E&O Insurance For IT Consultants: Why It Matters and How Much It Costs
Dan Levenson January 31, 2017
Suppose you design a database that has a glitch that keeps everyone at your client’s company from accessing crucial business data for three days. The client sues you, the IT consultant, claiming they lost $500,000 in sales during the time the database could not be accessed.
Or to put a timelier spin on things, consider if something you did allows a hacker to access to a client’s sensitive data or introduce a virus into the computer system. You might be sued.
As an IT consultant, you need insurance more than other businesses for a variety of reasons. The tricky part is that these types of jobs are relatively new compared to those in other industries, and the laws are not fully defined. No standard yet exists on what is and isn’t acceptable in the industry. This will be the case until there are more legal precedents.
These are just some of the tech lawsuit risks every IT consultant should be aware of.
The Customer Is Always Right—And They’re Mad
Dissatisfied clients could bring a claim against you, whether or not you have actually done something wrong. A client could bring a claim if he simply isn’t satisfied with the quality of your work, whether or not his claim is valid.
He may have expected you to deliver something you didn’t—even if his expectation was unreasonable—and as far as you understand, you delivered just what you promised. Or he may have simply expected something to function differently.
Even if the client is unreasonable, he could sue.
A dishonest client who has a big legal department could sue you just to avoid paying money he legitimately owes you. Can you imagine explaining your work to a judge who doesn’t understand the technical ins and outs of the work you’ve performed for the client?
Operating Without Insurance Is Risky Itself
Many clients won’t even hire you without you having proof of errors and omissions (E&O) insurance. This type of insurance is important because it protects all parties involved in the event that you or your employees make a mistake that might cause serious financial or operational harm to the client. Many companies will just move on to a different consultant if you don’t meet this requirement.
Your own personal assets could be at risk without coverage as well. Without insurance, if there is a judgment against you, your home, savings, and other possessions could be seized by a court. Even though the insurance may not be mandated by law, having it is vital.
Can You Afford Not To Have E&O Insurance?
You need protection. Suppose you lose a court case brought against you—do you have $1 million to spare if you lose? Could you even afford to write a client a check for $50,000 if he sues you and wins?
This insurance is like a doctor’s malpractice insurance, only for contractors. As long as an act was not deliberate, you would be covered for a variety of things you or an employee might do, including documentation errors, misrepresenting products or services, theft by an employee, exposing propitiatory information, defamation, slander, and other items.
It protects you for so many more things than just general liability insurance, which you also need. That coverage protects you if someone slips and falls in your office, or if you or an employee spills coffee on an important document.
With E&O insurance, you would be covered for legal fees to hire a lawyer to defend your company and for any judgments, fees, or settlements you are found liable for.
As for the cost, it might depend on which company you hire, but it could cost $1,000 to $5,000 annually for a web designer and $2,500 to $4,500 for a small consulting company, with a $5,000 deductible—with coverage of $1 million.
When you weigh one cost versus the risk of the other, it’s clear to see why this coverage is vital.