Information Technology
IT companies and the services they offer are not easy to categorise, largely due to the wide range of business and industrial environments in which IT professionals work.
IT companies
Broadly speaking, work carried out by IT companies falls into one or more of the
following areas:
- Packaged hardware / software provision
- Development of bespoke solutions
- Consultancy / project managemen
- Outsourcing
- IT recruitment
- Internet services
What do insurers look for?
Size of firm - One of the major factors that determine insurers' rating and underwriting criteria is the size of the practice. This is mainly established in two ways, the number of directors and staff and the gross annual income of the firm.
Qualifications and experience – The IT industry does not have a governing body and there are no standards of qualification. Therefore underwriters will look for a mix of qualifications and experience and a CV of the directors or principals will often help underwriters when they assess the risk.
Potential for loss - The central question is what would be the immediate financial loss, and other consequences, if data is incorrect, a system fails or becomes unavailable for any period of time. Much depends on the precise function of the software and the commercial application it is being used for.
The main areas that give rise to litigation against IT companies are:
- Failure of the software / system to do the job which it was intended for (fitness for purpose)
- Failure to deliver the system on time
- Failure to deliver the system to budget
These can give rise to three types of claims:
- Client withholds or claims for return of the purchase price / fees paid
- Direct financial loss arising from the negligence of the IT company
- Consequential loss
Written contracts - Insurers' first line of defence is the written contract between the insured and their client. Insurers will often ask to see the insured's standard terms and conditions. If smaller IT firms are asked to sign onerous contracts with larger customers it is important for the insured to understand the extent of cover offered to meet these contractual liabilities. Whilst cover for the first two types of claim are available in the market, insurers often expect that consequential losses will be excluded, or at least limited, by insureds in their contract terms and conditions.
Type of client - A prime underwriting criteria is what kinds of businesses an IT professional is involved in. Areas of particular concern to insurers include:
- The financial sector
- Games development
- Trading systems
- Process control systems
- ASPs (Application Services Provider) or ISPs (Internet Services Providers)
- Managed Service Providers
- Mission and safety critical systems
Contract sizes - There is a direct relationship between the size and complexity of the job and the exposure. Careful consideration would be paid to such work carried out for US or Canadian firms.
Retroactive exposure - Does the firm have an exposure to claims arising from past work, whether in the current firm or a former practice?
Claims experience - The claims experience is an important determining factor in the assessment of risk. This information usually reflects the type of work carried out by a firm. It also reflects the quality of the firm's work, staff, internal risk management and experience.
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Information Technology brochure.
EXAMPLES OF CLAIMS
Simpson Nash Wharton (SNW) vs. Barco Graphics Ltd - SNW (design consultants) bought a graphic design system (hardware, operating systems, applications software and peripherals) from Barco. Barco had an established system, Aesthedes 1, which they demonstrated to SNW. However, by the time SNW were to be supplied, Barco had brought out a new version, Aesthedes 2, which they supplied to SNW. There was no written contract or warranty document. The system was commercially unusable and over a long period of time Barco attempted to fix the problems and failed to do so. SNW rejected the system and claimed for misrepresentation and breach of contract (implied terms of merchantable quality and fitness for purpose). Many of the defects were software related but the judge treated the system as a whole (software and hardware) as one 'product'. Costs were settled at £450,000 on the grounds of misrepresentation and breaches of statutory implied terms.
St Albans City District Council vs. ICL - St Albans entered into a contract with ICL for the provision of a system to run the poll tax administration. There was an admitted error in the software, which resulted in the number of poll tax payers being overstated. This led St. Albans to set its poll tax rate too low and, consequently, creating a £3 million deficit. St Albans sued for breach of contract, relying on the express terms in the contract, as well as on implied terms under the Sale of Goods Act 1979, and for negligent misstatement by one of ICL's employees that it was safe to take population figures direct from a screen (an on-line output). ICL argued that St Albans should have realised there was something wrong (a report printed had produced a line of zeros), that no loss had been suffered because St Albans could recover it the following year, and that liability under the contract was limited to £100,000.
High Court Decision:
- The error in the software was breach of contract.
- ICL's statement that St Albans could safely take the figures from the screen was negligent, therefore, breach of contract.
Although software was considered 'goods' in this case, it was not necessary to decide whether or not software was 'goods' for the purpose of the Sale of Goods Act 1979, as ICL was in breach of the express terms of the contract. St Albans had lost money and had a duty to recover it for the benefit of taxpayers. The fact that it had recouped its loss by increasing the poll tax charge the following year was irrelevant.
Negotiations prior to the contract had left ICL's terms largely untouched so St Albans was treated as having contracted on ICL's standard terms. ICL's terms were subject to the requirement of reasonableness. The £100,000 limited clause was deemed unreasonable and unenforceable in view of the fact that ICL was a substantial company and, as they were insured for product liability to an aggregate sum of £50 million, they were one of the few companies that could meet St Albans requirements and they had not justified the figure of £100,000.
The Salvage Association vs. CAP Financial Services Ltd - Salvage entered into two contracts with CAP for the design, development and supply of software. Two years later, the software was incomplete and contained numerous errors. Salvage terminated the second contract (the first was complete), rejected the software, and dismissed CAP. Salvage abandoned the software altogether and engaged another party to develop a fresh solution. Salvage brought proceedings for breach of contract, claiming repayment of the contract price, (approximately £300,000), and damages for wasted expenditure. CAP relied on a clause limiting its liability to £25,000 in respect of each contract. Salvage claimed the terms were unreasonable and, therefore, unenforceable under the Unfair Contract Terms Act 1977. Total damages settled at just under £663,000 and Salvage could recover its' wasted expenditure on the project, payments for use of computer bureau facilities, testing, wasted management time, and stationery. Salvage could not recover for lost profits. This case is a prime example of what happens if a supplier tries to rely on a limitation of liability which is so low as to be out of proportion to the contract price, or any potential losses under the contract. It also highlights the fact that, in order to rely on a limitation of liability, a supplier is likely to have to find an objective justification for the limitation applied.
What should you look for?
Understand your client - The central question is what do clients’ businesses do? Broking an IT risk effectively rests on understanding the insured's exposures and demonstrating what the insured has done to manage the risk. This can involve interpreting the technical background into layman's terms. Always review the client’s web site which almost all IT companies have. However, it should borne in mind that web sites are used for marketing purposes and therefore may over not accurately represent the whole position. The business description in the policy should contain all of the activities which the insured is involved in. This is not always an easy task due to technical jargon and the fact that many disciplines may be implicit in a general project description.
Some insurers have identified the following disciplines:
Hardware
- Sales of own brand
- Distribution of other brands
- Installation
- Maintenance
Software Product Sales
- Shrink wrapped / off-the-shelf software
- Customisable software
Software Services
- Installation including configuration (no code changes)
- Customisation (including code changes)
- Developing bespoke applications
- Maintenance
Services
- Consultancy
- Contract staff
- Facilities management
- Training
- Internet services (excluding web hosting)
- Web hosting
Wordings
Because the profession has no governing body there is no required standard wording
and, as a consequence, many varied wordings are available. Of great importance is
the ability in the wording to allow insurers to put right a problem discovered before
a loss occurs. This is called first party cover as it is the policy holder, not
his client, who will make the claim. Of equal importance is the knowledge of the
underwriters, and their claims departments (and their advisors) of the profession.
HCCI is a leading underwriter in this class.
Cover is likely to be ‘any one claim’ with insurer’s costs payable in addition.
The usual cover
There are commonly separately identified heads of cover for claims due to:
- Professional negligence
- Negligent misstatement or negligent misrepresentation
- Failure of software to be fit for purpose
- Infringement of intellectual property rights
- Breach of confidence, misuse of confidential information
- Defamation
- Dishonesty of employees
Exclusions
- Failure of any inherent defect in a third party product
- Onerous contractual terms (e.g. fines, fixed penalties)
- Consequential losses
