Chances are, your business isn't properly insured. You may be covered for general liability, such as fires you may accidentally start while setting up equipment, or property damage you may inadvertently cause. But what about if you sell someone a backup solution and it fails, costing them millions of dollars worth of valuable data? What if they decide to sue you? Do you have the funds to defend yourself in court? Do you have the money to pay out if they win? Chances are, no.

That's why LANDA (the Local Area Network Dealers Association) organized a recent business seminar on insurance and contract law. The seminar brought together George Eyre, an ex-computer consultant turned IT lawyer and Joe McCabe, president of LMS Prolink Ltd., a collection of insurance companies.

The presentation began with an explanation by Eyre of Canada's first IT-related liability lawsuit, which was brought about in the B.C. supreme court on Oct. 5, 1990. Fitz-Wright Company Ltd. sued Jonas & Ericsson Software (J&E) because the accounting hardware and software recommended by J&E didn't adequately fulfill Fitz-Wright's needs.

Evans said when Fitz-Wright became upset with the service it was receiving, it switched consultants and refused to pay J&E the remainder of the money owed for services. J&E sued, which prompted Fitz-Wright's counter-suit for losses resulting from J&E's substandard service. Even though the contract contained many clauses limiting J&E's liability, the court ended up ruling in Fitz-Wright's favour, refusing to enforce these clauses.

Why? Well, in the first place, the court found that because J&E knew that no one at Fitz-Wright had any computer knowledge, it was deemed to have a responsibility to "take reasonable care that their representations were correct. " That is, J&E was required to sufficiently inquire about Fitz-Wright's operations to allow them to recommend the right solution set. By recommending an inappropriate solution set, J&E had failed to uphold that duty, it said.

Secondly, J&E was deemed to have used its knowledge of computers (and Fitz-Wright's lack thereof) to introduce unfairly broad limitations of liability into the contract, making the contract detrimental to the interests of Fitz-Wright.

Finally, the judge found J&E's failure to perform the services a "fundamental breach" of the contract.

After Eyre related this anecdote to the audience at the LANDA meeting, there was a discussion of what a contract does and what to make sure you include in one. Essentially, a contract defines each party's rights and obligations, defines what has to be done, gives both parties proof of the agreement, allocates liability and defines any ownership or trademark details.

McCabe said there are certain things that one ought to make sure a contract contains. They include: a disclaimer of warranties (that is to say, a clause that states that the manufacturer, and not the VAR, is responsible for any product warranties); a limitation of liabilities (which defines how much the client can sue the VAR for if things go wrong); a statement of integration (which states that what's on the contract overrides any other written or verbal agreement); and remedy clauses (which state how potential conflicts can be remedied without court action).

Of course, even if contracts are airtight and polished to a fine glow, VARs may still end up being sued.

Insurance was the focus of the second part of the presentation, specifically errors and omissions insurance, which provides coverage for a reseller's legal fees and settlement costs should a reseller be sued (like J&E was) over a contract gone awry.

While most companies insure themselves for general liability, few think to cover themselves for errors and omissions. Whereas general liability covers things like property damage and personal injury, errors and omissions cover liability arising from poorly set up systems and the like.

McCabe handled the insurance presentation, listing important things to be sure an errors and omissions policy covers: • coverage for all damages awarded by the courts (including such things as punitive damages, which many policies don't cover); • global coverage (especially important if you will be doing work that may have an effect on companies or systems outside your home province); • reasonable prior knowledge requirements (so that if one of your employees installed a faulty system before you applied for coverage, and didn't tell you about it, your policy will still cover it); • coverage during setup and testing as well as after the system is up and running (many policies don't include this); • a clearly stated coverage of data and other intangible assets as well as hardware.

McCabe also suggested resellers include an extended reporting period so that after terminating the policy, they are still covered for jobs that were done under the policy.

Go to the top.