IT Liability – what is it?
When we think of insurance we tend to have House, Contents, Car, Medical and Life probably come to mind and it’s usually only when you receive a contract from an agency and client that you find out that IT Liability (or Tech Liability) insurance exists, but what exactly is it?
It’s a fancy name that bundles up two liability policies: Professional Indemnity and Public Liability.
Professional Indemnity insurance (PI)
This is also called E&O or Professional Liability insurance is your legal liability to indemnify third parties for your errors and omissions in the provision of your professional services.
PI polices are claims made which means the policy has to be current at the time of the notification. For example. You take out an annual cover (standard) because your contract required it and when the contract ended it’s the first thing you got rid of from your expenses. A month passes and your client sends you a letter of demand. Unfortunately you have no insurance cover at this point to respond because you cancelled your policy a month ago.
Not only are you now left to defend and possibly settle this claim personally but your client can also secondarily sue you for breach of contract because you told them when you signed the wads of paper they put in front of you that you would effect and maintain the ‘appropriate’ insurance, to which self insurance, is not.
On the other side of IT Liability is Public Liability. Also called “Broadform Liability”, “General Liabilit”y” and more recently “Personal Injury and Property Damage” is also quite literally your legal liability to compensate the public (meaning third parties) for personal injury and property damage.
Public Liability is occurrence based, meaning the policy and policy limit in play at the time of the loss responds to the (valid) claim. So if you had a $5m programme now, but you had a policy limit of $1m up until 1 January and the loss date was 16 December, you don’t have $5m, you have $1m. This is the limit of liability that was “in place when the loss occurred”.
So for example, last month a Contractor asks for their PL limit to be increased to $5m. Their policy period is 1 Jan 2023 – 1 Jan 2024. So as at the 18th of July 2023, they now have a $5m PL limit.
They receive a letter of claim against their PL policy on the 18th of August 2023 for a loss that occurred on the 2nd of May 2023 to the tune of $2m.
As the PL policy is occurrence based, it goes back to the limit of indemnity at the time of the occurrence (in this case the occurrence was May 2nd , and the limit on that date was $1m (the Contractor increased it on the 18th of July , after the claim loss date).
In short, mistakes in your work causing financial loss = Professional Indemnity and mistakes in your work causing property damage or bodily injury to others (including product liability) = Public Liability.
Now IT Liability/Tech Liability policies will always have both sections and the reason for this is case law still hasn’t confirmed if an IT contractor provides a product or service and as one policy negates the other, they limit the mud in the water by providing both (caution: the IT Liability / Tech Liability policy is not a fee reimbursement policy, nor is in an income protection policy).
Next time: Why you need Insurance when working as an IT Contractor
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