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Attorneys

Tech Companies, Insure You Choose the Correct E&O Policy!

March 4, 2006

By Scott Hervey

Picking an Errors and Omission policy can be an extremely important undertaking, especially for a technology focused company. When legal costs for defending a complex intellectual property infringement claim can exceed half a million dollars, the right E&O policy can mean the difference between the life and death of a company just starting to find traction in the market place. But more often than not, the decision on what policy to buy is left to an inexperienced company employee who only has a broker’s advice to rely on. This arrangement is probably fine for workers compensation and general commercial liability policies, but non-lawyers and lawyers are not familiar with technology companies and all the issues they encounter are out of their league when it comes to determining which E&O policy shifts the most risk.

There are a variety of possible claims that may trigger E&O coverage. Those claims are:
– Patent infringement – the making, using, offering to sell, or selling in the United States, or importing into the United States a patented invention, without authority form the patent owner; performing a patented process in the United States without permission (35 USC 271);
– Right Of Publicity – the use of another’s name, voice, signature, photograph or likeness in connection with a commercial activity without consent (Cal. Civil Code 3344 and 3344.1)
– Cyber-Squatting – bad faith intent to profit from use of another’s trademark as a domain name and engaged in actionable conduct, such as the registration, trafficking or use of a domain name that is identical or confusingly similar to, or dilutive of the registered trademark of another (15 USC 1125(d))
– Database/Network Security – any breach in the security of a database when that breach results in or could reasonably result in the disclosure by an unauthorized third party of personal information about California residents (Cal. Civil Code 1798.82)
– Copyright Infringement – violation of any of the exclusive rights granted to a copyright holder (see 17 USC 106-121)
– Trademark Infringement – use of a mark in connection with any good/service that is likely to cause consumer confusion as to affiliation, connection, association origin sponsorship or approval (15 USC 1125(a)(1); misrepresentation of the nature, character, qualities or geographic orgin of goods/services (15 USC 1125(a)(2); trademark dilution (15 USC 1125(c)(1)
– Trade Secret Misappropriation – acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means (Cal. Civil Code 2426.1(b)(1); or the disclosure of a trade secret of another without express or implied consent by a person who i) used improper means to acquire the trade secret; ii) or at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was either derived from a person who utilized improper means to acquire it, or acquired it under circumstances giving rise to a duty to maintain security or limit use, or derived it from a person who owed a duty to maintain secrecy.

Not every E&O policy is the same; some policies cover a wider variety of claims than others. That is why it is very important for a company to involve their counsel in determining which policy is right for their needs. If a policy seems broad, but specifically excludes coverage for claims that are the most likely to be brought against the company, then the policy provides very little effective coverage and is a waste of money. Having a lawyer involved who understands the company’s business can help avoid uncovered claims.

Policy by policy, the language granting insurance coverage may differ. The insuring language of some policies may appear to cover everything under the sun (" The Company will pay on behalf of the Insured all sums in excess of the Deductible which the Insured shall become legally obligated to pay as Damages and Claims Expenses resulting from a Claim…"), while other policies are very specific about the coverage granted ("We will pay on your behalf money in excess of the Retention that you legally have to pay as a claim expense and damages because of a covered claim caused by a blip in your connected services"). Either way, the policy will also contain exclusions – or claims that are not covered – which narrow the coverage offered by the policy.

Even within the technology sector, different businesses will need different types of coverage. For example, a software company that makes and sells a CRM (Customer Relations Management) application will likely focus on securing robust IP coverage – patent, copyright, trademark and trade secret coverage. If a component of the application involves storage of user information on the company’s network, or if it sells its CRM application directly to consumers over the Internet, the company will also want to make sure that the policy provides good security perils coverage. If the company’s business involves the distribution of content, for example a news and social information portal, then the company will want to make sure that its E&O policy provides protection for invasion of privacy and defamation claims, as well as IP and security perils.

There are other elements of a good E&O policy than just covering the defense of a potential claim. California’s new database security laws requires notice to the public in the event of a breach in the security of a database that results in the unauthorized disclosure of personal information. If the compromised database is large, the notification costs can be costly. Certain E&O policies will provide coverage for this expense. Also, an E&O policy with robust securities perils coverage can also provide coverage for expenses related to denial of service attacks or computer viruses emanating from the covered company’s server.

E&O insurance is extremely expensive – One Million dollars of coverage can cost a company between twenty and thirty thousand dollars. It just makes sense for a company to be sure that its spending its money wisely and getting value for its premiums.