

One thing to take into consideration that I've not seen mentioned yet: If you get sued, and successfully defend yourself (without insurance coverage), you've still got to pay for the costs of defense. In my state (OH) current tort law does not allow for the collection/reimbursement of your defense costs.

Effectively, you could get sued, and win (no damages paid) and still be out $100,000.00 or so in the costs of defending your case -- with no way to collect those costs back.

With insurance, your carrier will defend you, and (depending on the type of policy and deductible) will eat those costs as a part of the claim process. Mine has a deductible that considers both defense costs and damages awarded. In the example above, rather than being out $100,000.00 for my defense costs, I'd simply be responsible for my deductible ($5,000.00) and I'd survive as a business. Without my E&O, I'd be out a hundred grand, and would likely have to fold the business -- even though I successfully defended my case and won.

Without E&O, I'd be leaving the courtroom where I just won my case, and walking down the hall to file my bankruptcy paperwork. Depressing.

We've looked at the costs, and our exposures, and determined that E&O is an absolute *must have* for the long term survivability of our business. Your case may be different.

It's all about: What are your risks? What are your exposures? How much can you afford to protect the investment (your business) that you've spent years building up? It was a "no-brainer" for us.

Sergent Sausage
Saturday, March 29, 2003

We don't carry E&O.  Our license agreement basically tells our customer that they're insane for installing our software because everything up to and including the end of the world will be the result. 

big bob
Sunday, March 30, 2003

...and before everybody & their dog jumps my a$%, let it be known that we have a legal dept. that wrote that, that's not verbatim, and I didn't have any say in the matter.

big bob
Sunday, March 30, 2003

Gosh, sounds like your legal department is highly competent:-) ,

Actually it is a good idea to put it all in, never know who will be in the mood to sue you....

Prakash S
Sunday, March 30, 2003

Presumably your legal department realizes, big bob, that if the only place customers see that notice is the license agreement as they're installing the software, it's unlikely at best that it can be successfully defended in court.  Hence you probably still need E&O.

Kyralessa
Monday, March 31, 2003

K,

You're assuming that the software is shrink wrap.  We make people sign a license agreement as part of our contract.  We don't do shrink wrap.  Maybe bob has a similar situation.


Monday, March 31, 2003

Quite true, if you're genuinely negotiating a contract rather than buying something off a shelf, it's a different story.

Kyralessa
Tuesday, April 01, 2003

I am looking for a good software package that includes checklists and sign off sheets for MA Property and Casualty Insurance-Personal and Commercial Lines. Any suggestions?n

Mary Ellen Metzger
Thursday, July 15, 2004

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