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Technology Insurance and Risk Specialists

Contracts, Risk, and Your Insurance

Gone are the days of Digital, Wang, Prime, Cullinet, Apollo, Data General, among other technology giants; the current profile of Massachusetts' technology business is smaller components manufacturers, software shops, middle industry parts and service providers. With local tech companies on the short-end of the contract stick, managing risks and exposures is increasingly important. A review of both your contracts and increased risks should be undertaken, with strategies to limit those risks. If contractual limitations are impossible, other means, such as transfer to your insurer, should be fully utilized.

Insurance Response

Your commercial insurance program probably does cover:

• Waiver of subrogation against your landlord — your lease is usually covered under "Limited Contractual" coverage
• General liability obligations required under most contracts for standard limits (including Bodily Injury and Property Damage)
• Workers Compensation coverage for most contractual obligation language
• Most "hold harmless" clauses found in leases.

Your commercial insurance program probably does NOT cover:

• Intellectual property infringement indemnification
• Pollution
• Employee non-disclosure agreements
• Indemnification for your landlord's building contractors
• Most "any and all causes" clauses
• "Your insurer will honor all the terms of this contract" language provisions

IT as a commodity: The Premise

Let’s look at a few interesting facts:

• Robert Weisman’s editorial in 4/30/05 Boston Globe argues a shift of IT from asset to commodity.
• Nicholas Carr’s May 2003 Harvard Business Review article titled “IT Doesn’t Matter” (referenced by Weisman 4/30/05) looking at the staggering in-creases in IT spending.
• The February 2002 Newsletter editorial article teasing readers with my opinion that hardware and software has never been worse!
• My (Nancy James) September 2004 Newsletter describing a greater and greater dependency on sub-assemblers and outsourced services.

A Review:

Nicholas Carr in his 2003 HBR article cites some staggering statistics regarding US capital expenditures on IT: 1965 = 5%, 1980’s = 15%, 1990’s = 30% and 2000 = 50% (NPJ comment: remembering that Y2K remediation was part of the millennium’s expenses).

I have maintained in my newsletters for the past several years that legacy systems and legacy processes have been updated with new hardware but obsolete methods. Low-cost processing workers have been replaced with high-cost IT professionals. As a consequence, corporate leaders, with Y2K remediation systems still not functioning, are understandably reluctant to invest in new technologies. Thus, the current drag on our business costs and economy.

We also see a trend by manufacturers to outsource work to precision assemblers for board and component assembly. In fact, precision parts manufacturing more and more defines the Massachusetts technology corridors.

"Small business solutions” suppliers from IBM to local providers offer outsourced support to harried executives tired of IT headaches. For example, among small business outsourcers is a local Waltham provider, New England Data Services (NEDS), providing solutions to the disruptions caused by in-house supported networks. Craig Brenner, CEO of NEDS, stated: “We offer a wide range of outsourced services designed to remove the headaches of complex IT structures, security, and reliability from client’s facilities. With NEDS support our customers can return to their business’s core compe-tencies.”

As our technology becomes more complex, focused solutions are needed. Commoditization may not be a bad resolution!

The Issues:

So now your processing functions as well as some hardware is scattered locally or widely. What do you do with respect to fire, theft, security, privacy, and other protection?

• Your outsourcer’s contract will disclaim any direct or consequential damages. You can expect that!
• Your own property/liability insurance policy will be your corporate location site specific, with only limited coverage at any other location.
• The privacy of your internal and client data is now way out of your control (even while you hold your provider harmless!).

As a business you are now a part of a complex web of communications movement and storage. What you gain in service capability and reliability, you lose in direct control.

The Solution:

Be sure your insurer understands your new operational configuration and has solutions within at least the same boundaries as before you outsourced. You will need to consider all outsourced services as branches of your own offices and operations. Coverage for each function should be analyzed and insured by you if not by your outsourced service provider.

Questions on Every CEO's Mind

I have been operating profitably with no losses for 5 years and my insurer is non-renewing? Why? And more importantly, what can I do about it?

Maurice "Hank" Greenberg, CEO of AIG the largest insurer in the world, stated: "Market share in the risk business is a bad idea!" Also known as "drive-by" underwriting, it has come back to bite insurers.

So insurers are taking the fastest way back to a conservative, solvent posture by slashing risks from the books. Any perceived exposure is a target, especially when insurers are unable to "lay off" risk to a dwindling pool of reinsurers.

What to do? The insurance industry needs opportunists right now. Back office marketing goals still need to be met; new business booked. There are insurers out there looking for quality business at reasonable prices. A risk management specialist in the industry keeps pace with "hungry" markets.

What should I do about Directors & Officers coverage?

Volumes have been written in every professional journal about the details of the hard-ening D&O market. In my opinion, Sarbanes-Oxley has raised the bar for all operating entities. Inevitably, higher expectations have now been set for private and even non-profit organizations. A higher level of management oversight will be expected from everyone. The Sarbanes-Oxley dust needs to settle before we will have a better idea of constituent expectations and our exposures. In the meantime, fasten your seatbelts.

What to do? You need to undertake a total corporate strategy. With D&O costs increasing exponentially, front-line non-insurance risk solutions must be considered. A braced, defensive posture is necessary until the market relaxes.

Insurer insolvencies are being blamed for my limited insurance choices. What is this all about?

These times are like a 3-legged stool with all 3 legs broken. The bottom of a 10-year soft insurance market cycle, a falling stock market, and 9/11 have all hit the insurance industry with crippling losses. 40% of our reinsurers are gone; capacity is severely limited.

In the technology sector, several markets, one of them being Kemper, have gone under. Remaining technology carriers just do not have the capacity to absorb all of those risks given the greatly dimin-ished reinsurance capacity. Recent earnings reports from some major insurers indicate a return to profitability, at least in the short-term. This severe reaction in the last 2 years will end; when is a prediction I cannot make now.

We offer over 20 years experience in risk management and the technology insurance marketplace. Call us to help. We will be honored to serve you.