Fintech companies are rapidly growing, offering various services that blend finance and technology. These companies range from those providing financial services enabled by technology—like those providing payments and transfers, personal finance, lending, and insurance—to companies providing technology products that allow others to deliver their financial services more effectively—like those that provide financial software, payment processing software, and secure connections for financial services.
Fintech companies face many potential liabilities. I previously discussed their cybersecurity risks. This time, I’ll focus on the operational risks these companies face due to the heavily regulated nature of the financial services industry and its critical role in the economy. I’ll also discuss how errors and omissions (E&O) insurance helps mitigate these risks.
Technology E&O versus Financial Services E&O
A key tool in managing risk for companies that provide services to others is E&O liability insurance. This is useful for all companies providing a service, but it’s especially important for fintech companies developing new technology products to improve financial services. Companies developing these technology products have an increased risk of errors in the delivery of services, software, and platforms. Compounding on these risks are changing regulations in finance and technology, which can result in unforeseen challenges—especially when a fintech company moves beyond just providing technology solutions to offering financial services like banking, lending, or personal finance.
One example of a challenge is when a company’s technology platform doesn’t work as intended, causing failures, security breaches, software glitches, or service outages. It’s important to figure out what caused these problems, but it’s also essential to determine the impact—especially on their customers. For companies that fall on the technology end of the spectrum, it could be the inability to fulfill their service level agreements with their business-to-business customers, leading to a business dispute. Then there are the companies who are venturing into providing financial services, where the impact could be the inability of customers to access their money or secure a loan promptly, leading to a dispute with the customer who was relying on them.
While the crux of what caused an issue might be the same, the resulting impact may affect which type of E&O insurance pays out, and ultimately which type of E&O insurance a company should purchase. Many different flavors of E&O coverage are available to companies, depending on the services they provide and the types of events they want to insure. For fintech companies, the two main options are technology E&O and financial services E&O.
Technology E&O is coverage for financial loss from a failure of a company’s product to perform as intended or arising from an act, error, or omission committed when performing services. This helps companies that provide software and other types of technology services to respond to customer claims alleging damage when the technology product or service does not perform as intended. A company providing software solutions to lenders to make their jobs easier might purchase technology E&O. However, this coverage may have exclusions related to financial services and/or not provide regulatory defense coverage.
This is where financial services E&O policies can come into play. These types of policies are more appropriate for companies providing true financial services that could be subject to claims for negligence, breach of duties, mismanagement, misrepresentation and undisclosed investment strategies, fee disputes, and delinquent filing. And more importantly, these policies can include coverage for regulatory/administrative proceedings or investigations. Examples of these policies are:
- Bankers professional liability
- Investment advisor errors & omissions for anything from financial advisors to hedge funds
- Broker dealer errors & omissions
Financial services E&O insurance may be better suited for those companies with technology platforms that provide financial services to consumers, where they are held to a much higher level of regulatory scrutiny. It can cover potential losses that would fall out of the scope of traditional technology E&O, especially in those situations where exclusionary language is added for financial services (for example, customers being unable to access their assets).
Understanding how errors in your technology solution may impact your customers is important in determining what E&O coverage you should purchase.
E&O for Fintech Companies: Protection for Various Risks
Errors & omissions insurance provides financial protection for fintech companies. It can protect them from costly customer lawsuits, including legal fees for defense and settlement costs. It can serve as a sales tactic for customers (or regulators) who require insurance coverage to be purchased as a backstop should a sizeable event occur. For those that should be buying financial services E&O, it can be the war chest needed to fund the defense bill for investigations and proceedings brought by state regulators or entities enforcing consumer protection, like the Consumer Financial Protection Bureau (CFPB) or the Federal Trade Commission (FTC).
Fintech companies should (and most likely will be required to) purchase E&O coverage, but it’s not a catch-all solution. Determining the right E&O coverage requires a nuanced approach, as different policies offer varying protections. Work with a broker who can support you as you evaluate your risks and determine the coverage you need.
