Errors and omissions for startups: What you need to know

Tech E&O for startups can protect you and your business from undue harm.

Can you imagine a world without technology? Or imagine how your grandparents lived without smartphones, computers, iPads, and virtual assistants?

Can you imagine yourself living without technology for at least a day? What would your workday look like or your spare time activities?

Now, you may be thinking that you don’t need to imagine such a world because technology not only makes our lives easier but also empowers many significant advancements.

Technology is probably also at the basics of your business, and together with your staff, it drives your company’s growth.

And it is true that we can’t (and don’t need to) run away from technology in our lives or careers.

Coming from the startup ecosystem, you know how innovative technology can revolutionize our society and reshape it for better or worse.

If we choose to focus on the better, we can’t disregard the advancements in medicine, agriculture, pharmaceutics, and engineering, powered by VR, AI, robotics, and similar technologies.

So, as a startup executive, you are aware of what young companies need to grow.

Apart from the talented, hard-working staff, a product or service that fits the market needs, and of course, money, your company also needs protection.

Why? Because mistakes happen, and as much as you are confident they won’t happen to your company, you can never know.

Suppose you’ve already heard of basic insurance policies (or even purchased if your startup is more seasoned) like general liability, workers compensation, employment practices liability, or product liability insurance.

Startups also need some additional coverages that would cover their unique risks, such as directors and officers (D&O), cyber liability, or tech errors and omissions (tech E&O for startups). 

D&O is typically required for every startup that raises funding from venture capitalists, but it is recommended for other startups, too.

Every company that conducts any part of its operations online should strongly consider getting cyber liability insurance.

And tech E&O for startups is a coverage that every startup should purchase, regardless of its funding status or online exposures.

What is Tech E&O for Startups?

To better explain tech E&O for startups, let’s first look into the regular E&O insurance, otherwise known as professional liability, malpractice insurance, or professional indemnity insurance.

If this is confusing, note that the biggest difference here is the language insurers prefer to use for certain industries.

For example, the term malpractice insurance is often used for accounting, legal, and medical professionals’ coverage.

Errors and omissions insurance policy is designed to protect professionals from lawsuits stemming from an unintentional error, omission, professional negligence, or other mistakes they make while providing their professional services. 

Your insurance policy will cover the risks related to the financial loss of a third party if your product or accompanying service doesn’t fulfill their expectations.

If the instructions or advice you provide with your product are not clear enough to your client, they can decide to sue for bad advice.

Tech E&O is a policy that protects technology companies and professionals from lawsuits if: 

• You fail to meet all the duties listed in your contract with the client.
• A client claims negligence (such as a coding error in software you designed for them or a wrong color palette in the new promo material).
• A data breach exposes your client’s information, and they hold your company liable for not protecting their sensitive data.
• Someone sues you for copyright infringement.
• Your online slander harms another company or individual’s reputation, and you get sued for online defamation.

Those are some examples of the claims a solid tech E&O policy would respond to. Even if your client’s claim is unfounded, you’d still have to defend it.

If you have a tech E&O policy in place, it will pay for the legal costs of defending the claim, settlement payments, court fees, and legal judgments.

It’s vital to note that all E&O policies are claims-made, which means that your policy would only respond to events and claims that happened while the policy was active.

You cannot purchase a policy after the claim was filed and expect it to cover the incident retroactively.

Tech E&O for Startups: Who Needs It?

The answer to this question is actually very simple: every technology startup should consider purchasing a tech E&O for startups policy.

Whether you are on the verge of becoming a corporation or a prosperous tech startup, you face your fair share of risks that could lead to a costly lawsuit.

Early-stage startups are particularly exposed as they don’t make much profit yet, but still risk being involved in defending E&O claims over professional negligence or intentional errors.

These processes can last for months, and even if you’re not guilty, the legal court costs could pile up to an extensive amount.

Even if you still haven’t received your funding but have clients, consider purchasing tech E&O for startups.

Your policy premium will be much lower than the cost of handling a lawsuit.

Also, even if you didn’t raise funding from venture capital investors but have obtained your financials elsewhere, you are equally at risk as any funded startup.

Here are some types of businesses that should strongly consider purchasing a tech E&O policy for startups:

• Software as a service (SaaS)
• Sofware development
• E-commerce startups
• IT consultants and project managers
• Graphic and web designing services providing companies
• Education technology (ed-tech) companies
• every other technology startup out there

Anything could be a trigger for an E&O claim against your company.

You could accidentally miss a deadline stipulated in your contract; you could send confidential documents to the wrong address by mistake, or your employee could accidentally post private information online.

Luckily, a tech E&O policy, if tailored to your particular needs, would respond to the majority, if not all, of the claims you could face.

Tech E&O coverage shouldn’t be confused with cyber liability. These two policies are complementary, but they don’t provide the same coverage.

Tech E&O vs. Cyber Liability Insurance: What Are the Differences?

Both tech E&O for startups and cyber liability insurance cover cyber-related risks and could respond in case of a cyberattack on your company, but under different circumstances.

A tech E&O policy would respond to the claims related to a cyberattack that compromises third-party confidential information if the incident occurred due to your company’s error or negligence. 

For example, if you designed your company’s cybersecurity system and made a coding error that left it vulnerable to outside influence, that’s your professional error.

If you as much as neglected to update your antivirus and firewall software, and your company suffered a data breach, your negligence led to the cyber incident.

The affected parties would almost certainly file claims against your company, and a tech E&O policy would cover the costs of defending those claims.

Unlike tech E&O, a cyber liability insurance policy would respond to claims related to a cyber incident that was not your company’s fault.

A first-party cyber insurance policy would cover your costs related to the data breach, whereas a third-party policy would cover the damages inflicted on everyone affected by the cyberattack.

Cyber insurance covers costs related to investigating the incident, notifying all affected parties, third-party credit monitoring, potential regulatory fines, and even hiring a PR expert to help you minimize the reputational damage your company could suffer in the aftermath of the attack.

Cyberattacks and data breaches are stressful enough without worrying about whether your insurance policy would respond to them or not.

The latest annual Cost of a Data Breach Report by IBM and the Ponemon Institute indicates that the average cost of a data breach in 2021 was a staggering $4.24 million.

That’s why you should have both policies in place and ensure your company is protected from claims related to potential cybersecurity incidents. You can learn more about the differences in our tech E&O vs. cyber liability insurance post.

The Takeaway

Suppose you are still having second thoughts about obtaining a tech E&O for startups. In that case, you should again remember that it costs much less to purchase an insurance policy than to defend a lawsuit.

Embroker has made it easier for you to get your coverage than ever before. It doesn’t matter if your startup is VC-funded or unfunded, our startup insurance product can cover you.

We’ve got you covered. All you have to do is sign up to Embroker’s digital platform and get your online quote.  

If you still have doubts if tech E&O for startups is right for you, feel free to reach out to one of our experienced brokers and get all the information you need.