How to Reduce Claims if You Must Assume Liability in a Contract

The party not in power assumes liabilities

Most tech companies enter into contracts with project owners or managers that specify the terms of the work, including which party is responsible when things go wrong.

The most common provisions that govern Professional Liability insurance (Errors and Omissions Liability insurance) and General Liability insurance risk factors and the transfer of risk in these contracts are known as Bodily Injury and Property Damage Indemnity, Pure Economic Loss Indemnity, Intellectual Property Indemnity, Breach of Privacy Indemnity, Consequential Damages and Limitation of Liability.

When these types of losses are specified in contractual provisions, they may or may not be covered by a tech company’s General Liability or Professional Liability insurance. It depends on the exact contractual language and the insurance policy language.

In most cases, a particular tecReduce Claimsh project will have one larger and more powerful company that will control the terms of the contract negotiation. This is known as the “party in power.” The party in power usually provides the contract form that is presented to the party not in power, who is then usually required to assume most of the potential liabilities. As a result, the party not in power is also the party that is assuming the liability under the terms of the contract.

The party not in power is typically a small one or two-man tech company performing work for a large company.

Strategies for the party not in power

All is not necessarily lost by the party that is assuming the liabilities. That party may be able to negotiate contract changes that can result in a more level playing field. The negotiating tips that are outlined in the sections below may be helpful.

Bodily Injury and Property Damage Indemnity

Most tech work performance contracts contain a general  provision that requires the party not in power to indemnify and hold harmless the party in power against certain third-party claims and lawsuits where a third party ( such as an end user of the tech work) alleges that they have suffered damages. The purpose of an indemnification/hold harmless provision is that the indemnitor  agrees to accept the specified liability as well as legal defense on behalf of the indemnitee.

The most common type of general indemnity agreement deals with responsibility for damages to a third party for bodily injury or property damage. Sometimes this provision  can be too broad and heavy handed to protect the interests of the“party not in power.

Negotiation tips:

  • If the indemnification provision uses terms such as “any and all liability,” try to amend this to “bodily injury” and “property damage.” Limiting the indemnification in this way will eliminate responsibility for lawsuits involving breach of contract, intellectual property infringement and breach of privacy.
  • Narrow the definition of property damage to exclude damage to “data.” It is important to note that the insurance industry has taken this approach under the most recent General Liability forms.
  • Limit the indemnity for bodily injury and property damage arising directly from your conduct, and eliminate the term indirectly.
  • Limit the indemnity to your n” acts, errors and omission instead of any acts errors or omissions.
  • Limit the indemnity for bodily injury and property damage to “the extent caused by your negligence” or “in whole or in part caused by your negligence.”
  • If you can’t negotiate the above-mentioned concessions, try to limit your total liability to whaT is covered by your General Liability  and Professional Liability insurance policies. Or, if this approach is not successful, try to negotiate a monetary cap for damages, such as $100,000.

Pure Economic Loss Indemnity

Tech companies that are the party not in power often assume liabilities under-written indemnity provisions that make them responsible for liabilities that go way beyond bodily injury and property damage to a third party.

These additional types of damages are broadly referred to as pure economic loss damages. Many of these types of lawsuits involve causes of action for breach of warranty or breach of contract. These causes of action are typically excluded by most General Liability insurance policies but may be covered by Professional Liability insurance policies.

Negotiation tips:

Attempt to limit liability to claims alleging bodily injury and property damage. If you are successful with this maneuver, you may have eliminated all of your indemnity risk for all other economic damages.

  • Try to limit your total liability to that which is covered under your General Liability  and Professional Liability insurance policies.
  • If the above approach is not successful, try to negotiate a monetary cap for damages such as $100,000.

Intellectual Property Infringement Indemnity

Many tech work contracts contain an indemnity provision for intellectual property violations. Intellectual property violations include offenses such as  copyright, patent, trademark, and trade name infringements.

Negotiation tips:

  • Try to remove any specific provisions dealing with intellectual property infringement indemnity.
  • Limit the indemnity to not apply to situations where the intellectual property violation is caused solely by the other party or in whole or in part (the better outcome) by the other party.
  • Limit the indemnity to not apply to situations where you are making a product to comply with the specifications required under the contract, where another party alters or modifies your product without authorization, or where another party co-mingles your product with another product.
  • Limit the indemnity to patent infringement only. Furthermore, patent infringement may be limited to U.S. patents only, as opposed to patents in other countries.

Breach of Privacy Indemnity

Invasion of privacy and identity theft claims can arise out of tech work where a tech product or service fails, resulting in release of confidential information such as bank account numbers, credit card numbers, social security numbers, medical records, etc.

Many contracts for tech work contain a specific indemnification provision for these types of violations. In addition, more generalized indemnity provisions can capture these types of claims if the general indemnity provision is not limited to claims for bodily injury and property damage.

Negotiation tips:

  • Attempt to remove any specific provision dealing with breach of privacy indemnity from the contract.
  • Limit the indemnity to not apply to situations where the breach of privacy is caused solely or in whole or in part (a better outcome) by the other party.
  • Limit the indemnity to only apply to the extent covered by your General Liability or Professional Liability insurance.
  • Place a monetary cap on the indemnity, such as $100,000.

Consequential Damages Waiver Clause

You should attempt to add a provision to your work contracts stating that you are not liable for any consequential damages arising out of the failure of your tech product or service or any other breach of contract or warranty. An example of consequential damages would be any loss of profits or extra expenses incurred by the other party over and above the actual failure of your tech product or service itself.

Negotiating tips:

  • Attempt to insert a consequential damages waiver clause into your tech work contract.
  • Make sure that your consequential damages waiver clause is not overridden by the indemnity provisions.
  • To the extent that you are not successful in negotiating the addition of this clause, try to limit your liability with a limitation of liability clause.

Limitation of Liability Clause

A limitation of liability clause is often found side by side with a consequential damages wavier clause in tech work contracts. While the consequential damages waiver clause eliminates certain liabilities, the limitation of liabilities clause limits liabilities to a certain monetary cap.

Negotiation tips:

  • Attempt to insert a limitation of liabilities clause into your tech work contract.
  • Set the monetary cap to a sum of money that relates to the contract, such as a dollar amount to be paid for a one-time project or an annual amount to be paid for an ongoing project.
  • Make sure that your limitation of liabilities clause is not overridden by the indemnity provisions.
Some of the above information comes from articles written by Michael Rossi and is available on www.irmi.com. These parts are reproduced with permission of the publisher, International Risk Management Institute, Inc., Dallas, Texas . Further reproduction prohibited. Visit www.irmi.com for free practical and reliable risk and insurance information.
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How to Reduce Claims if You Must Assume Liability in a Contract
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