Special Insurance Coverage Problems

High tech businesses, as with most, bring with them a certain degree of risk. What you may not know is that a standard commercial insurance policy won’t cover you for many types of damage unique to IT companies. Find out how to reduce your exposure and insure yourself for the rest! 

If your company services computers or computer networks or performs similar IT services, your company will not be covered for most damage claims by your customers under a standard commercial insurance policy. Your insurance company will disclaim coverage and your company will be faced with the prospect of paying for an attorney to defend the claim, and paying for any settlement or liability judgment.

The standard commercial insurance policy, known as a “CGL” or “comprehensive general liability” policy, is neither written nor intended to cover your company for claims by your customers. It is primarily designed to protect you from third party claims of bodily injury and property damage caused by your employees’ negligence arising out of incidental conduct not related to the quality of the services you provide. For example, if your employee drops a computer and breaks somebody’s toe, that claim should be covered by a CGL policy.

Special Insurance Coverages That You Need To Obtain

Claims by your customers arising out of your service require a special coverage endorsement called “completed operations coverage” or “CO” coverage, but that coverage is also limited. This endorsement is the service version of a products liability policy and usually the two coverages are combined in a “PL/CO” endorsement. For example, if your customer claims your service on a PC damaged his server or caused damages to a third party such as a customer of your customer, the claim should be covered by the CO endorsement. However, the CO policy will not cover your company for damage to the equipment you repaired. Using the previous example, it will not cover your company for damage to the PC you repaired. Also, the CO policy also will not cover you for business interruption claims.

The CO policy will not cover you for damage to the equipment you actually repaired because the quality of the service you provide is considered a business risk that is within your control: i.e., a warranty. Thus, for example, if the motherboard you installed doesn’t work, the insurer won’t pay for the costs of installing another motherboard. Neither will it pay for damage to the PC on which you were working. No generally available policy covers you for warranty claims and that is your risk. However, the policy should cover your company if the defective motherboard damaged a different computer such as a server.

Business interruption claims usually require a special endorsement, because insurers realize that such claims can result in enormous liability. Thus, while insurers will provide such coverage, the premium is likely to be substantial. However, if your business services networks and mission critical technology for customers, then coverage for interruption claims is essential. The liability from just one claim from a client who asserts that the defective motherboard you installed shut down his business for a week can bankrupt your company.

There is no coverage available for contractual disputes with your customers. Breach of contract claims allege intentional conduct and that is never covered by insurance. These types of claims are part of your risk of doing business. This risk must be managed by other means as described below.

A yearly insurance audit from an experienced commercial insurance broker as well as legal counsel is the best way to ensure that your insurance protection keeps up with the growth and risks of your business. Moreover, the audit can review other important insurance needs such as workers compensation policies, employment discrimination coverage, and coverage for indemnifying your client from your employees’ claims against your client for onsite injuries. Many companies require the latter form of indemnity before they will let your employees on their premises.

Additional Simple Steps To Protect Your Company

In addition to insurance coverage, you can take some simple precautions to help protect your company from catastrophic liability claims from your customers.

1. Utilize A Standard Written Agreement
Your company should utilize a standard written agreement for all services to be performed by your company, signed by the client before services are performed, that limits your company’s liability. The agreement should expressly limit liability to the cost of the services performed by your company and should disclaim any liability for business interruption and loss of business. Further, it should disclaim liability for defective parts that are not manufactured by your company and limit your responsibility to replacing or repairing any defective part. Depending on the particular facts, a court may not uphold some or all of these disclaimers, but it will discourage claims against your company. Additionally, the agreement should expressly disclaim any express or implied warranty that is not contained in the agreement. Otherwise, the law implies a number of warranties.

2. Obtain A Written Informed Waiver
If the particular service you are performing raises risks that could be very significant to your client’s business (e.g., the network might fail), then the risk should be explained to the client and put in writing. Ask the client to sign and date an acknowledgment that he understands the risks and that your company is not responsible for damages that may result. The waiver should be attached to your standard agreement and should be incorporated by reference into the agreement.

3. Have Your Standard Business Forms Reviewed By Counsel At Least Annually
The time to find out if your standard business forms are adequate is before you have a legal problem. Unfortunately, most businesses find out the hard way that the form they bought at the stationery store is inadequate. Moreover, it is prudent to ensure that your forms keep up with your growing business. Just as you should perform an insurance audit every year, you should also perform a forms audit with your counsel.

Risk Management Is Part Of Managing Your Business

Every business involves risk. Ignoring the risk is an invitation to inevitable disaster. You can’t eliminate risk but you can manage it by minimizing your exposure to it and obtaining the proper insurance coverage for your exposure. Too many young businesses don’t learn how to manage risk until after they already have a problem. Teaming up with your counsel and your commercial insurance broker is essential to protecting your business by managing risk, and ensuring that your business continues to grow.

Mr. Fogel is an attorney with McMillan, Rather, Bennett & Rigano, P.C., Melville, Long Island, who counsels clients on commercial legal issues including complex insurance disputes and risk management. This newsletter is for educational purposes and is not intended to provide legal advice for any particular situation. Email inquiries to rfogel@mrbr.com. See our website at http://www.mrbr.com

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