Software Consultants Professional Indemnity Insurance
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Professional Indemnity Insurance Policy Highlights
Why Do Software Consultants Need Professional Indemnity Insurance?
Software consultants professional indemnity insurance is designed for IT consultants and contractors who advise clients on all aspects of software and applications.
Software consultancy projects don’t always go to plan (for example, a software solution you provide is not fit for purpose) and you could be pursued for financial losses your client incurs as a result of your mistake.
Any business providing software consultancy should consider having insurance cover in case something goes wrong in the course of providing their services.
Without the right insurance cover in place, you would have to pay the cost of defending a claim (as well as any compensation payments that could be due to your client) out of your own personal finances.
How do Professional Indemnity insurers view the IT industry?
Professional indemnity insurance cover is necessary for both hardware and software consultants and it should be borne in mind that, because of the reliance many firms place on IT systems, the potential losses incurred by businesses may far exceed the cost of the IT project itself, and limits of indemnity need to be set accordingly. IT companies and the services they offer are not easy to categorise, largely due to the wide range of business and industrial environments in which IT professionals work.
Broadly speaking, work carried out by IT companies falls into one or more of the following areas:
- Packaged hardware/software provision
- Development of bespoke solutions
- Consultancy/project management
- IT recruitment
- Internet service providers
Things to consider
It is crucial that there is a full understanding of the extent of your business activities. A ‘catch-all’ description of IT Consultant for example is unlikely to fully describe the exact nature of a business.
Other insurers persist in the use of the general ‘IT Consultants’ description. Whilst this ‘catch all’ approach simplifies matters it may give the impression that the insurance is not tailored to the insured’s specific needs. The IT industry is arguably the most global, and potential US exposure must be considered. It is possible to arrange US cover but restrictive terms will apply and the price will go up. Checks should be made as to whether the insured needs cover for bodily injury or property damage arising out of the their negligence. This could be important if the insured’s systems are used in mechanical or medical environments.
Some insurers have identified the following disciplines:
- Sales of own brand
- Distribution of other brands
- Shrink wrapped/off the shelf software
- Customisable software
- Installation including configuration (no code changes).
- Customisation (including code changes).
- Developing bespoke applications.
- Contract staff.
- Facilities management.
- Millennium work.
- Internet services (excluding web hosting).
- Web hosting.
What do Professional Indemnity Insurers look for?
The central question is what would be the immediate financial and other consequences if data is incorrect or a system fails or becomes unavailable for any period of time. A lot depends on the precise function of the software and what commercial application it is being used for.
The main areas that give rise to litigation against IT companies are:
- Failure of the software/system to do the job for which it was intended (fitness for purpose).
- Failure to deliver the system on time.
- Failure to deliver the system to budget.
These can give rise to three types of claims:
- Client withholds or claims for return of the purchase price/fees paid
- Direct financial loss arising from the negligence of the IT Company
- Consequential loss
Insurers’ first line of defence is the written contract between the insured and their client. Insurers will often ask to see the insured’s standard terms and conditions. If smaller IT firms are asked to sign onerous contracts with larger customers it is important for the insured to understand the extent of cover offered to meet these contractual liabilities. Whilst cover for the first two types of claims mentioned above are available in the market, insurers expect that consequential losses will be excluded by the insured in their contract terms and conditions, or at least limited.
The prime underwriting criteria is of course what kinds of systems an IT professional is involved in. Areas that must always be disclosed to insurers include:
- Systems in the financial sector
- Games development
- Trading systems
- Process control systems
- ASPs (Application Services Provider) or ISPs (Internet Services Providers)
- Managed Service Providers
- Enterprise Resource Planners
- Large contract sizes
- Mission and safety critical systems
- Cases with US exposure