Purchasing insurance. It is important to engage the company's risk manager or insurance buyer in the contract process from the beginning. Otherwise, outsourcing contracts are likely to be negotiated by IT people and corporate attorneys with little regard to insurance ramifications. Before signing an offshore outsourcing contract, companies should look at the exposures raised by the agreement, compare them with their insurance protection to find any gaps in coverage and take appropriate steps to address them. Because companies are not likely to recover losses from a faraway contractor's insurance, management should purchase as much insurance as possible for exposures arising from outsourcing. Here are three major areas of exposure companies need to consider.

• Dependent business premises: Property, data or information may be affected by direct loss or damage to a dependent business premise by a host of traditional property perils, such as fire, flood or windstorm, as well as less traditional perils, such as terrorism. The contractor's ability to quickly migrate business operations to another location is critical. Companies should obtain adequate limits of business interruption and extra expense insurance for this exposure from their property insurer.

• Security breach: Theft, disappearance or disclosure of trade secrets, intellectual property, proprietary know-how or non-public personal information represents legal and operational exposures for the client organization. Although not all of these exposures are insurable, there are elements that can be insured. Most general liability policies offer a level of protection should the publication or disclosure of non-public personal information result in a privacy lawsuit. A few property policies offer protection for risks stemming from computer virus and other acts of malicious programming. Directors and officers policies may respond to shareholder lawsuits involving a security breach, regardless of where the breach occurred. Also, specialized media liability policies provide protection for suits involving intellectual property infringements.

• Negligence or failure to perform: In addition, companies should require foreign contractors to obtain technology errors and omissions insurance. This will provide protection for economic loss caused by the contractor's negligence or failure to perform in accordance with contract terms.

Achieving long-term value. In today's hypercompetitive world, companies want to move quickly to cut costs, and foreign IT contractors can offer significant cost advantages. It takes time, however, to set up an IT outsourcing arrangement that offers true long-term value. Companies need to make sure they enter into a comprehensive outsourcing agreement with a reputable IT firm. Prudent companies will take time to evaluate the exposures created by such arrangements and make sure they are protected with adequate insurance coverage. Organizations that base their decision solely on cost, without carefully weighing the risks and exposures, may find they have been penny wise and pound foolish.

Steven Pozzi is chief underwriting officer at Chubb Commercial Insurance