IT-Fail: 130.000 Euros in Damage Due to Faulty Backup
Especially in the IT sector, professional mistakes can have devastating consequences, which in the worst case can even threaten the professional existence. Often, these omissions result in a rat's tail of claims for compensation, extra work and disputes. An IT service provider insured through exali also had to go through this gauntlet in this real-life damage event.
Backup System Against Data Loss
An IT service provider seemed to have secured a worthwhile contract: The expert for networks, system integration and data archiving was not only to plan and install a data backup system for an investment consulting firm, but also to subsequently manage it during its ongoing operation. The main task was to automatically back up all electronic data (messages, advisory protocols, contract data, templates, correspondence, etc.) with a data volume of about 100 GB via a backup system on a daily basis.
Accordingly, the IT service provider implemented a backup system that created a backup copy of the individual new and changed workplace data every evening. In addition, there was a weekly copy of all data. To ensure a smooth process, he also provided an automatic check of the backup creation. This was meticulously documented and sent to the responsible system administrator on site by e-mail.
Complete Data Loss After Faulty Backup
After about nine months, the supposedly solid system reported the following error: "A daily backup could not be created". The IT service provider took care of the matter on the spot and sent a service employee to fix the defect. After a thorough check, the employee found an error in the control message system, which could, however, be quickly rectified. However, he did not check the quality and completeness of the backup. Instead, he arranged another service appointment for a complete system check, which never took place - although the investment consulting firm reminded him several times.
True to Murphy's law, "what can go wrong, will go wrong", the inadequate work was compounded by force majeure: after a violent thunderstorm, the company's data fell victim to surge damage. Those responsible wanted to solve the problem in the obvious way and restore the lost data via the backup system, but in this attempt they made a frightening discovery: not a single usable backup was available.
The complete loss of data in a company can have many causes, for example a server crash like in this damage event: Server Crash: 100.000 Euros Compensation Claim After Data Loss.
When the service employee checked the system, he did not notice that the data backup had not been working correctly for about a year. There were two reasons for this misery:
- Without the knowledge of the IT service provider, the investment consultancy had also stored other data than the intended workplace data on the hard drives. Thus, there was no longer enough space for the daily backup copies and the system only stored useless fragments.
- The IT service provider's employee did not carry out a proper check of the system and so this incorrect use went unnoticed.
Claim For Compensation of 325.000 Euros
Since all electronic possibilities had been exhausted, the aggrieved investment advisory company had to resort to analogue and more cumbersome possibilities. The employees were forced to manually re-enter all client and contract data. This was only possible in the context of many overtime hours, for which the company naturally had to compensate its employees accordingly in addition to their regular wages. According to an initial estimate, the effort amounted to 6.500 working hours for 175.000 euros.
As if that were not enough, the affected company had no way of accessing important data and conducting business. This not only caused the consultancy company to lose some of its existing clients, but also made it more difficult to acquire new clients. Thus, the investment consulting company lost an estimated 150.000 euros in turnover. This resulted in a claim for compensation totalling 325.000 euros, which the IT service provider was now facing.
Well Secured Even Before The Project Starts
If you, as an IT service provider, are responsible for the entire infrastructure of your clients and you make a mistake, both you and your customers are at risk of high financial losses. Whether you miss a deadline and your client suffers a loss of revenue as a result, a faulty update causes financial damage or someone falls victim to a hacker attack due to your failure: The best thing to do is to protect yourself against such a horror scenario in advance with Professional Indemnity Insurance through exali, even before you start your next project.
In the event of a damage event, the insurer will check at its own expense whether a claim is justified. Unjustified claims are defended on your behalf thanks to the integrated Passive Legal Expenses Insurance, while justified claims are settled. Our customer advisors will be happy to answer any questions you may have about the service and content of Professional Indemnity Insurance through exali by telephone on +49 (0) 821 80 99 46-0 (availability: Monday to Friday 09:00 to 18:00) or by email to firstname.lastname@example.org.
Insurance also in the Event of Data Loss
Confronted with this immense claim for compensation, the IT service provider now turned to exali. He had taken out an Professional Indemnity Insurance through exali and described the case to our experts. They passed the facts on to the insurer, who immediately started to examine the damage. It quickly became clear that the IT service provider could not be held solely responsible for the damage - because the company had stored other data than the intended work data on the hard drives without his knowledge.
IT experts are not only concerned about crashed servers, data loss or defective backups in their work - even advertising can fall victim to professional negligence. This was also the case in this damage event: IT Freelancer Ruins Advertising: Financial Loss Insurance Kicks In.
From the perspective of contributory negligence and the difficulty of precisely quantifying and proving the lost profit, the company was therefore unable to fully enforce its original claim for compensation. So a settlement was reached in which the damages were set at 130,000 euros. This amount was paid by the insurer, as were the costs of 5,000 euros for an independent expert. In the end, both parties were thus spared a protracted legal dispute with a considerable risk of high lawyer's fees and court costs.
This loss shows very clearly how quickly the financial damage caused by professional negligence can add up to six figures. Even though the amount of damage in this case was more than halved, the mild outcome was only possible because the IT service provider concerned had chosen a Professional Indemnity Insurance with a sufficiently high coverage amount of 1.5 million euros. For if this sum insured had not been sufficient to settle the claim, the IT service provider would have had to raise the sum itself and take a considerable financial risk.
Vivien Gebhardt is an online editor at exali. She creates content on topics that are of interest to self-employed people, freelancers and entrepreneurs. Her specialties are risks in e-commerce, legal topics and claims that have happened to exali insured freelancers.
She has been a freelance copywriter herself since 2021 and therefore knows from experience what the target group is concerned about.