Why Tech Underwriters Still Care More About Contracts Than Cloud Risks
In the rapidly evolving landscape of technology, from cloud-native systems to sophisticated AI tools, one might assume that tech Errors and Omissions (E&O) insurance underwriting has undergone a radical transformation. However, despite the emergence of new risks and exposures, the core principles remain surprisingly consistent. While cloud computing, AI, and cybersecurity threats are undoubtedly significant, tech underwriters often place a greater emphasis on contract language. This article delves into why contracts remain paramount in the eyes of tech E&O underwriters, exploring the reasons behind this enduring focus and the evolving considerations in the current tech environment.
Table of contents
The Enduring Importance of Contract Language
At its core, tech E&O insurance protects companies from financial losses incurred by third parties due to the failure of a client’s product or service. This fundamental principle hasn’t changed despite technological advancements. Whether the exposure stems from a SaaS platform, an IoT device, or an AI algorithm, the potential for financial harm to a third party remains the central concern. Erin Eisenrich, Vice President of Technology E&O and International at Berkley Technology Underwriters, notes that while the technology itself changes, the core underwriting process remains largely consistent. The focus remains on the potential financial repercussions of a product or service failure for others.
While the fundamental exposure remains the same, the scale and context have shifted dramatically. The explosion of digital connectivity, increased regulatory scrutiny, and the rise in cyberattacks have heightened the potential for cascading failures across interconnected systems. This aggregation risk, where a single error can trigger widespread disruption, is a key consideration for underwriters. However, even with these emerging risks, a breach of contract is often considered the most significant exposure for a tech client. The terms and conditions outlined in these agreements define the scope of services, responsibilities, and liabilities, making them a critical factor in assessing risk.
The Blurring Lines of E&O and Cyber Coverage
The increasing interconnectedness of technology has blurred the lines between E&O and cyber coverage. For tech clients, these two types of insurance are becoming increasingly inseparable. Underwriters often view them as a bundled offering, assessing both how a company protects its own assets and how it safeguards the interests of its clients. This dual perspective is crucial in evaluating the overall risk profile of a technology company.
This convergence of E&O and cyber risks creates complex claims scenarios. For instance, an IT consultant recommending a third-party security vendor could face legal action if that vendor experiences a failure, even if the consultant wasn’t directly responsible. This highlights the importance of due diligence in vendor selection and the potential liability associated with recommendations. Underwriters are now scrutinizing internal cybersecurity practices, such as the use of multi-factor authentication (MFA) and incident response protocols, more closely than ever before. MFA has become a baseline requirement, and the focus is shifting towards endpoint detection and response (EDR) and managed detection and response (MDR) as the new standard for security protocols.
AI Risks and the Evolving Insurance Landscape
Artificial intelligence presents a unique challenge for tech underwriters. The rapid adoption of AI has outpaced both regulation and case law, creating uncertainty around underwriting and claims forecasting. The question of how coverage should respond to AI-related incidents, how to settle claims, and how to price the coverage remains largely unanswered. The ambiguity surrounding AI risks is prompting discussions about which policy, Directors and Officers (D&O) or E&O, should cover these exposures.
As with cybercrime coverage in the past, the lines are blurring, and there’s a growing expectation that blended D&O/E&O policies will become more prevalent. Combining these coverages under a single carrier simplifies the process and eliminates ambiguity regarding responsibility. However, even with the emergence of AI risks, contract language remains a crucial factor in determining liability and coverage. The terms of service, warranties, and limitations outlined in AI-related contracts play a significant role in assessing the potential financial exposure.
Contracts: The Core of E&O Underwriting
Despite the attention given to emerging technologies like AI and cloud computing, contracts remain the cornerstone of E&O underwriting. A breach of contract is often considered the most significant exposure for a tech client. While insurers’ attention to contracts may vary depending on the size of the account, the underlying principle remains the same: clearly defined contractual obligations are essential for managing risk.
For smaller businesses with more transactional policies, contract reviews may be less frequent, and limitations more common. However, for mid-market and larger clients, carriers conduct thorough contract reviews, scrutinizing the details to identify potential red flags. One of the most critical aspects underwriters look for is the limitation of liability clauses. These clauses define the maximum amount a company can be held liable for in the event of a failure, and they play a crucial role in determining the overall risk exposure.
Conclusion
While technological advancements and emerging risks like AI and cyber threats have undoubtedly impacted the insurance landscape, the core principles of tech E&O underwriting remain rooted in contract language. Contracts define the scope of services, responsibilities, and liabilities, making them a critical factor in assessing risk. As the tech industry continues to evolve, underwriters will need to adapt their approach to address new challenges, but the importance of clearly defined contractual obligations will endure. By focusing on contract language, underwriters can effectively manage risk and provide tailored insurance solutions that meet the unique needs of technology companies in today’s dynamic environment.
Disclaimer: The information in this article is for general guidance only and may contain affiliate links. Always verify details with official sources.
Explore more: related articles.
