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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22 High-risk End Uses of Your Products or Services

They might prevent you from getting General Liability Insurance

We have listed below end uses of tech products and services that most General Liability underwriters specializing in tech accounts consider a high risk of litigation.  Unfortunately,  high tech involves high risk, so it’s important for you to be fully aware of how Technology Insuranceyour risk is viewed by insurance underwriters. Rejection is not clear-cut and there may be stipulations to specific instances.

Nevertheless, the core tenets behind declining the application would directly relate to what we have listed below.

  1. Environmental controls for heat, refrigeration, flame ignition or suppression
  2. Liquid level controls and pressure gauges
  3. Automated test equipment or process control equipment
  4. Manufacturing process/controls (robotics, factory automation, computer aided manufacturing)
  5. Critical parts of aircraft, autos, watercraft, trains, trucks or other transportation equipment or controls
  6. Athletic, medical or flotation equipment
  7. Safety or alarm equipment, systems, processes or parts (fire, security, emergency)
  8. Computer Aided Design (CAD) (This does not apply if you use CAD in designing computer systems It only applies when you sell CAD for use by your customers.)
  9. Scientific/weather (seismology, etc.)
  10. Utility/natural resource process (oil and gas, power, nuclear, waste disposal, etc.)
  11. Medical purposes (diagnostics, patient care, biotech, non-administrative)
    This refers to medical/healthcare operations or equipment, not to associated business functions such as accounting, billing, appointment scheduling or general office management.
  12. Chemical processing
  13. Financial software (funds transfer, trading, financial modeling)
  14. Aerospace, aircraft
  15. Computer security system advice/product diagnostics, encryption, vulnerability assessments or penetration testing (This does not apply if you are merely systems integrator and install security system software manufactured by others. Example: firewall, anti-virus from Norton or McAfee.)
  16. Pollution, environmental testing and remediation
  17. Agriculture/mining
  18. Machinery/equipment control (control of operating/moving parts of machinery, equipment, toys or appliances)
  19. Military defense (weapons procurement, guidance systems, tracking, etc.)This refers to military/defense operations or applications (such as weapons procurement, ballistic missile technology) not to general office management such as general accounting or non-weapons, non-combat related procurement.
  20. Staffing for temporary employees who do not perform “tech related” services
  21. Gaming machines or programs
  22. Computer aided mapping services

If you have questions about this list of other end uses of product, give us a call at 800-622-7370. A Sadler insurance expert will be happy to answer our questions and discuss your unique insurance needs.

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Guidelines For Content To Reduce and Prevent Claims

Guidelines for the digital information age

The Professional Liability Insurance ( Errors and Omissions Insurance and General Liability Insurance) safeguards below  that Intellectual Property safeguardsapply to your operations should be adopted to reduce and prevent claims against your company.

  • Formalized intellectual property clearance procedures
  • Acquisition of all the necessary rights, licenses, releases and consents applicable to content or services created or provided by you or by third parties
  • New hire and independent contractor agreements, which include signed statements declaring that a previous employer’s or client’s trade secrets or other intellectual property will not be disseminated or used .
  • Contractual acquisition of all rights (including electronic rights) to work done for you by third parties, including intellectual property rights, hold harmless and indemnification clauses which inure your benefit pertaining to that work
  • Permission of sites you hyperlink to or frame
  • All content and services prior to release or dissemination regardless of medium, including updates or changes to functionality of your website
  • Referral and affiliate program agreements
  • Content and services with respect to intellectual property laws in foreign jurisdictions where you provide services
  • Licensing/Cross-licensing agreements
  • Legal review and permission to use the trademark of others

General Liability Insurance Disclaimers

  • On link to or frame
  • On your website pertaining to any content made available or disseminated

Trademark searches for

  • Your domain name
  • Product/service designs, names and/or logos
  • Other content
  • Professional search firms
  • Legal counsel
  • Computerized database search

3 Don’ts of Professional Liability Insurance and General Liability Insurance

Advertise your services as superior to or use comparisons to the services of others without legal review performed prior to dissemination.

Never advertise that your product is similar to or a clone of services of others without a legal review performed prior to dissemination.

Implement a formal policy on action steps necessary to address complaints of inaccurate, defamatory, infringing or troublesome content on your website(s) or other content you responsibility for or have designed

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Web Site 101: How To Know If Your Web Site Exposes You To Claims

How to know if your website exposes you to claims

Be aware that websites containing a chat room, bulletin board or any other type of interactive exchange that can be viewed by others exposes you to a greater risk of litigation.  Libel as a liability risks can be reduced by exercising editorial control and performing edits before content is posted.

If you subcontract control over your chat room, bulletin board or other interactive exchange, you should transfer all liabilities to your subcontractor via written contract.

Be aware that websites containing the following types of content can expose you to a greater-than-average risk of litigation:

  • Children’s interest
  • Entertainment/games
  • Law/legal
  • Cultural arts
  • Insurance
  • Software for downloading
  • Financial
  • Medical
  • Travel
  • Religious
  • Commentary/editorial
  • Sports
  • Adult
  • News
  • Instructional
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Customer Service Procedures That Can Prevent Claims

Do your customer service procedures measure up?

It may seem irrelevant or unnecessarily protective, but you would be surprised how easily a claim can be made due to poor customer service practices. Or worse, claims of quality customer service being essentially derailed because of insufficiently trained staff, improper risk management procedures or no contingencies in place that could easily avoid these situations.

Here are a few helpful ideas:

  • Formal customer complaint resolution procedures is by far one of the most significant ways to protect your company from claims under professional liability insurance.
  • Have a customer notification plan in place in the event of you discontinue a service or support.
  • Customer or service support information should include your company’s email, website, customer site visitation address, fax, in-house repairs and toll free and after-hours numbers.
  • 24/7 availability for emergencies.
  • Have a formal plan to inform and address  all customers of any bugs, anomalies, problems, etc. discovered in your services.
  • Have a formal product recall plan in place for defective products.
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Computer Consultant Insurance Needs

The number of computer consultants in the job market and the need for affordable professional liability (errors and omissions liability) insurance for computer consultants has mushroomed with the technology explosion.

Computer consultants are vulnerable to the types of lawsuits that are covered by Professional Liability (Errors and Omissions Liability) insurance. The failure of their technology services and products to perform can result in lawsuits for negligence and breach of warranty. Professional liability insurance covers computer consultants commonly named in lawsuits alleging that their negligent acts, errors, and omissions have resulted in economic damages to their clients when the technology products and services fail. Computer consultants who bear these risks out of their business or personal assets face unacceptable risks. A good Professional Liability (Errors and Omissions Liability) insurance policy can provide computer consultants with peace of mind.

General Liability Insurance

In addition to Professional Liability insurance, computer consultants should also have a good General Liability Insurance policy to protect their business.

Find out how much Professional Liability (Errors and Omissions Liability) Insurance for information technology companies can cost for you.

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Categories: Errors & Ommissions, General Liability, Professional Liability, Reports, Tech Articles and Information