Products vs Services and what type of insurance solution is required.

1. May 26 & 27 Products vs Services and what type of insurance solution is required. David Barrett – Simmons & Simmons Stephen Wares – Hiscox Lisa Hansford-Smith - MARSH

2. David Barrett Simmons & Simmons

3. How The Law & Contracting Practice Looks at Technology & Services • Hardware – a sale of goods or tangible property; ie a product • Standard Product Software – although technically a licence of an IPR is treated as equivalent to a sale of goods or a product • Embedded software • Customisation of standard software; e.g. entering fields • Ancillary services • Bespoke software – again technically involves a licence or transfer of IPR is treated as provision of services • ITO/BPO clearly provision of services • Contract can also include supply of product

4. Liability • Terminology can change – underlying concepts very similar throughout Europe • US law and practice can be surprisingly different • General standard of liability for professional services is higher than for products or general services • Contract generally determinant of risk allocation between parties

5. Legal and contracting practice – product model • Historic bargaining power was with suppliers • No control over use of technology • US orientated legal analysis – supplier driven • Wish to price in and limit risk • Contracts shut down liability by type and financial limit • Market acceptance Industry risk averse – pressures for risk transfer coming from ITO and BPO

6. Legal and contracting practice – services model • More competed – T&Cs often highly determinative of success • Fully negotiated/legal analysis • Customers transferring tasks and processes – not buying technology – want real risk transfer • “Staking the farm” transactions • Increased acceptance of high financial exposure, consequential & economic loss etc.. • Insurance cover a procurement & contractual issue Industry risk averse – pressures for risk transfer coming from ITO and BPO

7. Lisa Hansford-SmithMARSH

8. The Technology Risk Profile • Technology are providing a combination of the following solutions: • Products • Software • Services • Consulting • Will a General Liability policy cover all of the above risks or is stand alone Errors & Omissions policies required?

9. General Liability Coverage • Purpose of General Liability - To provide protection for third party damage or loss due to bodily injury or property damage including resulting financial loss. • During soft market, the general liability expanded to provide pure financial loss cover not linked to property damage/bodily injury. • This included coverage for areas such as intellectual property risks and miscellaneous Errors & Omissions etc.

10. The present situation • Pure financial loss not linked to Property Damage/Bodily injury is difficult to obtain. If it is covered under the General Liability then there is generally a sub-limit. • Many General Liability underwriters are looking more closely at what is being covered under any pure financial loss extension. We have started to see cases where: • The General Liability underwriter is passing along the “services” related risk to his Errors & Omissions underwriter. • Not all of the software related risk is being covered under the General liability and thus stand alone carve out cover needed to be placed. • Some Errors & Omissions cover is provided but only for core services and not for Miscellaneous areas. • As companies move more towards the Errors & Omissions or “services” related solutions, the need for stand alone Errors & Omissions cover increases.

11. What to consider regarding the General Liability • Ensure that your General Liability cover is providing full protection for you products and services related risks. • Examine your limits under your General Liability for this type of coverage – are your limits sufficient? • Do you also have an Errors & Omission policy in place? If so, are there duplications of cover?

12. Stephen WaresHiscox

13. Why would Professional Indemnity/Errors & Omissions cover be required? • Professional Indemnity covers services and General Liability covers products. • General Liability Policies may not be designed to do what you might ask them to do. • You purchase insurance expertise not just words on a page.

14. So how does Professional Indemnity/E&O cover address the issue? • Pure advisory services businesses. • IT companies providing product.

15. A defined level of contract cover • Products do not conform with a written specification. • Products are materially defective. • Not complying with implied statutory terms. • Common law duty of care expressed in a contract. E.g. reasonable care and skill.

16. Why is cover so strictly defined and tightly limited? • We will insure you against breach of contract. • A contractual duty of care of perfection. • A contractual guarantee that the product will deliver the client’s business case.

17. What now? • Do not ask an insurance product to be something that it was not designed to be. • If you buy a PI policy, do not buy one designed for pure advisory professions. • Get the right expertise.

18. Conclusion • It is important to review the coverage that you have under your General Liability and match this to the risks that your company faces. Is a stand alone Errors & Omissions coverage now required? • If you have both a General Liability and Errors & Omission policy it is important to ensure that these policies are matched and that there is: • No duplication of cover • No gaps in cover • It is important to have a clear understanding of what revenue is being produced for products and services in order to provide accurate information to the Errors & Omissions underwriters if stand alone cover is being considered.