David Barrett – Simmons & SimmonsStephen Wares – HiscoxLisa Hansford-Smith - MARSH

Products vs Services and what type of insurance solution is required.

May 26 & 27

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David Barrett Simmons & Simmons

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How The Law & Contracting Practice Looks at Technology & Services

– Hardware – a sale of goods or tangible property; ie a product

– Standard Product Software – although technically a licence of an IPR is treated as equivalent to a sale of goods or a product Embedded software Customisation of standard software; e.g. entering fields Ancillary services

– Bespoke software – again technically involves a licence or transfer of IPR is treated as provision of services

– ITO/BPO clearly provision of services Contract can also include supply of product

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Liability

– Terminology can change – underlying concepts very similar throughout Europe

– US law and practice can be surprisingly different

– General standard of liability for professional services is higher than for products or general services

– Contract generally determinant of risk allocation between parties

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Industry risk averse – pressures for risk transfer coming from ITO and BPO

Legal and contracting practice – product model

– Historic bargaining power was with suppliers

– No control over use of technology

– US orientated legal analysis – supplier driven

– Wish to price in and limit risk

– Contracts shut down liability by type and financial limit

– Market acceptance

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Industry risk averse – pressures for risk transfer coming from ITO and BPO

Legal and contracting practice – services model

– More competed – T&Cs often highly determinative of success

– Fully negotiated/legal analysis

– Customers transferring tasks and processes – not buying technology – want real risk transfer

– “Staking the farm” transactions

– Increased acceptance of high financial exposure, consequential & economic loss etc..

– Insurance cover a procurement & contractual issue

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Lisa Hansford-SmithMARSH

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The Technology Risk Profile

Technology are providing a combination of the following solutions:

– Products

– Software

– Services

– Consulting

Will a General Liability policy cover all of the above risks or is stand alone Errors & Omissions policies required?

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General Liability Coverage

Purpose of General Liability - To provide protection for third party damage or loss due to bodily injury or property damage including resulting financial loss.

During soft market, the general liability expanded to provide pure financial loss cover not linked to property damage/bodily injury.

This included coverage for areas such as intellectual property risks and miscellaneous Errors & Omissions etc.

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The present situation

Pure financial loss not linked to Property Damage/Bodily injury is difficult to obtain. If it is covered under the General Liability then there is generally a sub-limit.

Many General Liability underwriters are looking more closely at what is being covered under any pure financial loss extension. We have started to see cases where:– The General Liability underwriter is passing along the “services”

related risk to his Errors & Omissions underwriter. – Not all of the software related risk is being covered under the

General liability and thus stand alone carve out cover needed to be placed.

– Some Errors & Omissions cover is provided but only for core services and not for Miscellaneous areas.

As companies move more towards the Errors & Omissions or “services” related solutions, the need for stand alone Errors & Omissions cover increases.

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What to consider regarding the General Liability

Ensure that your General Liability cover is providing full protection for you products and services related risks.

Examine your limits under your General Liability for this type of coverage – are your limits sufficient?

Do you also have an Errors & Omission policy in place? If so, are there duplications of cover?

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Stephen WaresHiscox

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Why would Professional Indemnity/Errors & Omissions cover be required?

Professional Indemnity covers services and General Liability covers products.

General Liability Policies may not be designed to do what you might ask them to do.

You purchase insurance expertise not just words on a page.

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So how does Professional Indemnity/E&O cover address the issue?

Pure advisory services businesses.

IT companies providing product.

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A defined level of contract cover

Products do not conform with a written specification.

Products are materially defective.

Not complying with implied statutory terms.

Common law duty of care expressed in a contract. E.g. reasonable care and skill.

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Why is cover so strictly defined and tightly limited?

We will insure you against breach of contract.

A contractual duty of care of perfection.

A contractual guarantee that the product will deliver the client’s business case.

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What now?

Do not ask an insurance product to be something that it was not designed to be.

If you buy a PI policy, do not buy one designed for pure advisory professions.

Get the right expertise.

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Conclusion

It is important to review the coverage that you have under your General Liability and match this to the risks that your company faces. Is a stand alone Errors & Omissions coverage now required?

If you have both a General Liability and Errors & Omission policy it is important to ensure that these policies are matched and that there is:

– No duplication of cover

– No gaps in cover

It is important to have a clear understanding of what revenue is being produced for products and services in order to provide accurate information to the Errors & Omissions underwriters if stand alone cover is being considered.