IT Professional Indemnity

Information technology is all around us and our lives highly relies on the solutions, technologies that the IT companies have developed or created. It’s no different in the business world, especially in the last few years there has been a significant development in digitalisation regardless of the economic sector. The technology is evolving at rapid pace, especially emerging technologies are transforming industries and shaping traditional business processes significantly. One of the main driven factors of the rapid IT sector development that most of the companies have recognised they need to invest in IT solutions with most sophisticated software to have an edge over their competitors. Based on our experience the tech companies are providing information technology system development mostly for the following sectors which also can be considered as one of the most revolutionised sectors by the technology.

• Financial sector – online banking supporting system, core financial software development;
• Energy sector – process control and monitoring systems support solutions, business management related software developments;
• Manufacturing sector – developing solutions both for back-office and industrial operations;
• Accounting-, law-, management consultant firms – increasingly adding software as part of their service they offer to clients.

These means that with new solutions the companies are facing new technology exposures and risks within their daily operation which needs to be addressed.

These solutions and emerging technologies are highly affecting the companies – who implementing the new technology and achieving efficiency gains, the customers – who are the final beneficiary of the services or applications, the tech companies – who developing such solutions - and furthermore the insurers – whose providing professional indemnity coverage for Tech companies.

What does IT professional indemnity entail?

Information technology professional indemnity coverage general aim is to indemnify and defend the insured tech companies of third-party claims for omission or error in the provision of IT services. The reimbursement usually based on the financial loss that the client has suffered or the legal defence costs of the insured in the event of litigation. Professional indemnity provides broad range coverage for IT companies, such as covering them for mistakes, errors including IT service negligence, unintentional privacy breach or infringement, and loss of documents or data.

If the new IT solutions and emerging technologies are viewed from different angel, in one hand it brings significant results and has massive added value, on other hand it brings newly revealed risks and hazards that we had not thought of before. From the tech companies' side, new and unforeseen threats can arise that can cause significant damage to the customer. For instance within an AI development project, after implementation, the competitor sue the client copyright claim due to the client’s new product or website is quite similar to theirs. From insurer, underwriter side these unforeseen threats can resulting broadening exposure and anticipated new damages, claims what underwriter needs to investigate comprehensively about when these new technologies appear on the market.

In the near future, the following three emerging technologies could have a significant impact on tech companies, the business world and, through them, insurers and the IT professional indemnity products.

1. Artificial intelligence (AI)

The AI can bring a great added value for companies who’s stating to take advantage of this new technology, but it is not without additional risks. Just think about if the IT company implement an AI solution for a marketing company. The AI based system use copyrighted content for marketing materials, but unintentionally infringe on the intellectual property rights of others, that could end up lawsuit. (Currently several lawsuits are pending against OpenAI based systems that infringed on copyrights). Or the implemented AI based system is involved in the service level agreement, the terms of use, in this case the AI technology can be responsible for performance guarantees or data usage of clients.

The most interesting question is that: who is responsible for, if the AI system is working inappropriately and cause issues above? The IT company who developed or the company who uses it?

1. Internet of things (IoT)

IoT is the network of physical devices that connect, exchange data with other IoT devices and cloud and these devices are operating with IT related technology like software, sensor that grants the communication and data exchanges. The end users are mostly consumers who for example buy smart home devices, and all these devices can be controlled by one mobile app. The tech companies - developing such IoT supporting software or applications - may can get involved indirectly in a product recall or liability lawsuit. If the device goes wrong, cause a shot circuit and consequence of that the customer’s house burns down. The producer of the device may want to prove that the short circuit occurred due to wrongful software operation not defective device, so the software developer is responsible for the whole damage.

The IoT has more industrial tailored version that called Industrial Internet of Things (IIoT), this is a collection of sensors, software and stand-alone devices which are connected to industrial applications. With highly focus on machine-to-machine communication, machine learning and big data, the IIoT grants possibility for industries to gather data, analyse them through increase the efficiency, optimise the production, reducing the costs of manufacturing. One of the huge exposures of tech companies whose developing, implementing such solution that if a small error occurs in the system that can cause direct damages in the production, operational disruption, or through the vulnerabilities the hackers can get into the industrial company’s system.

1. Blockchain

Blockchain technology is a method to record data, information that makes impossible or quite difficult for the system to manipulate or amend these. A blockchain is a shared database which are stored on many different computers (nodes). It consists of several blocks which is basically a digital page that can be uploaded with record of transaction (data), if the transaction in a block is verified through nodes in the network the page is fulfilled, closed and added this page to the existing, unchangeable, chronological chain of previous blocks.

Most often the blockchain used for store transaction about crypto currencies, but it has other more sophisticated way of utilization in different industries. In media sector the companies use blockchain technology to manage copyright data, copyright verification process. In retail sector it can be used to record the origin and all the production data of the exact good, that can provide the buyer to get valid information about the product they bought.

In the future the implementation, development of the smart contracts can be widespread solution. These kinds of contracts enable easily created legally binding contract without involving third-party (lawyer). In the smart contracts embedded programs that runs automatically when predetermined conditions are met or fulfilled. Like in the real-estate sector if the payment is transferred the ownership transfer process will automatically be initiated.

Threats of tech companies: due to the nature of the technology, it is difficult to fix the developed app or system, so if a mistake has been made its hard to adjust the system. This technology can bring the next level of automatization that can be adopted by most of the sectors, like financial or energy sector. This newly automatization processes can result increasing number of damages for third parties due the nature of no human approval processes and nature of the learning phase of these technologies.

“At Colonnade we believe that the main competitive advantage of our company lies in the fact that we also strive to provide our clients a tailor-made professional indemnity cover for unconventional risks, like above detailed. This requires active collaboration between underwriters in different countries and a decentralised operational structure to ensure that underwriters find a supportive way to be able to make comprehensive decisions on risks as they arise, thus offering a wide range of coverage to the tech company.” – stated Bence Széles, Professional Indemnity Practice Leader of Colonnade Insurance S.A. Hungarian Branch Office.