With the Professional Indemnity Insurance, IT Firms get the cover for legal expenses and cost occurred with any claim filed against them by any of their clients.
The primary goal of a professional indemnity insurance is to safeguard IT professionals against any financial losses from lawsuits, which can be raised against them by their clients or shareholders. Also called Errors and Omissions Insurance policy, this plan is meant to pay for defence expenses along with the claim amount that the policyholder is legally responsible for paying to the third-party.
Key Takeaways
The Reality of Human Error: Regardless of an IT firm’s experience, software bugs and misinterpretations are inevitable. PII allows developers to push boundaries knowing they have a safety net for unintentional mistakes.
The “Scale” Mismatch: As seen in the T.S. Software case, an IT solution designed for a small business may fail when applied to a large enterprise. The insurer covers the resulting damages and the cost of legal defense to explain the technical causes.
Instruction Misinterpretation: In data-heavy fields, miscoding information based on misinterpreted instructions (as seen in the NS IT case) can render a project useless. PII covers the “recoding costs” and the client’s financial losses.
Defense Costs are Primary: IT lawsuits are technically complex and require expensive expert witnesses and specialist lawyers. PII pays these defense costs from day one, even if the firm is eventually found not to be at fault.
Contractual Mandatory: Most high-value IT contracts now include a “Mandatory Insurance” clause. Having PII is often a prerequisite for bidding on corporate or government technology projects.
IT Firms are covered for the following:
- Unintentionally breaching of a binding contract with a client – Breach of contract is the most common insurance claims raised against IT Firms, and this policy allows the coverage of such claims as a standard clause.
- Breaching of duty of care or negligence – It covers bad advice given to a client or making professional mistakes in the course of the work.
- Infringing intellectual property rights – Mainly when the IT Firm makes use or publish from another website’s content without permission from the latter.
- Breaching of confidence –Sharing of sensitive or confidential information of a client/any third party without prior consent of the latter.
- Defamation – If there have been damaging or false claims made against an organisation or person.
- Civil Liability – Even if any claim is made against the IT firm which is not included in the contract and it has not been excluded by the policy’s conditions then it is covered.
Irrespective of how experienced professionals are, mistakes are bound to happen. Therefore, it makes complete sense to go with a professional indemnity insurance policy that pays the compensation to the third-party in respect of errors on the part of the policyholder while rendering professional services.
Case: 1
Incepted in 2011, T.S Software is a leading name in the IT sector. Last year, the company bagged a contract of developing an attendance and payroll software for J.J Jewels. As per the contract, T.S Software must complete the order in 15 days.
Though T.S Software developed the software within a stipulated time frame; there were some grave issues in it. Like, even absent employees’ were showing present by the software and there salary calculations were done in the same manner as that of present employees.
Due to this error, the HR department of J.J Jewels had to cross verify the details manually and the entire salary process got delayed by ten days. It not only affected the employees, but it also had an adverse impact on the reputation of J.J Jewels as well.
Now, J.J Jewels filed a case against T.S Software and held it responsible for the tarnishing of its image and employees’ dissatisfaction. Luckily, T.S Software had a professional indemnity insurance, and the company approached the insurer who thoroughly examined the cause and found that the software was apt for the small company and not meant for the large companies, like J.J Jewels.
The insurer paid compensation to J.J Jewels along with covering defence costs incurred by T.S Software in contesting the case in the court. Without the professional indemnity insurance, T.S Software would have to bear the compensation amount solely.
Summary Table: IT Professional Indemnity Coverage
| Coverage Area | IT-Specific Example | Risk Mitigated |
| Breach of Contract | Failing to deliver a software module by the 15-day deadline. | Financial Loss: Covers damages for project delays. |
| Negligence | Coding errors that result in incorrect salary or tax calculations. | Accountability: Pays for manual re-verification costs. |
| IPR Infringement | Using copyrighted code or website content without a license. | Legal Shield: Covers defense against “theft of ideas” suits. |
| Breach of Confidence | Accidentally leaking a client’s sensitive user database. | Privacy Risk: Manages the fallout of data exposure. |
| Civil Liability | Claims not specifically listed in the contract but not excluded. | Broad Protection: Acts as a “catch-all” for professional errors. |
| Defamation | Making false claims about a competitor in a public forum. | Reputational Risk: Covers legal fees for libel/slander suits. |
Case: 2
A market researcher, Mr. Piyush Jain had requested a specialist IT firm— NS IT, to code and store all the data in software that had been collected. However, NS IT misinterpreted the instructions received from the market researcher and due to this error, the entire data was incorrectly coded.
Due to this error, the data couldn’t be used by Piyush who also suffered a major loss. The market researcher filed a case against NS IT for the delay and the cost of recoding the data. Luckily, NS IT had professional indemnity insurance cover, and the company approached the insurer for covering the compensation amount.
The insurer carefully analysed the case and later covered the loss due to errors. It would have been difficult for NS IT to settle the compensation amount without professional indemnity insurance policy.
Frequently Asked Questions (FAQs)
1. Does “Breach of Contract” cover me if I just decide to stop working on a project?
A) No. Professional Indemnity covers unintentional breaches, such as delays due to technical hurdles or failing to meet a performance specification. It does not cover a deliberate abandonment of a contract or “willful non-performance.”
2. What is “Breaching of Confidence” in an IT context?
A) If your firm has access to a client’s proprietary source code or their customers’ private data, and that information is leaked or shared without consent, you can be sued for a breach of confidence. PII provides the legal and financial support to handle such claims.
3. Does this policy cover “Cyber Attacks” or “Hacking”?
A) While PII covers errors you make (like a coding flaw that allows a hack), it is often paired with a separate Cyber Insurance policy for the actual costs of data recovery, ransomware payments, and notification of affected users.
4. Why did the insurer pay for the “recoding” in Case 2?
A) The insurer paid because the need to recode was a direct result of the IT firm’s professional error (misinterpretation of instructions). The policy is designed to put the client back in the position they would have been in if the error hadn’t occurred.
5. Is “Civil Liability” the same as “General Liability”?
A) No. General Liability covers physical accidents (slips and falls). Civil Liability in a PI policy refers to your legal responsibility for professional failures that cause financial or reputational harm, even if those failures aren’t explicitly detailed in your service contract.
About The Author
Amit
MBA Finance
Amit is an experienced insurance professional with 7 years in the industry, specializing in Errors & Omissions Insurance. Writing for SecureNow, he provides clear and insightful blogs and articles to help professionals understand the importance and nuances of E&O coverage. His expertise ensures that readers receive practical advice on protecting themselves from potential liabilities and professional risks. Dedicated to making complex insurance topics accessible, Amit stays updated on industry developments, delivering valuable content that empowers professionals to make informed decisions about their E&O insurance needs.
