For technology firms, one of the facts of life is understanding that software business insurance is a prerequisite for many potential clients. Local governments will often not allow you to bid on projects unless you have a plan in place. Private industry is also keen to ensure that you have some form of coverage.
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Losses Trump Partnerships
The rationale is that there have been a lot of flawed software programs delivered that have caused both the client and the software engineering firm untold financial problems.
Portland loses $16 million
One prime example occurred ten years ago, in Portland, Oregon; after a Houston, Texas-based software vendor completed their custom billing software. Home owners soon realized that the new software was online because some of their water bills climbed from around $60 per cycle to over $300 per cycle, without any reason. Other water users stopped receiving their bills altogether, leaving 10 percent of the city effectively un-billed. The city commissioner in charge of the water bureau was forced to get a new vendor and all future contracts with software vendors were moved from individual bureau control to the mayor’s office.
The political career of that commissioner stalled, while the software company ended up watching over $16 million in costs accrue to the water bureau because of the now-broken billing system.
Intel Loses $475 million
Another, earlier example came at Intel Corporation, when it was found to be the case that there was a serious flaw in another vendor’s floating point software that was embedded in every Pentium chip. Intel’s stock dropped sharply and the company was forced to offer replacement chips for all of the affected Pentium chips that were on the market. Employees staffed phone lines around the clock, talking to everyone from accountants to nuclear power plants and letting them know that their results with the flawed chip would not likely meet their own internal criteria for usage.
For the software company that produced the floating point software and created the faulty lookup table? They were forced to wait and wonder while Intel took over $475 million dollars in charges for a flaw that occurs only once for every 9 billion calculations.
NASA Loses $200 million
One more well-known example came when Lockheed Martin used the English measurement system in its software that ran on the NASA Mars Orbiter. NASA lost the orbiter, which was standardized on the metric system and had to absorb almost $200 million in costs. It was ultimately determined that the software was the likely reason, making another strong case for software business insurance.
Drilling into Errors and Omissions Policies
Within the insurance industry, most software business insurance is encapsulated in business liability policies that contain the phrase ‘errors and omissions’.
A standard error and omissions policy protects the software vendor against contract disputes and mistakes that are discovered after the software is delivered.
Another area typically covered within the contract dispute side is whether or not the work performed was deemed acceptable. Even if the package is signed off on by the receiving firm, security problems that are discovered after the fact are a common reason for clients to sue. As most policies provide different levels of coverage in different areas, it is normally a good idea to find a site that allows potential customers to compare results from different carriers and product classes
Beyond Errors and Omissions
Standard errors and omissions policies do not normally cover malicious acts by rogue employees that can be construed as being criminal in nature. For the contractor that opened the World Bank’s network so that outside parties could loot the bank of its information, they could only hope that their company was covered by a computer security policy that included 3rd party liability. In actuality, the contracting company, though a billion dollar a year in sales concern, was flat-lined by the revelation- and pulled from public trading on their stock exchange. The entire board resigned and the CEO was forced to make liquidation decisions.
Internet Publishing Liabilities
Similarly, companies that develop web software and host websites will not likely find solace in their standard or professional liability policies for issues that arise from defamation or intellectual property rights. There are several companies operating on the internet that actually spider as many sites as they can, parsing the results to find all of the images that are posted, and whether they are copyrighted correctly. If they find one image on a site you own, your company can be taken to court.
Having a separate internet policy that covers defamation and copyright is the answer for firms here, although it may be possible to purchase it as an option to your regular or professional liability policy.
Defamation is important because there are also online reputation firms that do the same sort of exhaustive searching on behalf of their clients. No company sets out to defame another, but if there is a miscue or mistake, a positive search result can end up costing your firm money.
Summing it up
Most firms, are therefore advised to get at least a professional liability policy on top of their general liability policy. Other types of insurance that they might consider include: employee liability insurance, network security insurance and intellectual property abuse insurance.
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