FinTechs
Designing the right financial loss liability for FinTechs
Understanding and properly hedging operational risks for FinTechs
FinTechs operate in an increasingly litigious, highly regulated and heavily controlled environment that exposes them to numerous financial loss risks. In addition to traditional tech risks, there are many risks associated with their original activities, from payment processing, the management of private finances or insurance to companies that develop software for financial service providers. Many of these sub-areas are associated with special liability risks or even compulsory insurance, which must be brought into line with the existing liability insurance program.
Comprehensive risk management is the key to sustainable success. Innovative FinTechs face unique challenges that require customized protection.
What is a financial loss liability (E&O)?
There are various types of financial loss liability insurance (Errors and Omissions - E&O). What they all have in common is that, unlike traditional public liability insurance, they all insure pure financial losses. This includes, for example, business interruption to your customers, financial losses due to errors in your software or services and many other consequences of errors in your technology products or services.
Tech E&O vs. Financial Services E&O
A core instrument of risk management for service companies is financial loss liability insurance. However, this cover is particularly relevant for tech or FinTech companies. They are exposed to an increased risk of errors in the provision of their services, software or platforms. In addition, constantly changing regulations in the financial and technology sector(AI Act, new EU Product Liability Directive, DORA, NIS2, etc.) can lead to unforeseen challenges - especially if a FinTech not only offers technology solutions, but also financial services such as banking, lending or personal finance.
EXAMPLE OF DAMAGE:
Your technology platform is not working as intended and there are outages, security breaches, software glitches or service failures.
It's important to find out what caused these problems, but it's also important to determine the impact - especially on customers. For tech companies, it could be poor fulfillment of the service level agreement, leading to disputes. For FinTechs, the impact could be that customers are no longer able to access their money or take out a loan promptly, leading to a dispute with the customer who relied on them.
Even if the cause of the damage may be the same, the damage itself can trigger different insurance policies. The potential for loss is therefore important when deciding what E&O insurance your business needs. There are many different types of E&O insurance for businesses, depending on the services they offer and the types of losses they wish to insure. For FinTechs, there are two main options: technology E&O insurance (Tech E&O) and financial services E&O insurance (Financial Services E&O).
Tech E&O Insurance: Coverage for financial losses caused by the product not working as intended or caused by errors or omissions in the provision of services. The coverage helps you when customers claim damages when the technology product or service does not work as intended. A company that provides software solutions to lenders to make their jobs easier might purchase tech E&O insurance. However, this insurance will include exclusions related to financial services and will not provide coverage for regulatory defense.
Financial Services E&O: This is where financial services E&O policies can come into play. These types of policies are suitable for companies providing genuine financial services where claims could be made for negligence, breach of duty, mismanagement, misrepresentation and non-disclosure of investment strategies, fee disputes and late filing. And, more importantly, these policies may include coverage for regulatory/administrative proceedings or investigations. Examples of these policies include:
- Financial Insitutions E&O (Banks)
- E&O for venture capital funds or private equity funds
- E&O for financial investment advisors
KEY TAKEAWAYS
➜ E&O is the most important tool for protecting FinTechs
➜ Insurance cover must be adapted to the specific risks of the company
➜ A combination of Tech E&O and Financial Services E&O can be useful
➜ Identify how your product's flaws can affect your customers in order to select the right liability insurance
Customized E&O for your FinTech
The right E&O insurance provides financial protection in the event of costly customer lawsuits, including legal fees and court costs for defense and settlement. It can also give your customers peace of mind or even be required by regulators. For growth-stage FinTechs, it can be the war chest needed to fund defense costs for investigations and proceedings initiated by government regulators or consumer protection enforcement agencies such as BaFin.
If there are two insurers, it must also be ensured which one is responsible in the event of a claim so that the insurer cannot claim that the other insurer is responsible. We solve this for you by drafting subsidiarity clauses.
FinTechs should take out E&O cover (and will most likely be obliged to do so). However, this is not a one-size-fits-all solution. Determining the right E&O coverage requires a nuanced approach, as different policies offer different levels of protection. Work with a broker who can help you assess your risks and determine the coverage you need.
Why you should act now
- Strengthen the confidence of investors and stakeholders
- Secure your growth in the long term
- Protect your innovative strength
Our team of experts is at your side
➜ Benefit from our many years of experience in insuring FinTech companies.
We will work with you to develop a customized insurance strategy,
that is optimally tailored to your specific needs.
Our approach
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Feel free to contact our experts for a non-binding consultation!