When you sign a contract to work with a client, contractor, or subcontractor, you enter into a tangled web of errors and omissions liabilities. If anything goes wrong on the project, it’s common for the party that suffers losses to sue everyone involved in an effort to recover damages.
Practically speaking, that means that even if you're only a subcontractor on a project, you could be sued for the failure of the project as whole.
In Part 2 of our series on Common Risks for IT Project Managers, we'll examine the ways you can be sued and what you can do about it. We'll cover the following:
- What are professional liabilities?
- How professional liability lawsuits work.
- Two ways to protect your business from lawsuits.
E&O Basics: What Are Professional Liabilities?
Professional liabilities are the obligations you have to your customers, clients, and business associates. These might include delivering work on time, meeting standards, and fulfilling client expectations – but IT professionals also face a number of industry-specific liabilities.
You're responsible for being knowledgeable about your industry, employing best practices, and using strong software that is both secure and effective.
But your responsibilities don't end there: you also have cyber liabilities, which mean you're responsible for keeping up with trends in cyber security. You're responsible for developing products that not only work, but also won't expose your customers to identity theft and data breaches.
For more details on E&O liabilities, see the blog post "What are IT Professionals Legally Responsible For?"
E&O Risks for Contractors and Subcontractors: How Liability Lawsuits Work
Contractors generally include "indemnification" language in contracts they use when they hire you as a subcontractor. Indemnification is a legal term, which loosely translates to "who you can blame."
Indemnification clauses in your contract will specify that the contractor can hold you responsible for errors, omissions, and negligence in your work. This means that when the contractor is sued by the client, the contract can allow them to shift the blame to you.
Errors and omissions lawsuits are complicated. We began this article saying there can be many parties involved: clients, customers, contractors, and subcontractors. If a client is disappointed with software, they'll talk to their lawyers about an E&O lawsuit. Lawyers often take a "shotgun" approach, and sue anybody involved. They'll file a software lawsuit against the main contractor as well as the subcontractors. Even if you didn't directly cause the problem, you could wind up in software litigation.
2 Ways to Protect your Business from Lawsuits
To recap: IT businesses are exposed to a variety of liabilities. They're responsible for client security and can be sued for shoddy work or data breaches as both a contractor and subcontractor.
That leads us to the big question: how does a business protect itself from lawsuits? Here are two ways:
- Understand your contracts. As we saw above, contracts use indemnification language to define who is responsible for a mistake. If a contractor hires you, you might be able to get them to remove the indemnification language in the contract. But most businesses won't budge on this. Instead, you suggest changes to the contract to specify what aspects of the project you can be sued for and try to limit the scope. You can also include language saying you can only be sued up to the amount of your fees and not for the client's lost profits. (Want to see some sample contract language? Check out these free sample contracts available for download.)
- Keep your business insurance up to date. Professional Liability Insurance (aka E&O coverage) and Cyber Liability Insurance can be a lifesaver. They pay for lawsuits over professional mistakes and data breaches, respectively. But you need to keep them up to date. If you have a lapse in E&O coverage, your policy may stop covering old contracts. A client can sue you years after you completed a contract, but if your Errors & Omissions coverage lapsed, you could lose coverage for the lawsuit. Many insurance policies don't cover E&O claims that happened before your policy began, and when you switch insurers or have a gap in coverage, you lose protection for all your old work.