When Minimum Coverage Is Not Enough for Your Business

The name of the game in insurance is risk management. As a small information technology business owner or manager, you transfer the risk of loss to an insurance company in exchange for a premium. Of course you don't want to spend more on that premium than you have to; nobody does. But skimping on your liability insurance could cost you your business. Litigation costs are rising, particularly for IT companies. More and more businesses are completely dependent upon their software. If that software fails, the IT Company which supplied it is going to end up paying. But if that IT firm has the right professional liability coverage, then it's their insurance provider who does the paying.

So, are you one of the lucky ones who can get by with having only the minimum amount of liability insurance coverage? That depends on your assets but even more on your exposure. And if you're running a high tech business, don't count on it.

You need to consider both professional liability and general liability insurance. General liability insurance protects you in the event that your business is responsible for a bodily injury or the destruction of property. If your firm is open to the public or if your employees regularly interact with other companies or with the general population, you'll want to bump up this coverage. If the manufacturing of your product is hazardous, again, you'll want to raise your liability insurance. Most agents will be able to advise you on how much general liability insurance you'll need.

But in this modern world, only having general liability insurance isn't enough. It doesn't protect you against claims that your product failed or did not perform as advertised. And even if your product works perfectly, defending against a spurious lawsuit can easily cost you hundreds of thousands of dollars in legal fees. To protect you in these situations, you need professional liability coverage. Okay, but how much?

You need to consider where your product will be sold. With the Internet, we often take doing business in a global marketplace for granted. However, most minimum coverage professional liability policies only apply to North America (assuming you reside in the United States). Furthermore, minimum coverage will not only have limits on the amount payable per case, but also on the aggregate amount payable per year.

A few court cases could put you over that limit. Let's look at this possible IT firm scenario:

- Your software lacked adequate security and allowed hackers access to your client company's customers' financial information-case settled for $300,000 plus legal fees.
- Your software corrupted data in a client's database-case settled for $700,000 plus legal fees.
- Due to your court cases, you cannot make a deadline in your contract to another business- case settled for $500,000.
- Worst of all, your company's software does not live up to the extravagant claims of your salesman, and the case goes to a jury to determine damages-judgment against your firm for several million dollars plus legal fees.

That's a lot of money, more than most small businesses could pay. While you hope that your product will perform better than the one illustrated above, liability insurance of any kind isn't about hope, it's about the realities of the industry.

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