Your client contract is signed. But is the risk insured too?

Software companies often spend a great deal of time negotiating the price, functionality and delivery date of a project. Liability provisions tend to receive less attention. Yet we know that this is precisely where the biggest financial risks can arise.

Take a software company with annual revenue of €4 million. It signs a contract with a client worth €75,000 per year. To secure the deal, the software company accepts broad liability provisions proposed by the client. If something goes wrong, the client may be able to claim not only direct damages, but also loss of revenue, remediation costs and third-party claims. As a result, the total claim could run into several million euros, while the software company’s insurance policy has a much lower limit.

The contract value says little about the risk
A relatively small contract can involve significant liability. This may be the case, for example, if the contract does not include a clear liability cap. Or if the cap is linked to the client’s total loss rather than to the value of the contract. It is therefore important not to accept liability limits without careful consideration, but to assess whether they reflect the actual risk and potential loss. Consequential and indirect losses also deserve attention. Examples include loss of revenue, reputational damage or production losses suffered by the client. These losses can quickly add up and are not always covered by insurance.

Promising more than your insurance covers
Indemnities are another potential risk. Through an indemnity, a software company may, for example, assume responsibility for third-party claims, privacy breaches or infringements of intellectual property rights. SLA penalties relating to delays, downtime or insufficient availability are also often excluded from insurance coverage. Insurance generally reflects the liability that applies under the law. If a company accepts broader responsibilities in a contract, this does not automatically mean that the insurer will cover those additional obligations.

Review the contract before signing
Do not only consider what a contract may generate in revenue, but also the risks you are accepting. Pay particular attention to:

• The maximum liability

• Exclusions of consequential loss

• Indemnities for third-party claims

• SLA penalties and warranties

• Whether the provisions align with your policy limits and terms

Align your contracts with your adviser
Have important client contracts reviewed in advance and discuss any non-standard provisions with your insurance adviser at an early stage. This helps prevent an attractive contract from turning into an uninsured financial risk after an incident.

Would you like to know whether your client contracts are aligned with your insurance coverage? For more information, please contact Sandy Buurman-Drenth, Senior Account Manager Tech.