Errors & Ommissions/Professional Indemnity Conference EFU General Insurance

2 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 2

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4 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 3

5 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 4

6 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 5

Benchmarking EFU General Insurance 6

8 Geographical spread Split by credit ratings Split between sectors Media 34% A 31% Telecoms 32% B 8% BBB 61% Technology 34% UK 48% France 16% Germany 16% Italy 8% Belgium 3% Netherlands 3% Norway 3% Denmark 3% Clients Industry sector split, credit rating and geographical spread 7

The data for the 1 to 100m group is skewed by one client Without this clients 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 19 Errors and Omissions One company in this sample buys a limit that is higher than its annual revenues! 8

Errors and Omissions The middle group has skewed results as the differences are markedly out of trend with the upper and lower end 9

EFU General Insurance Insurance Markets 10

12 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 Claims 11

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14 Failure to deliver software conforming to a contract. Failure to deliver software conforming to a contract. Mismanagement of the installation of a computer system intended to keep track of the states tax revenue Jury award $474.5M, including punitive damages. Reduced to a settled amount of $185m ($102m paid by insurance) AllegationResolution Failure to deliver software conforming to a contract. Failure to deliver software conforming to a 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 govt entity) must obtain the Justice Departments approval to sue Claims Scenarios 12

Users of a Korean ISP have signed on to a class action suit against a US software company: 3000 Users of a Korean ISP have signed on to a class action suit against a US software 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 AllegationResolution 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 Scenarios 13

16 Suit filed alleging service provider negligently administered claims and mismanaged system Suit filed alleging service provider negligently administered claims and mismanaged system. A software service provider was retained to develop and manage a program which would monitor an insurance funds automobile claims. This case settled during the trial for $5,025,000. AllegationResolution 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 Scenarios 14

17 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 expectations 15

18 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 16

19 World-wide capacity for Errors & Omissions insurance is approximately Euro 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 17

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