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The big four in IT Liability: Key considerations for technology companies

Information Technology Liability Insurance is essential for any IT organisation or company, providing a unique combination of Professional Indemnity Insurance and Public & Products Liability cover. However, the host of products available makes it difficult to determine which policy will meet the needs of your organisation and provide you with the right level of protection.

The key is to simply ask the right questions in order to determine which policy is right for you.

Q1. Where are your customers based?

Most technology companies operate in a market without international borders, with offices, employees, contractors, clients and/or customers across the globe.

In the unlikely event of a claim, it is the latter two, clients or customers that will most likely be the claimant. With customers or clients located internationally, you would need to ensure coverage under your IT Liability Insurance policy by assessing the territorial (where the claim originates) and jurisdictional (the countries in which the policy covers proceedings brought against you) limits applied in that policy.

There are five common variations to territorial and jurisdiction limits applied as standard. These are:

1. Territorial & Jurisdictional Limits: Australia & New Zealand
2. Territorial Limits: Worldwide, excluding USA & Canada; Jurisdictional Limits: Australia & New Zealand
3. Territorial & Jurisdictional Limits: Worldwide, excluding USA & Canada
4. Territorial Limits: Worldwide; Jurisdictional Limits: Australia & New Zealand
5. Territorial & Jurisdictional Limits: Worldwide

Choosing the appropriate territorial limits is easy, as this is a matter of matching the countries you operate with where your customers are based.

Determining which jurisdictional limits are acceptable is a little more difficult. Cross-border disputes and international litigation can create complex jurisdiction issues.

If you have an entity or assets in a particular country, or are contractually required to do so, you should ensure that jurisdictional limits extend to that particular country. By applying this test, it may be found Australian and New Zealand Jurisdiction is sufficient. You should be aware however that jurisdictional issues are not argued at the time the initiating process is issued. There is also the possibility of parallel proceedings with litigation initiated in both the overseas country and Australia.

If your policy only applies to the jurisdictions of Australia and New Zealand, you will not have access to defence costs in the event of international litigation, even whilst jurisdictional issues are considered. If an action is permitted to be heard in a foreign court and you choose not to defend the proceedings, perhaps because you have no assets in that country, you will put at risk your ability to visit or do business in that country at a later date.

Depending on the policy coverage, claims are not always limited to litigation by customers and clients, and, if you transact business overseas, you may be subject to various international government agencies undertaking investigation, the application of fines or other legal remedies.

Hence, it is recommended you match the jurisdictional limit to the territorial limit. In the event of a claim under the policy, costly disputes relating to jurisdiction are handled by the insurer who will also respond to any remedies awarded by foreign courts, protecting your ability to transact in that country and your company’s reputation.

For information on the legal risks in international transactions, see The Australian Law Reform Commission Cross Borders report.

Q2. Are all your business services covered?

The importance of an accurate professional services description is discussed in PI Basics and IT Liability Insurance policies are a prime example of where the services are commonly defined in the policy wording. Modern technology companies generally no longer fit the traditional mould (as stipulated by insurance policies) as they look to expand or change their business model, such as providing digital marketing services. These activities may not be included as standard, so it is imperative that your services are listed accurately by amendment for proper coverage.

Q3. Does your policy align with your contractual exposures?

Technology companies, like any business, are consistently entering agreements for the supply of goods or services. Where a company will not agree to your standard terms and conditions, it is not always possible to negotiate for the removal of certain clauses, and occasionally you may be required to provide certain warranties or accept indemnity clauses. Moreover, you may only be able to utilise the goods or services of another company if you indemnify, release or cap the supplier’s potential liability. This is often the case where you are dealing with a large company. Unfortunately, there are very few IT Liability insurance policies which will automatically cover these contractually assumed risks.

There are two issues you need to consider:

1. Whether the policy covers liability for breach of contract
2. Whether the policy covers liabilities assumed under contract

Most quality IT Liability insurance products available will extend to claims alleging breach of contract however, you should read the policy wording carefully. A large percentage of claims against technology companies include allegations of contractual breaches so it is important that your policy provides clear, unambiguous cover, providing you with certainty that this critical exposure is covered.

This is common in engagement agreements clauses, in which technology companies provide a range of warranties. For example, contracts may include an express warranty in relation to the design and/or fitness for a particular purpose, or provide warranties in relation to time periods. Frequently, insurers will exclude any contractually assumed warranty, guarantee or undertaking, unless liability would have existed in the absence of such warranty, guarantee or undertaking.

A claim against may be brought against you in an alleged breach of the contract of engagement to exercise due care and skill, along with a claim for breach of a contractual provision. Even where your policy covers breach of contract, such a claim could present issues as the second basis may trigger the assumed liability exclusion. In such circumstances, it is likely the insurer will do one of three things:

1. Decline to grant indemnity altogether, even in respect to the first (covered) part of the claim. The insurer may take the view that you will be found liability under the assumed indemnity or warranty and leave it to you to defend yourself at your own cost.
2. Conduct the defence of the claim but fully reserve their rights to recover costs and expenses incurred should the policy not respond.
3. Conduct the defence and meet the defence costs in respect to the breach of duty aspect of the claim, yet decline policy coverage in relation to the contractual indemnity and require you to contribute to the costs for that portion of the claim.

Insurance policies include a write-back where such liability would have arisen independently of such provision. In any case, none of these scenarios is ideal for you, so in the event you accept contractual indemnities or warranties, unless the policy provides automatic cover, you should ensure the policy is endorsed to extend to specific contracts where you have assumed liability.

Q4. Do you have large value contracts?

Several IT Liability insurance policies limit cover to consequential damages. This means that in the event of a claim, the policy will exclude cover for the refund of your professional fees or charges, whether by way of damages or otherwise. This may be a significant cost to you and if you have any large single contracts you may want to avoid this limitation.

The wide variety of coverages and products available for IT Liability insurance presents a challenge in determining if yours is right for you and your business. Careful consideration of the key policy features will help, and understanding how your policy will respond in the context of your business activities, is crucial. With the right questions and the right advice from an experienced insurance broker, this difficult task will become a breeze.

If you would like more information, please drop us a comment, email or call Intuitive on (02) 9493 6111.

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