Director at McParland Finn, Mark Philmore, highlights the risks that can come with PII scheme exclusions for IT and digital businesses.
If there still remains some debate as to what exactly constitutes ‘cloud computing’ there is little doubt that all IT/digital businesses need to fully understand what dangers lurk hidden within their Professional Indemnity Insurance that could leave them exposed to uninsured losses in using the ‘cloud’.
Software access or services hosted remotely is nothing new for end-users and to a large extent they probably care little what the actual mechanics of the delivery are. However, if there is a problem, their first port of call for a grievance will be with the IT business they have contracted for that service to be provided.
The ‘cloud’ by its very nature means that in supplying this service, an IT business may be reliant upon a number of third parties to provide infrastructure, platforms, software, storage and processing services for example.
Professional Indemnity Insurance has become more and more prevalent for IT businesses over the years, whether driven by contractual requirements or simply good housekeeping for the business.
However, as insurers have become more experienced in the sector they have increasingly sought to exclude claims arising from the failings of others.
For example, IT Professional Indemnity Insurance policies commonly remove cover for claims arising from ‘any inherent defect in deliverables (e.g. software, hardware, firmware or IT services) which are supplied by or originate from a third party’ or, ‘any failure or default by a third party to supply any service’.
From both of these it can be seen that where a third party provides anything upon which an IT business relies, if that party should ‘fail’ after having caused a claim the business is potentially left with a shortfall in its insurance protection. Whilst some insurers water this down by not applying exclusion where it can be demonstrated that any costs can be ‘legally recovered under a written contract’, the onus is very much on the insured party to demonstrate that to be the case.
It is clear, however, that in the event (for example) of the insolvency of a provider, the IT business will be unable to demonstrate its ability to recover any costs from that third party, thus potentially leaving itself hugely exposed.
This approach by insurers can be understood to some extent, as they would argue that, if they were to provide cover, they would simply be insuring the mistakes of others. However, businesses should be aware of the potential ramifications in relation to their own Professional Indemnity Insurance.
Exclusions such as this bring into sharp focus the need to have legally drafted terms and conditions and to have any Service Level Agreement(s) and other contracts with third party suppliers carefully vetted by an experienced IT lawyer.
The extent of such exclusions varies from insurer to insurer. Most do have potential impact on IT businesses utilising the ‘cloud’ although some do not carry such exclusions in their policies. It is imperative that IT businesses fully understand the possible consequences of any exclusion(s) in their policy.
For further information please contact: Mark Philmore
MFL Science & Technology Insurance Brokers
2 Wellington Place, Leeds LS1 4AP
DDI 0113 366 2359
MFL Science & Technology is a trading name of McParland Finn Ltd.
Registered office Barlow House, Minshull Street, Manchester M1 3DZ.
Registered in England No. 2817700.
McParland Finn Ltd is authorised and regulated by the Financial Services Authority.
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