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Should You Add an Errors and Omissions Clause to Contracts?

Should You Add an Errors and Omissions Clause to Contracts?

Find out how an E and O clause can strengthen your contracts and why the clause alone is not enough to manage your risk exposures

Thursday, January 9, 2014/Categories: errors-and-omissions

Any time you start working on a new project, you should sign a contract with your client. You may be wondering, how do these contracts protect me? Good question. In order for a contract to protect your business, you'll probably need to add a few clauses (including an errors and omissions clause), which limit and define what you can and cannot be sued for.

We'll go over what clauses protect your E&O liabilities in a minute, but first let’s take a look at the kinds of liabilities IT professionals face.

Why Do Tech Companies Need E&O Protection?

Tech Republic's Meredith Little correctly points out that IT companies are especially susceptible to E&O lawsuits. Why is that? There are three reasons.

First, IT companies have to satisfy customers who know much less about technology than they do. A client may ask for software, expecting it to work a certain way, but after you build it they are disappointed with the results. Given the highly technical nature of your work, clients may not know exactly what they want. This can lead to communications problems, unmet expectations, and, ultimately, lawsuits.

Second, IT companies are also more likely to be sued because of the scale of their projects. Information technology forms the infrastructure of almost all businesses. A relatively small error can shut down a business, causing them to lose profits and customers.

Finally, IT professionals face additional challenges in the courtroom. Let's say you're sued by a customer who claims your software was at fault for a data breach on their computers. Imagine having to sit in a courtroom and explain the technical reasons your software wasn't at fault to a judge and jury. Most likely, your judge isn't going to have a degree in computer science. Furthermore, there are fewer legal precedents for IT companies because the industry is relatively young and constantly changing.

All of this adds up to one conclusion: IT professionals face more E&O liabilities than most other professionals, and so need to do more to protect themselves.

Read more on this topic in the blog post “Why E&O Insurance Is More Important for Tech Firms than Others.”

How Should You Customize Your Contracts?

In addition to covering their business with small business insurance policies such as Professional Liability (aka E and O) Insurance, many IT professionals use language in their contracts to further protect themselves from E & O lawsuits. Typically, they include language that protects them by doing three things:

  • Limiting damages. Many IT consultants stipulate that they cannot be sued for an amount greater than the money they received for the job.
  • Prohibiting lawsuits for lost profits. It’s common to include language in a contract that says you cannot be sued for your client's lost profits. When a website goes down for a week, a client could claim you've caused them to lose profits and suffer massive damages to their brand identity.
  • Including an errors and omissions clause. Your contract can also explicitly state that you can't be sued for any errors you make or actions you fail to take (omissions). It may be hard to get this clause into a contract because many clients will object.

As you customize your contract, remember that these clauses might not hold up in court. A judge or jury may still hold you accountable. No contract can protect you 100%, which is why many IT consultants and project managers have E & O Insurance.

You should also note that specificity is important in contracts. Rather than include a broad errors and omissions clause, make a more specific addendum to the contract. If you are concerned about being sued for missing a deadline or producing software that fails to mesh with a client's other programs, consider explicitly limiting these liabilities in your contract.

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