IT SMBs Face Specific Risks, Require Specialized Insurance

Tuesday, December 13, 2011
Posted by John Beagle


by Kevin Kerridge

Every technology specialist and IT SMB owner knows that the IT landscape is complex and constantly changing. Working in the current environment where data and systems are linked through the global web, making systems at once more powerful and more vulnerable, is extremely challenging. Despite the best efforts of technology professionals, pitfalls are inevitable and the repercussions from errors or missteps can be severe.  

SMBs rely on technology to perform critical tasks such as accounting and e-commerce and any disruptions can result in significant financial losses. In fact, according to The Ponemon Institute's 2010 U.S. Cost of a Data Breach study, the average organizational cost of a data breach increased to $7.2 million from $6.8 million during 2009.

When an event such as a data breach does occur, blame often falls on the IT contractors, whether they are consultants, service providers or software developers. Technology is now so closely aligned with meeting business objectives that SMBs that hire IT consultants have become increasingly litigious when something goes wrong.

With such high stakes, it’s clear that tech businesses require specialized protection, including tailored small business insurance products.  A well-designed insurance program for an IT company takes into account exposures that go beyond those of a typical business.  

Those in the IT business face a wide range of risks. For example, aslight error or unseen vulnerability in a web-based system or firewall designed for a client could result in their data being breached, where confidential or sensitive information is lost, stolen or misused.

In another scenario, while creating a website for a client, an SMB tech specialist could accidentally use software code that is copyrighted by another business, triggering a lawsuit.

As in any professional services business, client expectations can also be a stumbling block and a risk. For instance, an IT firm hired to develop a new invoicing system may think the finished product meets the client’s needs. But the client doesn’t agree, alleges negligence on the part of the IT firm, and makes a claim alleging that the firm failed to deliver a working product.  

Any of these situations and their repercussions would be damaging to any IT business and could be devastating for an SMB. However, there are ways to safeguard your business and mitigate risk. One of the most effective tools is professional liability insurance coverage designed specifically for technology companies. This coverage, also known as errors and omissions insurance(E&O), addresses a key risk exposure tech businesses face: the economic damage a client can face resulting from the tech firm’s alleged negligent acts, errors and omissions, or flaws in the technology services they sold to the client.    

As a complement to E&O insurance, virtually anyone who works with computers or IT needs general liability coverage, including IT consultants, application service providers,  database administrators and designers, computer consultants and programmers, hardware installation experts, integration specialists, IT project managers, online security specialists, software developers, system designers, and website developers, among others.

In addition to a broad range of claims, technology professional liability typically also includes payments for legal representation. This is important because, even if a court finds that the tech firm is not at fault for its client’s problems, the expense for legal representation to get to that point is typically very costly. Without insurance, this can be a major setback and could even put an SMB out of business.

With the complexities of the fast-changing world of IT and the threat of lawsuits looming, IT contractors and SMBs need to get ahead of any potential issues or claims by purchasing tech-specific insurance coverage. If they fail to protect themselves, SMBs can find themselves facing down a lawsuit or other adverse event all by themselves. A small error or omission (or even the allegation of one) can erupt into a full-scale, costly problem for the client and a legal and financial crisis for the IT firm.  The good news is that with protection and coverage at hand, these issues don’t have to be life or death for an IT-focused SMB.

About the Author

Kevin Kerridge is the Director for Hiscox Small Business Insurance. Mr. Kerridge previously led Hiscox’s small business insurance coverage in the UK, which covered 38,000 small businesses in 2010. Learn more about insurance for small professional services businesses online at or over the phone at 888-202-3007. Also visit us on Twitter, Facebook and LinkedIn.

Note: This article does not offer legal, tax, or insurance advice related to the needs of any specific, individual business. Please consult your professional advisor.