Making the Sale: Coverage for Software/Hardware Resellers

Should resellers of hardware or software buy E&O insurance that includes coverage for their sale of products, instead buying insurance that only covers their other services? It might be fair to ask, in turn, if a physician should only purchase malpractice insurance for surgery, but not for the tests, diagnosis, advice and care provided before and after surgery.

Yet there are insurance companies selling E&O coverage covering some services of technology professionals but not covering the sale or resale of hardware and software on behalf of others.

Some resellers may be satisfied with that partial coverage because of their assumption that the manufacturer will protect them in claims stemming from faulty product.

But it’s not that simple. Where does such coverage leave the reseller? The carrier? The producer?

The reseller may be left without needed protection. Although the reseller may expect the software or hardware manufacturer to protect them from claims, and a contract may require it, sometimes that won’t work out. A product provider may be reluctant to defend when the product provider feels the problem stems from another cause, even if the product is suspected of contributing in some way to the problem. For example, it’s not unusual at the outset of a lawsuit, and for a period of time thereafter, for it to be unclear whether the problem is with the software or the hardware, with representations made by a reseller, or with some change or configuration by a value-added reseller. It’s also possible to have more than one cause of a problem, and the product provider may refuse to defend a reseller throughout the case.

If an insurance company covers one part of a case but not another part, it may defend the entire case, which is often required by law. In some cases, however, the carrier may be permitted to only defend the covered part of the claim, or it may be permitted at the end of the case to recover expenses paid for uncovered parts of the claim. And while it may defend, if a judgment is for an uncovered matter, the carrier is not likely to pay for the loss.

The best practice is to buy E&O insurance that covers an insured as well as possible for its activities. That’s for the benefit of the insured and, in rare circumstances, for the producer due to a potential producer’s E&O exposure.