The server crashed. “No problem,” I told the client, “I have nightly backups.”
I was wrong. The cron job had been failing silently for 18 months. The “backup” files were empty 0KB placeholders. We lost 10 years of customer history. The client is suing for “Gross Negligence” and the estimated value of that data, which they claim is $2 million.
Key Takeaways
- “Failure to Perform”: This is the core of E&O. You promised a service (backups) and failed to deliver.
- Valuation of Data: Clients always claim data is worth millions. Your insurance lawyer’s job is to prove it’s worth the “cost to re-enter,” which is much less.
- Limitation of Liability: Does your contract cap damages at “12 months of fees”? This is your lifeboat.
- Rectification Costs: Can the data be scraped from old paper records? Insurance might pay for the temp staff to do manual data entry.
The “Why”: The Definition of Damages
The Trap: How do you value a lost SQL row?
Clients value it by “Potential Future Revenue.” Insurers value it by “Cost to Restore.”
If your policy has a low sub-limit for “Non-Monetary Damages” or excludes “Intangible Property,” you might be exposed. You want a policy that covers “Consequential Damages” (the money they lost because they didn’t have the data).
The Investigation: I Quoted 3 Major Carriers
1. Tokio Marine (Tech Specialist)
- My Analysis: They have a specific module for “Data Processing Errors.” They understand that a failed backup is a process error. They are good at funding the “reconstruction” of data.
2. Chubb
- My Analysis: Chubb’s “Digitech” policy is high-end. They often include “Mitigation Expenses” that allow you to hire experts to try and scrape data from old hard drives to minimize the loss.
3. Hiscox
- My Analysis: Good for defense. They will vigorously argue that the client had a duty to check their own reports (Contributory Negligence).
[IMAGE: Screenshot of a log file showing “Backup Failed: Disk Full” repeated for months]
Comparison Table: Backup Failure Liability
| Carrier | Covers “Silent Failure”? | Data Re-entry Costs? | Cost | Best For… |
| Tokio Marine | Yes | High | | Managed Services |
| Chubb | Yes | High | | Enterprise IT |
| Hiscox | Yes | Low | $ | Freelancers |
Step-by-Step Action Plan
- Preserve the “Empty” Files: Do not delete the 0KB files. They prove the date stamps.
- Audit the “Alerts”: Did the system send an alert that went to spam? If you can prove the software failed to alert you, you might shift blame to the software vendor.
- Check Contract Limits: Find the clause that caps your liability.
- Notify Carrier: Prepare for a “Failure to Deliver” claim.
FAQ
Is “Gross Negligence” covered?
Usually, yes. “Gross” just means really bad carelessness. “Intentional” means you deleted it on purpose. Intentional is excluded; Gross is covered.
Can I fix it myself?
You can try, but insurance won’t pay you for your own time. They pay third parties.
What if I outsourced the backups to AWS?
Then you have a claim against AWS (good luck), but the client still sues you. Your insurance covers you.