Errors & Ommissions/Professional Indemnity Conference

EFU General Insurance

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General description of Errors & Omissions insurance and how this type of coverage can be required for other industry areas

What coverage can be found under General liability insurance

The requirement for Errors & Omissions insurance - trends

Benchmarking - what are other technology companies doing?

Insurance market statistics

Agenda

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To provide cover for a breach of obligation to provide a service or solution to a third party.Legal Defence costs & Damages

Coverage under errors & omissions policies relates only to pure financial loss and is generally not linked to bodily injury/property damage.

The type of firms that generally have E&O/PI insurance are the professions such as lawyers/accountants and also technology companies.

We are now also starting to see Telecommunications firms also look to purchase errors & omissions coverage. There are circumstances where other industry areas such as manufacturers are looking to purchase E&O/PI insurance.

Companies either have stand alone Errors & Omission cover or pure financial loss cover under their General Liability policies. In a General Liability policy - pure financial loss is an extension (which provides for financial loss not related to property damage or bodily injury).

Errors & Omission Insurance

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In the current insurance environment - General liability policies can have sub-limits for pure financial loss.

There can be exclusions under the General Liability policy that can reduce cover for services provided.

General Liability insurance

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Contractual tenders are now requiring proof of stand alone Errors & Omissions insurance. In the past, only indemnification was required but trends are now indicating that contracts are now requesting insurance. Companies are finding that to be competitive, stand alone errors & omission insurance is required.

As companies are moving more towards the provision of services (not linked to products) - general liability underwriters are not providing high enough pure financial loss limits.

Often, pure financial loss limits are shared with other lines of coverage (if there is no sub-limit).

The need for stand alone Errors & Omissions Insurance

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Benchmarking

EFU General Insurance

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Geographical spread

Split by credit ratings

Split between sectors

Media34%

A31%

Telecoms32%

B8%

BBB61%

Technology34%

UK48%

France16%

Germany16%

Italy8%

Belgium3%

Netherlands

3%Norwa

y3%

Denmark3%

ClientsIndustry sector split, credit rating and geographical spread

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Total E&O limit (€) 1 to 100m 100m to 5bn >5bn

Average 14,268,000 9,601,000 52,312,000

Median 7,384,000 8,692,000 40,316,000

Min 1,477,000 7,384,000 10,000,000

Max 73,845,000 15,453,000 140,000,000

14 10

52

7 9

40

1 7 10

74

15

140

1 to 100m 100m to 5bn >5bn

Average Median Min Max

Total E&O limit (% of revenue) 1 to 100m 100m to 5bn >5bn

Average 28.68 3.08 0.87

Median 17.06 2.28 0.60

Min 1.79 0.39 0.08

Max 109.38 9.46 2.59

28.68

3.08 0.87

17.06

2.28 0.61.79 0.39 0.08

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9.462.59

1 to 100m 100m to 5bn >5bn

Average Median Min Max

‘000’000

• The data for the 1 to 100m group is skewed by one client

•Without this client’s data the average would be € 6,884,000 and the maximum would be € 19,346,000

•This difference is illustrated on the graphs by the pale blue bars

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Errors and Omissions One company in this sample buys a limit that is higher than its annual revenues!

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0.96

% 4.48

%

0.86

%

0.83

%

0.75

%

0.40

%

0.20

%

0% 0.13

%

2%

20%

2%

1 to 100m 100m to 5bn >5bn

Average Median Min Max

E&O deductible (€) 1 to 100m 100m to 5bn >5bn

Average 57,000 360,000 625,000

Median 40,000 68,000 100,000

Min 4,000 0 21,000

Max 148,000 1,477,000 2,000,000

57360

625

40 68 1004 0 21148

1,477

2,000

1 to 100m 100m to 5bn >5bn

Average Median Min Max

E&O deductible (% of total limit) Revenues 1 to 100m 100m to 5bn >5bn

Average 0.96% 4.48% 0.86%

Median 0.83% 0.75% 0.4%

Min 0.2% 0% 0.13%

Max 2% 20% 2%

’000

Errors and Omissions The middle group has skewed results as the differences are markedly out of trend with the upper and lower end

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EFU General Insurance

Insurance Markets

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Where are claims coming from?

Supply chain management Real-time production systems Systems outsourcing Enterprise Resource Planning Software Enterprise Wide Software Solutions Insurance Systems Large customized products, programming, installation &

integration

Tech E&O ClaimsTech E&O Claims

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Failure to deliver software conforming to a Failure to deliver software conforming to a contract.contract. Mismanagement of the installation of a computer system intended to keep track of the state’s tax revenue

Jury award $474.5M, including punitive damages. Reduced to a settled amount of $185m ($102m paid by insurance)

Allegation Resolution

Failure to deliver software conforming to a Failure to deliver software conforming to a contract.contract. Mismanagement of the installation of computer system designed to allow federal workers and retirees access savings accounts. Insured was a year behind schedule and incurred overruns of $57m (Project was only $30m)

Plaintiff sued for $350m. Case dismissed because plaintiff (a gov’t entity) must obtain the Justice Department’s approval to sue

Claims ScenariosClaims Scenarios

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3000 Users of a Korean ISP have signed on 3000 Users of a Korean ISP have signed on to a class action suit against a US software to a class action suit against a US software company: company: Hold the US company responsible for the spread of the SQL Slammer virus as software company knew about vulnerability in its software.

Case is still ongoing

Allegation Resolution

Record company:Record company: Security hole on the retail site exposed data on millions of US/UK customers until it was closed.

Result of case still ongoing

Claims ScenariosClaims Scenarios

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Suit filed alleging service provider Suit filed alleging service provider negligently administered claims and negligently administered claims and mismanaged systemmismanaged system. A software service provider was retained to develop and manage a program which would monitor an insurance fund’s automobile claims.

This case settled during the trial for $5,025,000.

Allegation Resolution

Breach of privacy/security - former HR employee with access to confidential employee information (from the previous company) accessed this information from from a computer at his new employers to delete 950 files, destroying employee compensation records.

Damages/Losses were $91,000

Claims ScenariosClaims Scenarios

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Underwriter Information/Written Submissions sample customer contracts, highlighting limitation of

liability clause contract management procedures circumstance elevation procedures Top 5 customers and revenues Prior year revenues broken down by work

performed/services offered Loss history (5 years) Definition of professional services/covered activities Application

Underwriting expectationsUnderwriting expectations

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State of technology - is it tried and tested?

Off the shelf v bespoke products?

Adequacy of pricing - can the company realistically deliver at the price indicated?

Are expectations on both sides realistic?

What does the client stand to lose if the system fails?

Does the client know what they want? If not, what has been done to establish a clear understanding of deliverables?

How often does the vendor decline invitations to tender?

Time and materials v fixed price

Implied and express warranties - what statements are made by sales staff and/or in product literature which are exaggerated and misleading?

Underwriting expectations

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World-wide capacity for Errors & Omissions insurance is approximately Euro 250 - Euro 300 million.

There are several specialist markets who concentrate on professional indemnity insurance (with a focus on the technology sector).

Deductibles for larger technology companies (depending upon US percentage of revenue) tend to start a Euro 1 million.

The some of the leading markets who specialise in technology companies (on a primary basis):– Hiscox– Beazley– AIG– Chubb

State of the E and O marketplace

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