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1 Let us help make things clear. Information and Network Technology Errors & Omissions Liability Global Benchmarking Study 2005 Executive Summary Conducted by

2 The Chubb Group of Insurance Companies is proud to have commissioned this groundbreaking Information and Network Technology Errors & Omissions Liability Global Benchmarking Study. This Study provides important insight into the E&O liability insurance needs and buying habits of more than 700 industry leaders. Selecting E&O liability insurance to protect an innovator s future has never been easy and, until now, information and network technology companies had no reliable industry information to use as a guide. As a result of this Study, conducted independently for Chubb by PricewaterhouseCoopers, LLP, we have a current, comprehensive picture of the E&O liability insurance landscape. Chubb hopes this Information and Network Technology Errors & Omissions Liability Global Benchmarking Study will serve as the basis for vigorous discussion about managing risk in this fast-growing arena. We also hope it will become a trusted resource to help you make informed decisions about the purchase of this essential insurance protection. Timothy G. Ehrhart, Vice President Manager, Global Errors & Omissions Liability Insurance Chubb Group of Insurance Companies 2

3 TABLE OF CONTENTS Executive Summary and Key Findings Industry Segment Highlights

4 EXECUTIVE SUMMARY AND KEY FINDINGS 4

5 In March 2005, Chubb released the results of the 2005 Information and Network Technology Errors & Omissions Liability Insurance Global Benchmarking Study. Chubb commissioned the Study, which was conducted by PricewaterhouseCoopers, LLP (PwC). Over 250 insurance agents and brokers responded on behalf of their more than 730 publicly and privately owned client companies, which ranged in size from 25 to over 2,500 employees and from under $10 million to over $1 billion in revenue. Methodology was developed by PricewaterhouseCoopers and piloted with agents and brokers in the United States, Europe and Australia. Over 1,000 agents and brokers were contacted by and directed to the e-study site. Since a self-completion research instrument was selected, statistically insignificant gaps in the data emerged. For this reason, the bases in the Study figures may vary. All financial data are presented in U.S. dollars. Percentages may not add up to 100% due to rounding. Key Findings: Company size drove the E&O limits purchased. Approximately two-thirds of companies with revenues over $1 billion purchased limits of more than $20 million, while companies with revenues less than $10 million purchased limits of $1 million or less. Publicly owned companies purchased approximately four times the total E&O limits bought by privately held companies. Deductibles/retentions rise in relation to the size of the company. Over 70% of companies with revenues over $500 million had deductibles/retentions of more than $150,000. For 86% of companies, deductibles/retentions did not change at renewal time. Nearly all companies said E&O limits were determined by customer contract requirements. Three-quarters said producer recommendations were also factors in determining limits. There has been little discernible change in carrier behavior from the previous year. Asked to note what changes companies had seen in carrier behavior, responses focused on more careful underwriting including financial reviews, additional information required and a conservative approach to offering limits. Hardware/network equipment and components manufacturing and assembly companies (28%) were more likely to have experienced an increase in premiums greater than 2. They also experienced the largest decrease more than in their premiums (2). Prepackaged software and custom software and specialty programmers were the two segments that reported their premiums stayed the same. A large majority of companies described themselves as satisfied or very satisfied with their carriers; expert claims handling was cited as the main reason for this satisfaction. Seventy-six percent of companies said terms and conditions and 66% said price were the factors that most influenced buying decisions. 5

6 Most companies had been with their current insurance carriers for three years or less, while only one in seven had been with their carrier for more than five years suggesting turnover despite apparent satisfaction. Among all industry segments, network voice and data transport companies purchased the highest percentage of E&O limits above $20 million. Web hosting and design/data center/outsourcing companies purchased the lowest limits. Eighty-five percent of companies did not change limits at renewal time, and 1 in 20 decreased their limits. The primary cause of E&O claims was failure to provide or perform a service, and the average indemnity and defense costs were in excess of $200,000. 6

7 Average Total Limits Purchased by Revenue Average total limits purchased are greater for companies with higher revenue. Figure 1: Average Total Limits Purchased by Revenue Revenue Average Total Limits Purchased Less than $10mm $10 $25mm $26 $50mm $51 $100mm $101 $250mm $251 $500mm $501mm $1 billion More than $1 billion $1,741,789 $3,403,333 $5,358,695 $7,808,823 $9,661,290 $15,681,250 $20,384,615 $49,288,461 Total Limits Purchased by Revenue Approximately two-thirds of companies with revenues of less than $10 million purchased limits of $1 million or less, while a similar percentage of companies in the over $1 billion bracket purchased limits worth more than $20 million. Figure 2: Total Limits Purchased by Revenue Revenue Total Limits Purchased Less than $10mm 6 2 1% 1% $10 $25mm Up to $1,000,000 $26 $50mm 20% $1,000,001 to $2mm $51 $100mm % 2 $2,000,001 to $5mm $101 $250mm 3 16% 8% $5,000,001 to $10mm $251 $500mm 6% 4 $10,000,001 to $20mm $501mm $1 billion 4% 4% % More than $20mm More than $1 billion 8% 4% 4% 1 6 0% 20% 30% 40% 50% 60% 70% 80% 90% 100% Base: 698 7

8 Average Total Limits Purchased by Segment All companies in each of the industry segments purchased on average more than $5 million in E&O limits. On average, the Web hosting and design/data center/outsourcing segment purchased the lowest limits ($5,250,943) compared to the network voice and data transport segment, with average limits purchased of $8,883,333. Figure 3: Average Total Limits Purchased by Segment Segment Average Total Limits Purchased Prepackaged software developer Custom software developer/specialty programmer Hardware/network equipment & components Networking voice & data transport Consulting & system integration and design Internet/application service provider Web hosting & design/data center/outsourcing Other $7,773,728 $7,131,205 $8,240,413 $8,883,333 $7,709,278 $5,612,676 $5,250,943 $6,661,764 Total Limits Purchased by Type of Ownership The average limits purchased by publicly owned companies were just over $16 million compared to privately held companies, who purchased nearly $4 million. Most privately held companies (61%) purchased limits under $2 million. Fifty-six percent of publicly owned companies purchased limits over $5 million compared to only 1 of privately owned companies. Figure 4: Total Limits Purchased by Type of Ownership Type of Ownership Total Limits Purchased Publicly owned Up to $1,000,000 $1,000,001 to $2mm $2,000,001 to $5mm Privately held 40% 24% $5,000,001 to $10mm $10,000,001 to $20mm Other More than $20mm Base: 694 8

9 Limits Change at Last Renewal Eighty-five percent of companies did not change limits at renewal time, and 1 in 20 decreased their limits. This data would seem to indicate that the market has stabilized. We are no longer seeing the change in limits experienced during when insurance carriers were struggling to manage capacity. Figure 5: Limits Change at Last Renewal Change in Limits Number of Companies Stayed the same Increased 73 Decreased total Average Deductibles/Retentions by Revenue A quarter of all companies with revenues of less than $10 million had deductibles/retentions of less than $10,000, while over 70% of companies with revenues above $500 million had deductibles/retentions over $150,000. The average deductibles/retentions rose with revenues, ranging from almost $20,000 for companies with annual revenues of less than $10 million to approximately $3.6 million for companies with revenues of $1 billion or more. Figure 6: Average Deductibles/Retentions by Revenue Revenue Average Deductible/Retention Amounts Less than $10mm $10 $25mm $26 $50mm $51 $100mm $101 $250mm $251 $500mm $501mm $1 billion More than $1 billion $19,505 $40,946 $60,511 $119,604 $144,508 $341,034 $487,500 $3,630,870 9

10 Deductibles/Retentions Change at Last Renewal For the majority of companies, deductibles/retentions stayed the same from the previous year, although a slightly larger percentage experienced an increase rather than decrease. Figure 7: Deductibles/Retentions Change at Last Renewal Change in Deductibles/ Retentions Number of Companies Stayed the same 86% 612 Increased 1 91 Decreased 1% total Premium Change at Last Renewal At last renewal, premiums remained the same for 2 of companies. Of companies that experienced a premium change, 7 saw an increase. Nearly half (48%) saw increases of or less, while saw increases greater than 2. Some 1 of companies enjoyed premium decreases. Figure 8: Premium Change at Last Renewal Change in Premium Number of Companies Increased more than 2 51 Increased % 42 Increased Increased Increased Decreased 1 28 Decreased 6 28 Decreased more than Unanswered 6% total 10

11 Change in Terms and Conditions at Last Renewal Four-fifths of companies experienced no change in terms and conditions at last renewal. Those for whom terms and conditions had become more or less restrictive were approximately the same ( and, respectively). The main reasons given were additional exclusions and coverage enhancement. Figure 9: Terms and Conditions Change at Last Renewal Change in Terms and Conditions Number of Companies Stayed the same 80% 589 More restrictive 64 Less restrictive total Reasons for Claims The principal reason given for claims was failure to provide or perform a service (30%). Also cited was failure to meet specifications (16%), overpromising (1) and payment dispute (1). Figure 10: Reasons for Claims Claim Reason Failure to provide/ perform service 30% Number of Companies 26 Product failure 12 Incompatibility 1 11 Overpromising Underestimated complexity of project Defective system Design error Did not meet specifications Payment dispute Subcontractor error or nonperformance 16% 1 8% total 11

12 INDUSTRY SEGMENT HIGHLIGHTS 12

13 Total Limits Purchased by Segment In each industry segment, at least 4 of companies purchased E&O limits up to $2 million. Fifty-nine percent of consulting and system integration and design, 56% of Web hosting and 50% of Internet/application service provider companies purchased limits in this range. Less than 20% of companies in all segments purchased limits of more than $10 million. Among all industry segments, network voice and data transport companies purchased the highest percentage of E&O limits above $20 million. Figure 1: Total Limits Purchased by Segment Segment Total Limits Purchased Prepackaged Software Developer 26% 2 1 Custom Software Developer or Specialty Programmer 34% 1 2 6% Up to $1,000,000 Hardware/Network Equipment & Components Network Voice & Data Transport Consulting & System Integration and Design 28% 38% 34% 2 20% 2 20% 16% 8% 26% $1,000,001 to $2mm $2,000,001 to $5mm $5,000,001 to $10mm Internet/Application Service Provider % 4% $10,000,001 to $20mm Web Hosting & Design/ Data Center/Outsourcing % More than $20mm Other 34% 8% 1 0% 20% 30% 40% 50% 60% 70% 80% 90% 100% Base:

14 Average Total Limits Purchased by Segment All companies in each of the industry segments purchased on average more than $5 million in E&O limits. On average, the Web hosting and design/data center/outsourcing segment purchased the lowest limits ($5,250,943) compared to the network voice and data transport segment, with average limits purchased of $8,883,333. Figure 2: Average Total Limits Purchased by Segment Segment Average Total Limits Purchased Prepackaged software developer Custom software developer/specialty programmer Hardware/network equipment & components Networking voice & data transport Consulting & system integration and design Internet/application service provider Web hosting & design/data center/outsourcing Other $7,773,728 $7,131,205 $8,240,413 $8,883,333 $7,709,278 $5,612,676 $5,250,943 $6,661,764 Average Total Limits Purchased by Segment by Revenue Band In order to obtain statistically significant results, revenue brackets were rebanded into three. Figure 3: Average Total Limits Purchased by Segment by Revenue Band Segment Less Than $10mm $10mm $50mm Greater Than $50mm Prepackaged software developer (Base: 118) $1,836,842 $4,421,053 $16,178,571 Custom software developer/specialty programmer (Base: 141) $1,638,298 $4,648,148 $16,937,500 Hardware/network equipment & components (Base: 130) $1,646,591 $4,052,083 $14,170,833 Consulting & system integration and design (Base: 96) $2,023,529 $3,108,108 $22,520,000 14

15 Limits Change by Segment at Last Renewal While many companies across all industry segments had no change in limits at renewal time, the Web hosting and design/data center/outsourcing segment was most likely to have no change (9). The network voice and data transport segment was most likely to have an increase in limits from the previous year (1). Figure 4: Limits Change by Segment at Last Renewal Segment Change in Limits Prepackaged Software Developer 8 Custom Software Developer or Specialty Programmer 8 4% Stayed the same Hardware/Network Equipment & Components 86% Increased Network Voice & Data Transport 80% 1 Decreased Consulting & System Integration and Design 8 Internet/Application Service Provider 8 6% Web Hosting & Design/ Data Center/Outsourcing 9 8% Other 8 8% 8% Base: 700 Deductibles/Retentions by Segment The consulting and system integration and design segment had the lowest deductibles/retentions. By percentage, the Internet application service provider and network voice and data transport segments had the highest deductibles/retentions. Figure 5: Deductibles/Retentions by Segment Segment Prepackaged Software Developer Custom Software Developer or Specialty Programmer Hardware/Network Equipment & Components Network Voice & Data Transport Consulting & System Integration and Design Internet/Application Service Provider Web Hosting & Design/Data Center/Outsourcing Other 6% 1 16% 1 16% % % % 4% 8% 1 1 Deductible/Retention Amounts Up to $10,000 $10,000 to $24,999 $25,000 to $49,999 $50,000 to $99,999 $100,000 to $149,999 $150,000 to $499,999 More than $500,000 Base:

16 Average Deductibles/Retentions by Segment The lowest average deductibles/retentions are seen in the Web hosting and design/data center/outsourcing segments ($96,683) and the highest, almost five times as much, in the consulting and system integration and design segment ($475,115). Figure 6: Average Deductibles/Retentions by Segment Segment Average Deductible/Retention Amounts Prepackaged software developer Custom software developer/specialty programmer Hardware/network equipment & components Networking voice & data transport Consulting & system integration and design Internet/application service provider Web hosting & design/data center/outsourcing Other $112,350 $231,561 $205,937 $153,898 $475,115 $137,094 $96,683 $117,265 Deductibles/Retentions Change by Segment at Last Renewal Companies in the consulting and system integration and design segment (90%) were most likely to experience no change in deductibles/retentions at renewal time. One-fifth of companies in the network voice and data transport segment saw an increase in deductibles/retentions compared to 80% that did not. The consulting and system integration and design and Web hosting and design/data center/outsourcing segments experienced no decrease. Figure 7: Deductibles/Retentions Change by Segment at Last Renewal Segment Prepackaged Software Developer Custom Software Developer or Specialty Programmer 8 86% 1 1% 1% Change in Deductible/ Retention Amounts Stayed the same Hardware/Network Equipment & Components 88% Increased Network Voice & Data Transport 78% 20% Decreased Consulting & System Integration and Design 90% Internet/Application Service Provider 86% Web Hosting & Design/ Data Center/Outsourcing 8 Other 86% Base:

17 Premium Change by Segment at Last Renewal Hardware/network equipment and components manufacturing and assembly companies (28%) were more likely to have experienced an increase in E&O liability premiums greater than 2. They also experienced the largest decrease more than in their premiums (2). Prepackaged software and custom software and specialty programmers were the two segments that reported their premiums stayed the same the greatest percentage of the time. Figure 8: Premium Change by Segment at Last Renewal Change in Premium Segment Increased more than 2 Increased 16 2 Increased % 1 6% 6% 1 16% 1 28% 2 24% 28% 20% 24% 16% Web hosting & design/data center/outsourcing Internet/application service provider Others Increased 6 Increased 1 Stayed the same 4% 16% 8% 8% 1 6% 20% % 20% 1 Consulting & system integration and design Network voice & data transport Decreased 1 4% 2 4% Hardware/network equipment & components Decreased 6 24% Custom software developer or specialty programmer Decreased more than 4% 4% 2 Prepackaged software developer Base: 729 Claims Activity by Segment Custom software developers and specialty programmers were more likely to have claims than might be expected from the size of the population approximately a third of which were associated with not meeting specifications and a further third with failing to provide or perform a service. Figure 9: Claims Activity by Segment Prepackaged Software Developer Custom Software Developer or Specialty Programmer Hardware/Network Equipment & Components % 1 20% 28% Network Voice & Data Transport Consulting & System Integration & Design Internet/Application Service Provider Web Hosting & Design/Data Center/Outsourcing Other 6% 16% 1 6% Base: 729, companies in sample Base: 158, companies with claims 17

18 This document is advisory in nature and has an edition date of March It is offered as a resource to help information and network technology companies make informed decisions about the purchase of errors & omissions liability insurance. This study is necessarily general in content and intended to provide an overview of certain aspects of errors & omissions liability exposures. It should not be relied on as legal advice or a definitive statement of the law in any jurisdictions. For such advice, readers should consult their own legal counsel. No liability is assumed by reason of the information this document contains. Copyright Chubb & Son, A Division of Federal Insurance Company, Chubb Group of Insurance Companies Whitehouse, New Jersey Chubb refers to the insurers of the Chubb Group of Insurance Companies: Federal Insurance Company, Vigilant Insurance Company, Great Northern Insurance Company, Pacific Indemnity Company, Northwestern Pacific Indemnity Company, Texas Pacific Indemnity Company, Executive Risk Indemnity, Inc., Executive Risk Specialty Insurance Company, Quadrant Indemnity Company, Chubb Custom Insurance Company, Chubb Indemnity Insurance Company, Chubb Insurance Company of New Jersey, Chubb National Insurance Company, Chubb Lloyds Insurance Company of Texas. Not all insurers do business in all jurisdictions. Form (Ed. 3/05)

19 Sincere appreciation goes to all the independent agents and brokers who participated in this Study. A special thanks to the members of TechAssure, all of whom provided valuable knowledge and insight that helped in the development of this Study. TechAssure is an international nonprofit organization founded by independent insurance agents and is dedicated to helping organizations manage the risks associated with technology products, services and processes.