Question about an E&O exposure vs. Products exposure

[SFINS]

Hello all,

We have a risk located in CA that is selling and installing wireless temperature monitoring systems in cold storage warehouses, hospitals, labs, restaurants, etc. The insured installs the devices at the client's location, and installs the monitoring software on the client's computer. If there is a fluctuation in temperature, the customer is notified via e-mail, cell phone, alarm, etc. Our insured performs no electrical wiring as the monitors include a battery with a two year lifespan.

Our insured develops the software that is used for their system. Design and manufacturing of the monitors is handled by a third party. The insured performs no other programming services for others and their software is not used for any product other than their own.

As they develop the proprietary software for their system, the insured believes that they have a Professional Liability exposure.

We feel that this would fall under a products exposure, as the software is part of the product that they are selling and installing, and they are not performing any type of programming or similar services for others. The policy we are proposing is on an ISO CG 00 01 12/07 form, with no specific professional liability exclusion, and the policy specifically names their temperature monitoring system as the covered product.

The insured is looking to be covered in the event that their system fails for some reason (either hardware or software), fails to notify the customer of the temperature change, their customer's products are damaged and our insured is named in a suit for the loss. Obviously, the manufacturer and installer of the refrigeration unit would come into play but the insured is concerned about being brought in on such a loss as the customer would otherwise been notified of the temperature change if the monitoring system did not fail.

Their customer contracts also state that the insured is not liable for any direct or indirect damage to products due to the system failing, and they are not assuming any additional liability by way of their contracts.

Any thoughts on this one?

[Big Dog]

This is more of a Cyber Liability (a type of E&O/Professional Liability exposure).

I work in the risk management department for a large healthcare provider in Houston, and with anything to do with software, we require the vendor to carry cyber liability.

[LadyBroker]

This is always a tough one. Where I think your client has the professional exposure is that he developed the software. If the product malfunctions because it blows a fuse or something, that's one issue. If the product doesn't function correctly because the parameters of the software installed were inadequate, that's another issue altogether.

The bottom line is this...it's a gray area. Knowing this, your client is better off purchasing the cyber liability coverage. Best case scenario is he has a loss, and both carriers think they should respond. Worst case....he doens't have professional coverage, a loss ensues, and the Products liabilty carrier not only denies the claim, but denies the defense costs, too. Ouch.

PS: while the CG0001 may not have a profeessional liability exclusion, don't be so sure the carrier hasn't added an endorsement restricting that coverage.

[SFINS]

Big Dog and Lady Broker,

Thank you very much for the input.

PS: while the CG0001 may not have a profeessional liability exclusion, don't be so sure the carrier hasn't added an endorsement restricting that coverage.[/quote]

Lady Broker,

With regards to the policy in question the carrier does have a Professional Liability exclusion pertaining to construction activities including surveying, engineering, architectural services, etc. but the exclusion does not apply to work that the insured is performing. We were also very clear with the underwriter that although the insured is installing the sensors, they do not perform any wiring or electrical work (or any other type of work requiring a contractors license), and she was OK with the way the policy was rated and underwritten.

Any other opinions out there would be appreciated. Thanks!

[kevinraz]

SFINS, here is an easy way to remember what type of coverage to purchase.
If the exposure is primarily bodily injury and property damage, that's GL. A GL policy is built to respond to these issues and they do have exposure in this area - if their product fails and damages equipment or goods then we have a GL claim.

If the exposure is financial in nature that's E&O. The equipment does not work (or does not work as well as intended) and the client alleges financial damages as a result - lost sales, costs to correct, etc - the E&O policy should respond.

They have exposure in both areas so I'd recommend they buy both.

[ScubaMan]

Personally I think they need GL and E&O. Monitoring unit fails, it's GL. Software they designed fails, it's E&O. Just be careful calling the coverage for E&O "cyber liability".......many companies consider coverage for internet exposures - conducting business online Like eBay - as "cyber liability". That's not what you need. You need a Technology E&O coverage to cover their software development and installation services. Because your client is installing software on their client's computer systems, you also want to make sure the coverage includes "unauthorized access" and "malicious code" .