Errors & Ommissions/Professional Indemnity Conference

1. EFU General Insurance Errors & Ommissions/Professional Indemnity Conference

2. Agenda • General description of Errors & Omissions insurance and how this type of coverage can be required for other industry areas • What coverage can be found under General liability insurance • The requirement for Errors & Omissions insurance - trends • Benchmarking - what are other technology companies doing? • Insurance market statistics 2

4. Errors & Omission Insurance • To provide cover for a breach of obligation to provide a service or solution to a third party.Legal Defence costs & Damages • Coverage under errors & omissions policies relates only to pure financial loss and is generally not linked to bodily injury/property damage. • The type of firms that generally have E&O/PI insurance are the professions such as lawyers/accountants and also technology companies. • We are now also starting to see Telecommunications firms also look to purchase errors & omissions coverage. There are circumstances where other industry areas such as manufacturers are looking to purchase E&O/PI insurance. • Companies either have stand alone Errors & Omission cover or pure financial loss cover under their General Liability policies. In a General Liability policy - pure financial loss is an extension (which provides for financial loss not related to property damage or bodily injury). 3

5. General Liability insurance • In the current insurance environment - General liability policies can have sub-limits for pure financial loss. • There can be exclusions under the General Liability policy that can reduce cover for services provided. 4

6. The need for stand alone Errors & Omissions Insurance • Contractual tenders are now requiring proof of stand alone Errors & Omissions insurance. In the past, only indemnification was required but trends are now indicating that contracts are now requesting insurance. Companies are finding that to be competitive, stand alone errors & omission insurance is required. • As companies are moving more towards the provision of services (not linked to products) - general liability underwriters are not providing high enough pure financial loss limits. • Often, pure financial loss limits are shared with other lines of coverage (if there is no sub-limit). 5

7. EFU General Insurance Benchmarking 6

8. ClientsIndustry sector split, credit rating and geographical spread Split between sectors Geographical spread Telecoms 32% Technology 34% Netherlands 3% Belgium 3% Norway 3% Denmark 3% Media 34% Italy 8% UK 48% Germany 16% France 16% Split by credit ratings A 31% BBB 61% B 8% 7

9. Errors and Omissions One company in this sample buys a limit that is higher than its annual revenues! ‘000’000 19 • The data for the 1 to 100m group is skewed by one client • Without this client’s data the average would be € 6,884,000 and the maximum would be € 19,346,000 • This difference is illustrated on the graphs by the pale blue bars 8

10. Errors and Omissions The middle group has skewed results as the differences are markedly out of trend with the upper and lower end ’000 9

11. EFU General Insurance Insurance Markets 10

12. Tech E&O Claims Where are claims coming from? • Supply chain management • Real-time production systems • Systems outsourcing • Enterprise Resource Planning Software • Enterprise Wide Software Solutions • Insurance Systems • Large customized products, programming, installation & integration 11

14. Claims Scenarios Allegation Resolution • Failure to deliver software conforming to a contract.Mismanagement of the installation of a computer system intended to keep track of the state’s tax revenue • Jury award $474.5M, including punitive damages. Reduced to a settled amount of $185m ($102m paid by insurance) • Failure to deliver software conforming to a contract.Mismanagement of the installation of computer system designed to allow federal workers and retirees access savings accounts. Insured was a year behind schedule and incurred overruns of $57m (Project was only $30m) Plaintiff sued for $350m. Case dismissed because plaintiff (a gov’t entity) must obtain the Justice Department’s approval to sue 12

15. Claims Scenarios Allegation Resolution • 3000 Users of a Korean ISP have signed on to a class action suit against a US software company: Hold the US company responsible for the spread of the SQL Slammer virus as software company knew about vulnerability in its software. • Case is still ongoing • Record company:Security hole on the retail site exposed data on millions of US/UK customers until it was closed. Result of case still ongoing 13

16. Claims Scenarios Allegation Resolution Suit filed alleging service provider negligently administered claims and mismanaged system. A software service provider was retained to develop and manage a program which would monitor an insurance fund’s automobile claims. • This case settled during the trial for $5,025,000. Breach of privacy/security - former HR employee with access to confidential employee information (from the previous company) accessed this information from from a computer at his new employers to delete 950 files, destroying employee compensation records. Damages/Losses were $91,000 14

17. Underwriting expectations • Underwriter Information/Written Submissions • sample customer contracts, highlighting limitation of liability clause • contract management procedures • circumstance elevation procedures • Top 5 customers and revenues • Prior year revenues broken down by work performed/services offered • Loss history (5 years) • Definition of professional services/covered activities • Application 15

18. Underwriting expectations • State of technology - is it tried and tested? • Off the shelf v bespoke products? • Adequacy of pricing - can the company realistically deliver at the price indicated? • Are expectations on both sides realistic? • What does the client stand to lose if the system fails? • Does the client know what they want? If not, what has been done to establish a clear understanding of deliverables? • How often does the vendor decline invitations to tender? • Time and materials v fixed price • Implied and express warranties - what statements are made by sales staff and/or in product literature which are exaggerated and misleading? 16

19. State of the E and O marketplace • World-wide capacity for Errors & Omissions insurance is approximately Euro 250 - Euro 300 million. • There are several specialist markets who concentrate on professional indemnity insurance (with a focus on the technology sector). • Deductibles for larger technology companies (depending upon US percentage of revenue) tend to start a Euro 1 million. • The some of the leading markets who specialise in technology companies (on a primary basis): • Hiscox • Beazley • AIG • Chubb 17